SVT on Impact

Last summer film producer and Full Circle Fund Technology Circle Chairman Marc Smolowitz was wondering which nonprofits were being hardest hit in the recession, and therefore where donors might direct their resources to greatest effect. Marc met Amie Vaccaro, who suggested he connect with us to put together a map that would show where Bay Area nonprofits were bearing the brunt of the downturn. The all-volunteer team we rounded up with Marc’s leadership included savvy geospatial mappers and digital storytellers. The only problem was… no data!

Whereas in the world of public corporations there is a huge information infrastructure set up to publish moment-by-moment information about every single company, in the nonprofit world of nearly 2 million organizations no such infrastructure exists. The IRS has a list of registered charities, but the most recent filings of many are more than 2 years old. Is it because they are defunct, they have just filed late, or there is no requirement to update it more rapidly? One doesn’t know. Each US state also has a database but not every state makes it searchable online, and once again the filings may be out of date and offer minimal detail. Guidestar, a public charity, works to supplement the IRS forms with news, community ratings, photos and videos the nonprofits can supply themselves, but there is little detailed, systematic information about geographic scope, content or efficacy of the work, even for many of the largest nonprofits. For example the most recent 990 form on file for the American National Red Cross, which has been one of the charities recommended by the US government during the Haiti earthquake relief effort, covers only the period through June 2008. There is simply no single place one can go to get real time information about which nonprofits are thriving versus which are at risk, and which are going under… let alone who is partnering or merging with whom or what’s working to solve problems.

So, instead of creating a geospatial map of the real-time status of nonprofits, we headed for square one and created a scorecard that shows what official nonprofit information is made available online, on a state-by-state basis. We did it entirely using free tools, free information, and thanks to everyone who pitched in, free labor.

The Scorecard's goal is to stimulate the conversation about how to get more comprehensive and up-to-date information on nonprofits. What will drive demand for good real-time information, enough that nonprofits invest in providing it?  We’d love to hear what you think, and if you’d like to help improve the scorecard or realize the original vision of a real-time map of nonprofits' status, please share your opinions and get involved!

Part III

The Good, The Bad and the Well-intentioned.

So is anyone getting this right? What are some of the classic well-intentioned mistakes? And who is just getting it wrong?

The Good.
Perhaps the best example of multiple leverage points leading to a combination of small businesses whose individual and self-interested actions are adding up to a new vision of a collective whole is B Corporation. To pull from their website:

B Corporations address two critical problems which hinder the creation of social and environmental impact through business:

~The existence of shareholder primacy which makes it difficult for corporations to take employee, community, and environmental interests into consideration when making decisions; and
~The absence of transparent standards which makes it difficult for all of us to tell the difference between a 'good company' and just good marketing.

B Corps (as their constituents are called) are independent businesses who seek to use their enterprises to create social and/or environmental change while providing shareholder value. B Corps clearly articulate their social mission and make clear to investors and shareholders that they will be pursuing that mission. Investors then understand or can investigate any inherent risks or trade-offs between these and their profit-maximizing counterparts. Nonetheless, companies like New Leaf Paper, Numi Tea and Method cleaning products are all making great progress both financially and socially.

As of this writing there are around 220 B Corps, covering 54 industries and $1.1 billion in revenue. Though aggregate revenues like that don’t even crack the Fortune 500, it still represents an impressive cohort for less than 2 years time. That revenue figure is, however, 5x that of the highest single small business for 2009, according to Fortune Small Business. Thus, it is possible to conceptualize how a large group of individual enterprises can leverage consumers and investors to move the current paradigm to a new one. It is just the beginning.

B Corporation is also working in a variety of areas to facilitate this type of movement, from developing new measures of accountability to deriving methodologies for “impact investing” to developing a new corporate form for public companies to legally pursue multiple bottom lines (social, environmental and financial) without fear of shareholder reprisal.

The Well-Intentioned.
In the world of venture capital, Vinod Khosla is a household name. Khosla, co-founder of Sun Microsystems and investor in many Silicon Valley start-ups, opened his investment eyes in recent years to alternative energy. He quickly became known for his investments in corn-based ethanol (Khosla Ventures, his firm, deals in the various aspects of clean technology). Make no mistake, Khosla is motivated by financial return on investment, but rightfully sees clean technology as the coming revolution-- environmentally we have no choice to financially it makes sense. For him, a win-win would be significant financial returns from companies that are doing something to help the planet at a scale that could produce those returns. Energy production is one such area.

For a brief time, corn-based ethanol was the much-ballyhooed answer to all of our energy production problem. This is America. We grow a lot of corn. We can make fuel out of it. Perfect! Plus, though most American agricultural products are actually produced by large corporate farms, American’s still value the ideal of small family farms and thus garnering government support is easy. Again, a win-win.

The problem as we now know, a problem that would have been clear if Khosla and others had done environmental as well as financial due-diligence, is that corn-based ethanol is both very energy intensive to produce, it uses foodstuff required elsewhere and to make a serious dent in our fossil-fuel consumption, we’d need more land for cultivation than is even remotely possible.

This is a great example of a situation where there was actually consumer, investor and government alignment, but where the prospect of financial payoff trumped the long-term goal of sustainable energy production. As an impact investment, the profit motive outweighed the change motive causing improper or minimized due-diligence. Khosla Ventures’ clean technology investments going forward will no doubt provide much needed funding to innovative companies working to solve energy issues, but the well-intentioned but misguided corn-based ethanol enthusiasm on behalf of consumers, investors and congressmen reminds us to ask all the right questions with regard to multiple returns on investment.

The Bad.
I know this is almost too easy, but I’m going to use oil companies as an example anyway. Many of us have seen the major oil companies such as BP and Chevron work to rebrand themselves as ‘energy companies,’ beyond petroleum, and touting their renewable energy investments that will at least augment fossil fuels in the future. The reality is that the top ten oil companies on the planet spend less than 1% of their capital expenditures on renewable energy. It is hard to escape the disingenuous nature of their claims. In 2007 Shell had to pull down ads in the UK which overstated their green efforts.  

It is not difficult to see why the oil companies feel they need not make substantive change toward a renewables future. They lack the necessary three-point nudging I suggest above.

Though cars like the Prius have gained in popularity and some of the more egregious vehicles like Hummers have lossed market share, consumers have done little to drive less, demand more efficient cars or put pressure on oil (or car) companies to truly explore alternatives to fossil fuels.

Government, especially in the US, has done virtually nothing to give oil companies incentives to invest heavily in non-fossil fuel directions, nor has it made any significant progress in increasing vehicle efficiency standards.

Investors, of course, have put little pressure on oil companies as, well, they make tremendous amounts of money. Four of the top ten companies on the 2009 Fortune 500, including the top spot, were oil companies (and two more were auto makers). The top two most profitable corporations this year were also oil companies. Highest paid CEOs? Two of the top three are oil companies (Wal-Mart being the remaining one). It is not hard to understand why a market built on short-term returns would favor these companies.

