Beggars AND Choosers

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I recently read a 2008 report from the John’s Hopkins Center for Civil Society Studies on the priorities non-profit organizations had for the Obama administration coming in.

I was struck by how needy the organizations seemed:

[the] poll finds the vast majority of nonprofit executives reporting little improvement in government policy toward their organizations over the recent past, and pinning high hopes on a new national administration to establish a more supportive policy environment for their work at this crucial juncture of our national life. Heading the list of priority measures identified by these executives were four specific measures:

  • Restoration and/or growth of funds for their field in the federal budget;
  • Reinstatement and expansion of tax incentives for individual charitable giving;
  • Federal grant support for nonprofit training and capacity building; and
  • Reform of reimbursements under Medicare, Medicaid and other federal programs to ensure that they cover the real cost of service.

So basically all of the top priorities involved a demand for greater funding.  This seemed pretty interesting to me considering that, according to the 2008 Non-Profit Almanac, total revenues and assets at non-profit organizations grew 54% from 1990 to 2005, a full 20% greater than GDP over the same period.  Granted, these figures are skewed by the large proportion of revenues coming from the high-inflation education and health sectors, but the message is clear: non-profits haven’t been starving.

So what gives?  I think its addiction.  Similar to the way some corporations get addicted to growing through acquisitions, non-profits have become addicted to growing by acquiring new funders.  Sure enough, it is the largest revenue organizations that placed priority on these funding supports, while smaller organizations at least placed some emphasis on training and capacity building for their employees and student loan forgiveness for public service careerists.

Of course, I understand the need for funding support for the critical services in society that private markets fail to pay for, but the dollar addiction is intriguing when considered alongside this:

Only 22 percent strongly favored strengthening the capabilities of government oversight agencies or introducing “community benefit standards” to clarify the basis for tax exemption.

Ok.  No one likes to be regulated, but it needs to be accepted that organizations that are fully tax-exempt and benefit from the tax deductibility of charitable contributions cannot just have their cake and eat it too.

This is something that private markets understand.  Becoming a publicly traded company promises a huge and ongoing source of capital, but any company that wishes to get even a taste of those dollars has to endure major hurdles and regulation.  There are enormous legal, accounting and underwriting fees, onerous accounting standards and quarterly reporting requirements, and constant oversight from the Securities and Exchange Commission.

But most non-profits want subsidized, hassle-free, blank checks.  At the very least, they should be willing to accept some “community benefit standards” in order to get that money.  But it should go deeper than just the money.  An organization should want that validation, to be able to point to a standard they have met that certifies they are indeed providing their stated benefit to the community.

The icing on the cake is that standardization would only help them raise more money by allowing organizations to avoid to the dazzling array of individual foundation requirements on a case-by-case basis.

Posted on February 22nd 2010 in news

The awesome power of markets, ctd.

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Social Funds provides a nice addendum to my previous thoughts and theories on markets:

The Social Investment Forum (SIF) reviewed the performance of 160 socially responsible mutual funds from 22 of its members, and found that 65% outperformed their benchmarks in 2009. The SRI funds reviewed by SIF outperformed their benchmarks across nearly all asset classes.

This essentially means that those who invested in companies they believed to have a social impact achieved greater financial returns on average than those who invested in just traditional companies.

This is another nice setback for those who cling to the theory that you cannot do well by doing good.

Posted on January 26th 2010 in news

The awesome power of markets, ctd.

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As mentioned, I think the power of markets holds some potential for the public and social sectors.  Imagine.  Could a mechanism exist whereby funders, taxpayers and investors could assess the potential impact of an organization or program in real time and reflect the value and potential of that impact immediately?  Could there be a social stock market?

Durreen Shahnaz seems to think so.  She has tested many waters in her career, which includes time at Grameen Bank, the World Bank and Morgan Stanley, and now is the Head of the Programme on Social Innovation and Change at the Lee Kuan Yew School of Public Policy in Singapore.

