John Hoffmire, Director, Center on Business and Poverty, University of Wisconsin-Madison
Welcome to the second annual Oxford Business Fights Poverty Conference. Over the next two days, you will hear from and interact with a series of speakers, most of whom will speak as part of panels. They will show you very few slides and their main goal will be to participate in dialog with you and with one another.
2016 Oxford Conference on Business and Poverty
Welcome, John Hoffmire…………………………………………………………………………………pg. 3
Setting the Context, Frank Venegas……………………………………………………………………pg. 3
Human Resources & Mentoring, Grace Cheng & Mark Evans………………………………………pg. 7
Corporates Helping Scale Firms, Tara Sabre Collier & Frank Venegas…………………………….pg. 15
Responsible Leadership, Ted Malloch & Jonathan Michie……………………………………………pg. 25
Honoring the Entrepreneurs, Scott Huish & Nick Davies……………………………………………..pg. 35
Mutuality & Employee Ownership, Ruth Yeoman, Luis Granados & Martin Staubus………………pg 45
Business Addresses Poverty, Len Greenhalgh & Frank Venegas……………………………………pg. 54
Lean, Waste, Ethics & Poverty, David Brunt & Scott Hammond……………………………………..pg. 65
Addressing Poverty through Impact Investing, Geetha Tharmaratnam……………………………..pg. 73
Slaves and Enfranchisement, Steve New & Laurel Steinfield………………………………………..pg. 79
Catalysts of Prosperity, Patrick McDonald & Tom Magnell……………………………………………pg. 89
Ownership and Poverty, Colin Mayer & Frank Shipper………………………………………………..pg. 96
Introduction to Day 2, John Hoffmire & Zahid Torres-Rahman ………………….…………..….……pg. 101
Poverty and Insurance, Stefan Dercon………………………………………………………………….pg. 102
Creating Employment, Abdulrahman Al Dabal & Alex MacGillivray………………………….………pg. 110
The Business/Poverty Message, Rupert Younger and Don Barden…………………..……..………pg. 118
Behavioral Economics and Poverty, Mungo Wilson……………………………………………………pg. 124
A Foundation Addresses Poverty Through Impact Investing, Mohamed Amersi………….………..pg. 132
Shared Value for Small Holders in Agriculture, David Croft……………..…………………….………pg. 139
Two Views on Poverty Reduction, Oren Sussman & Marc Ventresca………………………………..pg. 144
The Internet of Things, Social Impact and Poverty, Ahsan Zaman……………………………………pg. 151
Measuring Impact, Jarrod Ormiston & Richard Barker…………………………………………………pg. 156
Crowdsourcing & Funding, Matt Novak & William Conner………………………..…………….….….pg. 163
Venture Philanthropy in Growth Market Pakistan, Ahsan Jamil……………………………….………pg. 171
Wrap Up, John Hoffmire & Zahid Torres-Rahman………………………………………………………pg. 175
Note to readers: Not all speakers’ comments are included in this transcript. This is because of two factors. First, recordings were only made in Mandela Auditorium. Second, not all speakers’ words were possible to transcribe and edit. Some of their sessions may be transcribed and edited in the future and will be placed, along with the rest of the transcript, on the www.progressdaily.com site.
There are fears among many people today that their children will be poorer than past generations. The number of children living in poverty in the US has increased, by many measures, over the past 40 years. If you look at the broader statistics, however, the world as a whole has improved over the past 40 years. One of the questions that will be asked and hopefully answered over these two days is what is the role of business in addressing poverty? Business has the opportunity to create livelihoods and increase income. These directly reduce poverty. The business community, working towards producing better goods and services, can make a difference. But, the real issue is about whether businesses can and will make the reduction of poverty part of their DNA and make this goal part of their everyday operations.
Let me welcome our first speaker to the stage. For all of our other speakers, I will offer brief introductions. But, for Frank Venegas, his talk is all about who he is as a person and as a leader. I will now get out of the way and encourage Frank to tell his story. Please welcome Frank Venegas.
Setting the Context
Frank Venegas, Chairman and CEO, Ideal Group
My grandfather left Mexico and moved to Detroit in 1917. He worked for 41 years as an assembly line worker at Ford Motor Company. My father followed in his footsteps, working as an assembly line worker for 39 years at Ford.
Their employment gave us a decent lifestyle – one that allowed us to have a roof over our heads and food on the table. Their jobs were also what created a chance for me to go to a good school and get educated. But more than anything else, what my father and grandfather created for me was the opportunity to do what I wanted to do, which was be an entrepreneur.
In 1979, I bought a raffle ticket that gave me a chance to win a new car. I was lucky! I won a brand new Cadillac. I drove it home, and used the car for 9 days. But I needed startup capital more than I needed a fancy new car, so I sold it and used the money to start my business. It was an incredible experience to start my own company, especially not having come from a family of entrepreneurs. Because I did not have a safety net, I needed to make sure my customers were happy, my product was better than those of my competitors, and my service was better, too.
Furthermore, I needed to hire people from the local labor market. My factory was located in the Detroit inner city which was, at that time, a multi-cultural neighborhood with a lot of poverty and a lot of gang activity. It was known as Mexican Town. I wanted to run my business well, but also make a difference in the community.
My first venture into working with people that needed help was with prisoners who got daytime release for work. The prison van used to drop these guys off at my factory in the morning and they’d work all day long with me and then the prison van would pick them up at night.
These guys from prison would surprise me with comments like, “I want to do a good job for you, but I don’t know how to read a measuring tape.” Because I was in a steel-related business, it was really important that my workers knew how to measure. So I taught them how to use measuring tapes.
These guys were serious about learning. But they weren’t allowed to take steel measuring tapes back to the prison at night so that they could continue to practice and learn. To adapt to their situation, these prisoners created measuring tapes on pieces of paper—putting the inches and the ½ inches and then the ¼ inches on their pieces of paper. They would take these pieces of paper back to the prison with them at night and study how to get better at measuring. This was all part of their first successful learning experience about how to read a measuring tape. This self-improvement was important to them, both in being able to make more money and to make a living after their prison terms were served.
Well, it was pretty incredible what happened from there. After they got out of jail they would come to work for me, and they were amazing employees—hard working and diligent. They gave you the feeling that you were extra special to them. And you were so special to them because you gave them an opportunity. Shortly after that some of the young ex-prisoners said “I want to do better than just reading a measuring tape” so I started teaching them some basic engineering. Some of them went on to do some fantastic engineering work, and it was a life-changing experience for them and a success for the company.
As I said earlier, I grew up in Mexican Town, a poor neighborhood that had its issues and problems just like you hear about in other parts of Detroit. For me, it was an encouraging experience to have some business success in the inner city and to be able to work well with the guys I recruited through the prison release program.
By 1997, my business was doing very well and I had a chance to buy the manufacturing plant that had built the Cadillac I had won. There was an interesting history to this. One day, without any public notice, the company had shut the plant down and everything in the community around it just ground to a halt. Poverty soared, and so did all the problems that go with it.
This was the neighborhood where I had grown up and knew very well. But, after the plant shutdown, the neighborhood didn’t have the vibrant culture of the place where I grew up. The restaurants and storefronts weren’t there anymore. The people I had grown up with weren’t there anymore. Gangs ruled the streets.
So, I bought the old Cadillac plant. I bought it knowing what I was going to do to revitalize the community. But I didn’t know the challenges I was going to be faced with.
One thing I did know was that there was 40% unemployment in the neighborhood where the plant was located. Another thing that I knew was that the gangs were driving everyone indoors. I knew that the prostitutes were flagrantly parading up and down the streets because I was seeing them there each day. I was also seeing that there was no commerce, and therefore no jobs.
It was also clear that neighborhood people had a lot of fear. They were scared in their own community. The unemployed were scared that they wouldn’t be able to provide for themselves and their families. But even those who had jobs were also scared: They were afraid that they might lose their jobs. And for those who did feel secure, there was a worry of being stuck in a low-paying, dead-end job, thinking: “What am I ever going to do to advance my career?”
Well, shortly after I had bought this plant, I drove down there one day and on the street I saw these three tough guys pushing around this old man.
I’m from the neighborhood and I had grown up thinking of myself as one of the tough guys. So, I stopped the car, got out, and said, “What’s going on here?” It was kind of nutty because at that point the old man retreated, leaving these three tough guys and me standing there. They started in on me, saying “Hey, who are you? What’s going on?” I said, “You can’t beat up on old people.” They said, “What are you, the mayor?” I said, “No, but I just bought the manufacturing plant down the road and I’m going to start building things there.”
Fortunately, I was able to calm these fellows down and nothing more happened in that confrontation. But, the experience got me thinking. I knew that the people I would be bringing to that plant were women, engineers, educated people and people that had never ventured into an inner city to work. I scratched my head at that and thought, if the professionals I want to have working in the plant are going to be threatened and they are going to see dangers in the streets, it’s going to be tough to get people to come to work for me. If I had people breaking into my buildings or doing anything else that was threatening, my business wouldn’t be successful. Remember, this was an area where gangs ruled the streets.
Well, also remember, I’m an entrepreneur, and I have experience finding solutions to problems. So, I looked at what was going on in the community and I asked myself, what do I need to do? I came up with a creative idea. Knowing I would be working with people that were poor and needed to support themselves, I made contacts with the five major gangs in the area and I asked them to meet with me. Four of the leaders responded and basically said: “I’m not coming to any meeting. You’re crazy.” I said, “No. You need to meet with me, because I need to know what you want. I said I trust that you need me to create opportunities for people to raise themselves up. I said I wanted to open a manufacturing plant without anyone being threatened.”
So, they agreed to meet, and it was a very strange business meeting with the four gang leaders. I didn’t know where we were going to meet until 15 minutes before the meeting, because they were concerned I might bring the police and have them arrested. So they telephoned 15 minutes before the meeting, and gave me the secret location. So we sat down with the leaders of these four warring gang bosses—the leaders of street gangs that had been shooting at and beating up each other the day before. We sat down and talked about what each of us wanted. I told them, “I am going to open up a manufacturing plant, and we’re going to create jobs and boost the local economy, and things will get better around here.” They looked at me like I was batty.
I said “Okay, what can I do to convince you to leave us alone?” I had a pocket full of money, and I figured I was going to have to bribe each one of the gang leaders with a monthly payment. But, it didn’t work out that way. They took me at my word and all four of them told me the same thing. They said, “We want jobs. We want jobs with medical benefits, we want jobs with opportunity, and we want jobs for the long term. We don’t want you to hire a bunch of our people and then close the plant and fire everyone.”
It was a bizarre business meeting. These were really tough guys, with tattoos and body piercings, and dress for the ‘hood. I said “You can start tomorrow. Bring 80 of your gang guys, and come to work, but there has to be peace.” So I had 80 gang members show up the next day as job candidates. Many had fought against each other. I told them, “Okay I’ll give you all jobs.”
What happened next was amazing. They gave us the equivalent of a private police system around our plant. They also gave us one of the best employee recruitment programs. I would say I need three more employees and they would find me three more suitable people. They did the screening for me and told the applicants what was expected of them at my company.
It was interesting to see the responses of my engineers. Many of these professionals weren’t used to the gangs; they were scared at first. But then they started to warm up and it was amazing to watch. They started to see these employees as people, not as gang members. And some of these former gang members had real potential. One of the four gang leaders, a guy who started with me in 1996, more than 20 years ago, now runs one of my companies: He runs 11 states for me in the southeastern part of the United States. He now has a beautiful house with a pool. He has three kids. All of his children have gone to good schools. He is taking care of his mother. This was a guy who society had written off.
Just as important is that when he comes back to our Detroit headquarters, he goes back into the Mexican Town neighborhood with me, and we just keep recruiting. Before we knew it we had his cousins and brothers working with us, and they started having children. But the children were going into an inadequate local school system. So I replaced the education system in our neighborhood with one that worked a lot better.
It is hard to boil any success down to one factor. But I believe the people in the neighborhood really needed one thing: they needed a chance; they needed an opportunity that had been missing in their lives. What I have found is that working with the poor is similar to what Steve Jobs and Sergei Brin have done in Silicon Valley. You have to look at everything from a totally different perspective. We thought about the neighborhood surrounding the plant. We knew that Detroit had tried a number of urban renewal initiatives and failed over and over again. So we said “Let’s get creative and let’s see what is really possible here.” People wanted businesses in the neighborhood that would give them steady jobs with benefits for them and their families. And they wanted education to do the jobs and get them out of the endless poverty cycle that holds back each succeeding generation.
Here I am 20 years later and I get to do speeches, I get to talk to groups all over the world. I get to do this because I did something that wasn’t all that ingenious, it was just a long way out of most people’s comfort zone. I was attacking the problem of poverty at its roots. At my company, we attack every problem at its roots, using a six-sigma approach taught to us by Raytheon. What works on the shop floor also works in the neighborhood—getting at the root of the problem and fixing it.
So, in conclusion, you will find that a lot of times that you can surprise yourself. Things will be different if you create a system that works for people. So I am honored to be the first speaker at this conference. I appreciate the opportunity to share my ideas and experiences with you.
Human Resources and Mentoring
Grace Cheng and Mark Evans
John Hoffmire: First let me introduce Grace Cheng. Grace is the greater China country manager for Russell Reynolds Associates. Russell Reynolds is a large executive search firm. She’s a member of the firm’s board of CEOs in the practice and financial services sector. Grace’s firm is also one of the sponsors of our conference.
At this important time in China’s continued development, the financial sector is a dramatically important sector for China. So, Grace is influential in her own country but she is also influential here. She graduated with a DPhil from the Sociology Department at University of Oxford and I would like you to welcome her here today.
Mark Evans is the founder and CEO of Adaptix. He is a good friend to entrepreneurship here in the greater Oxford area. He has been involved with the leadership of almost all of the radiology companies that have existed in Oxford and Mark continues to play an important role in creating jobs and a fair amount of innovation in this part of the UK.
Mark and Grace, my first question is short: What is the goal of the companies that are a part of the business and poverty movement that want to “put people first”?
Mark: To some degree, it is creating jobs. You have to remember, in the recent past there was a real shortage of jobs in this country. There is still a large problem with unemployment and underemployment. But, things have vastly improved.
One of the problems at our company, in terms of being involved with poverty reduction, is that we tend to be working with people that have already have lots of human capital and some of the savings to begin accumulating assets. They’re bright people, they have qualifications. One of the challenges for me, as we sit in this pocket of relative wealth that is Oxford, is that is that the smaller pockets of relative poverty that are near to us become forgotten. A very heartwarming experience I have had is to watch the local social agenda become more inclusive. This is leading to the creation of jobs for people who are less fortunate.
One of the people doing a great job with this is Joy Foster. Joy is doing fabulous work in terms of working with people who wouldn’t otherwise have access to real skill-building. She works though her company, Made With Joy, to give them skills in new forms of digital media, and works with them to feel employable. She is also putting them in touch with the business community where opportunities are unfolding in front of them.
John: So, why would people like Joy want to be involved in this way? Talk about their motivations for a couple of minutes.
Mark: Well, most entrepreneurs talk about money because they have to. When they have to make money, they’ve got no choice. But many of the people that I see, particularly around Oxford, have an agenda that says “we have to make the world a better place.” Part of that is creating meaningful jobs and inclusive societies. So I think it’s like Frank said before we came onto the stage. Many people start their businesses to make the world a better place. I think that the poverty reduction agenda inevitably informs part of that. I think one of the things that I’m missing out on, is helping to drive that, and if there is such an initiative in Oxford, I hope we can do more to support it.
John: Grace, in China, how is the business climate and talent development changing as the economy slows and the country continues to try and create enough good jobs for its graduates?
Grace: Let me take a twist on this question and tailor it more towards the reality of China. I come from Beijing, and I think that many of you know that Asia and China today are in the driver’s seat in terms of economic development. But very few people understand what is behind the staggering economic statistics. The reality is that the business environment is fiercely competitive and very complicated. On the one hand you have these fast-growing Chinese companies that are extremely connected to the Chinese government trying to go beyond the national boundaries, and then you also see the western multinationals trying to figure out the complex situations of the landscape in China, trying to grow in their own right.
So, this very complexity itself makes the need for top talent a very very big one. That is why many people today are saying that the executive job turnover in China is extremely high and that this is the number one challenge facing the sustainable growth of any company in the future. In order to understand the needs of employees in this market, Russell Reynolds conducted a survey of 1,000 executives in the region, just to find out how serious the problem of retention of senior talent really is. In the survey we found 25% of the people saying “I’m really interested in staying with my current employer”, that’s only 25%. 41% of people said “I’m very receptive to other opportunities.” So it is a very precarious situation. Then we tried to understand, what actually keeps people staying with their current employer versus leaving? What are the “values” people hold? For that, we looked at the employer value propositions, we looked at the job itself, the people, the organization, the opportunity, and the reward system.
The top three things they emphasized in their responses were: #1) Compensation, #2) Recognition, and #3) Career opportunities, including leadership development opportunities. Now, if compensation is given such important focus, then companies are trying to cater to that need by comping up with very creative, innovative compensation design. ESOPs for example, employee stock ownership programs, are actually being adopted by more and more Chinese companies so they can actually align employees’ emotional, psychological, and financial needs with the needs of the company. Also leadership development is very important, so companies are pouring money into mentoring and coaching of their top talent. You may ask, what are the areas that need mentoring and coaching? Let me highlight for you. First is the transition from an individual contributor to a team leader. People want to know how they can be successful through what they do themselves. But, they also want to learn to lead others who can be successful, as well. Second, because of the major mergers and acquisitions happening in and outside China at this time, top managers what to learn how you manage cross culturally. Last, but not least, as Chinese companies become global players, top leaders want to learn how to develop their own global mindsets and compete successfully in the global market. So these are the key areas where coaching and mentoring are provided, and these are ways top companies are taking care of the new emerging needs of their top talent.
Mark: If I could just offer contrast to this point. Grace has given a view of big companies with lots of money. When I used to work for big companies with lots of money, what Grace described is what happened at our firm as well. The problem you have with an early-stage company is that you don’t have all those tools and resources. So one of the things we have in the UK is called an Enterprise Management Incentive Scheme. It gives the firm the ability to grant equity equivalents to many of your employees. I know of many companies involved with this type of scheme. The plans get everyone involved in some form of equity participation and the shares really help give people a feeling of ownership. The second point is about employee development. Smaller companies don’t have the financial resources fund to fund young people to go off and get their MBAs. So instead you have to give them opportunities for personal growth and also engagement in the business so they feel as though they are valued. Many of you when you hopefully start your own companies, you won’t have the capability to do what Grace discusses. But hopefully you’ll find other ways to provide people with greater meaning in their work life.
One of the other things we do have to do very well is to pay market rates. Even though people join companies because they want to do good for society, we still have to make sure they can fulfill their own aspirations, and the aspirations of their families. So it’s a very delicate balancing act. But, for smaller companies, it is a somewhat different balancing act than the one Grace is talking about.
John: I want to stay with this employee ownership theme since both of you have raised it. It seems like the really wealthy people get wealthy because they are able to sell shares. Do you feel that employees both in China and here in the UK, Mark, sense the route to prosperity involves owning shares? Or are shares scary to people—do they even understand what equity is?
Mark: One of the fortunate and great things about what I do is that many of the people I work with have at least a graduate degree or higher, and they understand the value of equity. They tend to be quite savvy and understand what ownership means. Many seem to recognize that, perhaps, it is better to pay off your mortgage after exercising share options rather than having to wait 30 years and paying the mortgage through installments. So I think most people today, particularly people entering the housing market, see shares as being important to them. Being involved in equity is important.
Grace: In China today more and more companies are adopting employee stock ownership plans. One of the best examples is Huawei. I’m sure most of you know about Huawei; it is the world’s largest telecom equipment manufacturer. But fewer people know that Huawei is actually 100% owned by its employees. Of the 170,000 employees they have, 80,000 are owners. The founder himself only owns about 1% of the company. So what Mark said is true. There are differences between big and small companies.