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So to conclude this three-part piece, it is my contention that the best hope we have of making substantive change, of achieving the vision of a world where people/planet/profit actually reinforce each other rather than detract, is to push corporations from multiple leverage points to make the changes in products, services and processes that they lack the incentive to make on their own. This requires proactive actions on behalf of consumers, investors and governments. While much of the world will continue with incremental change, look to the aggregate power of small business and consumer actions to truly make a course correction that, while it may seem small now, will land us in a very different place than we would otherwise find ourselves.

Part II
The Role of Investors and Leadership

An inherent tension exists within for-profit social ventures. Often they are founded by ambitious people who truly want to solve social or environmental problems, and see the marketplace as an effective means of doing so. As if often the case, though, they need capital to get these ventures of the ground. And as many of us know, investment capital rarely comes without some strings attached. If the business isn’t turning a solid profit, it likely won’t matter how much ‘good’ it is doing.

While investors have the right to demand some return on their risk, often a rift can open up between the profit-motivated investor and the change-minded entrepreneur. A profit motive will entail a certain set of decisions to achieve end goals. Similarly, a change motive also require its own path, which might diverge from the profit motive path. At a small scale, however, matches can be made that align sympathetic investors and their ‘patient capital’ with astute change-makers who see success as a combination of financial solvency and social or environmental problem solving.

But will those nice alignments be enough to course correct as noted in Part I of this post, or simply further incremental change with localized success but little ability to scale? Further, what happens at the slower moving, more institutionalized levels such as multinational corporations and policy-making? To achieve course correction requires throwing full institutional weight behind a new way of doing business and making rules. And it appears that nothing shifts institutional weight faster than incentives for personal gain. This, of course, raises a clear contradiction--I am suggesting a collective good created out of personal self-interest. How can this be...?

In any of the institutionalized chains of command, there are those that hold the ultimate purse-strings. In Corporate America, for example, influence comes from three different points of a triangle: consumers, investors and the government. Without appeasing those constituent groups, even the highest paid CEO will be powerless. So nudging the ship, this Ark of Challenges, will require a new incentive structure derived from both the top and bottom of the business ladder. Neither a top-down approach, nor a bottom-up one, will get the job done alone. 

So this begs the question... what are those incentives? Well, money seems to work wonders.

From the consumer perspective, it is fairly straight-forward. Companies want to sell what people want to buy so very simply consumers must change their buying habits and hold companies accountable for the products, services and actions. Consumers have significant power to push companies in new directions simply by making different choices at the store.

As for investors and philanthropists, it’s time for them to take responsibility for the businesses they support. Whether a board-seated seed funder, distant shareholder, or donor, it is simply no longer okay to contribute cash to something that feels good without holding leadership accountable for multiple (or combined) bottom lines. One idea of how to throw weight around is to commit investment sums early on but allocate portions according to progress against performance milestones. Or better, don’t fund anyone that doesn’t have a change model that is crafted with the same integrity and diligence as their business model.

And what about the government? I’m sure there are many ideas but I’ll throw out tax incentives to start. Companies who achieve certain social and environmental performance standards would be eligible for tax breaks. Companies who tie executive compensation to meeting these standards, and actually achieving them, could be eligible for even greater incentives that are given directly to corporate leaders. Yes, I am suggesting that bonuses be tied to social and environmental performance just as much as financial, supported by the government but not at a cost to taxpayers. Companies that institute product end-of-life take back policies could gain even more. Businesses that use minimal raw materials could be rewarded. And so on. Leadership incentives would ensure sustainability was as high of a priority as financial return, as well as provide some cushion for executives worried about breaching fiduciary responsibility by looking ahead more than a quarter. The government has a role to play, but it need not be over-regulation (though certain policies like cap and trade or a carbon tax are indeed critical).  

It would be folly to think that the collective power of small actions, if performed in concerted effort, cannot shift the direction of the ship just enough to set it on a new course. Part III of this entry will look at some real world examples. If any readers have suggestions of success, failures or good-faith attempts gone awry, please comment below.

Part I
Are We Doing Good or Just Feeling Good?

The numbers are impressive. 50 million consumers make at least some purchasing decisions based on a company’s claims of ‘doing good.’ That’s 1 in 4.6 Americans or about 22% percent of the US population over 18 years old. On average, 160 million Americans donate $229 billion  each year to charity. That equates to approximately $1,000 for each American over 18 or 2% of the average US household income. Billions more are invested each year in social enterprises (broadly defined here as anything serving the public good while attempting to generate profit), ranging from renewable energy to recycled paper products to jobs skills programs and so on. By this account, it seems we are swiftly moving in a positive direction where people are making informed decisions, donating to organizations trying to make a difference and fund business that benefit the 3 P’s—People, Planet and Profit. But are we?

We are indeed making progress, but I would contend that is it very slow. There are however, two kinds of slow progress. Let’s call the first incremental change. This common concept is simply the process of taking small, intentional and forward steps on a path to some end goal. Let’s call the second form course correction. In this scenario, imagine a ship traveling thousands of miles across the ocean. If it changes course by just one degree early in its voyage, by the time it reaches the far shore it will be hundreds of miles away from its original destination. In navigation, that’s bad. In social change, it can be very good.

Currently we are making incremental change, but a pace that is not keeping up with the growing challenges we face (climate change, famine, political instability, water access, corruption and so on). But what if rather than making concerted effort after concerted effort to achieve small wins, we muster all of our weight and focus it on nudging the Ark of Challenges just a degree or two towards a better shore?

The reality is that we have almost no idea if the billions of dollars spent, donated or invested on incremental change are having any scalable success. Yes, there are numerous examples of localized successes which absolutely must be applauded. But are the large issues being tackled at their cores, or are we simply acting like Bugs Bunny using gum to plug up a hole in the dam that in turn causes two more to open up... in other words, using stop-gap measures that don’t solve the real problem at hand?

Imagine if we took the collective weight of all these people and dollars aimed at doing good and leveraged that towards a common goal—a reformulation of our financial markets full of incentives and rewards, for managers, consumers, policy-makers, communities, investors and the planet alike. A sort of collective self-interest where people win the most when everyone wins. To be clear, I am not proposing some sort of Marxian system of mutual benefit through artificial equality, but a free marketplace built upon and rewarding a new set of end goals.

How would this look? What is the role of investors, business leaders and the public? In Part II I’ll dig deeper into the roles of these various actors to see if its possible to nudge the boat just enough to make substantial infrastructure change. Part III will explore some examples-- the Good, the Bad and the Well-Intentioned.

This was highlighted in readings we discussed during the daily 2-hour Colloquium sessions. A couple of these described scenarios that explore the conflict between individual and collective well-being. In one story, a subsistence farmer stops chipping in to the community fund used to support the poor, and forces his family to live on the bare minimum for two years, in order to save enough money to create productive assets he can use to trade its way to a higher income. This eventually benefits his family and the larger community, but the community ostracizes him and his family while he’s doing it, first because he has broken the social contract, and later because they begrudge his wealth. In another story community members fail to speak out against a moral crime that the community allows to go on because they believe their collective happiness depends upon the crime’s perpetuation.  A few people leave, but they do not speak out.

