Milton Friedman declared there is only one social responsibility of business, to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.
During the age of entrepreneurship, the gap between rich and poor grew rapidly. New business models directing capital in a more purposeful, moral way can help change that. Entrepreneurs who saw their ideas turn into billion-dollar companies over the past several decades are now increasingly looking for ways to direct capital toward the goal of making other people’s lives better. In this interview, Sir Ronald Cohen speaks with Dominic Barton about how the thinking has changed around raising capital for the benefit of society at large.
Dominic Barton: Thank you for being with us. I thought we’d start at a broad level on capitalism.
Sir Ronald Cohen: My view about capitalism is that it has evolved greatly in the course of my career. We’ve seen, of course, the age of entrepreneurship. When I started in the firm in 1969, big companies were the thing. But it was obvious that small was going to be beautiful, because innovation was more easily and more successfully carried out by smaller organizations. I realized that the gap between rich and poor, which I thought would be helped by entrepreneurship, was actually being exacerbated—not that you didn’t create a lot of jobs and you didn’t make economies higher growth through entrepreneurship and innovation—but somehow, the way the capital was being allocated meant that the rewards to capital were much greater than the rewards to labor, and the gap between rich and poor got bigger and bigger.
I began to interest myself in why we had been so versatile at developing ways of funding those who want to take risks in order to make money but had failed to find mechanisms for raising capital for those who want to help others, putting it very, very simply. As I worked through the reasons, it became apparent to me that something quite fundamental was going to have to change in our capitalist system. And I can now see, 17 years after I started to look at this, that this paradigm shift is going to disrupt the models of entrepreneurship, of big corporations, of philanthropy, and of government.
Dominic Barton: And what dimensions do you see?
Sir Ronald Cohen: It’s beginning to be apparent to me that business entrepreneurs—not all of them, but many of them—are, in their effort to solve these types of problems, going to create business models that can grow faster than the mainstream economy would allow them to grow because of the social impact, and of course, they can attract greater talent. And at some stage, they will probably have a lower cost of capital because they will be perceived as not having threats that companies that disregard their social and environmental consequences would have.
Dominic Barton: Do you mind giving an example?
Sir Ronald Cohen: In 2010, we developed, in the UK, the first social-impact bond, as it’s come to be called. We said, “Look, we will raise some money from investors who are driven to try and achieve risk return and impact—to help prisoners, 60 percent of whom return to jail within 18 months of their release, particularly younger prisoners”—to the extent that we can reduce the number beyond the threshold of 7.5 percent; below that, it would be a philanthropic donation. The greater the reduction, the greater the yield. And you can get 1 to 13 percent return. The punch line, Dom, is government is paying about one-third of the savings in the first year from preventing these young people from going to prison. So you have a mechanism here that can work on prevention of social issues. You can prevent people from going to jail. There are, today, 74 social-impact bonds across the world, in 18 countries, addressing 14 different social issues: dropout rates from school, dropout rates from university, prevention of type 2 diabetes, homelessness, teenage pregnancy. Dom, if I’m right, over the next several decades, the flows of capital within our whole system are going to be directed in a more purposeful way, from the point of view of society. Not just because people feel a moral imperative, as the millennial generation does, but also because it’s going to become the key to being a leader in your business area.
Charity refers to the direct relief of suffering and social problems. Philanthropy systematically seeks out root causes of these issues and endeavors to find a solution. Traditional philanthropy is a transactional process in which a foundation identifies, selects, and funds nonprofit organizations that do work in line with the foundation’s mission. The focal point in philanthropy is the grant proposal. Grant-seeking organizations submit proposals for work that they hope will align with the funder’s interests.
Clear measurement standards, high-grade operations, specialized products, and more training for entrepreneurs can make impact investing a more influential practice. Nearly ten years have passed since a coalition of philanthropists and investors introduced the financial-services industry to impact investing, a practice distinguished by its aim to generate social and environmental benefits alongside financial returns. In that time, impact-investing funds have amassed more than $77 billion in assets under management, and prominent investment managers—Bain Capital, BlackRock, Credit Suisse, Goldman Sachs, and JPMorgan Chase, to name a few—have added impact products to their portfolios.
As the impact-investing business has expanded, it has developed some growing pains. Impact-fund managers, who invest mainly in privately held businesses, are having trouble finding companies that are ready to put large amounts of capital to work. Evaluating those companies has proven challenging, too. They are highly diverse, spanning various sectors, levels of risk, and expected returns. And the numerous standards for measuring social and environmental impact can be overwhelming, even for industry specialists.