But, you have to remember, not too long ago Huawei was a small company. In 1988 they were set up in the southern part of China and then three years later they adopted their ESOP program.
Initially it was just for financing purposes. Because they were privately owned, they didn’t have anyone to turn to for financing. So they made available about 15% of their shares for employees to purchase and the company had the right to buy back everything at exactly the same price. The employees didn’t have any bargaining power.
About six years later the company changed the function of the ESOP away from one of financing, to one of incentivizing productivity. Another four years passed and they started to adopt so called “virtual stock options.” The financial returns to the employees were no longer made available through fixed dividend payments.
Today if you wonder whether Huawei is successful or if you wonder whether the ESOP is successful, I can introduce two sources for you. I have read two papers written by John’s research team in which the researchers analyzed the financial data of Huawei and its main competitor over 10 years between 2006 and 2015 and the answer is that Huawei’s ESOP had a positive effect on its productivity over ZTE, the competitor.
The interesting question for me is: Why does an ESOP influence productivity? What Huawei feels about its ESOP program is that it’s very effective in binding employees to company’s long-term strategic objectives. People feel special, people have a sense of pride. They feel pride because they are the owners. They are emotionally invested. Also financially, the longer you stay with the company, the more money you make off your shares, so I think that gives them a lot of stability and creates a company which retains its talent within the company. These are some of the reasons why I think ESOPs are successful at increasing productivity.
But there is something special about the features of ESOPs in China. It is that they are more of an “add on” management tool. It is also important that ESOPs do no touch the top level of the companies’ governance issues. Huawei, for example, is not managed by its labor union. Everyone accepts that the ESOP is meant to reward people through its long-term incentive components. The ESOP is not even tax deductible in China as they are in many other countries. So there is something inherently special about ESOPs in China that may be a little different than in other countries.
John: I’m going to come back to this topic in a minute, Grace, and ask you about the cultural difference between Huawei and their competitor, especially in regard to how people feel at work, how long they work, and how productive they are in a day. But, Mark, I want to have you, first, contrast two businesses that are based in the UK. Take the John Lewis Partnership’s Waitrose stores and contrast them with those of any other supermarket chain. Can you contrast the cultures and how people feel at work? If you could respond more as a consumer rather than an academic or a business person, it would be great.
Mark: When you go into a Tesco’s and you go into a Waitrose, you notice the difference. Any of the John Lewis Partnership stores are different. It doesn’t matter whether you are talking about their grocery stores or their department stores. The firm is owned by the partnership, by people who work there. There is a very different feeling that you get as you interact with the people who are working there at the employee-owned company. They engage with you. In particular it feels a lot more local. This shows up because they collect for local charities and at the end of your shop you’re given a coin to pop into one of three different jars for different charity choices and your children go off and make the choice of which charity they want to support. So you have very much culture that feels tied to the local community. This is easier to do when the employees own the company. But you also have the feeling that people are very much more bought in and invested in the company for which they work. That feeling of ownership and connectedness with the company drives different behaviors.
By the way, related to different behaviors, it is better practices that are some of the reasons that, this week, we will be pleased to announce, at our firm, that the increase in value of our share options per employee is worth about 540 pounds. So, my recommendation, for all of you who own companies, is to go off and start granting shares of stock to your employees, through whichever method is available. It will really change how people engage with your company. So that’s the lesson we take away, share ownership improves the connectedness employees feel with your company.
John: In most parts of the western world right now, we see less than a 2% increase in yearly compensation. But 500 pounds is probably worth the equivalent of 1 or 2% increase that came just in the stock bonus that your employees received.
Mark: So the way share options work in UK through the Enterprise Management Incentive Scheme is you have a right to buy at a set price and that right only can be exercised when the company sells. So our last price per share was 540 pounds. Employees receive their number of shares dependent upon the roles they have with the company.
Once they have their shares, they won’t be able to exchange the shares for money until we have an accepted offer for the company. Hopefully that offer will be a lot more than 540 pounds per share. At the time of the sale, the employees can sell their shares, and that’s how they get their profit. Then, that profit is taxed at capital gains rates, rather than the much higher income tax rates. Our government has led the way by allowing employees to receive very tax beneficial treatment. And, this is one of the reasons that, we, as employees, are so very much engaged with our company—because we know that the sale of shares is a great way to get ahead in life.
These employee ownership plans have steered many firms, particularly those in the tech community, toward remuneration packages that rely heavily on equity compensation. So, these plans have become almost the default compensation system amongst the tech community firms here in the UK. I just wish the same could be said about other firms, especially those where lower- income employees are working.
John: Grace, I want to go back now to Huawei and ZTE. I almost wish that I had never visited Huawei facilities. I have my own biases about these issues. But, I’ve never been to a ZTE facility. When I walked into a Huawei facility and saw all the managers eating lunch in the same room with people who were their administrative assistants, it was moving to me. I really felt a different culture at Huawei than at any of the other companies that I visited. Will you talk about whether that was an unusual experience that I had? Or is the culture at ZTE the same even though they don’t have an employee ownership plan?
Grace: John I have been to Huawei myself, but I have not visited ZTE either. Given the fact that Huawei is an employee-owned company, the people there feel a sense of ownership. When you have ownership, you maintain a long term view. For example, just after the financial crisis, both ZTE and Huawei suffered from a reduction in revenue. But ZTE is owned by a smaller number of shareholders, very big ones. To cope with the financial crisis, ZTE made some drastic changes in their strategy to turn around the situation. At the time they took on some high-risk, low-margin projects in Africa and they tried to turn around the business. Revenue went up, margins went down, and stayed down for a long time.
At the same time Huawei was trying to turn around their company. But they invested money post the financial crisis with the agreement that employee owners were also investing for the future. So Huawei put money into R&D, they hired more people and started a new business called Consumer, and you would not be surprised to find out that last year the consumer business of Huawei had 73% yearly growth which is the fastest ever. All of this just shows that it might just be easier to turn around a company because of this ownership, because of the support they receive from their employees. Huawei was able to implement a strategy change much more effectively than ZTE, and I think a significant part of the difference in outcomes experienced by the two firms was driven by the difference in ownership structures.
John: Very few if any of the businesses you are working with are hiring people directly out of prison or out of gangs, in the way Frank did. But when you think about the needs of somebody who may just not have had all the advantages or who didn’t have the greatest home environment, can you talk about how mentoring can make a difference to someone, through a friendship, or in the workplace? Will you talk for a little while about why helping people who are in their first job, and perhaps moving up in life makes a difference?
Mark: In Oxfordshire, we’ve created a self-mentoring group for CEOs of new companies. One of the problems you have as CEO is that you are the captain of the ship. You have no one to turn to, and often it is the first time you’ve done this job. So we bring a group of 8-10 CEOs together, they go through a structured program that allows them to present their specific business and the problems they’re facing and other people challenge and provide potential solutions to them. Then there’s a round where people go through and present specific particular questions and they look for feedback. One of the things that has proved positive as I have witnessed this situation is people very often don’t realize the value of this type of group mentoring until they go through the experience and then go back and reflect on it.
I can’t speak to the impact that mentoring has on lower-income individuals. But, I know that any time people are experiencing something for the first time, it is important to create engagement that encourages individuals to reflect on their experiences and learn from the challenges they are facing.
John: You mentioned Made With Joy earlier. Talk about the mentoring that goes on in that particular environment.
Mark: Joy does a fantastic job. She reaches out to school leavers themselves, to people who have not made the next step into higher education. She and those who work with her have been assisting individuals on specific IT projects where she literally sits down and tries to transfer ownership of a project to them. She encourages the participants to learn by doing. She literally sits down and works through what the project will look like and visualizes it, and then this helps her transfer the project to the person who is learning.
One of the great things about coding is if you are working on a good platform, you can pick it up quickly. Particularly if you find people with that particular coding sort of mind, and she tends to find those people. So I think you would find that Joy is working with people who have had some problems or in some cases she is working with moms who have been away from the workplace for a long time as they have raised their families. They haven’t had routine access to IT and training. When she finds people who may fit either of these two molds, she takes them through a phased progression. The problem relates to how to leverage the program and move beyond being a company that is just working with eight people at a time. I think she could engage with 80 or 800.
John: Grace, will you speak about the macro issues regarding how people move out of poverty?
Grace: I’m going to spend some time talking about poverty reduction in China. We all know that China has had tremendous growth in the last 30 years, and tremendous amounts of wealth were created. So that gave China an unprecedented confidence to fight poverty. Just to give you an example, between 1980 and 2010 China was successful in elevating 678 million people out of poverty, and that was 93% of all people who came out of poverty over the past 30 years in the whole world. That’s really a huge contribution.
But people may ask, why has China been so effective? I’d have to say the answer to that is that the Chinese government is strongly committed, highly efficient, and extremely well organized. I think this antipoverty campaign itself is top-down and nationwide. They touch every county and through those counties they touch most of the villages in China. Poverty alleviation is a nationwide thing. But other than the government’s actions, I think the market economy itself is most helpful. You may remember that in the last 30 years China became the world’s factory. Anything from consumer electronics, packaged goods, and automobiles were manufactured. And domestically, there was construction of office buildings, and residence houses. In addition, a large service economy grew. As a result, China needed lots of labor and that brought a huge wave of migrant workers who came to live in the Chinese cities.
At the end of 2015 we had 277 million migrant laborers living in Chinese cities. That’s about 20% of the Chinese population. I don’t know how accurate this is, but I think it is fairly close. The average Chinese migrant laborer today is probably making about 2,800 RMB per month. In USD terms that is about $400-$450. This, compared with the World Bank’s defined standard of poverty, is more than 10 times higher. So that is quite amazing and when these workers send the money back to their children at home, that probably helps with another couple of hundred millions of people. This is how poverty is being overcome.
John: I’d like to draw a line under that final comment about market forces. Often we think that there is some very small part of the economy that is actually bringing people out of poverty. I think one of the main messages we want to offer today and tomorrow at this conference is that it actually is private enterprise that for the most part has created one of the world’s greatest miracles for those some 600 plus million people who came out of poverty in China.
Let’s now move to the audience questions?
First audience question: When China decreased poverty by 93%, what was the means through which that was accomplished? Were people trained, and provided work, or was this through subsidies, or some combination of both? And secondly, if employees have a share of the company when you sell the company to someone else, do the employees have to sell their shares, or not?
Grace: If you see what happened in China in reference to the first question, we saw foreign investment increase dramatically over the past 30 years. Booming private sectors created lots of opportunities for people. They actually came to the cities for these opportunities and they became trained once they started working in the cities.
I think you are right to ask the question the way you do. It is not one or the other. It is both, you provide training and you provide subsidies to businesses. China has done both. There is a saying in Chinese as well as in English that goes: if you give someone a fish, you feed them for the day. If you teach someone how to fish, you feed them for life. So the emphasis is to train as many people as possible. But for the poorest people, in the most remote areas, I think what the government is trying to do is to provide subsidies on a targeted basis. They are trying to do both at the same time—training and direct assistance to businesses.
Mark: I am going to take on one part of your second question. With respect to maintaining ownership of equity, certainly in the US schemes and the UK schemes, I rarely see employees retain rights to hold their share options when they leave the company. The reason is quite simple. Many of the companies in this category that are deemed to be valuable tend to be tech and growth companies that are venture capital and private equity backed, and the people that fund these companies don’t see it being necessary to leave value with the employees who have already left the firms. The purpose of an option is to align the interests. Once the employees have left the company, their options are cashed out or they fall away. You could say that this is unfair, but the point that would be made in response is that options have no cost when they are rewarded to the employee, and what we talked about earlier on is that generally people are paid market rates for their jobs, and the purpose of options is to align and to attract the best talent. So I think that it’s unlikely that people would ever ordinarily choose to leave options with departing employees unless under exceptional situations.
But, what you really asked about was the employees who stay. What happens to their ownership when another company acquires the firm? The vested options are purchased by the employee and sold back-to-back to the acquirer, so the employee gets the profit, and we hope that the amount is sufficient to be life changing in some form. Often the employees are the most valuable element of a company, so they will also then receive share options in the acquiring company and bonuses to ‘lock them in’.
Second audience question: Grace, in the US it is easy for employees to buy into the idea of employee stock ownership. Part of the challenge we have as business owners is giving up the control. It is a challenge to convince business owners to give up their shares, so how do you deal with that challenge in China?
Grace: Right now we are seeing some emerging companies doing that. But most of the entrepreneurs don’t like to give ownership to employees. Even with great examples such as Huawei, employee ownership is at an early stage in China. I think it’s a matter of educating entrepreneurs and the government about the benefits of employee ownership.
Third audience question: I’m wondering if the two of you could explain what the differences are between ESOPS and equity participation in the market, and how do they work and how do they differ in terms of incentivizing employees.
Grace: I wish we had more time for John to answer this. The ESOPs we have in China are more of a management tool. They are often long term incentive plans. ESOPs in China don’t offer the employees any governance rights at this time. That’s my short answer.
Corporates Helping Scaling Firms
Tara Sabre Collier and Frank Venegas
John Hoffmire: I’d like to introduce Tara Sabre Collier. She was one of the first students I got to know here when I first arrived at Oxford. Tara was a Skoll Scholar, the highest designated honor you can receive as a student social entrepreneur here at Oxford. She has been working with EY for most of the time since leaving Oxford.
You all got to meet Frank before. So, he needs no introduction.
Would you each tell us what you do to help entrepreneurial companies outside of your firms? What do you do to help smaller entrepreneurial companies to grow?
Frank: My biggest thing is mentoring. There are a lot of successful people in this room today, and I can venture a guess that not one of them would have been successful without at least one mentor, and most probably many more. I have had 162 mentors in my life, and I’ve found that the most important thing in working with mentees is to stay focused. You, as a mentor, need to explain the most basic easy things that are hard for them to understand in the beginning. You do not need to tell them what to do. But, first you have to listen to what they say. Lots of times they will be going in the wrong direction. But let them explain themselves. Then go back and say, “What if you did it this way?” That’s the way that I work. I make them think.
John: I want to go back to that number of 162 you mentioned. It sounds like to me that you have counted and acknowledged those people. It must be that you have let them know you are thankful.
Frank: I have not graduated from college, but I recently received an honorary doctorate from Dartmouth College. I told Len Greenhalgh, who is here today, he was the big eagle and I was the little bird just learning to do things. Len is a professor at the business school at Dartmouth. He let me just watch what he did, and ask questions. He was incredibly candid. That’s one of the most important things about being a good mentor: being honest.
John: Sabre, what do you think the key levers are for entrepreneurs and what do those who want to assist need to do to help?
Sabre: There are multiple levers involved with promoting entrepreneurship. For example, you can have the best training in the world and if you don’t have a marketable idea with demand, it won’t work. You can have all the capital in the world, but if you don’t have the right people with the right skills, it won’t work. You can have a great company, with a great idea, for which there is demand. But if you are in an environment where there is no infrastructure, let’s say you are in a country where there is paltry access to transport or electricity, then those factors will greatly diminish your chances of success as an entrepreneur. Your potential of success, in terms of generating jobs and having an impact, will be lessened.
I have been looking at this through multiple lenses for several years. I started initially working on entrepreneurship through multilateral organizations like the World Bank and the UN. Then I actually became an entrepreneur in Brazil and Africa and so I saw the other side of it. So, I have seen all of these levers pulled by various players.
Some people were surprised when I joined EY and entered the large corporate environment after 1) being in the social sector, 2) being with development finance institutions, and 3) being a social entrepreneur. But the reason I made this switch to the corporate sector is to have the ability to access even more and important levers to help empower entrepreneurs and grow the private sector, especially in countries where they are most lacking.
For example, EY can address problems related to access to finance for entrepreneurs because we have access to information and people access that not everyone has. We are trusted advisors to a large number of financial institutions. So, based on this access, we can understand what entrepreneurs and businesses need to succeed to access capital and grow in their market.
Another example is that we can help entrepreneurship as we assist with policy development. We advise governments on how to invest in startups and how to create a business-enabling environment. We can also address the need for training directly. We do this as we provide what are typically expensive advisory services at discount rates to high-potential startups.
Still another example of what EY does is the naming of entrepreneurs of the year. This is a global celebration which over 60 countries participate in. This set of events is important because it creates a forum for entrepreneurs to access each other’s knowledge and networks. We really need to acknowledge the importance of social capital, because it’s often based on the people and partners, and leveraging their collective resources, that new ventures are able to go to the next level.
We also have a project called Enterprise Growth Services. This part of our company sends people to work at a discounted rates with social enterprises to help them grow. We have seen time and time again where investing in an advisor can really fuel your business. But, if you don’t receive the discount, such services can be so expensive for small businesses.
So there are a few ways that I think big corporations can support entrepreneurship. I have responded to the question by talking about our firm. But, there are many large companies that are helping entrepreneurship.
John: Can you provide a specific case study or example of an individual person or individual company you worked with and mentored, Frank? One of the things we want to focus on this weekend is talking about helping people get to scale. Can you talk about the importance of scaling, and that process?
Frank: Thank you for the opportunity to talk about this. By the way, I was an entrepreneur of the year with Ernst & Young and it was quite an experience to be able to be an atmosphere with EY and in an environment where fellow entrepreneurs could candidly exchange ideas with each other.
In regards to scale, back in the United States, one of my main clients is the General Motors Company. As you know, in Detroit, we have GM, Ford, and Chrysler. During the last 20 years, one of the messages from Procurement to suppliers at GM was “Either grow, or go.” They told me: “You have to be global, and if you are not global you will not be a supplier for General Motors.” Well both things, growth and being global, were really kind of daunting. GM wanted me to build production capacity in Europe, China, and Mexico. My response was to say: “I’m not ready.” They said, “You have to be ready, you have to be global.” I received quite a bit of pressure to open overseas operations, but I knew what was right for my company at that time. I was in a meeting one time and there was a globe in the room. At that point, we happened to have facilities in Toledo, Ohio, as well as Detroit, Michigan.
As I sat in that meeting, I decided it would be good to go to the globe and point out Toledo, Ohio on that globe and said, “Look, we are global.” They never had anyone challenge them like that.
In the end, they backed off and said “Well you have to grow to scale.”
You see, when you start becoming successful in your business, you become popular. When you become popular, people want to start doing business with you. Well, Ford wanted to do business with us and so did Chrysler. I made a strategic choice to stay a little bit smaller and keep most of my resources focused on General Motors.
In one of the last big talks I gave, I told the audience about how our company had $250 million in sales and 500 employees. But, now it’s actually changed a lot. Now we have about $380 million in sales and 900 employees. How did this happen? I decided I was going to grow to scale working with one major company, which was General Motors. So, the question was about how mentoring can help smaller companies to grow. I followed my GM mentor’s advice about growing to scale.
The one thing I did not do, though, was follow the advice I would have been offered in business school. Most business school professors would say “Wow, you have 60% of your business with one company, that’s very risky.” It was actually the greatest thing that could have happened to us, because the centralized customer focus allowed us to grow to scale in a deliberate way. GM understood our business and the limits we faced.
That said, the strategic direction I chose never allowed me to go to General Motors and say “Hey I’m going to take on this big job at Ford, and I’m going to take some of my key employees from my A Team who are now helping GM and move them over to help Ford.” Instead, I was able to show GM that we had a highly-skilled work force that was committed to doing a good job for GM. This orientation gave us the chance to increase our sales with GM and grow to scale.
It’s interesting to note, though, we just got an opportunity with Toyota. They are very interested in seeing us grow to the same level as our business with General Motors, $250 million. With this opportunity, we may be able to grow to $600 million in sales. But we have to be careful about how we manage our relationships with these two big, competing clients.
