iustitia

Jed Emerson of blendedvalue.org recently published a sort of introspective about his experiences in impact investing.  I read the paper and felt compelled to write the review below.  You can download the paper here.

———

First off, this is a great paper.  Jed does a fantastic job at bringing together the many mindsets in this field with a focus of their shared values – for example, good governance (social capital) is a foundation of both sustainable investing and critical to Fundamental investing.  Also, for myself who is only equipped with CFA level 1 knowledge of investing, I like how the paper is written not for experts but for individuals with an interest and a basic understanding of investment principles.

In many ways this paper is also a call to action; Jed literately calls for a revolution within finance to spread “sustainable” practices across traditional capital markets.  We writes, “our goal should not necessarily be to simply act as a catalysts to create a larger investment community of ‘sustainable’ firms, but rather to act as revolutionaries within Traditional capital markets to embed sustainable instrument practices into the capital market mainstream.”

Additionally, I agree with Jed’s assessment that “shorting bad companies within a good industry offers the potential to improve the efficiency of those markets, punishing the poor performers in a segment within which many would like to see greater growth and expansion.”  In many ways I also see (but it is not highlighted in the paper) a parallel between long/short funds and long only funds. Both have their niches, but long only funds could maintain a greater activist role within their investments, almost mimicking a private equity. While in long/short investments I see as being more like a public equity firm because there is less shareholder involvement (because of the short side).

A portion of the paper is spent solely focused on timing of investments. Jed mentioned that “as soon as one makes the shift from ‘short term flip and profit’ to longer term value creation one moves beyond simply crunching number to an exploration of how to augment such financial analysis with deeper manager insight and perspectives gleaned from sound, Fundamental research.”

I am reminded of Brian Trelstand, from the Acumen Fund, who argues that in order to maximize returns (both social and financial), one must focus on medium-term investments.  He argues that longer time frames on investments reduce IRR to where they become unsustainable.  Brian cites Robinson and Carlin’s 2009 article in Judgment and Decision Making (vol. 4, No. 5, August 2009), where they studied the outcomes of 4,394 hands of blackjack.  With rational, imperfect human play, they should have seen a distribution of aggressive and conservative errors in each hand. Instead, the study found that 80% of mistakes were a result of playing too conservatively.  The point is that being too conservative with an investment strategy can lead to lower performance. Brian didn’t define what a short, medium and long-term investment time-frame was, and I do not want to make assumptions, but I thought the concept was interesting.

All and all, this is a very interesting paper, especially as it is written from an insider’s perspective of a very insular community.  It also serves as encouragement and motivation for anyone interested in the emerging fields of impact investing or venture philanthropy.  The paper ends on the exciting note that “what was once a fad is now a trend, [and] how that trend evolves is a future we have the potential to create.”  I am looking forward to the future.

I was watching TV the other day and saw a commercial asking American’s to donate $10 to give mosquito nets to people in Africa. Unfortunately, I don’t remember the exact organization, but the ad caused me to look up organizations that do the same thing (give mosquito nets away) such as Nothing but Nets. I think that this “$10 to give a net” campaign (regardless of who’s doing it) epitomizes what is wrong with the way non-profits deliver their services, especially in developing countries.

There are certainly emergency scenarios where donations are needed. But, these nets aren’t for emergency situations. The $10 net donation is a short-term solution to a long-term problem and I see it as money wasted when I think about the opportunity cost. I’m not arguing that people don’t need mosquito nets in Africa, they’re essential, I just don’t think that a donation is the best way to go about it.

I am reminded by a presentation I attended in 2008 by Rob Katz of the Acumen Fund where he spoke about a $325,000 investment they made in an African mosquito net company back in 2002.  Before that, mosquito nets were not made in Africa; they were made in other countries and imported.  That’s great, but did this investment help anybody?

Yes.  Actually, it helped a lot of people, more people than could have been helped by the same size donation of just nets.  Actually, it might be the same amount, but the difference is where the people live.

The Fund’s investment of $325,000 started a Tanzanian-based company that now employs 7,000 people in Tanzania, and through innovation has reduced the cost of a net from $7 to $5.  The factory produces 20 million nets a year, and those nets last 10 times longer than average.  The cost savings, innovation, learning, and jobs were a result of a small investment rather than a handout.  These wide-ranging impacts resulting from the investment far outweigh a donation of foreign-made nets.