For these reasons, fund managers are able to market a wide array of products as impact investments. Investors, however, find these options confusing to sort through. Some products aim for below-market risk-adjusted returns, which is satisfactory for certain investors. Many more will consider only impact funds that achieve market-rate returns. Investors have also expressed concern that some new impact-fund managers might not have all the investment skills and experience they need to earn appropriate returns.
Strengthening the impact-investing business shouldn’t be seen as a priority only for fund managers. Expanding the industry could generate some of the money to improve human welfare worldwide. The United Nations estimates that reaching the Sustainable Development Goals in developing countries will cost about $3.9 trillion per year—and that private and public sources provide just $1.4 trillion.
Proven and self-sustaining economics. When the impact-investing industry has matured, investors will generate market-rate financial returns without tax breaks, subsidies, or other help from governments. Until then, governments can play an important role in nurturing impact-investing markets. The United Kingdom’s impact-investing market is more sophisticated than any other, in large part because of the government’s support. A decisive shift took place in 2012, when the government funded an entity called Big Society Capital with about £120 million from dormant bank accounts and a levy on the four main UK High Street banks (followed by another £210 million through June 2015). Since then, Big Society Capital has provided seed capital to new impact-investment managers and has served as a clearinghouse for knowledge of impact investing and social entrepreneurship.
The UK government also lent indirect but vital support to its impact-investing industry by going further than many governments in contracting public services, such as welfare-to-work programs, to nonprofits and companies. Some argue that this approach has not always fulfilled its promise to produce better social outcomes for less money. In any case, it has created reliable demand for social enterprises and impact-oriented businesses, which increases these organizations’ need for capital.
A clear, consistent way of describing products. Impact investing means different things to different people. Some see it as a strategy for beating financial benchmarks, because businesses that target unmet social or environmental needs can be profitable but easy for investors to overlook. Others are happy to accept lower financial returns for the sake of backing enterprises whose main interest is creating social benefits. The investors we spoke to believe impact-fund managers need to clarify their intentions as well as the trade-offs inherent in their approaches. In particular, managers should be more objective about the levels of risk and the expected returns, both financial and nonfinancial, of their funds. Just as a mature impact-investing market needs shared standards for measuring impact, it will also need a common language for profiling impact funds.
The family offices and large asset managers we spoke to in the United Kingdom are especially excited about investing in businesses that put profits first and see social impact as a coproduct of their work. One example is the Gym Group, a UK company offering affordable health clubs to low-income people whom the wider gym industry generally does not serve. With capital from the impact-investment firm Bridges Ventures, the gym expanded to more than 35 locations in under five years and returned more than 20 times its original investment.
A range of well-defined offerings. Another sign that the impact-investment industry has matured would be the availability of specialized products. Just as some mutual funds and exchange-traded funds concentrate on geographies, industries, and asset classes, so should impact investors come up with targeted offerings. Focusing on distinct social and environmental themes can help when it comes to setting goals for how much nonfinancial impact a fund will make. Thematic funds should also be easier for investors to compare. Impact investors have set up funds devoted to education, and healthcare is emerging as another focus area.
A high degree of professionalism. More capital will flow into impact funds when they consistently offer investors the same quality of service as other investment funds. Some impact funds have operated for more than five years and have established sound, disciplined processes. However, UK investors told us they have concerns about newer funds, pointing to shortcomings in areas like financial modeling, business-plan preparation, and the evaluation of management, which can be a major risk in impact-investment portfolios. Funds may also need to offer more competitive pay packages to attract top financial talent.
UK investors credit Bridges Ventures with setting high standards for professionalism and paving the way for other firms. Bridges was founded in 2002 to finance companies that serve the most deprived 25 percent of the UK population. Several of its funds, the last of which raised £200 million, have delivered returns that match or exceed those of traditional private-equity managers. The firm has consistently developed investment funds with progressive features. For one of its funds, Bridges created a way to invest in social enterprises whose legal structures make it difficult for them to accept outside financing. Many impact-oriented investment firms will also need to combine novel financing mechanisms with professional investment practices to appeal to a wider range of limited partners and increase the assets they manage.
The investors we spoke with made clear that the global impact-investing market has some way to go before it achieves these four hallmarks of maturity. We see several efforts that are especially urgent for impact investors, asset managers, governments, and entrepreneurs to pursue, since they will help establish a sound basis for the industry’s continued development.