Sabre: It’s interesting, Frank, you brought up this point up about procurement, and the importance of procurement. Typically in the entrepreneurship and developmental space, there’s a lot of focus on training, which is key. But I also think getting in the door, getting that first opportunity through procurement opportunities presented to minority entrepreneurs, women entrepreneurs and generally these smaller firms, can potentially increase revenues as much or more than training. Procurement programs have so much potential to help new and small businesses grow and create jobs.
Most recently I’ve been working with a government in the GCC [Gulf Countries refers to Qatar, Bahrain, Oman, UAE, Saudi Arabia and Kuwait] where they have been, like many developing countries, reliant on natural resources. They have not yet seen their knowledge economy grow like in some other developing nations. The lack of a diversified economy also adds to problems such as high youth unemployment.
The same is true for Africa. Throughout the continent, there is need for tens of millions of jobs that need to be created to ensure that many youth will find employment. On the one hand, it is obvious why this is important. It’s important because when you have high rates of youth unemployment it can lead to the kinds of social backlash that can lead to strife and uprisings, as we have all seen in the past few years, for example in North Africa.
So this is where the procurement side of big corporations comes in. From Africa to the Middle East, the large natural resource conglomerates or government agencies cannot create enough jobs. We worked with governments on various projects to help promoting startups, funding SMEs and growing the rest of the private sector. At the same time, the big corporations in those same countries are often driven by natural resources and have ties to government, which means they often have a mandate to support local content. Because of this, the big corporations in the form of procurement are in many cases enablers for emerging market startups and SMEs to build their initial revenue streams. So it turns the thinking on its head, to realize how much big corporations create these opportunities for many smaller firms access to revenues, finance and opportunities.
John: I want to touch on the big company issue here. I know there is some cynicism in the room anytime a big company does something for social purposes. The question is always: “Are they just doing something good to assuage their guilt, are they doing it just for public relations purposes?” I know some of that happens, but if both of you would both answer as honestly as you can, I would appreciate it. Do big corporations really have pure motives working on supplier issues and entrepreneurship issues to help the less fortunate?
Frank: Social purposes and business self-interest are not necessarily at odds with each other. A focus on minority supplier success can translate into increased market share. Look at the automobile business. If you’re driving a car, GM wants you to be driving a Chevrolet, and one day to be driving a Cadillac. Presently, you see a lot of low-income people buying used cars. GM wants them to buy new cars, so their minority inclusion programs are related to increasing market share. Minorities are the fastest-growing sector of the US population, and if an auto company puts money into the hands of minority vendors and their employees, they, in turn, are likely to buy cars from that company.
Really it’s a bottom line approach that they take: that’s why they have minority procurement programs. I happen to be Mexican-American. In the United States, we have minority programs. I used to be enrolled in several minority programs. But I don’t like to be trapped in them. The reason is that they work on percentages. So let’s say 15% of the purchases a big firm makes are from women-owned companies, minority-owned companies, veteran-owned companies and other historically-disadvantaged companies. I do speeches like this in front of a lot of minority entrepreneurs and the first thing I tell them is “Don’t fight for a 15% share of procurement spending, fight for 100% so you can run and operate your company at the scale it is supposed to be.”
I also heard something earlier on mentorship related to big companies. The best thing that I do, and I’m doing this with Toyota, is I ask them to assign me a high-level person within the company. I don’t want someone that just wants the assignment, and someone that will just take it to advance his or her career. I want someone who is going to be objective and tell me: “You’re not doing it right, or you need to do this or that in a different way.”
Of course, this was not how it was for me when I just started in business. At the very beginning of my time as a supplier to General Motors, I had a mentor who was at a fairly low level of the company. He really didn’t want to be there as my mentor. But one thing he did was he gave me names and phone numbers and said, “Call them.” He said, “Come back and see me in two weeks.”
Well he kept great records, and if I called someone 17 times and left a message and they never called back, my mentor would pick the phone up and say, “You need to call this gentleman back.” He helped me break barriers down and open doors.
Sabre: I want to encourage everyone to look at Michael Porter’s publication on creating shared value. Also, read Tomo Suzuki’s work on accounting for sustainability. It turns out that a lot of factors that people previously assumed are completely independent actually are correlated. For example, it turns out that women’s representative participation on boards is positively correlated with better financial returns to shareholders. So CSR and diversity and inclusion are listed as line item expenses with no return associated with them. Of course, good CSR programs have a social return. But, in some cases, there is a correlation with better financial performance—is it not then an investment, not an expense?
For example one of the things Frank was talking about was market share. I think that Frank would tell us that minority vendor programs cost big firms some money in the short term. Those costs are not immediately paid back as time is spent building relationships with small entrepreneurs who do not look very mighty in the short term. That said, if you can build relationships with the Franks of the world of tomorrow, before they are big, you will benefit. When those small companies become big companies, you will improve your market share with future market leaders. And minorities have some of the fastest growing rates of entrepreneurship in the US—isn’t it a market worth getting to know?
Another important aspect related to programs led by large companies to help smaller firms is the potential for shared knowledge. We focus, in the lessons we teach the entrepreneurs, on topics such as the commoditization of so many products. We focus on the Internet of Things and teaching the entrepreneurs about disruptions across sectors. We tell them: “you can easily be displaced in the long term. So you’re going to have to disrupt your own companies even when you are at the early stages of developing your companies.” But exposure to startups, and new business models and innovation helps big companies stay ahead of the curve as well.
Additionally, there is something I think that is very important to address in a forum such as this one. My generation, I am in my 30s, is more motivated by social value and social impact than previous generations, or at least this is the common assumption. So if you want to get the best people and be competitive, you’re actually going to have to show how you give your younger employees an opportunity to do something more. People want to feel that they are legitimately a part of something that is contributing to a better world and having impact. If your employees feel this, you will actually improve your retention, which will be positive for many other key performance indicators within your company.
John: What would you ask for from big companies that they are not doing right now? What do they not understand? What knowledge, Frank, would you like big firms to have that would help other firms that are smaller to grow to be like your company?
Frank: What I find, especially at General Motors, is that they ask me to be a leader. And, to a certain degree, they have helped me to become one.
Becoming a leader is really a difficult thing. This is especially true in my community and my neighborhood where there was a strong need for a positive role model. I wasn’t a famous athlete or entertainer: how was I going to become a role model? But, now that I’m getting a lot of public recognition as a leader, I have become a role model.
Something else that big companies ought to ask me to do is to become a better mentor. I should be explaining to more mentees about the skills that have gotten me to where I am. Being honest, even if GM asked me to be a mentor to the leader of a direct competitor, I would do it. There’s nothing wrong with teaching a competitor how to be better. If you teach, it will make you change your own approach for the better.
Sabre: I’m going to speak about this from an emerging market perspective, because that has been a focus in my career. When you’re speaking about large corporations, there can often be a lack of alignment between them and the development finance institutions, the nongovernmental organizations, and the social sector. There is often a lack of follow-through in regard to the large companies putting their money where their mouths are. When it comes time to actually help give business opportunities to smaller companies, they have to do it. When it comes to human resources and hiring minorities, they have to do it. So if you say you are committed to investing in communities where you operate, whether that is in Africa or low-income communities in developed countries, then that means you would actually actively look for and build up local companies that could be in your supply chain.
Doing what you say will create a much more impactful socioeconomic impact than just giving money to an orphanage. Actually enabling a local business to build its capacity is really meaningful. When you do this, it enables people in the community to see the example you are setting.
Setting aside resources for these types of economic development thrusts is much more impactful than paying for a table at a gala event. I think, even among businesses that say they are in the “social sector”, there is a serious shortage of money and effort going into recruitment of employees from minority backgrounds and there is a serious shortage of money and effort going into using procurement as a tool to help small impact businesses.
Finally, there is an organization that people might be interested in. It is WeConnect. WeConnect works with some of the world’s biggest corporates like Boeing, Coca-Cola, and Walmart. The big corporates work through WeConnect because they acknowledge that women-owned businesses have a big and positive social impact. It helps the big corporates to work through WeConnect because WeConnect knows how to source women-owned businesses across emerging and developed markets. WeConnect knows how to help the small companies move into the supply chain of the big firms. This entry generally helps the women-owned firms to raise their profits and revenues.
First audience question: Frank, how did you get that big break with General Motors? What was that moment that allowed you to gain scale?
Frank: I am going to answer this, first, from a personal, entrepreneurial perspective. Being eager was my strongest trait. This is what allowed me to excel.
From a business opportunity perspective, what made a difference in regard to our really being able to move into the big time was the bad stretch that General Motors went through during the Great Recession. Remember, General Motors went bankrupt in 2009. They went through an awful lot of financial issues and problems. Well they were closing plants left and right. I told one of my main contacts at the company, “You guys are absolutely crazy, you’re closing these plants and you are literally throwing away millions of dollars’ worth of things that could be used in other plants.” I was talking common sense to them. I just kept blabbing my mouth, and then, one day, I was with the president of General Motors and I kept running on about how things were getting worse at General Motors and how they needed to save some money. I mentioned the type of waste I had seen.
It turned out that soon after our conversation, he happened to be at one of the plants that was being shuttered, and he saw what was going on, what was being thrown in the dumpster, and what was being set aside to be thrown in the dumpster. At the same time, he remembered what I was saying. He picked the phone up, called me, and said “You get down to Louisiana now and tell us what we can save. You tell us where you want us to ship the materials.” Well, I saved them, that year, $97.4 million.
Now when you save a company almost a hundred million dollars, you have done them at least a small favor. This was especially true given the financial difficulties GM was having.
Something else that was important as we moved from being a medium-size supplier to GM to being a large one was that I realized that they really like to have data. I had created data from the beginning of my career as a business owner. But, at that particular time, when GM looked at the data I had collected and was using to manage the business, they saw that we really had our act together and said, “Give Ideal Group more work to do for us.”
Second audience question: How do EY and other consulting firms contribute most effectively to making the world a better place through their measurement practices?
Sabre: At EY, and other large professional service companies, there are typically divisions that are actually focusing on sustainability reporting. These don’t necessarily have to be integrated into accounting services, they can range from helping companies measure and standardize their processes for greenhouse gas reduction, all the way to economic and environmental impact assessments for any proposed investment or construction. As far as understanding sustainability accounting goes, I had mentioned Tomo Suzuki’s work. I would definitely recommend the methodology that he has pioneered. The Indian government and the Japanese government are both in the process of adopting these methodologies. The way these methodologies measure what are called externalities is very interesting. They are not normally captured in corporate reporting.
Third audience question: Specifically to EY, you mentioned a lot of stuff that seems separate from the core business that EY does. I’m wondering how integrated are those things, are they willing to shift the way they view their company and run their supply chains? Or is EY really just looking to advise companies about how they can improve their bottom lines?
Sabre: I can tell you what I see. Remember, I see what I am working on. That is what I know best. When it comes to helping governments and investors, whether that’s policy advice about promoting entrepreneurship, or whether that is about helping investors evaluate biofuel projects, our work is completely in line with the core business of EY: it is a service that we charge for, and we are making the world a better place as we do our work. At the same time, our clients are making a profit. I see all of this as consistent with what all businesses should do.
Now, can we do better? Of course we can. But, I think that almost all big companies need to do better at this.
Fourth audience question: Sabre, I’m curious externally, what have you found is the most successful or compelling argument that will get more big corporates involved in the social entrepreneurship space and emerging markets?
Sabre: I think there is so much data now being gathered that supports corporate involvement in this space. We have talked about the big corporates improving their own market share by having a brand that people think aligns with their values. We have talked about how these types of programs can help companies both recruit and keep their people longer. By promoting these types of programs, you can also keep your own employees happier because they feel their work is meaningful.
It’s also the case that we are now better able to measure the long-term cost of unsustainable practices. We know better now than we used to that use of fossil fuels influences climate change in negative ways. Social entrepreneurs have helped many across the planet to better understand climate change. Each time that a big corporate aligns with the progressive side of the climate change argument, the big corporate makes a positive difference in bringing others along with them.
I think people are seeing paradigms shift around the world. How do those of us who want to see paradigms shift act to make things change even faster? Some of us have found that we can speed the process by being within big companies. This is why I’ve made the jump myself from the social sector to the corporate sector. Remember what I said earlier, in the past, I had worked all over Africa, the Middle East, and Latin America as a social entrepreneur. I had worked with some of the most significant development financial institutions. But, I do feel that, through the work I am doing now, I have potential to have more impact. If I didn’t feel this way, I would not have made the change.
Ted Malloch and Jonathan Michie
John Hoffmire: Ted Malloch is Senior Fellow in Management Practice at the Saïd Business School, University of Oxford. He previously served as Research Professor at Yale University. He is also Chairman and Chief Executive Officer of The Roosevelt Group, a leading strategic management and thought leadership company. He is also the author of Doing Virtuous Business and Practical Wisdom in Management.
Jonathan Michie is Professor of Innovation and Knowledge Exchange at the University of Oxford, Director of the University’s Department for Continuing Education, and President of Kellogg College. He previously held the Sainsbury Chair of Management at the University of London, where he was Head of the School of Management and Organizational Psychology at Birkbeck College. Dr. Michie was also Dean of Birmingham Business School. Earlier in his career, he worked for the consultancy company Analysys Ltd, and served as an expert to the European Commission in Brussels, before moving into academia.
John: I’d like you both to give your definition of what responsible leadership is, and what we should think about when we talk about responsible leadership.
Jonathan: I think it is fundamentally taking into account the interests of all stakeholders, not just the owners of the business. I would say responsible business takes into account the employees, the customers, the suppliers, the local communities in which the business operates, and the environment. Ensuring the company takes proper regard for all those is important. Responsible leadership puts emphasis on taking into account ordinary stakeholders.
Ted: In a macro sense, there is a longstanding tradition of wealth creation in the western world. I’m certainly in favor of capitalism and the free market. Adam Smith, while here at Baliol College, 17 years before he wrote “The Wealth of Nations”, wrote something called “The Theory of Moral Sentiments”, which basically argued you couldn’t have a market economy without a virtue-based society, a benevolent society, a compassionate population and an inclusive concept of what capitalism is. I think that over the last 200 years capitalism has certainly moved away from some of those ideals. In the West, we have focused almost exclusively, over the past 30 years, on an approach that is aligned with Milton Friedman’s ideas of business and shareholder value.
We are swinging back, frankly, toward what Smith discussed. In the modern era, this approach is most identified with what was written about by Michael Porter in his work on shared value. In essence, we’re swinging back towards a more responsible view of business.
This leads to an important question, namely: what is the role of business in society? No longer are they just two large entities separated from each other, but now they are moving toward greater intersection.
On the micro level, my own work looks at not only the legal forms of corporate governance that give rise to responsibility, but also the ethical compass that is necessary for leaders in order to build the kind of corporate cultures that can be responsible. I have recently been doing research on what I call “virtuous business.” In our survey of 60 great companies, we discovered 14 different virtues, no two of which were evident in any one company. So each company has its own unique history and special orientation and value sets. In the end, it’s the discussion about virtue that brings us back to the discussion of responsibility.
John: There is a growth in the use of the term “responsible leadership.” Do you see a difference between the old corporate social responsibility movement and the responsible leadership community? Or is there no difference?
Ted: There is a big difference. We are moving into a radically different realm where companies, I’d even say capitalism itself, is evolving a demand for a higher level of responsibility. The Ford Foundation sponsored this piece of research, which was done at Oxford. They asked us to look at how responsible leadership, and how responsible businesses, are evolving. The also asked us to look into how the term “inclusive capitalism” was used.
One of the interesting things in this space is there are a lot of different terms used interchangeably. Responsible capitalism, inclusive capitalism, conscious capitalism, long-term capitalism. We actually studied 200 different organizations that have come to the fore in the last 10 or 15 years that advance this movement towards responsible leadership, responsible capitalism. So responsible leadership is not the old paradigm. This is something new, something much more sincere, much more inclusive.
Jonathan: The question is this: Is it really different this time around? Some said the same sort of thing when the term “corporate social responsibility” was coined. The corporate social responsibility movement gave great awards to the leading companies which were later found to be doing things that were completely fraudulent. One of the companies which had a great reputation in this regard 100 years ago was Barclays Bank. Yet they appear to have behaved just as badly as the rest of the financial services companies in the build up to the 2007 global financial crash.
There has been an attempt to get the big global banks to change their ways. Barclays has tried. How successful that has been, well, I hope we don’t find out the hard way. There are a lot of people who think that actually not that much has changed. My feeling is that, unless more is done to regulate correctly, there will be another global financial crash like there was in 2008. It may happen in two years, five years, or ten years.
So I hope that things are actually moving much more fundamentally towards responsible business than was the case with what we called corporate social responsibility. But I don’t think we’ve really seen the evidence, particularly with the big banks.
John: I want to see if we can differentiate between a couple different thought processes here. What is the role of regulation in trying to make companies be more responsible?
Ted: So I think there are three legs to this stool when you are talking about responsibility.
The first leg, which people don’t like to talk about, is individual responsibility. What is the makeup of the individual leader? How is he or she trained? How is he or she bringing forth their values through their leadership qualities?
The second leg is the one, frankly, we are most interested in. That is the corporate culture leg. How is corporate culture created? Particularly, how are progressive notions about innovation and growth promulgated within the firm? What kind of leadership is used to promote sustainable, long-term growth? In this regard, there is no one pattern for all companies to follow. There is no one answer. We see a wide diversity of examples.
The third leg of that stool is the regulatory leg. I think I’d agree with my colleague here that the financial service industry is not one that has gone very far in the right direction. Even after the financial crisis, we are not seeing the right steps being taken in terms of developing responsibility. So the regulatory regimes are important. But they are usually created after the fact, after the scandals. Sarbanes-Oxley came after Enron; Dodd-Frank came after the last financial crisis. So, we can’t expect the regulators to be on top of regulating against the next type of scandal until after the next scandals happen.
The answer to all of this is that we need to build companies in the right way from their start-up stages so we need minimal regulation. In the end, we will of course always need some regulation. The real problem is: we are all involved in an integrated global economy and we don’t have global regulations. Regulation is not the starting place when it comes to responsibility, in fact compliance has become overly burdensome and can stand in the way of real responsibility.
John: Two Thursdays ago we had the Brexit vote. Let’s have a theoretical discussion about a made-up fishing community to the north where the fisherman were saying: “the EU regulates us too much.” In this same community, they were saying: “we can’t help low-income people in our communities because there is too much regulation.” On the other hand, in London, we have people who are very happy that the sea food that is being sent for them to eat is regulated. They like the fact that the foods they eat are safe for them. How do you balance these needs?
Jonathan: I think, with Brexit, the fisherman regulations were a bit of a side issue. Everyone agrees that you have to have regulation on fishing. Without regulation, some fishermen will catch all the fish and everyone who keeps a boat will go bankrupt. I think the bigger issue, which one of our previous panelists hinted at, is the state of the developed world today. The UK is not the only country suffering with this phenomenon. You can see it with Trump in America, and through the Austrian fascist who just barely missed being elected president.
So I think the big issue with Brexit is disaffected communities in not just the Northeast, but across the North of England. There you have tens of thousands of citizens, a lot of whom lost their jobs in the 80s and 90s and they’ve never really been reengaged like they were when they were prosperous. What can be done about this? Clearly, there is far more needed than just a few regulations. You need education and a reinvigoration of enterprises and businesses. You need to have businesses that are responsive to local communities. Communities need to feel reinvigorated. It all comes back to responsible leadership and stakeholders. I think the topics of this conference are really vital to the long-term issues related to Brexit.
Ted: I am an American citizen, so I was not able to vote on Brexit. But I certainly analyzed the outcomes and I think it does signal a trend. I think we could find various places around the world, which are reacting against both overregulation and the lack of inclusivity inherent to capitalism, as we know it today. These trends are particularly influencing the middle class, whether they are living in the north of England or the center of America. This also has to do with the topic I think you were trying to get us to speak to, which is the high cost of compliance. When you look at the regulatory regimes, whether it is Brussels putting them in place or Washington, DC, it’s more and more complicated. It’s more and more difficult for small and medium size enterprises to adequately comply with these regulations. There is a very high threshold that you have to rise above before you are following all the rules.