The power of social pressure to keep us from doing what is right, or to obscure what the right thing actually is, was on my mind. On the one hand, there is the right of the individual to pursue his own happiness. Then there is the common good, which in some cases, temporarily or permanently, conflicts with individuals’ rights.  And there is the issue that the common good and the common will may not always be aligned—communities may resist change that would actually benefit them.  I was mulling this last aspect of how social pressure conflicts with self-interest and even collective well-being when I was on the airplane.

At the airport, before I got on the plane, a friend from the Collaboration (who was taking a different flight home) had mentioned to me that he had caught a cold that he thought might actually be swine flu. A few other people had gotten bugs too with similar symptoms. My immune system was already weaker than usual at the moment for other (non-contagious) reasons, so although I was pretty much recovered I was conscious of the risks of catching a more serious bug. My significant other at home had encouraged me to buy a facemask to protect myself while traveling, and I was sitting there knowing that I ought to put it on, but feeling very reluctant to do so. I was thinking about why this was, when wearing it would certainly not do any harm to anyone else and would be good for my health, and maybe even for others.

The problem was that I realized I was reluctant to wear it because of what it might suggest to my fellow travelers: that either I was a threat to others, or that I thought of other individuals as a threat to me. The social signals were contradicting what I knew would be the prudent thing to do. I realize this equivocation may sound silly, but on the other hand not a single person among the hundreds in the airports and planes I had seen coming and going to the meeting wore a sanitary face mask, yet surely some of them were sick, and some others of them (perhaps nearly all) were reasonably vulnerable. I must not have been the only one subject to this social tide.

So I thought about the readings, and about when it’s worth doing something different and risking making one’s community uncomfortable in order to make something good happen… and I put on my mask.

In preparing to write about what prevents people from ascertaining whether they’re having an impact or not, I saw an interview with Professor Michael Sandel, who teaches political philosophy at Harvard. Sandel outlined the three general types of moral arguments. One is the utilitarian idea: in other words, whatever creates the greatest happiness for the greatest number. For example, torture of the one is justified because it benefits the many. The second is individual rights: freedom to choose for one’s self. For example, not being forced against one’s will to subsidize another’s welfare, or conversely, freedom to live a full life through access to opportunity. And the third is virtue and the common good: what is in the public interest. For example, provision of public education to cultivate a shared sense of civic responsibility among those educated. Each type of reason has come up in SVT’s research and experience into how people relate to measuring impact.

While many nonprofits and for-benefit companies we’ve polled consider managing impact to be of primary importance, it tends not to be as urgent as other priorities. Many of these groups are asked by funders to create customized reports tailored to the funders’ tastes, but these reports tend not to improve the ability of management to know what is working or how to improve. Thus not only is it physically difficult to find additional resources to do a more meaningful kind of impact analysis, and some feel it would be unjust to pay for it themselves when they’re already being asked by funders to do so much for the sole benefit of the funders. If funders or others with a vested interest would “put skin in the game” to help get impact measurement paid for, many impact-oriented businesses and nonprofits say they would be much more likely to do it—essentially an issue of individual rights and fairness, as well as resources.

On the investor side, many early stage investors don’t see a strong need in their own investment decisions for evidence of impact or for a management capacity devoted to assuring and improving impact. Down the line, however, these investors recognize that later stage investors, who tend to be more institutional, do value this information. Still, most often the infrastructure does not get put in place early, when it would be cost-effective to do, for reasons that at first blush boil down again to the individual rights argument: why should the enterprise or early stage investor subsidize the creation of an impact information infrastructure when it is mainly going to benefit others later? 

But there is more to the story than just fairness. I recently debated with a social venture capitalist friend about how one can know whether impact is happening. He said, ”Do you know the bonefish? They swim in schools that collectively look like a big fish. When a predator comes upon them, the school collectively senses it, and instantly moves as one into two or more groups to confuse the predator.” To this venture capitalist, there is a connection among the fish that lets them act instinctively in unison for the collective good. This is analogous to the relationship between him, the individual impact investor, and the ventures he invests in. He trusts his ability to judge empirically and intuitively whether impact is or is not taking place. To him, applying formal and objective measurement is not only unnecessary; it risks interfering with this transcendent connection. His is one spin on the stance held by a number of philanthropists and investors, as well as entrepreneurs and other leaders in the social capital space. They express skepticism about applying the language and metrics of efficiency and effectiveness. They see these as being derived from free market capitalism, which has seemingly proved adept at hollowing out our capacity for wisdom and humanity. So there is a “virtue” argument against measuring impact.

Yet it butts up against the experience of many in the field who passionately believe the common good is being failed by the current absence of impact measures. A social entrepreneur we know who has worked for the past five years in Cambodia has been deeply troubled by the fact that so many aid and development nonprofits in the region receive funding from donors overseas, without any check on their actual results. In one case he knows of personally, the director of an orphanage is known locally to have sex with the orphans in his care—and yet well-intentioned donors continue to fund the do-good organizational profile he posts online and in grant proposals. This sort of tragedy spurs many to call for a behavioral shift toward accountability and an impact measurement infrastructure.

Champions and foes of the impact measurement movement have been too quiet about the moral issues at stake. Let us name them and improve our grasp of them, so we can collectively shape solutions that address the moral risks on both sides of the issue.

The phrase SROI is intuitive. People who haven’t heard it before immediately grok that it speaks to the idea of quantifying the non-financial benefits created by a given entity relative to investment.

Beyond that, opinion seems to split into two camps, the Pro and the Con- with many people holding both opinions simultaneously.

• Evolution
• It’s part of the professionalization of the field. It implies strategy, invites a conversation about how we can be more strategic.
• When you hear “impact,” you think about the cost of measuring it. But “return” sounds like efficiency.
• It’s of interest to investors or donors who bring expectations of more rigor.
• Social enterprise has more business thinking [than traditional development organizations]. Attaching a value to social and environmental things, I think that’s a good thing.
• A bridge to the finance world
• It’s in alignment with the CFO or investor. I would be comfortable having that conversation [about social impact] using those terms. If you come with ‘social impact’ only, they’d say, “Why are you coming to me?” Today they don’t know how they fit. SROI helps them get into it.
• It holds the potential to create a marketplace. I get a mental picture of a stock exchange for social value-- it’s exciting.
• In sum: "The promise to me of social enterprise is sustainability. The term SROI is about sustainability."

• A fuzzy straightjacket
• I’ve never been sure how to measure it. It’s fuzzy…. tricky to wrap my head around.
• It implies boiling things down to one or two metrics. Is that useful?
• A quantitative goal is good I suppose, but there is not such a quantitative story in agriculture- if you try to use a clean, neat metric you might be overlooking some important impact- one that’s unexpected, unquantifiable, or that takes a long time to manifest.
• I felt frustrated [in an social investment fund that quantified impact] with the way it limited the types of businesses we would invest in.
• “Smells like Wall Street”
• On the one hand, the term implies comparison of apples to oranges. Arts vs. environment would be ridiculous, but it has that connotation.
• I don’t like the term, I wish it had not been coined. This is not vocabulary we should not borrow. The words bring a lot of baggage into this space that shouldn’t be there. We need an entirely new dictionary.
• An alternative term without its own baggage is hard to find, but should be found.
• In sum: It’s an interesting time for the field of impact evaluation, but the language can be dangerous."

