Social Impact Bonds: I Couldn't Disagree More

My response to those who condemn Social Impact Bonds

A few days ago I came across a post entitled "The Hidden Reality Behind Social Impact Bonds".  As I've mentioned several times, I believe the Social Impact Bond Model has true potential for progressing social finance in Canada.  The author of this article, however, has taken an extreme opposite stance, and I couldn't disagree more with his opinion.

If you aren't familiar with what a Social Impact Bond is, I suggest you read my explanation on a past post, "Social Impact Bond Model: 7 Easy Steps" before continuing. It's a short but comprehensive read, I promise.

Here's the part of the author's post that inspired me to explain why he is missing the whole purpose of Social Impact Bonds:

"Let’s take a systems approach to understanding the biggest flaw of the Social Impact Bond program. We have to ask the question, where does the money funding the Social Impact Bond come from? Obviously, it comes from the budget of the federal government. Now, where does the federal government get the money for its budget? It comes from taxpayer dollars. This is where a Social Impact Bond starts to make no sense at all.

Here is a more concrete example. Assume that a given program is successful in meeting its predefined measures. The program was funded by a private investor. The government now has to pay the private investor its profit, using taxpayer dollars. Taxpayer dollars are explicitly going into private hands through the use of the Social Impact Bond. On a side note, assume that a given program is bound for failure. What investor would invest in something with no return? One might as well donate money instead...The problem is when you or I are forced to pay a profit to that private individual via a tax. It is no longer a voluntary exchange..."

Alright, Let me begin by clarifying that the purpose of the Social Impact Bond is to SAVE the usually-wasted taxpayers dollars in the long-term.  If you look to the yellow-highlighted words, the author attempts to illuminate the absurdity of using tax-dollars to pay back investors.  In my mind, this is no "hidden reality"...in fact, using our money  to pay for private return is CLEARLY what is happening.  And it's happening because the investor was willing to take a risk on the given social program, it worked, and will now save taxpayers' money in the future because the government no longer needs to waste time or money on its traditional, failing methods.  The return paid to the private investor will be only a fraction of the total our government will save going forward... that's the whole point.  It's a math game.

Are you okay with that?

I certainly am.   

 

Now let's take a look at the words highlighted in blue, and remind ourselves that ANY investment, be it for high financial returns, blended value, or pure impact, involves risk. 

The author asks, "What investor would invest in something with no return?", and I respond, "Ugh, many people invest without receiving a return."  The risk factor is what drives the market to work.  Just as investors take on the risk of losing money in the stock market, investors in Social Impact Bonds take on the risk that the given social program/venture will not be effective.  But at least it will have allowed us to see what doesn't work, which will make for more effective solutions going forward.

And so to the question of "What investor would invest in something with no return?", my second response is: Impact Investors, of course.

And there are a growing number of these people.  We need them, because relying on donations and government grants does not allow for risk-taking in the non-profit world.  And without risk-taking, the big solutions won't come.  It works the EXACT same way in the main-stream business world. 

SO, as you might tell, I am a little heated by this topic.  But it's only because I believe in its potential and want taxpayers to understand the powerful influence of Social Impact Bonds and non-profit risk-taking.  

In Obama's recent budget announcement, $100 million is allocated to social impact bonds.  While this is only a meager .003% of the entire U.S. budget, it is at least a step forward.

 

Only time will tell how well the model will work and how taxpayers will respond.  

Stay tuned, it will be an interesting ride!

Social Entrepreneur vs. Social Enterprise

A Noteworthy Distinction 

As the field of social innovation grows, we are all still attempting to discern the jargon. What is the difference between the terms ‘CSR’ and ‘sustainability’? What about ‘social finance’ and ‘impact investing’? What does a ‘social business’ mean and how is that different from a ‘social enterprise’? What on earth does social innovation even mean?

Well, the answer is: No one really knows. 
(Sidenote: For the rest of this post I will use ‘social innovation’ as the big umbrella term for the others.) 

Sure, there are some well-articulated definitions out there, but these are merely opinions. From the research I’ve done and the network of social innovation professionals I have spoken with about this question, I have concluded that this sector is still very much in its infancy. And as any sector or industry develops, the structure behind its communication, efficiency, and norms develops with it. As such, the terms that describe the different pieces of this field are still building consensus. 

While I have my own way of defining each of the terms mentioned above, I would like to highlight my interpretation of the distinction between ‘social entrepreneur’ and ‘social enterprise’. In my mind, these are vastly different pieces of the social innovation puzzle and I feel compelled to explain why. 

Here it goes: 

Many people understand a social enterprise to mean a for-profit business model motivated by the shared value it procures. The idea is for the business operations to achieve a social mission while churning a profit (often a smaller margin than the traditional for-profit firms). The profit is the unique piece of the social enterprise that keeps it sustainable, as opposed to a traditional non-profit that depends on grants and fundraising. The profit is either reinvested back into the social enterprise to scale its impact, used to pay shareholders to pool capital, or invested in its affiliated non-profit  as unrestricted funding. 

A good example of a social enterprise is Potluck Catering, whose wonderful service I experienced in Vancouver for the Social Innovation and Social Finance Tour. Potluck’s revenue from its cafe and catering services is invested back into its 5 community social programs that are integrated into its daily operations. For example, Potluck provides a Life Skills Training and Employment Program that has trained and employed dozens of Vancouver’s downtown east-side residents with barriers to employment. Click here to learn about the other amazing ways they are giving back. 

I completely agree with this explanation of a social enterprise. Where I disagree is how people use the term social entrepreneur to describe the individuals who start-up these social enterprises.