I think there is a serious reaction against such over-regulation. The outcome of the Brexit vote may signal such a reaction. I think that word “compliance” is worth focusing on. There are costs to regulations; it’s not just a matter of making laws. People then have to figure out how to follow them. A very good industry has been created whereby consultants are paid good money to tell firms how to comply with very confusing laws. Compliance I would say is a legal concept; it is not an ethical concept. It is understandable that some want to comply at a very low threshold. The laws confuse them. They feel they have to pay too much to be able to comply. What we are finding is that the better companies are going well beyond what the law requires and trying to be responsible citizens and go far beyond what the laws suggest. But, many other firms either do not want to or do not feel that they are able to comply fully—either to meet the letter or the spirit of the law.
John: If I can get a yes or no answer to this next question, I would appreciate it. Yes or no, would there be fewer poor people if there was less regulation, and why?
Ted: Yes, there are costs for these regulations. I don’t think there should be no regulations, I just think there should be a sunset law of how long regulations should stay in place and we should have repeated discussions about what regulations are necessary.
Jonathan: I would say the opposite, no. I haven’t seen much evidence that would suggest otherwise. Ideally you wouldn’t have regulation and people would just do the right thing. But obviously, that’s not the case. I think one of the most successful areas of regulation in the UK has been the minimum wage. We never had one until 1997, and it was very controversial at the time. Within several years of it being implemented, it became mainstream in all parties to believe that yes it had been a good thing. It took out the low road option of some companies competing against others through low wages. It became a matter of fact that as a company you would have to compete on a basis other than the wage you paid.
John: Take one company that you think is virtuous and responsible, and tell us the story of that firm and why you think it is a good example.
Ted: I’d like to mention a company in the Midwest of the US that makes office furniture. The company grew up in a spiritual tradition, which is interesting in its own right because it gives rise to certain kinds of values that permeate that company. It became a large company, about a $6 billion dollar firm, so it is now publicly listed. Over the past 20 years or so it has been on Fortune magazine’s most admired company list, so it is widely admired. It’s called Herman Miller. They have a degree of covenantal relationship in that company that I think is very respectful. It makes them a responsible company. When they had to cut the workforce in the last recession, the CEO, instead of cutting his employee’s pay, he cut his own paycheck radically to keep people employed. They have a great environmental record, as well. I think the way they respect the people that are employed there and the environment, gives rise to a very unique and interesting company. No company, and, for that matter, no individual, can be replicated. You can just learn lessons from certain “best in class” companies.
Jonathan: I think it’s worth mentioning the John Lewis Partnership, particularly given the discussions about employee ownership and shareholders that are taking place at this conference. The John Lewis model is a very different one. The company has 100,000 employees, but none own shares personally. It’s owned by a trust which has to act in the interest of the employees. So the employees do benefit, because the company makes profits each year which go to employees. These profits are paid out in the form of large bonuses each year.
I think this a great model of ownership for almost all types of companies.
One of the things that is special about John Lewis is that they stress the interests of all employees —all current and future employees. It would be quite possible to use a similar model but with the interests of other stakeholders included, as well. It would be very interesting, for example, to see the interests of the environment included in the ownership trust.
I know you asked, John, for one example. But, I would like to mention one other. An area I have been quite involved in has to do with the stakeholders of football teams. I guess you would call this sport by the name of soccer in the States. In general, football teams in this country can be badly led. It is clear that companies that own the football teams rely entirely on the fans. They are the customers. There are a few models where the fans and the communities are well connected to the companies that own teams. But, in many cases, there is scant regard shown for the fans. In many cases, communities have to force the board to pay attention to the teams’ fans.
I have come to the opinion that the only way fans will be well-treated is if they actually become shareholders and demand rights as owners of the teams. So, for example, Barcelona is a very successful football club, and is 100% owned by its supporters. The Green Bay Packers, who are part of the National Football League in the US are also owned by their fans.
John: It is interesting to note that the company Ted mentioned, Herman Miller, is employee- owned, too. Although, their ownership structure is a little bit different than either of the types of models that Jonathan just mentioned.
We seem to have consensus that not just one stakeholder, a single owner, should be given priority. This raises an interesting question, though. Which stakeholder should be given the highest priority: the employee-owner, the employee, the environment, the community, the government?
Ted: I don’t think you can prioritize them in a vertical way, I think they have horizontal relationships so that if you tried to prioritize them, you’d have to get into an ideological defense about why one or the other would be a better decision. There are some legal codifications regarding the rights of shareholders in the courts of Delaware once companies are incorporated. So, they have a stronger foothold from a legal perspective than the other stakeholders.
I tend to want to think about these issues with the view in mind of a vertical plane. The real question is: how do we balance all the interests of these players?
Jonathan: That’s an important point. As UK company law is written, it is not possible to have truly responsible leadership in the way that I define responsible leadership. It is not possible to take the interests of all stakeholders into consideration in legally enforceable ways. The law requires the board of directors to give ultimate power to the private or public shareholders, and that is just the law.
So to achieve the sort of things we’ve been talking about, like responsible leadership, and giving more ownership equally to stakeholders, would require big legal changes in the UK, and I think most countries. This is quite dramatically illustrated in Britain with the case of Cadbury, which had a very good reputation going back decades in terms of relationships with their community and their employees. They experienced a takeover attempt by Kraft. Cadbury was a public company at the time. The board thought it was not in the interest of the company or the organization, or their current or future employees to sell the company to Kraft. But, the board was, nonetheless, told by their advisors that they had no alternative other than to accept the offer.
John: Do you believe there should be more regulation and legislation that would enable employee ownership?
Ted: My reply would be if there is so much interest in employee stock ownership, why isn’t there more employee stock ownership? I mean, are there laws holding back employee stock ownership? There are some great employee stock ownership firms. So, we need to tell their stories more often and better. We need to tell the stories in business schools and everywhere else, but I actually found, I’m doing research right now on Cargill, which is the world’s largest privately owned company, and at a point of time early in his history, Mr. Cargill himself thought about employee stock ownership and he died before he could put it into existence. The relatives that took over the firms said “not over our dead bodies.”
John: One of the great things is that the next generation which came into ownership at Cargill actually did implement an employee ownership program, so it is interesting to see how these things come around.
Jonathan: I think it would be better if there was more employee ownership. But I think it is equally important that I make the point about how important it is to structure employee ownership correctly. I talked earlier about the trust model of employee ownership used at the John Lewis Partnership. In this case, I talked about trust meaning that a trust owned the company. The trust-based method of ownership used by the John Lewis Partnership allows the employees to own the company in perpetuity. Other forms of employee ownership often lead to the employees selling their companies. This can result in a good alternative form of ownership being replaced by more traditional ownership.
Although the caveat I make is this. And this caveat is reflected in the literature. It is good to have both models. One model requires that the shares are held for the employees in the trust in perpetuity. The other model is where the trust can sell all or some proportion of the company shares. There are advantages to the perpetual ownership, especially if you want the employees to have a proper voice in the future direction of the company. On the other hand, when a trust can sell shares or individual employee owners can sell shares, the employees can more easily benefit financially over the short and medium term through the sale of shares.
First audience question: What role do you see educational institutions playing in informing future responsible leaders? I am not just asking about business schools, but higher education institutions as a whole, as a community?
Ted: I think business schools have done an abysmal job. Some business schools give out “get out of jail free” cards. They teach the students compliance and the current legal frameworks. The business schools then feel that they’ve done their job and can graduate the students. So I think there’s a lot to be done yet in terms of educating the next generation of responsible leaders. I also think there’s an example of a business school that does it right. What we say here, at this business school is that “you will not get an MBA from the Saïd Business School unless you take a compulsory course in responsible leadership.” American business schools do not generally have such requirements.
Second audience question One of the speakers said he is a firm believer in free-market capitalism. Are you willing to reconsider your strong belief in free-market capitalism?
Ted: I think that if you look at world history, over the last 200-250 years, the planet has moved from a situation where the entire globe, developed and less developed, was sick and poor. Now we have a situation today where most of the world (we still have 1 billion poor people in the world) is no longer sick or poor. In other words, we are living to extraordinary longevity and our societies are prospering more. Now, are we prospering equally? No, there are variances in the world.
But, overall, something very important has happened in the past 200-250 years. Something has been unleashed. The question is: what has been released? I would say the spirit of democratic capitalism has been unleashed. This has had an enormous impact on our history, on our own lives, on our own wellbeing and sustainability. It’s not to say that we have arrived or are at the end of history, it just means that we are on our way. We are flourishing more than in previous eras.
So, I wouldn’t put the genie back into the bottle, I would let it loose.
But I would say we have to do a better job. Even though we have done a powerful job in the past 20 years moving a very large number of people out of the worst types of poverty into middle income kinds of status, we still have not done enough. We need to do a better job with the bottom billion. Paul Collier’s work here at Oxford is focused on that and I would recommend it to you—look at some of his suggested solutions. Some of what he suggests is governmentally oriented. Some of what he suggests is dependent on civic organizations and society. But, the largest of responsibilities fall back on capitalistic business organizations.
Jonathan: I would agree completely that since the industrial revolution 200-250 years ago or so, the world economy has grown fantastically. But, I wouldn’t say it was because of free-market capitalism. I think the successful economies—Britain early on, Germany and Japan—actually all of them developed almost entirely through the exact opposite of free-market capitalism. There was huge state intervention. There were industry tariffs, regulations, state ownership of a huge number of industries and assets. The example of China was given earlier. There is no doubt that 600 million people have been lifted out of poverty. I’d assume everyone knows that there is massive state leadership in the economy there with the infrastructure and investment and so on. So I don’t think that free-market capitalism is the right way at all.
Third audience question: I think one of you mentioned earlier on about the behavior of banks and lending. I was interested in your thoughts on the relationship between responsible business, social impact, and cash flow in business. Do businesses need to be wealthy in terms of the amount of cash flow they produce before they can actually start affording to produce social impact?
Jonathan: I think many small, many start-up companies start with a positive social impact ethos in mind. They make an impact from the minute they start up. I used to work for a private company in Cambridge where you have these industrial areas that are quite unique. Many of these companies are started by people with doctorates from Cambridge. The ethos is all about creating social impact firms with good corporate cultures. The regulations are irrelevant in this case because the companies are all doing the right things anyway. Every one of the best companies has been very successful in scaling up using a progressive model. So I don’t think they needed to wait until they had positive cash flows.
There is, though, a separate issue. You need access to finance in order to expand and ensure the positive growth of your company. Related to the previous question we received from a member of the audience, where lots of governments—Germany and so on—have regional financial structures in place, there has been much growth of good companies. This has been a problem in Britain. The institutional financial structure of society in this country is much more capitalistic than the one in Germany. Private banks, for example, give overdraft facilities to small companies as they start up. These overdrafts can be withdrawn at any time. Great companies have gone bankrupt just because banks have withdrawn overdrafts.
Ted: There is a theory that suggests both at the individual level and the corporate level that people should do anything that they can get away with for the first half of their lives and then come back in the second half and be good citizens. In the second half they would be philanthropic and responsible. I would like to suggest that is a very devious, unethical, and wrongheaded proposition. That companies and individuals both should build that into their DNA at the very beginning is bizarre. What we need are more responsible companies now. It’s a bad idea to wait for some billionaire CEO to decide after they have cashed out that now it’s time for them to “give back.”
Fourth audience question: I want to ask whether you have examples of people who have met crisis and done really interesting things to transform their lives or their organization as result of addressing a crisis
Ted: Doing a turnaround is particularly difficult. One of the companies I’ve written about is Cummins Engines, the world’s largest diesel manufacturing company, located in Indiana, now global with large operations in China. They’ve had at various points in time different crises. The one that I thought was most interesting writing about was the ongoing set of decisions they made in the 1960s right through the 1980s to fund the civil rights movement. They actually took action. By the way, this all sounds very courageous after the fact, to pull all their operations out of South Africa during Apartheid. It was a very bold move and others actually followed suit. They were one of the first companies to pull out and it cost them pretty dearly in terms of bottom line losses. But, in the long term, it positioned them rather well.
Fifth audience question: Ted, you had a lecture series on spiritual values in the workplace, so my question is how important do you think spirituality is as it relates to responsible leadership in the workplace?
Ted: I have written a book on spiritual enterprise, and I’ve also written a book called practical wisdom in management. At Yale we funded 24 different case studies from 14 different spiritual traditions showing how these types of companies are birthed, and how these types of traditions are continued in corporations. There is no one specific spiritual tradition that works best in business. But, there are really great companies that either grow out of spiritual traditions or that are faith-based companies and I think this is something that is understudied.
John: Any final words, Jonathan?
Jonathan: Colin Mayer, a professor here, wrote a very good book on the issues I’ve been touching on. It is called: Firm Commitment. It is about good companies and trust models. Inherent to the book and my argument is the point that corporations have to make commitments themselves. You can try to regulate, and we must continue to regulate, corporations. But, unless corporations really decide that they want to act properly, we will never make the progress that is necessary in societies.
Honoring the Entrepreneurs
Scott Huish & Nick Davies
John Hoffmire: Scott Huish is a founding partner and Managing Director at HighStreet Capital. Mr. Huish has been an entrepreneur, founder, and corporate director for a number of companies. Mr. Huish has dealt with all stages of technology development and corporate growth, both as an entrepreneur starting and growing companies, as well as after being brought in as a consultant or as an investor. Mr. Huish holds a BS in Finance from Arizona State University and an MBA from the University of Oxford, where he was a member of Christ Church College.
Nick Davies is an ex-agency marketer with 25 years of experience helping brands create value. He has worked with some of the world’s best-known companies, creating campaigns to help them build reputation and sales. But the game has changed. Nick launched Neighbourly.com in July 2014 to help forward-thinking companies find the right balance between value for shareholders and value for society.
Scott and Nick are also two of the sponsors of our conference.
John: Can each of you tell us what role you play with your entrepreneurial companies?
Nick: I launched my company, Neighbourly.com, to help companies activate their social purpose. On the run up to the recession, my old company, my communications agency, had already identified that as a business and a brand got more global, it quite often started losing touch with its local communities in quite significant ways. And that was something they needed to act on.
This realization was not purely driven by commercial opportunity. It was a change of mindset—a realization that the relationship between business and society was changing. So what we were doing as part of my old agency was really helping those brands get local, get on the ground and really get into grassroots conversations to stop companies projecting an advertising message to communities but instead start authentically engaging and listening and saying “what can we actually do to help?”
As you can imagine that’s fairly people intensive. We were putting people into communities and trying to engage on a case by case basis. What we found is that you can’t scale that type of business.
At the same time, the recession absolutely underlined this sense in business that consumers really didn’t care about business anymore. There’s a survey that runs annually called the Edelman Trust survey. Back in 2009-2010 they came out with some really striking data that showed across the world, after they had interviewed 30,000 people, the majority of people wouldn’t care if more than 90% of the brands disappeared tomorrow. That demonstrated a pretty resounding rejection of big business and at that point I think business really got the message that, actually, profit at all costs was just no longer going to work in the long-term.
Neighbourly, my new company, is a social network which is designed to help firms collaborate with their colleagues, their citizens, and their customers to activate their social purpose at a community level. Our basic hypothesis is that brands are increasingly talking the talk and walking the walk. They are saying: “we know that we need to make a social and environmental contribution.” Neighbourly is there to activate that.
Scott: My background has been mostly as an entrepreneur starting three different companies in the past, and the fourth being the one I am growing now, HighStreet Capital.
To help grow one of the companies I previously started, we took on some funding from one of the big investment banks and other investors. To put it bluntly, we had an abysmal experience. We watched conflicts of interest play out on the part of investors. We watched as they were purely financially driven and had objectives which were at odds with our objectives. We were all about trying to do good things that influenced communities in positive ways while making money, and they were one track minded and in a hurry.
So that was the genesis that led to our wanting to start HighStreet as an investment firm that invests smart capital for impact. We are making investments where our hearts are behind the investments, where there is a thought towards the community and towards the other shareholders.
John: Give us some examples of some of the firms you’ve worked with in completely different situations when you are investing or advising.
Nick: Our founding clients, the three that got us going, were Marks and Spencer, Starbucks, and Heineken. Now we are talking to and working with British Airways, Microsoft, Body Shop, and many other great companies. It is important to note that, in every instance, our clients have started by making changes from the inside. Then, they began asking: “how do we help, through our business, to do more?” I think maybe many of you would be surprised, if you looked under the bonnet of many of these big global brands, about just how much change is happening. And you would be surprised at how regularly the changes have started from the inside of these organizations. Millennials in particular will not park their values as they come across the workplace doorstep. They want to work for companies that do right by society and the environment, as well as shareholders.
John: Will you tell us about a case study from Microsoft or Starbucks? Both are companies that were started by entrepreneurs during the last 45 years.
Nick: Starbucks wanted to activate their community purpose at a grassroots level, store-by-store. The best way for them to do that was to say: “let’s empower stores to make decisions about how we help people in their local communities.” One particular initiative involves taking a couple of projects from each store and backing them with £1,000 and £500, allocated according to who gets the most local support. We learned a few things from this:
a) £500 is a lot of money to a community project. There were no losers with this initiative and that’s critical
b) Creating a small competitive element worked really well—the projects were grateful for local people finding their voices to support them, which often resulted in local media coverage that otherwise would not have happened.
c) The initiative created a meaningful difference for those very small community projects, many of which were actually struggling to survive
The point here is it is a win, win, win. It’s a win for people, it’s a win for community projects, and it’s a win for the business.
John: Scott, will you tell us about your Arizona project? Tell us how many jobs were saved and tell us what you did entrepreneurially to help people?
Scott: Five years ago, a local congressman from the state of Arizona approached me and mentioned the situation facing a number of industrial energy plants. They were under threat of going bankrupt. There was a paper mill, a coal plant, and a biomass plant. All in all, the head count for employees across the three plants was about 400 employees. They were all located in the same city in a small town in the mountains in Arizona.
Anyway, when the congress member approached me, he shared that there was some tension between different owners of the different plants and mentioned to me that something should be done about it. I said: “why are you asking me, I’ve never dealt with utility companies, I’ve never dealt with bioenergy, I don’t even know how bioenergy is produced, I have none of the background needed to be successful in this situation.” He just said “I heard you are an entrepreneur, I heard you know how to figure things out.”
So, six months later we ended up acquiring all those plants and all of their assets. We ended up bringing all the former employees back to work who had previously been let go, Today the plants are running profitably and they are running well.
From an economic standpoint for ourselves, we ended up doing alright. We acquired the assets for about 15 cents on the dollar. This is measured from a construction cost perspective. We were also able to renew our purchase agreements with the utility companies by signing 20-year contracts. These are nice long-term contracts that we put in place and provide a lot of security for the community.
But, remember, economic gain for ourselves wasn’t the motivation we brought to the table. Our motivation was to reverse the job losses. The job losses had hit the community in a big way. We are happy that things have worked out well for us economically. We are happy to be compensated for the six months we spent negotiating with the prior owners and taking a financial risk. The side benefit was there was an economic benefit for us, the owners. But, the primary motivation was reversing the job losses and bringing the community back to life.
John: Nick, will you take us a little deeper into the type of work you do?
Nick: What’s really interesting about activating social purpose in these global brands is first of all you have to find a change-maker inside the organization. The change-maker is going to strive to work ‘from the heart’ in an environment where many are stuck in a rational, short-termist rut.
The first thing we encourage the change-maker to do is to tell stories. At a very basic level, that is the whole purpose of Neighbourly as a platform. Our goal is to help create an environment where community and brand can co-create stories—really authentic little one-minute scripts and films that humanize purpose in action. That process of story creation makes possible some very quick breakthroughs—senior managers really empathize with simple, real-world contributions.