One eloquent statement came from a film entrepreneur:

“I think it’s a good thing that business is waking up, but shoehorning [social value] through another frame that was created to do something else I don’t think is right. The frame of ROI was created for efficiency, and the people in charge of it are given authority based on effectiveness in that area, not on moral leadership.”

And another from an impact investing veteran:

“It’s hard for me to come up with an example of any for-profit or nonprofit that isn’t a net negative [impact]. It really depends how you define ‘social.’ Peoples’ hedonic index goes up, so if you include pleasure, there could be a net positive. Many of the costs are borne by society…. I’m jaded, but the loudest probably get the most press. It’s very easy to be overcome by the PR. That’s partly why you want the SROI- stories are really powerful, so something that is more objective would be useful.”

And this veteran will have the last word for now: “It’s really hard to come up with a standard way of measuring, but I agree it’s worth trying.”

(see the Economist's "Capital Markets with a Conscience," Sept. 1).

An increasing number of players seem to agree that getting transparency into what impact is occurring, using a language people can agree on, would do wonders for the capital markets. It is one of the key dominos that needs to fall for the social capital markets to be unlocked.

At SVT we admire startups that have clearly identified a specific set of proverbial dominos to topple, and the order in which they think they will fall, and who are working with all they’ve got to knock those dominos over.  For example, GoodGuide’s dominos are basically: 1) customers have access to data on products’ environmental and social practices at the point of purchase; 2) customers buy products that have a more benign impact; 3) producers of those products have a growing financial incentive to decrease their impact; 4) the information about impact becomes more valuable; and 5) GoodGuide as the source of that information gets lots of “eyeballs“ and makes money.  Being crystal clear about what the dominos are is essential to being able to figure out whether they are in fact tipping, and whether they’re doing so at a cost that will allow the process to become profitable and scale.

We’ve been thinking about what the dominos are in the impact management space. Some of the cardinal ones might be:

1. Impact information is definable in terms people generally can agree on, and is accessible.

2. Enterprises want information about their impact.

3. Enterprises obtain information about their impact.

4. Money and other benefits flow more freely to those enterprises that know and manage their impact.

5. Enterprises with impact information become more effective and efficient at creating positive impact and reducing negative impact.

6. The planet becomes healthy, happy and sustainable.

And there are other dominos we could identify (which do you think are important?).  Until this point for obvious reasons there’s been a lot of energy focused on #1, making impact information definable and accessible. We see this in everything from GoodGuide to the exciting efforts of B Lab, the Rockefeller Foundation, Acumen Fund and the Global Impact Investing Network, who have formally announced the creation of their Impact Reporting and Investing Standards (a taxonomy of units of measure of various kinds of impacts and proxies for impact), to the host of frameworks that articulate the process for defining and measuring impact, and the host of software-enabled tools for lowering the cost of doing so. But what about domino #2, enterprises wanting the information?

The funny thing is, while a lot of the visionary leaders in this space realize the power of this information to help them persuade others that there is a more efficient and effective way to solve their chosen problem, scale with quality, capture value, decrease risks, and inspire, when you really start to unpack the demand for this information, the benefits are by no means universally embraced, and the reason isn’t just that the information has seemed relatively expensive to acquire.

What are the down sides to transparency about impact? We will be unpacking the dark side of impact in coming posts.  What negatives to knowing one’s impact, real or perceived, have you observed?

Currently, the world of corporate sustainability tends to fall, generally, into a few camps. One is the ‘do no harm’ principle. Another is government compliance- making sure no laws are broken. Yet another is ‘monitoring and evaluation’ which is fairly ominous. This is for psychiatric patients, not proactive business efforts. And yet another is the ubiquitous annual report. Time and again the format of the report dictates the activities undertaken.

All of the phenomena noted above have at least one thing in common—they are not connected to any sort of systemic change. They may help managers prevent damage but do not leverage the best that companies are capable of doing to help the world and its people.

Though we have seen some incremental change in corporate thinking in recent years, a paradigm shift remains distant and elusive. Will large companies be able to reinvent themselves as entities that derive revenue directly from environmental and community benefit? Doing so will take a new brand of leadership.

Next month, the 2nd annual Social Capital Markets conference (SoCap 09) will take place in San Francisco, bringing together investors, social entrepreneurs and others blurring the lines between business and ‘doing good’ from around the world to discuss making change through markets. The speaker and attendee lists are a who’s who of this space. While SoCap promises to be instructive with A-list experts-- and fun in a class reunion sort of way-- the question it must address is how to get its message to the greater business community- the same one that is capable of knocking global economies off-kilter and rewards profit at any cost.

The Social Capital marketplace, of which our company is proudly a part, is just a first step. Events like SoCap provide a loudspeaker for for-benefit business to speak to the greater world; to create case studies of corporate success in a language that makes sense on Wall St-- an audience that most would say is usually much less receptive to progressive thinking than the business leaders on the West Coast. 

The challenge lies equally within two often-opposing aims: those of us who aim to create positive impact via profitable activity in the social capital marketplace have to apply our small-but-significant successes on a much greater scale; and corporations that aim to generate profit regardless of impact must fundamentally revamp their leadership, not simply to instill beneficial practices from the top down, but to create corporate cultures where innovation of processes and products that work toward environmental and community improvement is a required element of success.

SoCap has the opportunity to channel the collective voice of its constituents to the traditional business community; a community that will need a lot of help manifesting new leadership and the philosophical underpinnings that can fundamentally change corporate thinking. SoCap can provide that leadership assistance should it’s organizers and participants choose to do so. It’s off to a great start, but in subsequent years the event should move from a forum for sharing ideas to path for actively changing a broken corporate system through leadership training and case study/business case development. 

I do declare, on this here virtual soapbox, that the environmental progress made in the last few years is in danger. That danger, despite intense and positive environmental activity, is stagnancy. The biggest barrier to progress can be success.

It is not uncommon for leaders in a field to make strides ahead of the competition, whether it be technology, consumer products, social impact, environmentalism, etc., get recognition for their efforts, and then rest on their proverbial laurels.

After decades of struggle trying to make an easy case, environmentalists found a much needed beacon of hope--an easy to measure and communicate metric of progress: tons of carbon equivalent (CO2e). Carbon reductions are critical and the fact that there is an easy to evaluate metric of success in CO2e has been hugely beneficial in helping companies, governments and other organizations manage carbon and provide a focal point for addressing climate change. But... it should not stop there.

The risk, which may already be becoming a reality, is that environmental activity is managed to simply lower CO2e. Yes, it’s the old ‘what gets measured gets managed’ axiom. What mainstream environmentalism lacks, ironically, is an ecosystem approach that a) considers effects of climate-related activities in multiple areas ranging from biodiversity to environment-based economic development for communities and b) allows for the development and emphasis of non carbon-related projects in critical areas including water, biodiversity and agriculture, among others.

