Beyond Extreme Capitalism - Blended Value Investment
London, UK - 25 August 2006 - Remembering John
F Kennedy's speech -- I am a Berliner! -- or as he said it "Ich bin
ein Berliner", which actually translates to "I am a jam doughnut!"
, in June 1963, Germany, we watched the collapse of the Berlin wall with some
of our faculty at the University of Southampton, England, in the same department
of electronics and computer science where Sir Tim Berner-Lee, the inventor
of the world wide web at CERN, now holds a Chair. On 9th November 1989, I
remember that one of the students queried, "Is this the collapse of Socialism
and the Soviet Doctrine?" and one of our our faculty members who had
liaised with Eastern Europe and had also worked estensively at the Nobel Prize
winners club -- also known as Bell Labs -- in the US remarked, "Yes,
and the beginning of the end of extreme Capitalism as we know it." "How
long?" shot another query. "The Berlin wall has collapsed
because the Soviet Union has failed in Afghanistan and emboldened by their
retreat the Eastern European dominoes are falling one by one beginning with
the fault line. When Western Capitalism meets its Afghanistan, then we will
see the beginning of the end of the present confrontational thinking based
around the cold war." Little did we realise that his prediction may
be alluding to the real Afghanistan [and Iraq] and not a metaphorical one!
Capitalism has lost its way in some of its ruthlessness, short-termism and
down right disregard for leaving people, the planet and its environment in
a healthy condition for generations to come. Of this, there is no doubt. However,
what will replace it. Totalitarianism based on an ever increasing restriction
on civil rights and liberties? Perhaps not. And we may indeed head towards
the Blended Value approach, which would require a new way of thinking, accounting
and management practices.
Value is what gets created when investors invest and organisations act to
pursue their mission. Traditionally, we have thought of value as being either
economic (created by for-profit companies) or social (created by non-profit
or Non-governmental Organizations, ie, NGOs). What the Blended Value Investment
Approach states is that all organisations, whether for-profit or not, create
value that consists of economic, social and environmental value components
— and that investors (whether market-rate, charitable or some mix of
the two) simultaneously generate all three forms of value through providing
capital to organisations.
The outcome of all this investment activity is value creation and that value
is itself non-divisible and, therefore, a blend of these three elements. The
term 'blended value' was coined by Dr Jed Emerson, Senior Fellow at The William
& Flora Hewlett Foundation and Lecturer at The Graduate School of Business,
Stanford University. Dr Emerson, utilised the term to articulate that all
forms of organisational activity have social, environmental, cultural and
financial dimensions.
So, there is a fundamental schism in modern capitalistic thinking which needs
to be readdressed. The vast majority of people divide the world into business
on the one hand, which is perceived to be principally about economic activity
and the financial bottom line, and the public sector and civil society on
the other hand, which are perceived to be about social and environmental bottom
lines.
The reality of "Blended Value" is being increasingly reflected
in a blurring of the lines in the 21st century between public, private and
civil society activity. Large corporations are becoming ever more concerned
about their environmental and social impacts; NGOs are becoming increasingly
engaged with private sector organisations, and many are also looking at the
extent to which some of their activities can be commercialised through social
enterprise activities; while governments continue to increase the reach of
public private partnerships, and are now also encouraging the 'social sector'
to compete with the private sector in tendering for the delivery of public
services.
However, the majority of decision makers still tend to operate with an isolationist
mentality and act as if the public, private and civil society sectors are
separate worlds. So we live compartmentalised parallel lives, wearing multiple
hats and operating according to different rules depending on which hat we
are wearing: business executive, family member, counsellor, charitable trustee,
and so on. The prevailing mentality remains that business is about making
money whereas charity is about addressing social or environmental issues,
after one has made the money. So the default strategy of even the more socially
conscious business leaders is to make their money in the commercial world
first and put it to 'good use' later through
thropic activities. This strategy is frequently undertaken with no apparent
awareness of the conflicts and contradictions within their overall portfolio
of business and philanthropic activities -- where sometimes the very problems
that their philanthropic donations are being targeted at are being exacerbated
by their business and investment strategies. How sad is that?