We also encourage employee empowerment very early on. If you empower employees to make choices locally about how they engage, you see really swift movement towards engagement. Most big companies are offering 1, 2, 3 days of employee volunteering now in the UK. The uptake is low, it’s between 30% and 40%. But, if you empower people it can switch to 60% to 70% very quickly.
The third thing we often do is help our clients focus on customer data. If you can see project reach and share as you can with Neighbourly, you are moving in the right direction. Then, if you can measure sentiment, how people feel about you pre- and post-campaign, using a Net Promoter Score or similar, then you are really moving forward. If you can then give your customers a coupon as an exchange to say “thank you” to anyone who supported a project in the community, you are moving even more positively. The coupon says: “thank you, here’s 10 pounds off your next purchase.” You can then track that through to sales. You see, you can work with clients as they go on a journey toward better involvement in the community, and better use of metrics and data. Through this process, you gradually start to bring the doubters in the community around. They are on the journey, too. For that matter, there will be doubters within the client organizations too. There will always be people that say “this type of community involvement can’t possibly improve our bottom line.” Time and time again it has been proven, through data-driven means, that most situations that deliver a win, win, win are possible when a client is acting authentically.
John: This has all been very helpful. I want to turn the discussion slightly. I have a pet peeve when we start talking about certain types of entrepreneurial attempts that lead to good outcomes. It’s that we use the term social entrepreneur. I think when we use this term, we somehow make other entrepreneurs look anti-social. I think that’s a problem. Talk about this theme for a little while, if you will.
Scott: I think I share your pet peeve. I’m not sure I necessarily agree with current definitions of social entrepreneurship. I think it’s largely an academic term. I think, in reality, most entrepreneurs believe they are doing something that is good for society. The entrepreneur is the change agent. They’re finding a need in a marketplace. The needs they meet are diverse. They could be helping a customer buy a certain product, good, or service. They could be in a developed country, or in a developing country. Regardless, entrepreneurs see a need, and they fill it. It is often the case that some will differ about whether meeting certain needs qualify as meeting a social good. Often, I believe, social good is defined in the eye of the beholder.
There are things that are done that touch the environment, or impact job growth, that will always be defined as “social entrepreneurship.” But, many of the mundane activities of the world are valuable to someone. We should probably leave it to the academics to argue about splitting hairs around what is real social entrepreneurship and what is not.
Nick: I had a very interesting experience with this when I first started Neighbourly in 2012. This was when I was trying to figure out how to legally incorporate my company. I wanted to start a business actually with a purpose, and I thought, should I start with a business that is a CIC, a “community interest company,” or should I start it as a for-profit company? Much of the advice I received at that time suggested that I had to launch as a CIC if the platform was to pursue purpose. The problem with this is, whilst the CIC purpose locks in your mission, it also locks you out of commercial fundraising. To build Neighbourly, we’ve spent over 2 million pounds in the past 4 years. To do what we’re trying to do, there would have been no way we could get there as a CIC. So we had to start as a for-profit company.
The solution we were looking for appeared 18 months later when we discovered B corporations. B corporations started in the US about five or six years ago. These are companies that change their articles of association to stand for people, planet, and profit. So the point about your legal obligation as a business director to maximize profit, you can change that if you take B corporation status. For me that badge is really important because to me it says “I am proving that my business is looking at all stakeholders in the way that we run our business.
John: I want to stay with this theme of definitions for a moment. You, Scott, were talking about how an entrepreneur fills a need. You, Nick, were talking about companies having a purpose. I’d like to change the language a bit and insist, to some degree, that people like Clayton Christensen are right when they say that every business is solving a problem and has a purpose. When you think about it this way, isn’t really the case that almost all entrepreneurs in our society are social entrepreneurs?
Nick: I think that there is an authenticity test that everybody applies to anything they see when it comes to business. I think you can be a for-profit business, you can be a big business, but if you are genuinely demonstrating that you are trying to make a change then people will respect you for that and hopefully respond.
Scott: I think when we talk about individuals, it’s mostly easy to see whether a person is well-motivated. You can spend time with an individual and get to know their core and learn the kind of things they believe in and how they’re going to behave in certain situations. I refer to this as the heartbeat of the individual. Organizations also have heartbeats which demonstrate their character. As organizations grow, it becomes harder and harder to know their inner core. So when businesses get bigger, it’s not that the organizations don’t have heartbeats, many of them still do, it’s just more challenging to feel where the heartbeats are. Sometimes you need to have corporate mandates to show the heartbeats to the outside world, but, at the end of the day, it’s more challenging for people to understand and decide where the heartbeats of big organizations are coming from.
What academia and governments attempt to do, through whatever means, is to define whether corporations, individually or collectively have good heartbeats, mediocre heartbeats, or bad heartbeats. It is very difficult, as you look at different organizations to correctly detect heartbeats. I wish we had more time to discuss this.
Nick: I want to bring this back to storytelling. I recently saw Rick Ridgeway from Patagonia speaking. I wish everybody here had a chance to hear his hour-long talk. He told story after story from over 20 years at Patagonia. Through these stories, he demonstrated that they had put their values and their purpose before profit. They are a for-profit organization but they have done an awful lot to try and sabotage that by being horribly honest about how they make their product.
You may know that they have publicly stated things like “don’t buy this jacket from us because we still have to use a chemical process in order to produce it and we haven’t found a way around it yet.” So they are brutally honest, yet their market share continues to grow because people appreciate that honesty. They appreciate the story, and they say “this is a company that shows us they are on a journey and they are trying to get there, so I’m more likely to buy from them compared to a company that’s saying nothing.”
John: This is a question where I don’t have a bias. So I’m really hoping someone else will have an answer. Clearly heart has to be part of the answer, but do you think there really are common characteristics about people who are entrepreneurs, especially the socially minded entrepreneurs?
Scott: I really like the comment that Nick made about full disclosure, or full transparency. So perhaps full disclosure is a key value, but I’m not sure if that answers the question.
John: I think it does. I think it may be the case that full disclosure and transparency are attributes of people who are doing the best in social entrepreneurship.
Scott: I believe consumers want to make informed decisions; I think they want to make wise decisions about how to spend their money. So, they feel cheated when they make a spending decision and then are surprised. On the other hand, they don’t feel cheated if the company they buy from consistently discloses difficulties the company is having. With information, consumers can make informed decisions.
Nick: I think we need to have conversations around being our “whole selves.” Everybody wants to live in a world where they can be their true self, where they don’t have to separate where they work from their personal values. At the end of the day, business and society are powered by a collection of real people doing their jobs in business. If they are empowered to be their whole selves, then amazing things can happen. I’ve got a friend and colleague who talks about applying human psychology to business. My friend does this rather than applying more business psychology to humans. I think that’s what business needs to do today.
The social entrepreneurs I have met that are given that label “social entrepreneurs” are those who simply live their lives by really being who they want to be. These are people who have stepped out of what they were doing before and moved completely into living as their “whole selves” and that process translates to their business. That’s an aspiration I think that managers of good big businesses have, as well.
John: I think if you get an entrepreneur on the stage and someone who is able to advise interesting companies that are living the principles of responsible leadership, the best thing for the moderator is to get out of the way. So, is there something else you want to say before I take questions from the audience?
Nick: I would like to make several quick comments. First, I want to talk about banks. I want to talk about finance institutions. Some brands in other industries have recognized that consumers are in control. So organizations like Marks and Spencer and Starbucks, ones who recognize that consumers need to say their piece—they work collaboratively with consumers and are moving the fastest toward becoming good social enterprises. The financial institutions, in my experience, haven’t got that yet. They still think they are in control and can dictate message to consumers, and I think that’s what’s holding them down.
I also want to talk to the point about regulation. The Carbon Tax is really interesting. Many of the big corporations that I’m talking with want a carbon tax because they want to create a fair playing field where they can’t be undercut by organizations that are being less authentic, who are going to cut corners, and not do the right thing. So that’s an example of where many corporations believe regulation is needed.
When looking at food regulation, there are some interesting things to learn. You are all familiar with “use by” date labels. These labels show when a sandwich, for example, has to be thrown away. These policies clearly aren’t written with all of societies’ best interests in mind. Much of the food that has labels applied could be used to feed hungry people.
Scott: We talked earlier about the idea of leadership. I believe that good entrepreneurship is also good leadership, and vice versa. I think they are fairly synonymous. This is the ability to change things, to make things better, the ability to provide additional goods and services, and motivate others to take action. The marketplace is screaming for people to step up and rise to these opportunities.
John: Thank you. Time for questions from the audience:
First audience question: What changes need to be made to common current business practices, and how can one tell what company to work for?
Nick: I’d like to suggest that we kill CSR. I’m saying this on behalf of the companies I’m working with. We’ve already alluded to this, CSR is and was about ticking the boxes and doing just enough to tell a good story in the annual report. Of all the new definitions coming out, the one I really like is CSV, which is creating shared value. I think that’s recognition of doing the right thing for your employee, doing the right thing for your supply chain, for society, for the planet, and for shareholders. This is the way companies will attract the best talent and generate long-term sustainable revenue. We have seen, in the past 18 months, evidence of employees saying “we will not work for this company if they do not align with our values. It doesn’t matter how much they pay, we will work for another company. What matters to us is values.”
Scott: If you want to know who to work for, focus more on character and personalities and mentoring and less on titles and prestige of organizations. And try to get close to the individuals who are creating the heartbeat that permeates through the organization.
Second audience question: I have a question regarding diversity within companies. Recently, in the US, there was story about an electronic faucet that was made that did not recognize people with darker skin. I’m assuming that’s because the team that was coming up with it, and the leadership of that team, just hadn’t thought about the fact that different pigments would be picked up in different ways. I have also attended a conference on women in business here at Said Business School for three years in a row. At one of the conferences, it was highlighted again and again that women entrepreneurs, in general, only receive about 5% of the world’s entrepreneurial funding. So, I’m wondering if both of you could speak to diversity, and how we can bring more diversity into corporate workforces and cultures?
Nick: With social media working the way it does now, it is just incredible how negative diversity stories are spread like wildfire. Companies are getting called out. Within 24 hours, 48 hours, they are having to make changes where they’re getting it wrong. Some business people often forget, to their own detriment, just how much power people have when they use social media effectively.
At the moment, many use social media to chastise or call out. But there’s a massive opportunity to use social media to say “actually this is the type of diversity program we support, this is what we endorse, thank you. Well done.” Using a combination of call outs and compliments is the fastest way to get companies thinking differently about how they incorporate diversity. People are making changes and it makes a difference. When we start caring across social media and when we start caring with our wallets, it makes all the difference.
Scott: I think what you just described is an opportunity for an entrepreneur. Instead of calling out where a company is doing poorly, look at that as an opportunity to fill a need. Remember, entrepreneurs fill needs in the marketplace.
Third audience question: I want to bring the conversation back to the fact that women entrepreneurs only get 5% of the venture capital. Some people say that the answer is that women just need to “fill that space.” But, it isn’t so easy to create venture capital funds run by and meant to fund women-owned business. It isn’t so easy for women just to start companies that fill certain customer needs. The playing field just isn’t level. Sorry to turn this into a debate. But, what is actually being done to help improve the situation?
John: I want that debate. I don’t even think it’s a debate, I think it’s a good conversation when we talk this way. Here is one answer, Goldman Sachs has started the 10,000 women program. It is very well-funded. Saïd Business School is involved with Goldman Sachs on this, and many other universities are involved. Let’s also back up a step. In most countries, if development monies or financial assistance goes to women, it’s better spent. This was brought up earlier in the conference. Families are better off when women have control of the budgets. From my perspective, we have to keep talking about this. Much must be done to support families through women. Much needs to be done to support venture capital creation that is controlled by women and that supports women-owned businesses. And much needs to be done to assist women-owned businesses as they take market share in many different industries.
Fourth audience question: My name is Paul, and I’m in from Malawi, where I work in creating sustainable fuel sources. I’m a little disappointed, to be honest, that the word poverty has been touted so heavily in the title of this conference. But, we have heard the word poverty used very infrequently so far. I have heard people speak only rarely about the fact that the majority of extreme poverty is largely away from our business communities in the developed world. It’s really the relief of poverty in the developing world that interests me. More people should be going to these places to develop systems to help people get out of this type of poverty. I think it’s a capital problem. I want to see these businesses looking to their employees and saying, what do you think we should do about poverty?
What does it mean to you? I want to hear today about targeted ways the business community can address this kind of extreme poverty.
John: I thank you for raising this point.
Nick: Yes, thank you for bringing us back to another place where we need to be. The big organizations that I’m working with in the UK worked out very quickly that they could look for projects near their stores where there were both chances to create a commercial opportunity, and where they could make a difference working with disadvantaged communities. Fortunately they didn’t need much prompting from me because, if they were only responding to me, it wouldn’t be very authentic.
We’re now just on the edge, with many of these companies, to going international. In one case, we will be going to our next 10 countries.
One of the things we have not talked about at this conference, yet, is the sustainable development goals that would, from a goal perspective, leave no one behind by 2030. Now, all of the organizations I’m working with are trying to leverage their skills and their expertise to deliver significant impact toward reaching a number of these goals.
So, what they want to do is learn in the UK and then generally take what they learn into the international arena. It often feels like a big stretch for them to just begin working internationally without having done more in their own countries, first.
Sometimes, I have to be reassured that the top of an organization really cares about the issues we are discussing today and tomorrow at this conference. I was heartened recently when a director of a major brand company was talking with me about how he wants to see street lights put into a village in India so that the women can safely walk home at night. He knows that, with lights, women will be able to get to their jobs safely and they will be more able to get home safely, as well. When I hear top managers talk this way, I actually do start to believe that these people at the top of these organizations truly have found their purpose and are on a journey towards properly addressing global poverty. I hope that we can help them take those steps and we do genuinely move in that direction the next 15 years.
Fifth audience question: How far do you think consumers can go to change legislation and regulation addressing poverty?
Scott: At the end of the day, the consumer can most easily influence the companies they buy from. Companies are essentially beholden to whomever is buying their product or services. I believe the consumer movement of rewarding greater transparency and greater management awareness of these types of topics are influencing companies. I believe this movement is certainly having an impact. But, I don’t notice that the movement is influencing companies through a top-down government approach.
Nick: Look at a platform like change.org, they have 10 million individual members just in the UK. We’re getting to a place now where these platforms help consumers find their voice. When consumers organize, they really can drive policy. Imagine if you could have an education and a voting platform working with an activation platform, then you might be able to join all these sites to influence people’s behavior in a way that influences companies and potentially changes polices. So I do think that the current system is under scrutiny and under challenge, and the system is trying to reinvent itself as quickly as it possibly can so that it make sure it is listening and responding and engaging.
Mutuality and Employee Ownership
Ruth Yeoman, Luis Granados, and Martin Staubus
John Hoffmire: I’d like to introduce our next panel. Ruth Yeoman is a research fellow at the Centre for Mutual and Employee-owned Business. She has been working with a number of employee-owned and mutual organizations throughout the UK. She comes from a consulting background and has a doctorate degree. She also led the Mars project on mutuality for the first years of its existence here at Saïd Business School.
Luis Granados is a retired partner at the top employee ownership law firm in the US: McDermott Will and Emery. He was also the past chairman of the Legislative and Regulatory Advisory Committee for the ESOP Association. It is important to note that he worked on some of the largest deals ever done regarding employee ownership.
Martin Staubus is the director of the Beyster Institute for Employee Ownership at the University of California-San Diego. He knows ESOPs from every angle. He was one of the top executives at the ESOP Association in the US many years ago. He’s a lawyer who has done ESOP deals. He worked at the Department of Labor and knows employee ownership from the government perspective, and now he’s working in an academic environment.
John: Ruth, let’s start with definitions: What is mutuality?
Ruth: John has asked me this question because I do quite a bit of research drawing upon business ethics, so I’m going to take sort of an ethicist, philosophical approach to answering this question, and give you a definition. I think mutuality is an organizing philosophy orchestrating multi-stakeholder collective action. In these terms we have a number of different dimensions. First of all mutuality tries to describe how we are to live with one another, it recognizes that we are unavoidably interdependent and relational. It specifies the values, principles, and practices needed for joining our efforts to those of others so that we can secure together what none of us can secure alone. Finally it aims at distributing amongst all affected stakeholders a fair share of the benefits and burdens which arise from their collective action.
John: Luis and Martin, what is employee ownership?
Martin: It’s something that my organization has tried to define and redefine for many years. Is it an organization where 5% of the shares are held by the top 10% of seniority of the workforce, is that employee owned? Does it take 20% ownership to make real employee ownership? Do all of the employees have to own something for it to be real employee ownership?
What we’ve concluded is that a more qualitative answer is more appropriate than a quantitative one. In other words, it’s really more a function of the commitment of the organization and how important they see employee share ownership. So, if shares are simply awarded because you have to keep up with labor market compensation schemes, such employee ownership may be functionary and not qualitative employee ownership. In contrast, if an organization has a central mission around employee ownership and they say it is an important aspect of who they are as a company, then it’s obvious that this form of firm is employee owned.
John: If you could take examples of mutuality and employee ownership and just take two minutes each to describe a company that works in those fields, I would appreciate it.
Luis: I’ve done a lot of work within the grocery industry. One of the employee-owned companies within that sector in particular is worth over a billion dollars now. It is called Houchens Industries. They are 100% employee owned. They’ve consciously diversified so that they are no longer just a grocery business, they’re also involved in insurance, construction, recycling, and some other things. From their logo on down, they’ve stressed that they are an employee-owned business. They encourage entrepreneurship within what is a very large firm with over 18,000 employee owners. People there, who are grocery clerks, earn very good money and are able to retire at a fairly young age to allow the next generation to move in.
John: I’d like to get particular here. I know that it’s a little bit hard to name for all different classifications of employee, but just take one classification of employee and just say what it’s been worth to them.
Luis: I’m not sure I can put a dollar figure on it, but it is not at all uncommon for grocery checkers at this company to retire comfortably in their early 50s.
John: That’s a very different environment than what would happen for grocery checkers in most organizations where employees don’t own their companies.
Martin: I think Springfield ReManufacturing is another good example. It’s a firm in the middle of the US, a very unglamorous part of the country, in a very unglamorous business. They produce rebuilt diesel truck engines. So they get dirty old worn out truck engines, clean them up and turn them around, replace old parts and ship them out so they can be used in new vehicles. They have a blue collar workforce.
The company was founded as part of a plant rescue. The parent company was on the verge of bankruptcy and the plant was facing closure in the mid-80s when a very young plant manager organized an employee buyout. What is important about the firm today is not just that it’s 100% employee owned—legally and literally, 100% of all the shares are in a trust for the employees—but they went a great deal further. They have made sure that every employee is educated in the financial operations of the company, and they use this knowledge to help run the business.
They are distributing financial knowledge and information to everyone within the firm to help them work towards financial goals. Usually, this type of information is given just to management employees.
What is significantly different at Springfield ReManufacturing is that all employee-owners are involved in regular meetings to evaluate how well the company is doing working towards targets, helping to evaluate those targets, etc. So they really fundamentally transformed how they operate on a day-to-day basis, and I think that’s one of the most fundamental pieces of a great employee-ownership environment. Springfield ReManufacturing has not simply instituted financial or economic value sharing, but they have re-oriented the way the company operates. I should add that this approach has been phenomenally successful, leading to dramatic growth in the business.
Ruth: I can give several examples from the UK. One which was established, and another which we should watch. The established is an 800-strong employee-owned business called Rochdale Boroughwide Housing which used to be a housing association in the public sector, but is now becoming independent and a commercial entity. It is particularly interesting because it is mutual. Not only is it owned by employees, but it is also owned by its tenants. So this is one of the new breeds of public service mutuals that are starting to grow within the UK context. At Rochdale, they have two groups of stakeholders that share in the ownership and the implementing of the purpose of the organization.