A holistic approach to environmental thinking will open the doors to a new generation of work that not only addresses critical climate change concerns, but that also put environmental protection and restoration into the context. To do this requires an easy means of managing progress and communicating results. While it may not be possible that all of these areas can be boiled down to an easy to use metric, we can work to do a better job of measuring and managing environmental programs that meet the multiple needs of the planet and its people together, cohesively, in a way that is dynamic and mutually beneficial. Organizations such as Ciudad Saludable and Grupo Ecologico Sierra Gorda have excelled in this. The answer is not yet clear, but CO2e has given us a model to follow, both positive and negative.

It is imperative, now more than ever with pending legislation in the US, global climate action and general momentum, that CO2e be the first step on the road, not the last. For the first time in decades, environmental activity is at risk of being a victim of its own success. CO2e provides a great starting point. Now, to move from minimizing damage to maximizing benefit.

The problem is, these days there are an incredible number of different types of investment opportunities, many of which have different types of data – some are debt, some are equity, some are debt that’s convertible into equity…not to mention their geographies or environmental and social sectors and impacts, which factor into their financial risk/return. It’s very difficult to keep up with all the template adjustments that need to be made to keep track of let alone extract business intelligence from all these entities, and all that programming time gets expensive. Many in the finance industry have been bothered by this for some time, so recently some clever folks came together to come up with a better way to enable computers to understand financial data coming from any source: XBRL.

XBRL means “eXtensible Business Reporting Language”… this is a fancy term for enabling computers to easily make sense of and work with financial reports from all different sources, by assigning a different tag to each type of data in the report. For example, “net revenues” has its own tag, so a computer can quickly determine which item is net revenues, no matter where it is found in the report, or what type of entity’s net revenues are being listed. This translates into tremendous time and cost savings in the tracking and analysis of financial performance for investors and company managers alike. It is incredibly handy in today’s complex financial world, since there are so many different types of financial instruments, and not all financial reports are structured identically. But where it gets really exciting from our point of view is when it comes to the next frontier of finance: managing information about social and environmental returns.

Measuring financial performance is closely related to measuring performance in terms of social or environmental impact. In both cases there is a need to track quantitative (dollars and numbers) information specific to a given organization, although in the latter case it is also important to track the nature or degree of change, as well as testimonials that may include audio and video, which as of now XBRL doesn't cover. And in both cases, the variety among and change within the myriad types of organizations makes it quite costly to keep a technology-based information management system current. As such, XBRL might hold some keys to reducing the cost of not only financial performance data analysis, but also social and environmental data analysis.

It’s worth noting that XBRL has been created using an open standard, which is to say that everyone in the XBRL network can gain access to and work to improve the basic taxonomy that forms the basis of the business reporting "language" of XBRL- (the taxonomy is more or less the equivalent of the XBRL "source code").  However, access to XBRL is not free; the gateway is through XBRL International, Inc. (XII), a membership fee-driven nonprofit that functions as an international standards organization to ensure the language’s core structure is maintained and supported, and facilitate consensus. (One division, XBRL-US, was chosen to define the standard that would be used by United States corporations when the US Securities and Exchange Commission mandated that they report financial information using XBRL beginning at the end of 2008.) XII's members are a consortium of companies, consultants, governmental entities, and nonprofits, many of which have a financial incentive to promote the standard's mass adoption. Each partner is free to charge customers for providing them services that involve the use of XBRL, not unlike the relationship between Linux and Red Hat.

The only group we are aware of as now that has forayed into the use of XBRL to help track social impact is the Acumen Fund/Google/Salesforce/ANDE/(and many others) effort that has led over the past 2 years to the creation of Pulse, a tool for managing impact investor portfolio data. Acumen has an RFP out right now for a home for Pulse that we think could potentially function somewhat similarly to XII. Stay tuned for more updates!

In honor of Bastille Day we looked up the French for XBRL, and it is: XBRL!


 

We've got more problems
Than we'll ever need
You got gang violence
And bloodshed on the street
You got homeless people
With no food to eat
With no clothes on their back
And no shoes for their feet

We've got drug addiction
In the minds of the weak
We've got so much corruption
Police brutality
We've got streetwalkers
Walkin' into darkness
Tell me
What are we doing
To try to stop this

I said you wanna be startin' somethin'
You got to be startin' somethin'

It's too high to get over (yeah, yeah)
Too low to get under (yeah, yeah)
You're stuck in the middle (yeah, yeah)
And the pain is thunder (yeah, yeah)

You love to pretend that you're good
When you're always up to no good

Ain't the pictures enough, why do you go through so much
To get the story you need, so you can bury me
You've got the people confused, you tell the stories you choose
You try to get me to lose the man I really am

The major ingredient of any recipe for fear is the unknown
And this person or thing is soon to be met

Just because you read it in a magazine
Or see it on the TV screen
Don't make it factual
See, but everybody wants to believe all about it

Honey, come set me free
Don't you know now is the perfect time

No time for castles in space
Or livin' in make believe

If you wanna make the world a better place
Take a look at yourself, and then make a change

Just take it slow
'Cause we got so far to go

So keep the faith
Don't let nobody turn you 'round
You gotta know when
It's good to go
To get your dreams
Up off the ground
Keep the faith, baby, yea
Because it's just
A matter of time
Before your confidence
Will win out
Believe in yourself
No matter what it's gon' take
You can be a winner
But you got to keep the faith
...Gon' keep it brother
You got it

Nothing good ever comes easy
All good things come in due time
Yes it does
You gotta have something to believe in
I'm telling you to open mind

Don’t stop til you get enough
Let that rhythm get into you
Don't try to fight it
There ain't nothin' that you can do

Nation to nation
All the world
Must come together
Face the problems
That we see
Then maybe somehow we can work it out

There'll be no more mountains for us to climb
We can touch the sky and light the darkest day

If they say -
Why, why, tell 'em that it's human nature


____________________________________________________________________________

All lyrics from All Michael Jackson Lyrics. Listed here in the order quoted above:

Ok, so perhaps its a little silly, but Acumen Fund and the others behind the Pulse initiative have declared today, June 16, as World Metrics Day. Yes, it’s fairly arbitrary and no, those of us in the ‘metrics community’ don’t expect families to be gathering with picnics to listen to local bands and buy cupcakes at bake sales. But, it is nice to see enough interest in this topic to even jokingly proclaim a celebration, let alone to actually convene people around such an important topic and build tools to make the concepts tangible.

Pulse is a platform designed to help Acumen Fund, and soon others, track basic performance data from its investees. Acumen Fund worked with a variety of heavy-hitters including Google, Rockefeller Foundation, Salesforce.com and PWC to define a metrics taxonomy and build a platform which on-the-ground organizations can use to enter performance data and funders can use to get a better sense of the returns of their investment. Pulse is an ambitious endeavor that is already gaining traction.