Since the term ‘social entrepreneur’ was coined by Ashoka founder, Bill Drayton over thirty years ago, let’s take a look at how Ashoka explains this increasingly popular concept:

"Social entrepreneurs are individuals with innovative solutions to society’s most pressing social problems. They are ambitious and persistent, tackling major social issues and offering new ideas for wide-scale change.

Rather than leaving societal needs to the government or business sectors, social entrepreneurs find what is not working and solve the problem by changing the system, spreading the solution, and persuading entire societies to take new leaps.

Social entrepreneurs often seem to be possessed by their ideas, committing their lives to changing the direction of their field. They are both visionaries and ultimate realists, concerned with the practical implementation of their vision above all else."

So to me, the social enterprise is about the business model, and the social entrepreneur is about the person.  And this person has a system-changing idea.  

The concept of system-change was quite fuzzy to me at the start.  I didn't see the full picture until I engaged with some of Ashoka's social entrepreneurs and understood the level of impact they are having on our society. Take Al Etmanski, for example:

Al is an author, advocate and social entrepreneur specializing in innovative, multi-sectoral  solutions to social challenges. He is President and co-founder of Planned Lifetime Advocacy Network (PLAN), which assists families across Canada and globally address the financial and social well-being of their relative with a disability, particularly after their parents die.  He proposed and led the successful campaign to establish the world’s first Registered Disability Savings Plan for people with disabilities.

Al identified a social gap, created a new idea to solve it, and changed the way individuals with disability can live as citizens.  I am completely inspired not only by his work, but also by his personal drive, perseverance, and entrepreneurial quality.  While I can throw out a ton more examples, I recommend you take a look at the Ashoka Global  website, where there are almost 3000 social entrepreneurs being show-cased. Now if you're looking for some inspiration, you know where to go!

So can social entrepreneurs start up social enterprises? Absolutely.  But not all social enterprises are started by social entrepreneurs.  It is this systems-change piece as well as the new idea that makes this distinction so clear in my mind.

Michael Porter: A Strategy Change

The strategy-man talks shared value 

You cannot have graduated from business school without knowing Michael Porter. He’s the king of business strategy, the celebrated Harvard professor, the brain behind the famous paper, “The Five Competitive Forces that Shape Strategy”. Any good strategy class will undoubtedly teach you two things: Porter’s Five Forces, and Porter's concept of Value Creation. 

I have recently come across Porter’s interview with the Harvard Business Review entitled, “Re-thinking Capitalism”. The interview is a complimentary piece to his latest paper co-authored with Mark Kramer, “The Big Idea: Creating Shared Value”. In both contexts, Porter drives the same message home: “Creating societal benefit is a powerful way to create economic development for the firm”. 

My thoughts: THIS IS A REALLY BIG DEAL!

Michael Porter, the business strategy guru, is telling the world that “Business and Society need each other”. Of course, we’ve had many environmentalists, government representatives, and even CEO’s talk about sustainable supply chains and the like, but they often preach these triple-bottom-line ideas to advance their own interests (be it to help their cause, win an election, or sell more products). While it's understandable, it may just not be so credible to the public.

Michael Porter has nothing to gain or lose from speaking about shared value and so his words are both credible and objective. And because he has such influence on business education, the Adam Smith enthusiasts and profit-pansies may actually internalize the fact that corporate sustainability isn’t some fluffy idea that should get pushed to the side in bad times. They might, for the first time, truly understand that achieving long-term economic success requires a blended value chain. 

Allow me to halt for a second and make sure we’re all on the same page here, business and non-business grads alike: A value chain is the sequence of activities a firm undertakes to create value. This is different than a supply chain, because creating value implies additional activities like marketing, sales, customer service, etc.      Capiche?

SO, the next question is: How can businesses, especially large companies, simply up-and- change their value chains? Wouldn’t that be a costly and lengthy process? 

Porter argues the opposite. He’s saying companies can, and have, cut costs and improved efficiency by serving societal and environmental needs in disadvantage communities locally and internationally. He says: 

“The concept of shared value, in contrast, recognizes that societal needs, not just conventional economic needs, define markets. It also recognizes that social harms or weaknesses frequently create internal costs for firms—such as wasted energy or raw materials, costly accidents, and the need for remedial training to compensate for inadequacies in education. And addressing societal harms and constraints does not necessarily raise costs for firms, because they can innovate through using new technologies, operating methods, and management approaches—and as a result, increase their productivity and expand their markets.” 

Here’s the Wal-Mart example Porter highlights: 

“By reducing its packaging and cutting 100 million miles from the delivery routes of its trucks, Wal-Mart lowered carbon emissions and saved $200 million.” 

And there are loads more examples that help improve the bottom line by integrating into your model important  issues such as energy use, employee health, and environmental safety. The idea is to delve deeply into each step of your value chain and ask some of these difficult but important questions: 

“Who are all the stakeholders in this link of my value chain?” 

“How are they specifically affected by this link's activity?” 

“Could this activity be more productive? Higher quality? Less wasteful?” 

“How do I fill those gaps?” 

“What effect will these value-added changes have on the environment, my community, and the international community?” 

Your answers will lead you to some surprising conclusions.

I’ll end this post by throwing in another one of Porter’s arguments in the article, one I feel strongly about and have mentioned before: 

“Businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face. The moment for a new conception of capitalism is now; society’s needs are large and growing, while customers, employees, and a new generation of young people are asking business to step up.” 

I couldn’t have said it better myself.