Another organization to watch is called Agilisys, which became an employee ownership trust last year. It’s a 2000-employee-owner-strong business. It formation, in the UK, starts to get at some of the criticisms of employee ownership that it doesn’t operate at scale. If Agilisys can make the effective shift to being a fully realized employee-owned organization, then they can provide a very interesting model. They have two drivers for doing this, one of which is: We need to appeal to our younger workers, we need to appeal to millennials so there’s a kind of engagement in the recruitment aspect in what they’re trying to do. Two, they need to appeal to their customers. They work with the public sector, and they want to show the public sector that they share the same progressive values held by many in the public sector. Agilisys feels that, by promoting employee ownership, they will have a new way to reach young recruits and align even more closely with their public sector clients.
John: Anything you want to add, Martin, about the outcomes for people at Springfield ReManufacturing?
Martin: So I think it’s important to look at this from a lens similar to Maslow’s hierarchy of needs. That involves a perspective that goes back 5,000 years to the days of hunters and gatherers. Their first priority was safety from wild animals, finding food, and having shelter. Once the heirs of the hunters and gatherers moved from their forebears’ practices into agriculture, many of the farmers’ basic needs were met, to some degree. This enabled them to move on to developed means of social organization.
So, in the context of poverty and talking about alleviation of poverty, I would bring the same lens Maslow used. The essential first step is to address basic income needs and the needs of people who don’t have enough money to put food on the table. Fortunately, while in today’s world, there are far too many people who suffer from food insecurity, the majority of us are able to feed ourselves without real difficulty. Except in the poorest of countries, the majority are able, through the use of money, to meet their needs. Food is bought. Shelter is paid for.
But, the question is: is the earning of money to meet basic needs really what life is all about?
I don’t think this is enough. What we need to do is to look beyond basic needs and figure out what life, at a more developed level, is all about.
I think this is where employee ownership becomes most important. It speaks to all the levels of the hierarchy of needs. Certainly it addresses income and wealth inequality. It is apparent from the stories that have just been told that many employee owners have done well because of employee-ownership models.
I see this type of improvement in the financial lives of employee owners consistently. I see employee owners, who otherwise would have been low-income workers, consistently generating 1 million dollar wealth accumulations in their careers.
It’s phenomenal on that level, but beyond the financial level, the broader socioeconomic changes that we see in ESOP companies, where people begin to develop a sense of dignity because they have a more important role and they’re no longer just a cog in some sort of machine, that is what is really meaningful.
Employee owners in these types of situations develop a feeling that they’re working together to achieve something together. There is a kind of spirit in these companies where the firms almost start to feel like the best types of sport teams. They win a big new contract and there’s high fiving in the hallways, they’re excited, “this is great, we’re winning.” They think of themselves as a group, a team, a community. It makes for a meaningful experience, and it makes life more engaging beyond purely increasing income.
John: That’s a perfect segue into what I want to ask Ruth about. So Ruth is one of the leaders in thinking about meaningfulness in the workplace. Would you develop that theme for us?
Ruth: I think there are some very important connections between ownership and meaningful work. Meaningfulness, at an organizational level is becoming increasingly interesting to firms. There’s an important body of work that is being built up to try and understand exactly what meaningful work is. I tried to make a little bit of a contribution to that, and my definition of meaningful work is this: having something worthwhile to do, which is judged to be independently valuable and is emotionally engaging. Meaningful work is not any kind of work under that definition. It is structured in a certain kind of way, and it structured around attributes of freedom, autonomy, and dignity.
I define dignity here as recognizing that a particular person in the workforce has a life of one’s own to lead. John you also asked us to address the question of why meaningful work and dignity are important, and I think they’re important for three reasons. They’re important for human needs, they’re important for human rights, and they’re important for building capabilities.
Meaningful work could be thought of as fundamental to leading a life of value, and which we can judge to be valuable by various criteria. This is a human need. Meaningful work is relevant to human rights because it has moral and legal rights attached to it. Finally, meaningful work is extremely important for generating human capabilities. Meaningful work that is structured in the right way enables us to make our human contributions. But it’s also important because it enables us to make a contribution ourselves and through that to develop an income stream that protects us over a life’s course.
John: I want to just point back to where we started today and in some ways where we’re going. We started with human resources: how people matter. We moved into conversations about how big corporates and entrepreneurs, as well, can play a meaningful role in helping poor people develop themselves. We’ve now moved into a conversation on how ownership actually influences the world of work. Our panelists have shown that meaningfulness and dignity are tied to the workplace in so many different ways.
So as I move over to Luis to talk about downsides, it’s not that we want to paint a rosy picture and convince everyone here that this is easy. We don’t want to say, just follow these simple steps and here are the ways you can just push some buttons and then all the sudden poverty will disappear because of business.
We’re evaluating a particular theme of employee ownership, and I’m just wondering how you address an issue that is often raised in this space. It has to do with workers having all their eggs in one basket. What that means is if you work for a company and you receive your wage and you also own shares in that same company, and it does poorly, aren’t you potentially losing your job when the firm goes bankrupt and you see your retirement disappear at the same time? Let’s hear what you think.
Luis: Most employees in most companies don’t have any eggs to lose. That’s the sad truth. I’m very sympathetic to the dignity and meaningfulness that comes with work. That’s great, you can do that in a company that’s owned by 1 million people. What really interests me most about all of this is the opportunity of employee ownership’s abilities to address the horrific concentration of wealth identified by Thomas Piketty last year, and by many others.
So the first step is to get those eggs in the basket, first. Typically, the way these transactions work, is that money is borrowed by the company in order to buy out the previous owners. The first few years, paying off the loan is difficult. Not all ESOP companies make it through this process. Most of the ones I have worked with have made it, but they don’t all survive.
It’s very sad when there is a bankruptcy that takes place at an ESOP firm. But, let’s face it, the impact on people who lose their jobs is almost the same as if some individual rich guy had bought the company and ran it into the ground. It’s a sad thing, no matter what type of ownership you have.
What you want, though, in the employee ownership community, is to win as often as possible. You want the loan to get paid off as quickly as you can. Then, the future profits that are generated by the firm are now totally or substantially owned by the employee owners. The money goes in their pockets as they diversify their holdings as best they can, as the law in the US requires, especially as employee owners age. I think this is the approach people should take. I am more concerned about getting the eggs into the basket than I am worried about the fact that some employee owners will lose shares when they lose jobs that they might have lost anyway.
Martin: There was a question that came up earlier this morning about structures of employee ownership. There is a range of structures for employee ownership. Each can be unique, as nation’s laws and regulatory systems are often somewhat unique. So you go around the world and in one country, say the US, there’s a particular type of ESOP retirement program there that has a particular set of tax advantages.
Each particular scheme and structure of employee ownership, country by country, may have some particularly favorable conditions, provide some particular legal advantages to help employee ownership along. I think employee share ownership is doable virtually anywhere in the world. Whether we talk about the US ESOP model, for which there are particular advantages built into the tax system, or whether we talk about the advantages in ESOP longevity that seem to be a feature of some structures in the UK, each nation has its advantages and disadvantages.
The one thing that is clear, though, is that to ever become a dominant player in any economy, employee stock ownership plans seem to need some tax advantages. When employee ownership is structured specifically through retirement plans, it is easier to justify some tax advantages.
John: Do our panelists have any other comments about employee ownership or mutuals?
Ruth: Financial participation is a tool in a toolkit, and everything we know about really well performing employee-owned and mutual businesses is that financial participation is one of a bundle of management practices that need to cohere together in order to align with the philosophy of the organization. So, it is really important to think about financial participation as being one piece of the jigsaw pattern and it will not do it on its own. You also need to think about the aspects of leadership culture, voice of the workers, governance, and all the rest of culture building that will actually create a way of doing business which will allow your organization to meet its philosophy and purpose.
John: One of the things I really want to do as part of this conference is to move beyond the point that many meetings go: trying to convince an audience that poverty is a problem. So, it is important to understand what poverty alleviation methods used by businesses actually work. Toward that end, one of the criticisms of ESOPs comes when employees become owners of two companies. One that is going to be very successful in the software industry, and another one that is a farm that may do okay, but probably won’t grow at the same rate as the software company. Aren’t you actually creating inequality in this situation?
I want to turn to Luis to ask about holding companies, particularly the firm that he was mentioning earlier, Houchens. I think the use of holding companies is one way to address the problem of inequality produced by ESOPs. I think if you can get a holding company that has a lot of different industries associated with it, and then you have lots of different holding companies that are employee owned, you can address this industry problem of inequality between ESOPs and ESOP owners.
Luis: Houchens started as a single, backwoods, southern grocery store. And in the late 70s, the last member of the family who was involved with the business sold it to one of these employee trusts. They gradually paid down the loan, and then the loan was completely paid off.
At that time, the tax laws changed in a way that was very favorable to young ESOP companies like Houchens, especially ones that generate lots of revenue like grocery stores do. Also management made a conscious decision that, now they had all this money flowing in, we, as responsible leaders, don’t want to have our employee owners wedded solely to the grocery business. So it’s been a while now, but they bought many businesses that they were connected to in some way. They bought an insurance agency that provided insurance for their stores. They bought a manufacturer that manufactures retail installations, a manufacturer that built a conveyer belt that moves groceries. They bought a cigarette manufacturing company, which sounds awful and antisocial, but they made a fortune on that cigarette company and then made a bigger fortune when they sold it to British Tobacco.
I’ve seen another ESOP company that, after it paid off their loan and achieved success, said things like this: “Okay we’re really good at the electrical wholesale business, we know that. We don’t want to leave that. But what we can do is expand beyond the Philadelphia market. So now they are in Washington, Boston, and Richmond, and through that they’ve achieved regional diversification.
John: We’ve done a lot of work here at Saïd Business School around the theme of mutuality and one of the questions I’d like to have Ruth answer is this. Do you think you can actually have mutuality without either consumer ownership or employee ownership?
Ruth: Yes, I think you can have mutuality at an organizational level and you can also have it, interestingly, at a system level.
The other thing that needs to be mentioned here in relation to inequality is power. Mutuality is an organizing philosophy, and whether mutuality is used at an organization level or a systems level is essentially about power sharing. It’s about looking at the different ways that all of those who have an interest in a company can contribute, can put in, can have a voice with one another on the basis of equality and common interest. In order to achieve that, the power has to be given up by some so that those at the margins can have their say.
John: Anything you’d like to add to that Martin or Luis?
Martin: I think it’s certainly possible to have mutuality exist without employee ownership in nonprofit organizations or NGOs. I think when you get into conventional for-profit ownership it’s a good deal harder because there’s almost a natural conflict without it.
Luis: As an example, I went up to Blenheim Palace yesterday. While I was there, I learned some things about Churchill. One of the things that I learned about him was that he sometimes spent time with lower ranking officers in the military. He learned, among other things, that they could move a whole lot faster with smaller carts on the roads they had to navigate. He learned that a larger number of smaller carts would get you where you wanted to go faster than a small number of larger carts. As a result of that mutuality, listening to lower ranking officers, the military, which was not even remotely like a business, worked significantly better than it otherwise did, due to mutuality.
John: Let’s take some questions.
First Audience Question: What drives the growth of employee ownership in different parts of the world?
Martin: To some degree it is different for each country around the world. There’s a confluence of two things that are driving employee ownership. One is the unique legal structure that provides tax advantages in some countries. The other is the large number of privately held businesses that were started by people who are now reaching retirement age. Each of them may only own one company. But, there are thousands and thousands of private companies and the owners are selling these businesses. The businesses, which they started 30 years ago, might today employee 200 people, and their advisors tell them they are worth several million dollars. The challenge is, what do they do with it, how do they actually turn that into money. Employee ownership is often a good avenue for them to take.
Ruth: Mutuality is one expression of employee ownership, and there are many others in many different countries. In the UK, employee ownership is still a small part of the economy. But because public service reform is such an important topic here now, we need to find new ways to deliver the public services that people value. Employee ownership and mutual ownership have had a bit of a flowering recently. With this flowering, the employee ownership and mutual movements have attached themselves, in some ways, to the social enterprise movement. In this way, the employee ownership, mutual and social enterprise movements have all coalesced around some common themes and they are now attaching themselves to a larger movement. This movement is about organizations that are trying to find their purpose. These organizations realize that there are ethical concerns out there in the business world. Employee ownership and mutuals offer both the social enterprise and purpose-driven organization movements some very fruitful ways to address some of their concerns.
Second Audience Question: The largest example of mutual ownership in the US is probably the Mutual Savings Association. From 1970-1990, it almost entirely converted to stock ownership. I wonder if you have any reaction or comments about that or any notions as to why they would have done that?
Luis: I am aware that happened, I know that in credit unions a similar trend is happening. In the credit union world there has been a strong reaction. What exactly the technical change in the law was that made it more attractive to make these types of switches, I don’t know.
Ruth: We have these debates In the UK about these different types of ownership forms, which is why I’m particularly interested in joint constituency mutuals, which incorporate both consumer and employee owned interests together. I think they’re a particularly striking model with an awful lot of productive potential. So in fact I think it’s a false dichotomy to think consumer versus employee ownership, I think that they can both serve in particular ways and in particular sector., But increasingly, no matter what sector we are looking at, we are saying we need to take a multi-stakeholder perspective. The question is: how can that multi-stakeholder perspective be enacted within the ownership or governance structures of organizations, and these new kind of models.
John: Going back to Luis’ point. Part of the reason that some Mutual Savings Associations and some credit unions converted was that managers got greedy.
Luis: One of the largest examples of consumer ownership in the United States, for about 100 years, is the rural electrification system. At one point in time, large parts of America had no electricity. There was a large government program that promoted: A) we want to get electricity out to these places, and B) this is part of the New Deal of the Roosevelt era, so it felt—we want to do this in a way that doesn’t make rich guys richer. So, the thought was that they were going to have consumer-owned cooperatives. We also restructured parts of the financial system to make this attractive and doable, and it worked. Electricity, it was a profitable industry, and it was a successful move to create these cooperatives. They still exist today.
If there hadn’t been such successful lobbying initiatives put together by the big investors outside of the cooperative sector in the electricity business, the co-ops would have gotten a lot bigger than they did. Small changes in the rules of finance and governance can influence trillions of dollars of business. This is one reason people need to take the problems that Piketty describes seriously. I just wish he had given us more realistic means to solve the problems.
Business Addresses Poverty
Len Greenhalgh and Frank Venegas
John Hoffmire: Len Greenhalgh is professor of management at the Tuck School of Business at Dartmouth, where he has taught since 1978. He is also the Director of programs for Minority- and Women-Owned Businesses, as well as Native American Businesses. He teaches an MBA elective course in Managing Strategic Business Relationships. His research interests include changing workforce demographics, supply chain management, negotiation, top management team effectiveness, and managing strategic alliances.
You have all heard Frank’s story. His bio is also in your program.
Len: Poverty is always relative to where you are, so Frank Venegas and I are going to talk about poverty in the United States, what can be done about it that actually makes a difference, and how business and poverty are connected.
The thing that’s happening in the United States is that there’s a concentration of poverty in minority groups. Minorities are much more likely to be impoverished than white people. When I say minorities I’m talking about African Americans, Hispanics, and Native Americans, for the most part. This is how the Census Bureau in the United States defines the term “minority.”
Our basic proposition is this. If society does not take serious action on the poverty issue, then everybody loses. We’ve been talking throughout the conference, so far, about win, win, win situations. I’m going to tell you about how were going to create lose, lose, lose if we don’t do something differently from what we’re doing now. What we’re doing now is creating a massive chronic poverty problem, massive income inequality, and the resulting hopelessness and despair. Because of this set of problems, you’re going to see—remember this is American data—US corporate competitive advantage decrease, and large deficits of public resources. With this deficit, monies will not be available to deal with problems related to infrastructure, health care, education, as well as poverty and everything else. Future job seekers are being influenced—we’re already seeing kids who, 5 or 6 years after graduating from college, are moving back in with their parents because they can’t make a living on their own. This is going to affect our children and grandchildren, and I’ll show you why.
There have been large demographic changes in the US. Since the 1940s, the proportion of minorities has been increasing at an increasing rate. By the 1960s, there was enough of a critical mass of minorities to start the civil rights movement. That movement’s message was: “We’re not going to put up with this chronic inequality, not being able to eat at the same lunch counters that white people eat at, etc.” The civil rights movement in the 60s successfully addressed some issues but did not succeed at addressing inequality. In the 80s, minorities made up enough of a percentage of the work force and the supply chains that supported major corporations, that society started to look at minority inclusion in the business sector.
By the time the 2000 census came around, everyone began to recognize that minority populations were increasing at an increasing rate, while white populations were staying stable. It was not hard to see what was going to happen, looking ahead. By 2040 at the latest, minorities will outnumber white people in the US. Today this is already true for children under 5 years old: there are more minority children under 5 years old than there are white kids. These data are not in dispute: we’re talking about people of color who have already been born or are already in the US and have been counted by the Census Bureau. By 2020, the trend will be accelerating so fast in terms of proportional difference, that by 2040 the population will be 50% minority. By 2060, whites will be a significant minority.
I created an economic model that takes into account demographic changes as well as all the other factors usually added into economic models. What we found is that minorities are not going to make meaningful progress in terms of their purchasing power or standard of living. Many from minority communities will continue to live below or just above what Americans consider the poverty line.
Also we found that white people—who had been enjoying being in the privileged majority—were going to be worse off as well. Look at history: In the 1960s, white people were doing well, and minorities were significantly worse off than were the whites. In the 1980s, the white people who made up the middle class were feeling a little worse off, and minorities were still not doing well. That period was the start of the economic decline in the middle class in the United States.
In the 2000 census, we noticed that the purchasing power of the majority was declining. Many in the middle class were dropping down into the lower middle class.
Predictions of 2020 do not look any better. Remember, this is only four years from now. Our model shows that the middle class is going to be quite a bit worse off.
In the 60s and 70s, a middle class American family could afford to buy a new car every other year, could take a two-week vacation in Europe, could own their own home, and send their kids to college. They could afford to do all of those things. The middle class family in America today can’t afford to do all those things. If you send your kids to college, you’re not going to get a new car. If you get a new car, you’re not taking much of a vacation. Everybody’s belts are tightening except for the richest one per cent that is getting even richer.
When we run the clock ahead in our economic model, we see that minority populations are going to increase as a percentage of US society. The proportion of the population that is white is going to decrease. The model also looks at economic statistics like net worth. In the US, we measure net worth by adding all the family’s savings, the value of their home and other property, and the value of their pension plan. You then subtract out what they owe in a mortgage and other debt. That brings you to net worth.
In 2006, the average black or Hispanic family had 1/10th the net worth of your average white family. So it’s a 10 to 1 ratio of wealth. Part of the good news is that ratio is going to shrink. The differences between minorities and white people will not be so big. But remember, this change will come at the expense of white people who are steadily becoming worse off financially. This change would not be troublesome if the pie was growing for everyone. But the pie is shrinking for the 99 per cent, and only growing for the one per cent. It’s not consoling to minorities that the difference between white and minority wealth is diminishing simply because white people’s purchasing power is decreasing.
So what is society to do about all of this? Just like others at this conference, we are here to say that business can do something about poverty, and that’s what we’re going to talk about for the rest of this session.
Turning to business, there are three additional factors that are going to add to the problems we have discussed. The first concerns the work force. The workers the US is going to need to run the country’s businesses are going to be decreasingly able to do the work that is needed.
Second, supply chains are going to be less able to supply major corporations. Frank talked about his work with the Detroit automobile companies, General Motors, Ford, and Chrysler. In the 1940s and 50s, those companies made everything in their own plants. If you needed carburetors, if you needed batteries, if you needed wheels, you made them yourself. Today, more than 60% of the value of the automobile you drive is outsourced globally. So that means the Chinese, or the Japanese, or the Indonesians—or countries in Eastern Europe—are making things and supplying many of the parts. The big car companies are now, essentially, assembly and marketing organizations. So if the supply chain is not competitive, then the whole organization isn’t competitive.