Interest in the space will be increasingly beneficial in that tools such as Pulse can not only bring more accountability to investors, but have the potential to help organizations actually perform better through data-driven decision making. Now... to realize that potential.

There seems to be increasing agreement among donor/investor communities that accountability is important. Various initiatives, from Pulse to New Philanthropy Capital’s idea of an “Association of Nonprofit Analysts,” to name a few, are evidence of this trend. This, we feel, is quite positive. It is important, however, not to get tracked into focusing only on the funding site of the equation. Though we very much applaud funder efforts to ensure their grants and investments are indeed productive, the point of impact reporting should not be to put funders’ minds at ease, but to ensure that the programs that are funded have tools to continually improve their work and thus become more effective at reaching programmatic goals.

There is much debate about who should determine metrics and require organizations to report on them. There are logical arguments on both sides—funders have a right to know if their money is being used wisely and organizations have a right to tell their story fairly. For us, the debate is not so much about origin but rather about end goal. Organizations and their supporters should be aligned with regard to end goals, and those end goals are what should determine metrics. What this means is that context is key. Performance measures hold little value without a contextual understanding of the conditions/sector/geography/geopolitics/etc. in which an organization operates.

So what does this mean with regard to metrics determination and implementation? Regardless of whether funders or organizations drive the process, those doing the actual work on the ground must have a say in what performance indicators are used. They must accurately reflect what a social enterprise or NGO can achieve in its operating context and, above all, provide valuable information it can use to do what it does, where it does it, even better. If that’s not also the funders’ end goal, then there is a misalignment.

World Metrics Day may be simple fun or the initiation of a movement (hopefully the latter). Regardless, it denotes the early stages of what will hopefully be a move from counting simple outputs to truly enabling social and environmental organizations to continue to learn, grow and ultimately do the best work they can with the resources at hand.    

Many who love the concept of SROI thrill to the vision of a universal performance measure that places human and environmental well-being on par with financial wealth…. Or to the vision that do-gooders might really be able to account for their performance…. Or that philanthropic money might be allocated against more objective criteria…. Or that SROI could be compared directly with financial ROI to reveal a new, sustainable “efficient frontier”…. Or that SROI will reveal the financial returns driven by social investments…. Whichever particular vision it is, they love SROI!

On the other hand, many of those who dislike it can’t stand that it implies that you could sum up all that is of value into a single, quantitative ratio…. Or that it caters to the dangerous tendency of mainstream capital markets to abstract everything to the point that it is no longer anchored in a real source of value.

Many of us, however, see a middle ground: that SROI in practice may provide a coherent underlying architecture on which to build processes and tools that help organizations manage the social returns of their investments in a hands-on way.

The analogy to financial ROI implies that SROI is two things: one, comprehensive, and two, a single ratio. The dilemma, though, is that to arrive at a single ratio, the social value numerator has to be in money terms so that it can be divided by the investment denominator-- but a complete summary of all significant social value simply cannot be represented in exclusively monetary terms. For example, the value of "children not orphaned" simply can't be fully captured in terms of their increased earning potential.

Many, especially in the finance industry, see exciting potential in figuring out how to unify all information about non-financial impact into a single ratio that would be more directly analogous to financial ROI. In concept we think that would be cool too, but it is hard to imagine that it would ever be perfectly analogous to financial ROI, which is the comprehensive sum of all financial value relative to investment.

That presents us with a choice. We can narrow the definition of “return” to refer just to that part of the value that can be reasonably captured in dollar terms; we can expand the definition of what “return on investment” means to include multiple numerators (monetary, quantitative, qualitative and maybe even narrative), relative to investment; or, we can scrap the term entirely.

A lot of us who have participated in the SROI conversation, and put the idea or measuring social returns into practice, have felt like the first option would not really get us anywhere—after all, we were trying to move away from the straightjacket of financial ROI being the sole design criterion for everything, since that was so clearly leading us into the abyss.

So, some took the third option and moved away from the term to chart a course to other concepts that spoke more accurately to the actual steps in the process and to the product.

While others, including ourselves, find the concept represented by the term itself-- with the implication of comprehensiveness, systematization and relevance to capital markets-- to be too powerful a compass point to abandon entirely. But we recognize that for it to be comprehensive requires a more broadened definition of return, so we have settled for annoying the financiers with an interpretation of SROI that results in multiple facets of value relative to investment... and we've either made the best of-- or gone into temporary denial about-- the knotty information design problem presented by multiple types of social value numerators.

Fortunately digital technology and the internet open up the possibility of transmitting videos just as easily as 1s and 0s. What does this look like? Microplace is one example of an organization beginning to put financial returns into their social context systematically, by including information about who, where and how poor are the clients served by a given microfinance organization. E+Co is reporting information quarterly about their quantitative social and environmental outputs, like the number of people with new access to clean energy, on par with financial performance. And Calvert Foundation was an early pioneer of interactive output accounting with its “SROI Calculator.”

The debate over the meaning of SROI is surely a creative one, and hopefully its tension will continue to spur constructive debates that lead to interconnections between the profit-driven and mission-driven worlds. We hope that one connection made will be that more professionals in the finance world will realize that, in isolation from the other kinds of returns that go hand in hand with it, financial ROI is a needlessly imperfect gauge of value.

Nonprofits could visualize where the needs for their services are, and what impact they, or others, are having on those issues... as well as how much it costs them to do it in different places.  Funders could watch where services are drying up as the economy shrinks, and where the gaps between services and needs are greatest.

Roving digital journalists could team with both citizens and academics to tell important local and global stories, such as of how lending in one place causes changes in health, jobs, population, traditional culture, forestation, water, emissions, or waste; or how a shortage of funds in another place causes changes in literacy, poverty, homelessness, domestic violence, or entrepreneurship.

People around the world could add in stories, images, videos and other data they capture with their cell phones and send into the digital globe via SMS. The digital globe could be constantly updated in real time.

You could tap into all the world’s data and create your own, customized maps with your own data just for you and your friends to see. If you did something really cool, you could share it with others.

And there could be a big “fast forward” button.  NASA, Shell, the king of Saudi Arabia and the World Health Organization could model and play with 50-year scenarios geospatially. Maybe they’d get together and bounce ideas around.

There could be a big “refresh” button, that lets you reset all the data and assumptions, or just a select few.

What would you want to do with such a toy?



 

Why do we do this? What draws us to go far out of our way to convene face to face? Is it the thrill of travel? The exotic locations? Meeting friends and colleagues in person? The ease of brainstorming in real time? Probably all of the above. They are key elements of convening great minds to address a challenge and at least in part, why we continue to do it.

But what about the information to come out of these events however? Where does it all go? Given the vast number of meetings/conferences/dinners/gatherings that take place globally each year, why do we not have an equally tempting way to share all of the knowledge and insight derived from these discussions? In our case, monitoring and evaluation is top of mind for many organizations. Some great advances in thinking and process have been made, and there is a great deal of new information generated every day about what works. Why, then, does the community not know about these advances. Why, then, does the community not know about them and therefore continue to trudge down the same road as always?