Clarifying impact-measurement standards. Looking at a dozen impact-investing funds that publicly disclose how they measure impact, we found that a majority employ more than one impact-measurement framework. Fund managers tend to use multiple frameworks because no single framework has metrics for all the social or environmental impacts covered by their portfolios, or even by individual funds. This practice burdens prospective investors with interpreting and comparing the various metrics that fund managers apply. Fund managers, investors, and industry bodies must devise a set of metrics for social and environmental results and use these measures consistently. For example, investors that wish to finance improvements in educational outcomes should be able to look at several education-focused impact funds and compare them in terms of the same educational metrics.
Professionalizing the practice of impact investing. Many impact-fund managers need proven operating processes but lack the resources to create them or train employees accordingly. Investors can help by convening impact-fund managers to share knowledge. For example, the ImPact is a coalition of investment firms that have pledged to share what they learn about impact investing. In the United Kingdom, Big Society Capital gathers and disseminates knowledge of impact investment. Impact-fund managers willingly exchange ideas, particularly with newer funds, to help the entire industry gain standing among limited partners. The flow of knowledge has enabled the industry to become more sophisticated and to establish more consistent standards. Major investment-industry associations could also lend credibility to impact investing by defining the competencies needed by impact-fund managers and developing certification programs.
Supporting social enterprises and impact-oriented businesses. Mainstream fund managers are usually willing to allocate $10 million to $50 million in capital to a promising company, but few social enterprises and impact-oriented businesses have demonstrated an ability to deploy even one-tenth that amount of money. Government agencies and large companies can expand markets for impact-oriented businesses and social enterprises by changing procurement practices in their favor and help them scale. Social-sector CEOs also need better training, as well as seasoned board members to guide them as their organizations grow. Investors and impact-fund managers can help in these respects, in addition to providing capital. One example is a program being run by the UK not-for-profit OnPurpose with support from the Centerbridge Foundation to provide leadership development training for social-sector CEOs.
Improving marketing practices and product development. The top concern of the investors we spoke with is the difficulty of comparing impact-investment firms and their products. Impact-fund managers need to be up-front about their overall strategies and about the objectives and risks of individual products, particularly when it comes to how those products balance nonfinancial impact with financial returns. Managers can also create sector- or issue-specific products whose impact can be measured in consistent ways. Investors can help by recommending themes for fund managers to focus on and by setting clear expectations for financial returns and nonfinancial impact.
Impact investing has attracted the interest of major investors and asset managers and has formalized much of the infrastructure that it needs to become a mainstream practice. But some shortcomings persist. Impact-fund managers must lead the way in resolving these problems, with help from investors, entrepreneurs, and governments. By doing so, they can put impact investing on equal footing with other investment approaches and thereby unlock the industry’s full potential to respond to global social and environmental challenges.
As Charles Dickens so astutely observed about life during the French Revolution in “A Tale of Two Cities,” it was the best and worst of times. One could say the same thing today. The Fourth Industrial Revolution of technology networks and platforms could usher in an era of mass societal disruption — as well as unprecedented social cooperation. Whether the latter would prevail depends on the ability of nonprofit entities and the broader social sector to boost their collective impact by adopting the new business models that are disrupting the for-profit world. It would also depend on whether they can embrace what we call ‘Social Change as a Platform’ or SCaaP.
During the turbulent 1960s, Bob Dylan wrote the following powerful lyrics for “The Times They Are A-Changin’” that seems apropos for today. “Come gather ’round people, wherever you roam, and admit that the waters around you have grown. And accept it that soon, you’ll be drenched to the bone. If your time to you is worth savin’, then you better start swimmin’ or you’ll sink like a stone. For the times they are a-changin’.” At the time, anti-war protests ruled the day. A generational collide over the future of America was afoot. And all the images of a nation coming apart at its seams were emblazoned across a new communications medium — TV — that was coming of age.
And so is it today. The Fourth Industrial Revolution — what Klaus Schwab (founder of the World Economic Forum) defines as the fusion of technologies blurring the lines among the physical, digital and biological spheres — is upon us. Meanwhile, nationalism is colliding with globalism, machine learning and artificial intelligence advancing geometrically, and global warming is on a direct path to changing the very nature of our planet. Despite these many challenges, this revolution, like the many that have preceded it, also comes with a great promise of opportunity.
To be sure, there are reasons for great optimism. In just the past 30 years, the global poverty rate halved with many of the poorest people in the world becoming significantly less poor. These gains mirror dramatic improvements in health and education including advances in life expectancy, child mortality, health care provision, among other important areas. Moreover, most of these gains predate the effective integration of digital technologies into the cause. In short, it is reasonable to argue that the potential for social ‘changemakers’ armed with today’s digital platforms in partnership with large and growing virtual networks can dramatically improve the human condition.