Third, economies have to reinvent themselves as technology changes. None of us came to this conference by horse and carriage! As industries become obsolete, entrepreneurs exploit emerging niches and if they get it right, they become big companies that drive the economy. This is what economists call the entrepreneurial growth engine.
When you look back 30 or 40 years ago, many of today’s big companies were entrepreneurial in size, and they were exploiting the shift from manufacturing to services. Today you have a few Fortune 50 companies that are in manufacturing. But, for the most part, today, these corporations have been replaced by technology companies, such as Microsoft, Dell, Google and Facebook. These are the Fortune 50 companies of today. These companies have been elements of the entrepreneurial growth engine of the US economy. Essentially, we have seen a replacement of old, decrepit, uncompetitive organizations with these hot, aggressive, two minutes to the marketplace kind of companies.
So the question is, what is going to happen in the future? Which are the companies that are going to employ the future workers of the United States? Who are the successful entrepreneurs going to be? They are most likely to be tomorrow’s majority—minorities, and, of course women, people who in the past have been denied their place at the table.
Let’s go back in history even further to help make this point even more strongly. I know that you all know much of what I am about to say. But, if we don’t understand this industrial history, it is more difficult for business to address poverty in the minority population.
Agriculture and manufacturing used to support most western economies, particularly the economy of the United States, but also here in the UK. In both countries, agriculture and manufacturing have, for the most part, been displaced by services and the knowledge economy. Here’s a timeline: the agricultural economy dominated until about 200 years ago. The major contributions to both economies were from farms, plantations, ranches, forests, and orchards. With the Industrial revolution, the manufacturing economy created more value in the economy than the agricultural economy. Agribusiness was still big, but not compared to manufacturing. By 1985, however, we found that the service economy had eclipsed manufacturing as a component of Gross Domestic Product.
Now, what do we see today? The service economy is being eclipsed by the knowledge economy. This is important and I will explain the difference between the service and knowledge economies.
The service economy is where you look up things in a phone book. The knowledge economy is where you go to Google and get much more information with a lot less effort. So here we are today: the recent drivers of real wealth were in the service economy, but now, the big money is in the knowledge economy. If you understand that, then you have to start asking: How does poverty affect the future of the service economy and the knowledge economy? And how do the demands of the service economy and the knowledge economy influence poverty?
Here’s how it works in the United States. We don’t have enough good graduates of educational programs that prepare people for high tech industries. In particular, we don’t have enough graduates from programs in science, technology, engineering, mathematics, and computing. America graduates about 67,000 engineers a year. What do you think India turns out? It’s about 350,000. What do you think China is turning out? It’s close to 1,000,000 per year. The US is at 67,000, India is at 350,000, and China is near 1,000,000 per year.
An important question is: where is national competitive advantage in the knowledge economy? It goes to the nations that have the intellectual horsepower to run knowledge economies. And, what is the American response to this? What Americans want to do is throw money at the problem. Americans say: Let’s give more scholarships to college kids, especially those who are brought up in minority communities, the same kids who will be in majority soon. Remember, the majority of young children today are minorities, not white kids. That’s the future workforce, that’s who’s going to power the future economy.
So we need college graduates. But you can’t just give people scholarships and expect them to get through college, if they’re not prepared for college. So you start looking at where does it all start? It starts in preschool, in the early years of learning. If they don’t do well in preschool, then they don’t do well in the early years of primary school. If they don’t do well in the early years of primary school, then you get a low high school graduation rate, and in America you have to graduate high school to get into college.
It is also important to remember that you need to have a college education to function in the knowledge economy. So the work force problem is systemic and it is deeply affected by family poverty.
Let’s briefly go back in history again, to put the problem in the perspective of the evolution of Western economies. In the old agricultural and manufacturing economies, you didn’t need to be able to read, write, add up a column of numbers, turn on a computer, or use email. It didn’t matter. You needed a strong back to work. An industrialist actually said, “Just give me somebody who is strong, I don’t care if they’re dumb, if they’re strong that is fine.” Today, look at a “white collar” service-sector occupation. You can’t be illiterate: you need to be able to read and write and add up a column of numbers.
So, now we have to start looking at the US school system in much more suspicious ways. We have to start asking: “What’s going on there, are we preparing people for the knowledge economy, or even the service economy?” Population is increasingly concentrating in urban areas in America. This is happening because people in the US are coming out of rural areas and flocking to urban areas. That’s what’s happening in many other countries, too.
The problem is that, in the US, urban schools are not very good. Less than 50% of the kids who start 9th grade (14 year-olds) in urban schools are ever going to graduate from high school: they are going to drop out. If they drop out, they can’t get well-paying jobs in the knowledge economy.
Of the ones who do get through urban high schools, many have been held back and given remedial courses. But it’s possible for them to still not be able to read, or write, or add up a column of numbers, or to turn on a computer. This makes the problem even worse. These students are not even able to work in the service economy. So if you’re a big company in the fast-food industry, what do you do with young people entering the workforce who have no skills or real abilities?
A McDonald’s cash register in the US has pictures on the keys. One picture is of chips (we call them French fries in the States). The less educated workers can figure which picture is the right one to press, but they can’t figure out what to do if you give them exact change: quite often they can’t count change. So we’ve gone to credit card and debit card use to purchase almost everything, even though there’s a three per cent cost to process credit cards, which further impacts the thin margins on fast food purchases. These are the types of problems you have to deal with if our school systems do not work in urban areas, the source of most of the work force.
Let’s focus on the knowledge economy again. The problems we are discussing are exponentially greater in the knowledge economy, because not only do workers have to be literate enough to work in the service economy, they also need knowledge of science, technology, engineering, mathematics, and computer science. These are the topics that workers have to have studied to be even partially successful today.
Entrepreneurs working in these sectors also have to be educated enough today to understand all of these subjects. So problems in the educational system hurt the service economy and, to an even greater degree, the knowledge economy, where much of today’s wealth is actually generated.
You probably know that companies like Facebook and Google are worth a whole lot of money. Have you ever looked at how much money these companies make? It’s amazing. These are knowledge economy companies that need workers. In the US, we’re headed for a problem if we cannot continue to train people for these kinds of companies and the suppliers who make up their value chains.
Many leaders within the educational system are predicting a long-term downturn in the US economy because we simply can’t staff the organizations with qualified workforces. The entrepreneurial support system, and the industry clusters associated with high tech, need qualified new blood to make their organizations successful. So that’s a big long-term problem for the US.
Before I turn things over to Frank, I just want to reiterate a few things and tell you a little about the educational system in the US. I’ve talked about how you need knowledge workers to work in the service economy and the knowledge economy. You need a good educational system if you are ever going to train knowledge workers. The educational system will determine not only whether you train the workforce you need, but whether your entrepreneurial infrastructure will stand up.
But, here’s the underlying cause of what’s going on in American urban areas. There’s a poverty cycle that condemns poor people to bad education. In America, the school system is funded from the local tax base. So if you’re in a poor community, they don’t collect much money in taxes, and the school system is under-funded.
Let me give you a case study that describes what happens. You have places like Greenwich Connecticut, which are very rich, and you have other places, like Bridgeport Connecticut, which are very poor. They are right next to each other, fairly close to New York City. The poverty rates in the two places are quite different, and the school systems are quite different. In Greenwich Connecticut, you have one computer per child. In Bridgeport, you can have one computer shared by up to 20 pupils. So, if you have 20 children in a school trying to learn how to use a computer and they have to practice, how does that work with only one computer? It doesn’t.
You have poor compensation for the teachers in Bridgeport, and, as a result, you can’t afford to have the best teachers teaching these children. In Greenwich, you have really well-paid teachers, because the affluent community has a much larger teaching budget.
In dreadful schools, it is not a surprise when kids don’t learn much. They come out of school poorly educated, they can’t get good jobs, and that renews the cycle of poverty. So the next generation ends up in the same hopeless predicament.
We know that early schooling makes an enormous difference. What we know about poverty is that inner-city parents in the United States don’t spend much time with their kids. They can’t read to them because the parents themselves often can’t read. They don’t talk to them that much because the TV is usually on all day. Interaction with a kid is very important because it makes the kid think. So if the kid is not thinking and forming sentences to respond, the kid is not learning a whole lot about how to speak and write.
So if you’re a kid in one of these communities, and your parents aren’t providing you with the early schooling and giving you the at-home learning experiences, such as teaching you the alphabet, reading to you, talking to you about what is going on in your life, you are not learning. If instead, you’re stuck in front of a TV, which is functioning as a baby-sitter, and your parents are separated and maybe have addiction problems, then you don’t learn as much.
So, if we look at cities for which we have data, we see that the average kid in the poor community starts preschool with a 1,750 word vocabulary and the average kid next door in the affluent community starts preschool with a 3,500 word vocabulary. The poor kid who doesn’t learn as much at home and may not receive early schooling in the community starts out with a big disadvantage.
The United States has an educational system consisting of a series of grades a student moves through. The kid from the poor community goes through the 1st grade, and he’s behind the other kids from affluent families because they have a natural advantage. Imagine being that kid. You never quite catch up in the 1st grade, you’re therefore behind in the 2nd grade because you struggled in the 1st grade; and in the 3rd grade, when you’re 8 years old, you’re now a whole year behind in learning compared to the kids from affluent families. It’s stressful and it’s humiliating.
This is the age at which kids start paying attention to the role models in the community, and the role models quite often are people who didn’t have much education either but turned to illegal forms of making a living—sometimes a good living, materially. That makes the criminals look really good. So, when you see these role models through the tears and frustration of young eyes, why would you struggle to finish high school to go on and earn a minimum-wage living when you can drop out of high school, join a street gang, and make a living in the drug trade?
You can see that we have to do something to break the cycle. If you don’t break the cycle, what you have is a situation where the urban communities become stagnant. It’s hard to find a job and make ends meet in a stagnant inner-city community. The businesses that once provided employment move out to the suburbs, because—as Frank explained earlier in the case of southwest Detroit—it’s hard to get good workers to come into a high-crime area. So when community stagnation sets in, family poverty increases because if the businesses are closing down or moving to the suburbs, there aren’t jobs available in the urban area.
It’s also very expensive to get car insurance in inner-cities with high rates of vandalism and car theft. And even parking your car means paying for a parking garage. If you’re a single parent, which is a typical scenario in many urban areas, you’ve got to pay for daycare, and in America, you might be making what is an unconscionably low minimum wage. So somebody tell me, how is someone who only makes $9 an hour going to pay for a babysitter who charges $15 an hour? The economics are not working for the inner-city family. So you end up with greater stagnation, more poverty, less opportunity. The downward spiral creates social instability. If you watch American TV, you may see Baltimore burning up, you may see Ferguson, Missouri burning up, or Los Angeles burning up. One city after another ends up with these riots that easily get out of control.
In America almost everybody has guns. I’m still not sure why we allow that. It doesn’t help the situation. So you get a lot of really desperate people who can get a gun easier than they can get a driver’s license or get registered to vote. The resulting situation is very dangerous, so we give police ex-military assault vehicles and water cannons to fight the urban minority citizens who are so desperate and feel they have nothing to lose.
Then, through spending on increased prison capacity, a larger police force, and tighter security, you end up with a situation that puts tremendous demands on your public resources. All of this makes it harder and harder and harder to build and maintain the infrastructure, to improve the school systems, to upgrade health care, and to sponsor economic development, entrepreneurial incubators, research and development. As a result, the city can no longer afford all the things that can make a community vibrant and healthy.
So, what we’re finding is, as the minority population expands to more than 50% of the populace, the problems in the United States are getting that much worse. The urban communities are in a dangerous downward spiral. So what do you do?
Sounds like a complicated problem. Well, I have my hero here, Frank, to tell you what he did in southwest Detroit, which is a largely Hispanic community that went through all of these dynamics. But Frank and his colleagues took it upon themselves to make a difference and set out to make progress through business. I’ll let him tell you what he did to make a difference.
Frank: I explained earlier about buying General Motors’ old Cadillac plant in Mexican Town. Conditions in Detroit had been difficult: the city went bankrupt, several major corporations went through bankruptcy, and the schools were a mess. It was all spiraling downwards. To reverse these conditions, I bought the abandoned Cadillac plant and I started hiring local people and putting them to work with the engineers and the supply chain. And I started to spend a lot of time in the community learning what was really going on in their lives.
One of the things I found out was that the local education system was even more broken than I had realized. It wasn’t just the City of Detroit that went bankrupt: The Detroit public school system went bankrupt, too. Things were so bad that the school system had been placed under the management of the State of Michigan for all the last 11 or 12 years. The graduation rate in these high schools was just horrible—it was down to 35% or 40%.
When I looked at the situation, I decided that I couldn’t fix the whole city of Detroit. But I could deal with my own southwest Detroit community, Mexican Town. In my community, they call me “the chief!” I’m seen as the boss of the neighborhood because I work with the community. I not only work with the kids, and work with hiring local people, but I had to fix many other things within the community that were broken. But I especially needed to fix the school system because that determined the fate of the next generation.
Not surprisingly, given that the schools were broken throughout Detroit, the schools in our poor community were not providing the education that our young people need. I’m not an educator, but I am a business owner and I’m an organizer. I know how to get things done, and to make sure they’re done right.
There are about 32 schools through the United States called Cristo Rey that are part of a Catholic school network. Cristo Rey was started in Chicago. The network is one of the most successful school experiments in the country. One of the unique things about these schools is that they prepare students for jobs, by requiring the students to learn to work. Specifically, the students go to work at a place like General Motors, Ford or my company, Ideal, for one day a week, starting as 14 or 15 year-olds in the 9th grade. In the 10th, 11th, and 12th grades, they go one or two days a week to their internships.
These kids had never been exposed to this type of opportunity. They had never previously had the chance to see what was in the environment of an office or a manufacturing plant. They were really interested in everything that was going on; they were all very engaged. The new system I put in place worked much better than what was happening in the nation’s other urban high schools: we have graduated 100% of the students for eight years in a row. We also found that 92% of the kids at our school got accepted into college. And we just celebrated the first college graduation of a Mexican Town Cristo Rey student.
So instead of missing classes and dropping out of school, our students were engaged and committed to building their own futures. It just goes to show what you can do with inner city students if you put them in the right learning environment. The graduating class of 2016 had 84 kids. We have 9th, 10th, 11th, and 12th grade kids in the pipeline, headed for future success. There are about 280 kids that we serve in total. That’s a critical mass of educated kids who will be the backbone of the future local work force, and role models for other inner city students.
As we solved one problem, however, another became obvious and had to be dealt with. Even though we were graduating kids at high rates, our students weren’t getting the college scholarships that the kids from affluent suburban schools were getting. The difference was that the suburban kids were being taught how to do well on the standardized tests that colleges use to determine whom is most worthy of scholarship assistance. So I went to the town and said: “All my kids will go to college and they will be well-prepared: Here is what we need to do to make that happen.”
Every time we turned around we found another problem that needed to be addressed. When I first started looking closely at what was going on in the school, I found that almost all the kids lacked computers. Being able to use a computer is a basic requirement in any modern business. So I went out and bought Apple computers for all the kids, teachers, and administrators. Student performance increased that year by 11%. I thought, wow this is incredible! After that we worked closely with Google and their systems people, and today we also work with Microsoft. In effect, we are bringing the modern technology tools to people who are less able to afford it than their counterparts in richer suburbs. We leveled the playing field for our students.
It’s good business practice to not only provide up-to-date technology, but to also ensure that it is being used. What I saw surpassed my expectations. By the end of the first year the computers were ragged looking, but not broken. Those computers looked like they had been used a lot. So I started asking questions about what was going on with the computers. The goal was that the students would use the computers in the schools and take them home at night. That way, they would get all the advantages of practicing and getting really familiar with all the things a computer can do. What we found was that the computers didn’t stop working once they were at home. That’s when our students’ brothers and sisters would get on the computers. So the computers kept running till 8pm, 8:30pm, 9pm. But when the kids went to bed, the parents got on those computers because they wanted to learn, too.
One of the most interesting things that happened after the first year was that I heard students complain that the computers weren’t working. I said: “What do you mean they don’t work?” They said: “there’s no Wi-Fi.” So we installed Wi-Fi capability in the school, and broadened the students’ horizons.
But, even with all these changes, when we looked at standardized test scores, we realized that the scores still weren’t going up. So I wondered what was holding these students back? If they weren’t doing well in the 7th grade, maybe the 6th grade wasn’t fully preparing them for 7th grade work, and then maybe the 5th grade wasn’t preparing them for 6th grade work. We discovered that students were at a disadvantage as a result of inadequate education from their earliest days. I started thinking differently about the problem, and I said: “I will start with improving the education of the 1st graders, so they’re not at a disadvantage in subsequent grades.” I did just that, and we just completed our first class of 1st graders, and they’re doing very well.
I didn’t stop there. My overall goal was to prepare young people in our community to participate in the modern economy, where technology is increasingly important. We found that there were things like robotics that we could be teaching to young people, to give them an advantage in the Detroit labor market. So we started a robotics program, and we have about 34 kids and eight mentors and these kids are loving it. These are inner city kids who made it to the state championship the first year. It was very successful. So I’ve started another robotics program for the 2nd year students. I found this 40 year-old Hispanic man who happened to be from my community who had become an executive at General Motors. He was very impressed with what I was doing and I was enamored with what he was doing at GM: He was designing and developing all sorts of interesting stuff, and I asked him to come and help me with this program. He did all the figuring, and told me the new program would cost me $171,000.
I said okay, and I signed on and said I would pay. But I also said: “You have connections I don’t have. I want you to go to the business community and raise money so that I don’t have to put in all of the $171,000.” He used his connections and got most of the funding, so I only had to put $41,000 in, and that left me with $130,000 left over to go do something else for the community.
His commitment to the program brought us more than an increase in charitable donations. We soon found ourselves with 188 kids in the program and 67 mentors. People that worked at GM, Ford, and Chrysler were mentors. They were Hispanics themselves, working with Hispanic kids.
And the kids had gone from not seeing much of a future for themselves to saying, “I want to be an engineer.” Surprisingly, many of the kids in the program were girls. Lots of these kids’ parents were laborers, and they never really dreamed of their sons going to college. But the thought of their daughters going on to be engineers was almost beyond their imagination.
This year, our school not only sent a robotics team to the state championships, we sent a team to the national championships. It is interesting to note that the one team that went to the national championships was the girl’s team! That was real progress.
By introducing computers and robotics into the school, arranging interesting internships in major corporations, and fixing the school system from the first grade on up, we changed the culture. There isn’t the numbing feeling of hopelessness and despair that holds back student performance in most inner-city schools. There is hope and ambition, and the sense that they, too can succeed. The mood is infectious. We have 4th graders that can write computer code as well as someone in their 2nd or 3rd year in college. We have a young woman who is teaching other people to write computer coding and doing things that most would say would be impossible to do in these low-income communities.
That’s why I emphasize what business can do about poverty whenever I’m asked to speak. When you look at the wealth that is being created in the world, you have some guys like me, but there are folks at Microsoft, Google and start-ups in California who are making a whole lot of money and have it in their power to make a big difference. As Len pointed out earlier, it’s in everyone’s interest to have a strong work force and a healthy supply chain. It can be done. In Mexican Town, we are creating a high-achieving network of students who perform better than their peer groups in other Detroit schools. Our students will now be able to make a living in today’s and tomorrow’s knowledge economy, because they will be the engineers, the architects, and the developers who do some things that have never been done before.
You look at the old rich guys. There are lots of old rich guys who have grown up in the US or here in the UK. They made their money in the old economy. But, if you look at a list of the world’s richest people now, there a lot of young people, a lot of people who made their money in the start-ups of the knowledge economy.