Knowledge can be described in several ways. To simplify, let’s consider two categories of knowledge. The first is knowledge as wealth—units of knowledge that carry a value and a person with that knowledge can use it at another’s expense. In other words, the fewer people holding this information, the better off each holder as he or she can sell/trade/capitalize on it. Examples range from stock market analysis techniques to secret recipes at trendy restaurants. The second category is knowledge as a public good.  In this scenario, information (though still valuable) is freely accessible and the more people have access to it, the better off everyone is. The value is derived not from how much you can sell it for, but how you use it to build new products and services, help people, protect the planet, etc. Examples here range from open-source software to biology to the evening news. Despite their opposite natures, both types of knowledge can align well in certain circumstances (such as the development of non-Apple applications and on the proprietary Apple iPhone).

In the world of performance management and impact evaluation, both types of knowledge are present. Though we have a long way to go, we are getting a better handle on knowledge as wealth as we build new and better organizations with social and environmental goals, as investors look for the next big thing, as funding-seekers look for novel ways to gain a competitive edge, and so on. But what about the public good knowledge? Where is it and how to do we access it? The answer to date is to attend every meeting/conference/dinner/gathering and then commit it all to memory, hoping to dig it out of your head when it is needed. This is not effective. Anyone who has ever studied a language knows the frustration of not using that language in a real setting for years, only to forget the words when the time finally comes.

The question now is how do we compile and access the public good information we all derive from our networking events? To do so will require three key things (at least):
1)    A low (or zero) cost and easy-to-use place to house, enter and access “public good” knowledge
2)    Sufficient incentive for those who have this knowledge to share it
3)    Awareness of the resource’s existence by its potential users

Like many public goods, however, there is a network effect of usefulness. In most situations, those who already possess the most knowledge have less incentive to contribute as there is little for them to take in return. It is only once a threshold of useful information exists that others have the incentive to join in. A basic example of a network effect is the familiar telephone. Originally there were two people talking- Alexander Graham Bell and his associate “Mr. Watson.” If someone came to sell you that third telephone, would you buy it? Unlikely as there are not many other people to talk to. But, if someone built the infrastructure (phone lines) and gave away the phone for free, soon there would be a greater incentive to join as your friends would soon be there too. Similarly, to have a functioning warehouse of institutional knowledge, the more people that are sharing the information, the more enticing it is for new users to contribute. So, how do we get people to share.

The challenge now is twofold: a) who should build the infrastructure (e.g. NGOs, governments, private enterprise, universities) and b) what is the business model for maintaining this network (e.g. a subscription fee, per-use charges, foundation grants)? To ease the burden of the network effect, an entity will have to take on the initial risk of setting up the means of housing knowledge, maintaining it, and creating something the very existence of which facilitates continued use by both those who have knowledge and those who need it…

Any ideas?

We have our ideas, and there are several projects underway around the world, but we would like to open this for discussion among the readers of SocialEdge, which itself addresses the network effect challenges of knowledge in our field. 

 

Imagine you went into a restaurant and rather than a menu, you were handed only a culinary Code of Conduct.

For your contribution of $10, we declare our intention to*:

1)    Hire employees from the area surrounding the restaurant
2)    Buy ingredients from a reputable supplier
3)    Cook them into something we hope you will enjoy
4)    Serve it to you in accordance with local health guidelines
5)    Ensure we compost our food waste and donate leftovers to the local shelter
6)    Send you an email once each year (with your permission) to let you know how many meals we’ve served

*These guidelines, developed by the Foundation Of Restaurant Knowledge (F.O.R.K.), are aspirational and we cannot guarantee they are met in all situations.

For a few very laid back customers, the F.O.R.K. guidelines may be enough to get them to put their money down and get ready for dinner. They seem fair and positive. Granted the customer has no idea what they get for their money, but it feels right and nothing else is being offered so they assume the best.

This situation is analogous to many social enterprises and their funders. In a time when economies are failing and funding is tight, it’s hard to imagine that any investor would put funds into an organization that can promise little more than an attempt to meet a set of guiding principles. But they do. Repeatedly.

Back at the restaurant, though, most customers might have a few more questions to ask, including:

• What type of food does this restaurant serve (Thai, Indian, Italian)?
• How much food do I get for my $10? A whole meal? A small plate to be shared?
• Do I get my choice of entrees or only what the chef feels like making?

Once these next-level questions are answered, the majority of people would likely stop at this point and either choose to place an order or move on to the establishment down the road. With this level of detail, most people will feel they have enough information to make a decision (and most do).

Still, though, some customers who are attuned to the particulars of achieving social benefit through business might want to really test the F.O.R.K. Code of Conduct itself, with questions like:

• What percent of employees are indeed from the local neighborhood?
• How much of the ingredients are local and/or organic?
• Does the restaurant support community gardens with its compost and provide job training in its kitchen?
•  How much of the above is achieved for each $10 spent by a customer?

Guidelines such as those put forth by the fictitious F.O.R.K. are pervasive in the social sector. They are everywhere, from niche voluntary carbon programs to broad consumer goods. Though it may seem counter-intuitive, investors and funders in the social sector often stop at the first level of detail- a Code of Conduct not even suitable for dinnertime decision-making, let alone one that affects positive social change.

One field that is notorious for this approach is sustainable tourism (or ecotourism). There are literally dozens, if not hundreds, of ways to get certified as an ‘ecolodge’ or ecotourism operation simply by making efforts to adhere to some set of guidelines. The primary means of certification is an evaluation of operational elements that point to efforts to meet the guidelines (such as intention to hire local staff, intention to protect the surrounding ecosystem, intention to build with native materials, etc.). Annual renewals simply check the continued attempts to meet the guidelines as opposed to setting benchmarks and tracking actual progress towards these guidelines.

Despite significant financial investment, it is rare that investors ask the simple question: Is this sustainable tourism operation indeed benefiting the local community and environment? And once in a great while, the question has a Part 2: If so, by how much, and in what ways can we improve our practices to achieve even more impact per dollar spent? It’s as if investors have forgotten to hold their social investees accountable as they would the financial recipients. To be clear, expectations should very different than a financial investment, but no less rigorous.

Recently, a coalition of heavy hitters (including the UN Foundation, Rainforest Alliance, UNEP, National Geographic, IUCN and several others) came together to develop a set of internationally recognized ‘criteria’ for sustainable tourism… with a major difference. The Global Sustainable Tourism Criteria (GSTC), released last year, operate in a similar fashion as most guidelines with the important exception that they are actively developing processes and tools to help organizations know if they are actually achieving positive social and environmental benefit, in a quantifiable way. The goal is to give operators actual tools to use in assuring they can deliver on their multiple goals (social, environmental and financial) and be able to communicate that to investors and funders. This should benefit more stakeholders involved - operators, investors, tourists, communities, and in general anyone spending money in this system. (Full disclosure: SVT is assisting in the development of these tools, as a volunteer member of the GSTC).