Civil society — the network of institutions that define us as actors in the civil sphere independent of governments — is supposed to serve as the leader in promoting pluralism and social benefit. As Klaus Schwab notes that “a renewed focus on the essential contribution of civil society to a resilient global system alongside government and business has emerged.” Unfortunately, nonprofit groups, academic institutions and philanthropic organizations engaged in social change are struggling to adapt to the new global, technological and virtual landscape.
Legacy modes of operation, governance and leadership competencies rooted in the age of physical realities continue to dominate the space. Further, organizations still operate in internal and external silos — far from crossing industry lines, which are blurring. And their ability to lead in a world that is changing at an exponential rate seems hampered by their mental models and therefore their business models of creating and sustaining value as well.
If civil society is not to get drenched and sink like a stone, it must start swimming in a new direction. This new direction starts with social organizations fundamentally rethinking the core assumptions driving their attitudes, behaviors and beliefs about creating long-term sustainable value for their constituencies in an exponentially networked world. Rather than using an organization-centric model, the nonprofit sector and related organizations need to adopt a mental model based on scaling relationships in a whole new way using today’s technologies — the SCaaP model.
Embracing social change as a platform is more than a theory of change, it is a theory of being — one that places a virtual network or individuals seeking social change at the center of everything and leverages today’s digital platforms (such as social media, mobile, big data and machine learning) to facilitate stakeholders (contributors and consumers) to connect, collaborate, and interact with each other to exchange value among each other to effectuate exponential social change and impact.
SCaaP builds on the government as a platform movement (Gov 2.0) launched by technologist Tim O’Reilly and many others. Just as Gov 2.0 was not about a new kind of government but rather, as O’Reilly notes, “government stripped down to its core, rediscovered and reimagined as if for the first time,” so it is with social change as a platform. Civil society is the primary location for collective action and SCaaP helps to rebuild the kind of participatory community celebrated by 19th century French historian Alexis de Tocqueville when he observed that Americans’ propensity for civic association is central to making our democratic experiment work. “Americans of all ages, all stations in life, and all types of disposition,” he noted, “are forever forming associations.”
But SCaaP represents a fundamental shift in how civil society operates. It is grounded in exploiting new digital technologies, but extends well beyond them to focus on how organizations think about advancing their core mission — do they go at it alone or do they collaborate as part of a network? SCaaP requires thinking and operating, in all things, as a network. It requires updating the core DNA that runs through social change organizations to put relationships in service of a cause at the center, not the institution. When implemented correctly, SCaaP will impact everything — from the way an organization allocates resources to how value is captured and measured to helping individuals achieve their full potential.
To be sure, early adopters are already using technology to effectuate change at a pace and scale not previously available in the physical and digitally disconnected world. The marginal cost of delivery remains too high. But with today’s technologies, with support from the board and management to make it happen, social change at scale is possible. Here are some organizations that are on the way to implementing SCaaP.
- DonorsChoose.org: Every one of their 1.5 million donors can create engagement paths for each potential recipient of a classroom project, matching their specific giving preferences and history — something previously available only to large donors. It is the only nonprofit to be named to Fast Company’s list of the 50 Most Innovative Companies in the world.
- Health Leads: It is a healthcare organization that connects low-income patients with the basic resources they need to be healthy, as part of their regular doctor’s visits. As Forbes noted, “Community health workers, case managers and/or student volunteers screen patients for unmet needs and help them access any of the 50 basic resource needs relevant for their circumstances, such as food assistance, childcare vouchers, enrollment in a GED program — even negotiating with the utilities company to get their heat turned back on.”
- College for America: Southern New Hampshire University went from a small, relatively unremarkable New England institution to one of the biggest nonprofit online educators in the country. According to Campus Technology magazine, “SNHU has succeeded in the online space by leveraging technology and providing well-constructed courses and Amazon-like customer service to mostly older students at a cost they can afford.”
- Salesforce.org’s Power of Us Hub: Among the most successful online communities built on Salesforce technology, the Power of Us Hub facilitates peer-to-peer collaboration around the effective use of technology for more than 30,000 social change organizations. More than 98% of the questions asked get answered by the community, a real shared benefit model in action.
Just as Apple chose a platform approach when launching their App Store, these organizations are enabling their partners and contributors to share and co-create in the value chain they co-inhabit. Each has moved beyond allowing supporters to donate and promote, toward sharing real value through stakeholders’ talents and assets.
We are at the dawn of the SCaaP era. The future of social change as a platform is a world of connected platforms working to solve society’s most pressing challenges more effectively as fast as possible. These platforms will supersede and encompass existing social change organizations. Those organizations that embrace social change as a platform will lead the way in helping to usher in this new era of connected social change platforms.