This is where non-profits and philanthropy need to focus more of their energies: giving people opportunities to help themselves, not just a giving them a handout.

In many ways I think this post also highlights the difference between delivering services/support through effective means vs. efficient means, and I’ll be exploring this idea in subsequent posts.

It’s true.  What’s different?  The tax status.  That’s it.

True, profits aren’t distributed to individuals (but they can be saved or distributed in salaries) and people can’t own equity in the same way as public for-profit companies (that’s also changing with SIX), but in this post I’m focusing on management and operations.

I attended a discussion with Ken Berger, the CEO of Charity Navigator last week.  One topic that briefly came up in discussion was the difference between non-profit and for-profit hospitals.  He noted that the services and quality were exactly the same, the only difference was the amount of taxes that each hospital pays.

Non-profits and for-profits can sell the same product, provide the same services, and operate and be managed in the same way.  The only actual difference is how much they pay in taxes (non-profits can even pay very high salaries).

Some people believe that non-profits should be managed in a fundamentally different way than for-profits. I heard in last week’s discussion, that only 0.2% of non-profits receive the vast majority of donations in the US, and this didn’t surprise me.  While much of what puts an organization in the 0.2% is due to scale and fundraising effectiveness, it is also due to a strong business-like approach to strategy and operations.

There is a division within non-profit mindsets - one group believes that non-profits should be run like companies, where inefficient management, low standards, and lack of planning is not tolerated.  These are the non-profits that learn from the experiences of for-profits and understand that there are no glaring operational differences.  However, the vast majority of non-profits believe that they fall into a special managerial and operational category that should applaud small achievements as long as some work is being completed (see my prior post on comparative vs. absolute advantage).

The first step to any sort of reform is acceptance. And, I think that non-profits need to accept that they are more similar to for-profits than they think.  And, therefore, there is much to learn.  There is no “non-profit way” to do business.  I recently read in a study by the Hewlett Foundation that Strive has been implementing SixSigma, and that The Acumen Fund is using portfolio analysis to manage a the risk of their social investments. These are great examples, but these are also only a few non-profits out of the many.

We need to borrow from the work of for-profits in managing our staff, developing our strategy and databases and managing our risk.  But first, we need to universally embrace the notion that we are all one-in-the-same and begin to raise the bar for our achievements.

I will be writing more on this in the coming weeks, and look forward to some good discussions.

I recently read a very interesting blog post by Phil Buchanon and below is my response.

———-

In response to the comments about markets: donors/investors are definitely attempting to create markets for non-profits, our donors are asking for a cost/outcomes, SROI projections, etc. to analyze the impact of their investments.  But, because there isn’t regulation on what these outcomes are, how to calculate them, or legal repercussions about publishing potentially-inflated outcomes, they can look larger than what would generally be agreed upon if analyzed.  Because of this, comparing investments between different non-profits is not always fair comparison.

Before a market truly exists, a legally-backed framework for reporting outcomes/impacts needs to be created, or else we’re right back where we started.  I’m all for a market-based approach, but a regulatory structure needs to be designed first; I think IRIS (http://iris-standards.org/) is a step in the right direction.  Nobody would want to invest a company if they weren’t sure that their financial statements were correct.  The same goes for non-profits.

I personally think that this is one reason that there has been such a growth in companies that “blur the boundaries” because it’s much easier to measure how many people you’ve helped based on the number of products/services you’ve sold than the current way that non-profits report outcomes.

I was inspired by a quotation my wife has as the description to her personal blog: “Most people would rather be certain they’re miserable, than risk being happy.” And I was again reminded of it as I finished reading the Hart House lecture by David Bornstein, “So You Want to Change the World?”.

In the last section of the lecture, Bornstein sets out to identify what drives the social entrepreneur, and touches on one aspect of American education: that our children are taught to fear failure.

Since this attribute is instilled in us from such a young age it manifests itself in many different forms throughout our lives.  I’m reminded of John Maynard Keynes’ identification of what he calls “animal spirits” - something present in people that do great things, the trait being that they don’t understand the consequences of failure and therefore take on such huge amounts of risk.