Tracking the real results of investment in the social sector is not as daunting as many believe. It is possible and critical. It happens every day in business with simple tools (as basic as an Excel spreadsheet); it is only a matter of rethinking how we define the ‘return’ in return on investment. Just as few of us would order from a restaurant that could only tell us they would try to make us good food without knowing what it is, especially in times when cash is tight, so should we know what our social investments buy us.
 

 
 

Many people have begun to suspect by this time that there must be knowledge about what works and what doesn’t that they should start with, or that could make what they are already doing smarter.  This is underscored for me every year when the Global Social Venture Competition rolls around, as judges, entrants and student organizers all grapple with how to evaluate the business plans’ “social return on investment” which each team is required to quantify in its business plan.

The few pages of instructions the GSVC provides for how to develop an impact assessment in a business plan feel somewhat less adequate to all sides with each year that passes. And, when a venture moves beyond planning and into implementation, the questions that come up are much more numerous, and require more than the high-level knowledge than can be found in the survey courses many MBA programs now provide. They include, to name but a few:

• Finance questions: How does a high social return on investment affect the cost of capital? Are there ways this can be used to decreased the cost of capital? How can this be employed as a strategy in capital formation? Can and should deals be structured to leverage large amounts of money without the social investors subsidizing the conventional investors? How?
• Accounting questions: What are the appropriate environmental, social or other impacts to measure in a given industry or sector? Are there any sector-specific performance benchmarks for carbon footprints, water footprints, health impacts or other kinds of impact? Whose job is accounting for this, and what training should they have to do it? Do audit standards exist? How can management use this information to inform strategy and improve results?
• Marketing and communications questions: What is the difference between marketing and “social marketing”? What are ways social media can be used to reinforce or undermine a venture’s intended impact? Are there principles or standards of practice for branding socially responsible businesses? How can branding and communications affect the value of sustainable business?
• Legal questions: What issues do managers need to understand about their right to remain true to a socially responsible business model when that comes into conflict with quarterly profit maximization? How can and should the needs of investors be balanced with those of other stakeholders and the environment? What legal and tax issues do managers need to understand about hybrid for-profit/non-profit business models?

Corporate social responsibility and social entrepreneurship courses are becoming more common, and touch upon these questions. However, we need to institutionalize the field's knowledge into our academic institutions if we are to reach a significant percentage of the population who will shape business in the coming years and decades. While leading practitioners have knowledge of every one of the topics above, 99% of their time they are in the field, not in the classroom. Over many years of experience they have accumulated datasets in their heads, and in some cases produced formal research for papers, conference presentations and university lectures. But this knowledge has not been codified into the scholarly disciplines that produce Ph.D.s who can be hired onto faculties, develop textbooks, develop curricula teach every day. In most cases I am aware of, it is only the faculty (and often these are only Ph.D.s) who can actually change curricula.

As a result, with minor exceptions, future business leaders—at least those who get MBAs—  are still being taught the same canonic skill set that managers were taught before the world realized that natural resources were not limitless, the climate could be made uninhabitable, and poverty may in fact be solvable. And, ten years into the competition, the GSVC's entrants are still having to rethink the same questions when they assess their potential impact, instead of building on the efforts of the rougly 1200 teams from around the world who have come before them. Social entrepreneurs and social investors will continue to operate on the margins of our economic system until this situation changes.

Although the canon needs to evolve, what this looks like will also be different than education prior to the advent of the global economy. One place where experienced entrepreneurial leaders are bridging academia, government and the private sector to address systemic gaps is here in Bangkok. Soon I’ll talk about the fascinating ways Ed Rubesch and Pattraporny Yamla-Or are teaming with the Thai national laboratory system and Thammasat to create a truly global entrepreneurship program. What other universities or programs do you think should be spotlighted as models?
 

Invitation: The public is invited to both the GSVC Symposium this Friday, March 20 at the Bangkok Art and Culture Center and to witness the semifinalists’ pitches to the judges there the day before.  See www.gsvc-sea.org for more information.

Update: the need to update MBA curriculum to speak to the systemic ethical and management failures the business world is seeing is addressed by Kelley Holland in the New York Times.

The underlying drivers of value the conventional economic system has left behind include trust, integrity, and the ability to sustain the creation of financial value; these are also interwoven with the health and well-being of the people who are employed by the business, buy its products and are affected by its operations, as well as with the natural resources within and upon which the business rests. These sources of value—trust, health and well-being of stakeholders, environmental resources, and sustainability—are, ultimately, assets. But none of these assets are directly accounted for in the financials on which the global markets trade, nor are they adequately defended by corporate law, or protected by market regulation.

Those charged with correcting the economy’s problems are attempting to find the rainbow… but they’re wearing infrared goggles.

Take the management accounting issue. The experts working on solving our crisis are surely very smart about how the current financial system works, and hopefully about the triage that will help us get the credit markets and all that rest on them operating again. But when it comes to wisdom about the tools that create the conditions needed to support investment in and management of businesses that grow financial, environmental and social returns simultaneously, the expertise is not to be found within academia or on Wall Street quite yet. It is to be found among the doers- the managers and investors at work in the social capital markets.

There's a ton of knowledge out there. Development finance, environmental management and social marketing are becoming increasingly established fields with university curricula and faculty to boot… but out in the field there is a growing group of experienced social entrepreneurs, impact investors and even impact analysts who know quite a lot now about how the multiple kinds of value are managed within individual businesses, venture funds, and funds of funds. There are emerging marketplaces with lessons to offer that broker opportunities to invest in debt and equity that deliver not only financial return but also poverty alleviation benefits; to buy carbon credits with or without co-benefits of the underlying projects; and even to fund social return on investment itself. And while we haven’t seen “impact derivatives“ yet, we are seeing an increasing number of financial engineering innovations particularly in microfinance, like credit guarantees that leverage the risk tolerance more so than the capital of guarantors to make more capital available to MFIs, and securitizations that offer investors choices about risk and return so that ever larger pools of capital can be brought to bear.

While most of these microfinance innovations are still based fundamentally on the ability to predict financial cash flows, rather than on integrated analysis of the underlying social benefits that drive the success of microfinance, this is beginning to shift. Take for example the Grameen Foundation, which has just launched ProgressOutofPoverty with a section aimed at educating investors about the importance of social performance and impact metrics. Why?

Consider that from a financial standpoint, one of the most attractive things about microfinance is that it is countercyclical, meaning it does not seem to be affected by the ups and downs of the global capital markets. At the root of this is the fact that the very poor (microfinance’s customer base) have to make ends meet every day, or they and their families go hungry. They also trust their microfinance lenders not to rip them off the way the alternative lenders often do. This combination of customer drive and goodwill—which are essentially key performance metrics—translates into sustainability of both microfinance’s social returns and of its actual and potential financial return. They are intertwined: without the social assets, microfinance would not be its marvelously countercyclical self. Therefore, to properly manage investment in microfinance or any security derived from it, we must also manage the social assets.

The field of social entrepreneurship is behind in the codification of management tools and institutionalization of knowledge. Right now this is a bottleneck hindering us from moving out of the global economic crisis we face, and into the sustainable economy we need. The good news is, this crisis will help us close that gap.