Philanthropists feel good because they may donate around 5% per annum of
their capital base to charitable causes -- helping to build a better world
-- whilst growing their main capital pool by 7% to 10% per annum by investing
in projects that may be busy destroying, damaging or disabling the world.
Where is the sanity in that?
Would it not be better to invest ethically in the first place keeping blended
value in mind and execute the "building a better world" strategy
through prudent investment so that 100% of their capital is being employed
judiciously to achieve harmony and well being. Although the returns may be
somewhat lower as a result, this would still be better than giving less than
5% amounts away to charity to clean the conscience, whilst Rome burns. Using
the lever of properly directed investment can change a lot more than "charity
peanuts".
These contradictions are often most apparent within large existing foundations.
What are they really? Mostly they are investment management businesses that
donate 5% or so of their profits to charity every year. When we are in private
dialogue with such foundations, It is an uphill battle to persuade the trustees
and asset managers of many of these foundations that it makes sense to ensure
that their investment activities do not merely consider the maximisation of
financial returns within certain risk parameters, but are also in sync with
the social mission of the foundation. Speaking to the founder of the foundation
can be an entirely different story!
When one considers the scale of the complex social and environmental challenges
that the world faces today, it is clear that we have no hope of moving ourselves
off the losing trajectory we are now on without mobilising the business and
finance sectors in a more serious way. According to multiple sources, private
philanthropic activity amounts to only 2% of GDP in the US, 1% in the UK,
and less in much of the rest of Europe and elsewhere. So while it is commendable
that Bill Gates and Warren Buffett are giving away their wealth to address
social causes, ultimately it is highly unlikely that such gestures will ever
amount to more than a drop in the ocean compared to what we could achieve
(and need to achieve) by mobilising the full weight of business behind our
greatest social and environmental issues.
This is not about the 'corporate community involvement' activities under
the banner of PR -- Public Relations -- and CSR -- Corporate and Social Responsibility
-- that operate at the fringes of corporate activity, commendable and self-serving
as they are -- but rather it is about the more serious efforts of all businesses,
from large multi-national organisations through to entrepreneurial start-ups,
in putting their financial and intellectual firepower into finding innovative
commercial opportunities to address social and environmental issues.
The Philanthropia
Encouragingly there is a small but growing band of private investors who
are beginning to understand that these worlds need not remain separate as
exemplified by The Philanthropia approach. This is the vision of The
Philanthropia for 21st century wealth management, which is bringing together
over 1,000 ultra high net-worth philanthropists and family foundations from
across the world. In Greek, Philos means Love and Anthropos means Humankind
so The Philanthropia means love for humankind. The Philanthropia
was founded in 2005 by myself and my wife -- Surinda -- and focuses on The
Trinity Club, Uni-purpose Investment Syndicates and Ethical Investment Funds
dedicated to clean energy, sustainable technologies, micro-finance, water
and eco-friendly infrastructure. The Geneva Chapter was inaugurated in Switzerland
in May 2006. As more and more wealthy investors and philanthropists get their
heads around the idea of a blended value approach to investing and philanthropy,
we feel we are truly making some progress.
Long Term Vision
In the long term, The Philanthropia wishes to empower an integrated
approach towards wealth management -- beyond the traditional Private Banking
approach honed by UBS, Credit Suisse, Goldman Sachs, CitiGroup, HSBC and JP
Morgan -- that looks at financial, social and environmental objectives and
then takes a holistic approach to asset allocation across all classes of investment,
including philanthropic donations viewed as an asset class, as well as sub-market
social investments, micro-finance, sustainable technologies, clean water,
clean energy and eco-friendly infrastructure. Rather than focusing purely
on the risk return profile an investor seeks, what sort of creative thinking
could Blended Value wealth managers inspire by asking their clients: "How
would you like to build a better world for the next generation and beyond
by utilising the resources you have at your disposal to help create that world?"
What are your thoughts, observations and views?
With all good wishes
DK
DK Matai
The Philanthropia, ATCA, mi2g.net
mi2g is at the leading edge of building secure on-line banking, broking
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