The core assets needed today to advance social change — ideas, individuals and institutions — continue to be the primary ingredients. What is changing and will continue to change, however, is the way these assets are assembled to deliver maximum social impact. Organizations can achieve SCAAP to the extent that those with a shared cause can gradually maximize shared capability (platforms) and minimize organization products. This represents a radical shift in approach.
Every organization relies on its information, capabilities and assets to be effective, but their networks are largely untapped or underutilized. Creating more value and scaling social impact requires the organizations’ leaders to leverage their networks, tapping into new sources of value, both tangible and intangible.
Value in the social impact supply chain will continue to come from new sources, for those who allow that to happen. Existing stakeholders in social change organizations will add value in new ways and new stakeholders will interact in new ways with the community’s resources and assets via the platform. SCaaP will increasingly bring all those actors and sectors together.
Philanthropic institutions supporting similar causes will be working together out in the open, ensuring all their resources and those supported through their grant-making are at the disposal of the community working to advance social change — not any one individual or institution. These efforts will be focused on maximizing the way value is derived and how the agency is built, shared and advanced throughout the n
Social change organizations that leverage their stakeholder’s networks as well as their tangible (programs and services) and intangible (expertise and relationships) assets will gain these and other advantages from embracing the SCaaP business model.
- Decreases costs: Stakeholders willing to share their opinions, skills, relationships and even real assets for shared value to the cause, at a very low or near-zero cost, stretch an organization’s very scarce resources. Moreover, reinventing the wheel each time social change products and services are created lead to duplication and waste.
- Deepens community engagement: Enabling meaningful ways for stakeholders to add value increases engagement and deepens understanding and strengthens these relationships. SCaaP enables anyone with a good idea to build innovative services that connect citizens to the cause of their choice, allowing citizens to more directly participate.
- Increases organizational flexibility and decreases risk: Operating as a network increases an organization’s adaptability and speed. Work is more distributed and lends itself to self-organizing, which makes it highly responsive to changing needs. Allowing common functions to be implemented as shared utilities across social change organizations instead of replicating them in each silo also reduces risk.
- Enhances transparency and accountability: SCaaP fundamentally shifts the power dynamic within the social change community. Grant makers work with community stakeholders as peers, helping them achieve full potential as individuals and their organizations.
- Expands impact: Ultimately, scaling relationships lets an organization secure more value, which helps maximize social impact. As co-creating partners who have a vested interest in advancing a cause, stakeholders’ incentive to add value is clear. The platform’s success is their success.
To succeed, a clear and understandable pathway to adopting SCaaP is necessary for this large, untapped market.
Social change as a platform is first and foremost a business strategy, a theory of change that needs to be integrated into every organization’s five-year strategic plan. That effort begins by identifying how and where an organization can accelerate the transition to a network-model across the entire organization. Specifically, organizations must assess their business model and inventory network assets, and start to reallocate resources and capital to networks as well as develop network key performance indicators (KPIs).
- Choose the right platform. Platforms that embrace intelligence, speed, productivity, mobility, and connectivity empower social change organizations to take advantage of the most significant transformations taking place in enterprise software.
- Select the relationships to scale. Identify all the key stakeholders for advancing your mission and indicate which relationships are the most important to scale. Be sure to include existing and potential relationships, including other partners and organizations that can add value.
- Connect programs and services. Plot the organization’s various offerings — programs and services offers to various stakeholders — and map how each contributes value to advance the relationships with different stakeholders.
- Convert the data into intelligence. A unified view of relationships and programs creates troves of data. Convert the data into useful, real-time intelligence integrated into the organization’s processes in real-time.
- Drive one-to-one engagement. Real-time intelligence lets organizations engage more effectively with all.
- Track what matters. It’s not just financial performance that matters, but also engagement, sentiment and co-creation. Create KPI’s for each of these items and add them to daily performance reviews.
- Keep platforms, networks and intelligence at the center. Products and services are helpful, but in the final reckoning, it is the breadth and depth of the network that will create the scale of social change desired.
The biggest hurdle to SCaaP is changing the mental models and core competencies of the leadership team and board of directors. However, nonprofit organizations and academic institutions are better positioned to embrace SCaaP because they are more accustomed to imagining their community as active participants, instead of passive recipients. But it is critical that leaders significantly change how they embrace today’s technologies.
With SCaaP, the nonprofit world will have the potential to enact social change on a scale previously unimagined. It is time to take up the mantle because doing so can unlock the future potential of every human being. People are worth it.