Today, Shahnaz aims to develop an Asian social stock exchange.  According to her:

It is a stock market where investors who care about social and economic returns buy stocks and bonds of companies that have strong economic and social returns. Interestingly, in a social stock exchange both not-for-profit and for-profit companies can participate. For-profit entities can either issue shares representing ownership in their companies or issue bonds. Meanwhile not-for-profit companies can utilise the stock exchange to issue bonds an action in itself that can bring operational accountability to the not-for-profit sector (as opposed to carte blanch donations from foundations).

It is quite a compelling idea, and many iterations exist.  In Europe, there is the FTSE4Good, which measures the performance of companies that meet globally recognized responsibility standards.  The Canadian-based Green Stock Exchange allows trading in companies the exchange has deemed as promoting environmental sustainability.

There are still links missing between these models and the ideal.  The companies on these exchanges are pre-screened and, once listed, the investment criteria becomes the same old financial returns.  There is no opportunity to assess social impact in real-time and use it to make investment decisions.  It lacks that responsiveness that makes financial markets so powerful, that lets them weed out those who can’t deliver.  Investors must accept the potential for social impact from the assumed wisdom of the exchange gatekeepers.

And when the metrics are only financial, there is still that sticky problem of what to do when the solution has no price.  The impact may not be quantifiable in the company’s potential profits and we miss out on the chance to fund some good.

Brazil’s BOVESPA Environmental and Social Investment Exchange has thought of an alternative model.  They merely mimic the idea of a stock exchange, but attempt to replace financial metrics with social ones.  The listings are purely NGOs and funders can follow the impact and adjust their “investments” accordingly.

I like this, but why can’t we have the best of all worlds?  If the Benevolent Barons of the world want double- and triple-bottom line companies, then why can’t the social stock exchanges have two or three lines instead of one?

I can see it: an exchange with multiple lines, side-by-side, measuring the gains and losses in both social and financial terms.  We could then even run correlations, and have some empirical data on whether or not profit comes at the expense of social impact, and vice versa.  And if the thought of drawing conclusions from more than one metric (egads!) drives you into convulsions, there is no reason we can’t compress it into a single line that simply places weights on each component based on where the financier falls on the spectrum of socially-driven to commercially-driven investor.

That’ll do just fine for what I have in mind.  Any takers or makers?

Posted on January 19th 2010 in ideas

The awesome power of markets

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Ok.  I know its tough; markets haven’t exactly put their best feet forward in recent memory.  But leave aside for a moment the systemic failures and just think about what financial markets are able to do the majority of the time.

I came from a non-profit and social sciences background, and therefore had little understanding of financial markets before I began attending business school at NYU.  And I have to say that I am often in awe of what they do.

The power of markets lies in their ability to allocate capital to those institutions that would use it best (defined by returns in the world of finance).  What amazes me is how responsive markets are to the news of potential success.  If a rumor about the Apple tablet proves to be true, markets respond instantaneously, sending Apple’s stock price (NASDAQ: AAPL) streaking upwards in a fraction of a day before settling near a new equilibrium price that represents the product’s potential for increased returns.  Dell’s price (NASDAQ: DELL) may accordingly drop.  All of a sudden, Apple’s fundraising capacity has mushroomed.  It is able to attract even more capital that it can invest in its next cool doohickey.  And the cycle continues, as long as the market sees potential.

I imagine the potential for applying this to the social and public sectors.  A public school develops a new curriculum that proves successful in narrowing the achievement gap, or a government health agency makes a major breakthrough in the development of an AIDS vaccine, and funders are instantly drawn to the solution like moths to a flame.  The “stock” rises and, all of a sudden, there are financial resources readily available for these organizations that would use them best.  For training teachers on the curriculum.  For mass production and distribution of the vaccine.  For the potential to solve a problem.

In the markets, those who demonstrate the most potential become great institutions and those who don’t fade away.  We are left pining over what the Apple tablet may bring and quickly forget about those who failed before.

There is a powerful logic to this I find compelling.  Non-profits solicit funding; it rarely comes to them, and many ineffective organizations remain afloat because they are simply able to find some funder somewhere.  We accept failed companies so that we can have iPhones.  Should we not accept failed organizations so we can have those that create real impact?

I am not yet finished with this thought…

Posted on January 14th 2010 in ideas
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