I agree with Borstein, that the fear of failure is taught in our uber-competitive schools, and I also agree with Keynes, that sometimes people not understanding the consequences of failure can lead to great things. Both of these men write about these concepts at very different points in history, and I wonder how this has changed.   Back in Keynes’ day (early-mid 20th century) there was much less education in general, so would an increase in education stifle entrepreneurship?

From this last thought I’m reminded of Thomas Kuhn, he wrote that paradigm shifts tend to be initiated by people outside of the relevant discipline. Is it the lack of training that produces these results, or is it the self-defeatist and narrow-mindedness that can come from too much concentration in one discipline?  We still need experts and PhDs, but we also need cross-discipline collaboration to think outside the box.  And, most importantly, we need people that are not afraid to challenge others, and who see failure as a challenge, not an end.

The last practical example I have in this area comes from a friend who interned at Toyota while receiving her MBA from Yale. She studied the auto manufacturing process, and identified a major difference between Japanese and America manufacturers.  When someone on the assembly line noticed a potential problem, they would pull a cord, a loud horn would sound, the assembly line would stop, and it was seen a lost productivity.  On the contrary, when a someone identified a problem on the Japanese assembly line and pulled the cord, a soft series of bells rang, the assembly line slowed (allowing others to continue working), and rewards were given to staff that noticed problems.  In the end, the Japanese companies thought of it as a good thing for all workers to be on the lookout for potential problems, resulting in much higher quality of the product output.

Maybe we need to change the way that our ‘uber-competitive’ society thinks about failure. We should be less concerned about achieving what we mean to achieve, and more concerned about what we learn along the journey.

There appears to be a widening divide between the devices and technologies that companies provide their staff and what the staff actually use. I recently read a report by Accenture that randomly surveyed staff members in a variety of different roles, geographies, and industries.  The demographic surveyed was “Millenials” or people born between 1977 and 1997. Over 20% of staff surveyed stated that employer-provided technologies did not meet expectations; meanwhile 75% of staff did not feel that they had to seek corporate approval to use technologies that were not supported by the company.  Additionally, only 40% of respondents said that their company had published policies related to posting work or client information on the web.

Even more staggering is the statistics that emerged on e-mail usage.  Older millenials spend roughly 9.5 hours e-mailing every week, while mid-millenials spend an average of 7.7 hours and young millenials (HS and college students) spend only 2 hours a week writing e-mails.

So, in summary, the younger you are the less e-mail you tend to use, meaning that you will use other technology such as Facebook, Twitter, etc. to communicate with your clients and peers. And, that corporations (probably due to this tech age gap) are not evolving fast enough by providing their staff with the new technology in a secure way, which would also include creating and enforcing policies around it’s usage.

The tech gap might be because managers think that the technology is a trend, or that it doesn’t apply to their business, but more and more companies are embracing social media to expand their customer base and shrink their marketing budgets.  I recently read that Best Buy will be providing customer service and support over Twitter, giving customers a way to see each others’ questions and potentially find the answer themselves more quickly.

A half-century ago, companies didn’t feel comfortable providing staff with telephones, thinking that they wouldn’t be useful for productivity. It appears that history is repeating itself. We should embrace this new technology, at stake is the prospect of companies being forced into its culture, rather than having it forced into theirs.

I read a blog post today by Brett Bregman on the HBR blog portal titled “Why Parents Make Great Managers”.  He basically writes that good managers tend to be nurturing and those same qualities are present in parents. This complements something I heard from David Hunter (a performance management consultant) that managers tend to nurture, while leaders tend to be disruptive.

This made me think about something else I recently heard, that donors need to get better at making grantees “take the medicine” – i.e. manage to outcomes, be innovative, and act more like a business. We’re in an exciting time, when non-profits are beginning to act less like government, and more like a business. The analogy comes from thinking of a mother feeding her sick child medicine that he really does not like. It is the love the mother has for the child that makes her want to give him the medicine, and although the child might think that at that moment that the mother does not love him, overall he will see when he’s better that it was all worthwhile.  The mother must accept the short-term pain she gives the child to produce long-term success.

Basically, we need grantors to act more like leaders and less like managers. They need to look through the short-term pain and promote real change within organizations as a whole, making them more accountable to their outcomes and more productive dollar-for-dollar. What will be the result? Hopefully, a sustained future of success after a short period of pain.