Without education, and without my mentor, Len, I would not have understood a lot of this stuff. I met Len 15 years ago. Without meeting him, I might have been just one of those regular smart kids that did pretty well. Len and education opened my eyes and let me see things that were far different than anything I saw before.
It was because of the educational process I undertook that I was able to change. I have discovered that if you focus on education of the poor, they can learn better, and do better and better. You have to give people a chance to succeed. That’s how we will change the world. If we educate kids better, they will raise their own kids better, those kids will grow up to be better mothers and fathers and they, in turn, will be able to put their kids through college. We need to break the inter-generational cycle of poverty, and business has an important role to play.
So, what can you do? If you want to make an impact in someone’s life, I believe there’s not one person in this room that can’t go out and mentor or otherwise help someone, and make a real difference. And if you search on the internet using the title “The web is working for Detroit’s Ideal Shield” you will find that Google made a two-minute video about three or four years ago about what we have done. That is up on the internet and available to you.
I appreciate the opportunity to speak at this conference and wish you the best.
Lean, Waste, Ethics & Poverty
David Brunt and Scott Hammond
John Hoffmire: Let me introduce first David Brunt. David is an executive at Lean Enterprise Academy. He is also the coauthor of “Creating Lean Dealers.” We also have Scott Hammond, who is professor of management at the business school at Utah State University. He is a speaker, consultant, and author. I’d like to start with a definitional question. Would each of you tell us what lean business systems are?
David: I think it’s about providing the most value from the customers’ perspective whilst consuming the least resources. If you’d like to expand that out, when you talk about this in the business system context, when we talk about a lean organization, we are talking about a business aligning customer purpose and business purpose with the processes that deliver that purpose, and aligning the people who deliver the process to the purpose. It’s about seeing value through the eyes of the customer. What lean management tries to do is take actions that create value for the customer.
John: What about you Scott? When we talk about a business going lean, what is the purpose of this?
Scott: I think David gave a good definition. What it means is that these systems are very dynamic. When you are moving one part, you move all the parts in some way or another. The border between a lean business system and a community is inherently problematic. That’s where conversations about lean management and poverty lead to some of the issues we are talking about in this conference. You don’t always know where the business ends and the community begins.
John: Some of you may be asking yourselves: “why are we talking about lean in a business and poverty conference?” I’d like to go back to go back to what was said during some of the previous panels. The assumption is we don’t want there to be poverty. We all assume that we would prefer there be no poverty. We, for the most part, assume that business can do something about poverty. Up until this point in the conference, we have talked about policies. At this point in the conference, though, we are starting to talk about how business processes can make a difference. We’re, for the first time, going into the question: “how do we really use business more effectively to address poverty.” So, if both of you could address this question I would appreciate it. The premise is one of the unstated purposes of lean has to do with the growth of low-income employees. If you think this is a true unstated assumption, tell us why you think it’s a true assumption. Can you address poverty through business, without having well-educated employees?
David: Well I think I would use the the most cited example in the lean movement to answer this question. What Toyota has talked about is building people before they build cars. So the primary purpose of their strategy is not so much about the cars but more about mobility, and developing the ability to move people. As part of that overall strategy, one of the key pieces of the strategy is actually about developing people. You can’t really do anything in business if you don’t have the ability to develop your human resources.
One of the key foundational pieces of developing a company’s human resources is teaching people to solve problems. Through successive iterations of developmental processes, people at Toyota are mentored by those who have solved problems, previously, at higher levels in the organization. One of the key capabilities in the business is developing that key problem solving skill. So, throughout a career, you start with very simple problems and you go on to solve bigger and bigger problems. That might, for an engineer, lead you to eventually becoming chief engineer and developing a new model of car for the company.
Scott: So here’s another part of the Toyota story. In 2009, when General Motors was going bankrupt, in a small village in Japan there was actually a company that outsourced for Toyota and made parts and wires that are installed in cars. This company contracted with many women who worked out of their homes weaving the wires. In 2009, the price of the materials went up dramatically to the point where they could no longer do this profitably.
You can imagine, at GM, they would say: “sorry, you can no longer deliver at the price you promised, we’re going to buy woven wires somewhere else.” But Toyota, investing in people, investing in communities, said “let’s figure this out together.” So they worked out a way to say: “okay, you will work, not at a loss, but at a point where you are not making a profit for a while, and then we will gradually increase the price.” The whole relationship between the community and the company remained intact because of this. All of that investment stayed in place. It wasn’t a big economic decision, it was a big people decision.
John: Let’s say we applied that same notion to development models. Let’s say that the continent is Africa, or Asia. Toyota clearly has done what it’s done in Japan, but are many of these principles usable in other parts of the world, especially developing parts of the world?
Scott: I would argue that when you are building a business in a developing country, and you are involving subcontractors from the community, you may not focus necessarily on the problem of poverty. But, when you focus on a business problem and solve it successfully, many times you are actually solving a poverty problem. In many ways, that is what this whole conference is about. Some tend to focus on poverty, which in and of itself, is a problem that you probably can’t solve outside of having business work. But, you probably can, by solving lots of little problems, through scalable businesses. As discussed earlier, in the China poverty alleviation miracle discussion, a miracle that was brought about through business, it may only be possible to overcome poverty when your main focus is to create scalable businesses that create jobs that pay better than subsistence wages.
John: That is exactly the point that I want people to be getting. Let’s just stay with that. Let’s say you do solve some small problems through lean, and the small additive improvements actually add up to something fairly significant, and all the sudden you have much greater productivity than you did before. Let’s say the whole industry is improving as you’ve improved productivity across the whole industry and there is actually need for fewer people. Now, you have people who leave these businesses because lean actually led to the productivity increases that made them redundant.
David: I think you need to address that before you even start. So one of your questions behind this might be, “if you increase productivity, what then are the ramifications of that?” We have seen several examples of companies that have actually addressed their issue of size before they started to do anything. This is good and I’ll come back to the thought. We’ve also seen companies that have used lean techniques just as a cost reduction driver. This doesn’t work—actually companies that are just interested in driving down costs through lean interventions are very rarely able to sustain their efforts. Many times their campaigns look like a one-off success. They might even be okay at keeping costs down for several years. But, the reality is: lean experiments that are only meant to cut costs don’t sustain.
So, in short term attempts at being lean, you don’t get continuous improvement after you’ve had your initial piece of success. When I say you’ve actually got to start by thinking about what your problem is and what you’re trying to do, this is how a good organization starts its lean process.
Coming back to the issue of what happens if you increase productivity, good lean processes are about growth. If the improvement you are doing results in needing less people for some particular tasks you’ve got to think about what those people are going to do moving forward, you’ve got to be simultaneously training people (the same people whose old job no longer exists because you’ve improved) to take over the growth aspects of the company that have just been created through the lean process. The other important thing to remember here is that we are trying to eliminate waste—we want to remove wasteful activities that create no value for customers or society—and so the jobs we are improving are, most likely bad jobs that no one wanted anyhow.
There are several really good examples. In automotive, if you take a car from 20 years ago, it didn’t have air bags. It didn’t have remote parking sensors. It didn’t have the ability to park itself. So there are a whole series of features and functionalities built into the vehicle of today. These extras did not actually cause real prices of cars to rise. But, one of the influences of these added attributes of cars is that fewer people lost their jobs than would have if productivity just led to job losses.
Next, take a retail example. A large proportion of you know about Tesco, the grocery chain. Many of the new things Tesco is doing came out of improvements they started making in the mid-1990s. Home delivery isn’t a new thought. But, it has created employment at Tesco during a time when otherwise there would have been more difficulty for employees as self-checkout scanners have been introduced.
John: As you make the connection to what I’m going to call a holistic approach to business planning, you’re saying if you don’t build a growth strategy, you won’t succeed at addressing poverty in a big way. What you are implying, if you go back to the beginning of this panel and you put that together with what you have just said, it is fairly clear that, if low-income people don’t participate in a process that leads to greater productivity and there is no growth strategy, they’re going to be opposed to productivity increases. So what you’re really saying, is holistic processes like lean, which are about greater productivity, need to have thought about potentially creating redundancy and addressing that in the preplanning process. Am I right?
Scott: Yes, and there is at least one thing you have to do when you begin a successful lean launch. You teach that you cannot anticipate what solutions will be from the outset. So, while you may discover early in a lean process that you are going to have redundancies, you can not necessarily assume that there will always be a downsizing.
I’ll give you an example. By the way, it comes from a service industry company. Lean is not always about manufacturing; most of the lean I’ve seen is in service industry.
I know of a hospital system with a group of physicians. They had a system that couldn’t sustain their work. They were making a lot of errors. They had lots of problems.
They went into a lean processing system. Over the first year, they identified what they had to do. They expected about a 20% redundancy in their workforce. We put this back to them and said “what do you plan to do about that?” I walked in the door with the CEO of this company six months later to talk with employees about what had happened.
In fact, they had developed, with the help of a group of MDs, marketing MDs, who went to the clinics nearby and said “we can do your lab work for you for less and we can do it better. Let us show you what we can do.” They invited the people from the other clinics over to the labs, had open houses, and impressed those from the other clinics. In the end, they created new business for themselves. They created a larger pie. You can’t anticipate those things or always see those things as you are going into certain situations.
John: Granted, you can’t anticipate. But, do you think productivity increases are normally expected when lean process are used in service or manufacturing industries?
Scott: I think the quality of problem solving goes up when you push problem-solving from the top of an organization to the bottom. I was on a loading dock a few weeks ago with some other professors. There were people from the loading dock, there were middle managers, there was the VP of operations, and you couldn’t tell the difference between any of them. Here we were, a group of professors, and a bunch of company people, and you couldn’t tell who was who, even by the way they were dressed. They all knew and understand their part of the system. They explained it well and the person who actually gave us the presentation had only been there six weeks and she was picked because she was the youngest employee. The hierarchy was decimated in that situation. The lean culture encouraged that. Their culture was very much: “we are all in this together, working on the same problem together.”
John: For me, this then gets to another really important question that is related to all of this. Isn’t there an ethical issue that is baked right into this when you decimate hierarchy? Isn’t it an ethical choice when you decide to go lean?
David: Yes, I think it is an ethical choice. Companies shouldn’t go into this without their eyes open to what is possible. However we are not talking about decimating hierarchy here, instead we are talking about people learning to solve problems appropriate to the work they are doing in the organization—to make things better. You can generally get a 2 to 1 productivity difference and a 100 to 1 quality difference achieved.
It’s also worth pointing out that lean can be applied everywhere. Sometimes lean is used in places you wouldn’t think it could be. I sat in a lean enterprise institute summit in Las Vegas in March, and across the table was a guy implementing lean in the San Diego Zoo. I’d never even thought about implementing lean at a zoo. But, they doubled the productivity of zoo keepers, and the keepers are engaged because they are able to spend more of their time creating value—doing research for example.
John: Just so we are clear, we are not advertising that everybody will get 100x better quality, but you have seen experiences like that and I have too.
David: Yes that is correct. If you took the benchmarks of the auto industry in the early 1990s when lean was first identified and compared Toyota to the Big Three US auto makers, you would find huge differences in the numbers. Some of those numbers have narrowed now. But, I’d still have to say, the time to market numbers are still very significant. There are many fewer hours of engineering per car put into a Toyota vehicle even today.
Scott: So it’s worth asking the question: “is it ethical to not do lean?” Is it ethical to waste time and have a certain amount of material waste in your system just to maintain jobs? Is it ethical to keep all the employees uninformed and keeping processes in place that allow for all decisions to be made at management levels?
John: Let’s go through those one by one.
Scott: Let’s talk about waste. One of the things about lean environments in general, is you would hope that they would reduce waste. Sometimes it hard to see that in the immediate term, but in general isn’t it your experience that there is a decrease in the environmental footprint over time? So there’s less travel, there’s less burning of fossil fuels, there’s less garbage in the dumpster.
John: It’s pretty clear that the waste issue is an environmental issue, isn’t it?
David: The green issue is really interesting partly because there has been a lot of research done about it. A good example again is from Tesco. The idea of being able to deliver exactly what’s needed when it’s needed, in the quantities needed into a retail outlet results in much more on shelf availability. So, you reduce the amount of batching and you would think that actually you’d end up with more truck movements. Instead of delivering to a store once per day, which was what was happening in the mid-1990s, they’re delivering multiple times per day to the same store. You would think there would be more trip miles. But, there are actually fewer trip miles and there is more on-shelf availability because once you start linking all the stores together, you can have a lot less truck miles and less trucks returning empty to the warehouse under the new system.
So the point is that there is a lean principle that states that the more waste you remove from the system, the more waste you can see. Unfortunately for people that don’t do this as a day job, a lot of what we talking about initially feels really counterintuitive.
The idea of making one piece at a time in a manufacturing plant drives most people to say: “I’m sorry that’s completely ridiculous, you can’t do that.” But, that is all before you start to actually do it and you realize there’s a much more economically viable way of doing business. This is because, when you make things in batches, this often leads to throwing stuff away. We talked about waste earlier. If you could only make what’s needed in the quantities needed, then actually you would reduce huge amounts of waste.
Scott: Somewhere in the United States, there is a hotel maid who suggested that we ought not to wash every towel that’s left in the bathroom by a remaining guest. The suggestion she made has saved a lot of soap and a lot of effort, and a lot of money. I can’t remember the name of the maid or the name of the hotel chain she worked for. But, I think that her idea has been used in every hotel chain in the world now. As you know, there’s a little sign in almost every hotel bathroom that says something like: “be green with your towels.” That was something that happened from the bottom up through a lean process, and the suggestion was made by a hotel maid.
John: Let’s turn the conversation to the ways that lean process is used in the developing world.
David: For the last five years I’ve spent eight weeks a year in South Africa working primarily with a group of Toyota dealers. We were working with different dealers. Three weeks ago I was in Botswana for a week.
The differences involved with using lean in developing countries all have to do with the problem you’re trying to solve. In Botswana, we had 20 people in a Toyota dealership who are highly qualified to fix cars. Those 20 people are also highly involved in servicing ambulances; their job is to make sure ambulances are on the road. They service these vehicles to make sure they can get out to rural communities and bring people back to the hospital.
What the business needs to do is actually service vehicles effectively because the end purpose is to ensure that those ambulances are mobile. So, when I first started working there, if I walked around the dealership’s car park, there would be 12-15 ambulances that would be waiting in the car park for one of three reasons. It might be because they were waiting for permission from the ambulance entity to actually get them fixed. Or, they would be waiting because of scarce resources. Or, they couldn’t fix them because they had too many other things to do.
So, the business had a problem. Because the business had a problem, the community had a problem—it didn’t have enough working ambulances. Our goal was to make sure that we got more ambulances onto the roads.
The way we went about getting ambulances onto the streets is like this. We get mobility by creating flow. So we organize all the work in flows. What enables us to do this is that we basically get these ambulances in and out on the same day and service them in half an hour while the drivers wait for the vehicles. So, in the end, the process we use is very similar in the developed world and in Botswana. But, the costs are so much higher if we don’t fix the ambulances in Botswana as compared to if we messed up in a developed country.
John: Tomorrow we will have Ahsan Jamal with us as a speaker. He is based in London. But, the foundation and programs he helps run are focused on Pakistan. What he will tell you about is the ambulance service they started to serve thousands of people in a number of Pakistani cities. What they found is that Pakistani people couldn’t get to the hospital quick enough because, if you think about it, many low-income people don’t have cars. They’re not going to be able to drive themselves to the hospital. So ambulances were one of the services the foundation could provide.
It’s interesting to note that they actually put their ambulance service into the private sector. This is a very interesting company and it is addressing a very important social problem.
Let’s take some questions.
First Audience Question: I need some advice. We’ve been asked to look at charcoal in Malawi. Now, the main driver for this appears to be that people don’t want the Malawians to cut down trees, which is very commendable with climate change and all this. But, none of the people who are saying all this or asking all this have actually been to Malawi. They don’t really understand that very large numbers of the people are employed making charcoal. Alas, they are making very very low pay. But, they are harvesting what is, to them, a free resource. A tree they can cut down for almost nothing.
Now, we’ve been asked to grow trees sustainably. We’ve become the first licensed charcoal producers in Malawi. But by doing that, we are putting out of work all those people whose only way to make a living is to produce charcoal. How do we find work for all those people who have been disenfranchised?
Scott: I don’t have the answer but I know who has the answer. The people who have been disenfranchised have the answer. This all may sound quite surprising. Every time I work with an indigenous population, they seem to know better than I do how to solve complex problems. So, one of the principles in lean is to bring back problems to the community that is influenced by those problems. It may take a while but they will find solution.
John: We talked earlier about whether cost savings are the main goals of lean. You basically said: “no.” I know this is a similar topic. But, let’s talk about whether or not profit maximization is the main goal of lean.
David: Not necessarily, because it depends on the situation of the organization, and how the organization defines what the problems are. Lean is a thought process, it’s a way of defining and aligning the purpose of the organization with the processes that create value and the people in the organisation. The organization I have been working with in Botswana is a family business. It needs to make money (like any business) to survive. But it doesn’t maximize profit at the expense of the people working in it or the community it’s part of. Actually one of the main issues is that it employs 85 people and it actually wants to improve the economic situations of those people that are there. So it’s using the lean approach to do that. It is pleased to support local businesses. It believes that if every business improves, the community will improve. So, it very much depends on what your angle is around this. I would say that’s different to the attitude of a big business that’s very focused just on cost reduction for the aim of profit maximization. You really have to think about purpose.
John: My goal has been to introduce a new theme into the business and poverty mix. I think David and Scott have helped us to do this. Please thank our panelists.
Addressing Poverty Through Impact Investing
John Hoffmire: Geeta Tharmaratnam is a Director at The Abraaj Group. She is responsible for advising The Abraaj Group’s partner companies on environment, social, and governance (ESG) performance. During her career in global growth markets private equity, Ms. Tharmaratnam has worked as both part of the Chief Investment Officer’s office as well as the Global Portfolio Management team on sustainable private sector development, new fund development, and the implementation of environmental, social, and governance practices.
John: Geetha, help us define the term impact investing.
Geetha: There is a challenge in defining the space we call impact investing. Some look at the size of the market and see 6.2 billion dollars’ worth of activity per year. Others see trillions of dollars of activity because they are including sectors such as infrastructure. When you see people use the larger numbers to define the size of the market, they tend to include mainstream investors who don’t prioritize impact. When the number is smaller, those who make the estimates are usually including just investments that have impact as the major goal. The size of the entire market changes. I’ve seen studies that have shown that between 2007 and 2012, there were about 51 discrete funds considered to be exclusively dedicated to impact investing.
John: If you had to come down on one side of the spectrum or the other, what would you say is the amount being invested for impact each year?
Geetha: I think I would say it is closer to the trillions. This was where I come from a philosophical perspective. Practically speaking, the private equity industry has fundamentally changed to the point where private equity now recognizes impact investing as an alternative investment class. This has allowed limited partners (investors in funds) to make allocations specifically towards this.
If you hear the founder of Apax talk about this, you would hear the following. Before private equity was recognized as a separate asset class, he was raising private equity funds of $50 million or $100 million. Once private equity was its own asset class, the amount he was able to raise went into the billions.
So, there are practical reasons why impact investing should be defined more broadly. But, philosophically, many of us believe it is possible to invest in pretty much anything and have a positive impact, even if one has no intent to have a positive impact. With these two thoughts in mind, there’s a big move to try and mainstream impact investing. But, the flip side of this is it sometimes curtails our ability to grow the amount of funds which are dedicated to a particular outcome and space.
John: If you assume $350 trillion worth of wealth in the world, and we have $1 trillion invested in impact investing, you’re looking at 1 out of every 350 dollars invested in this space. The $1 trillion would be on the high end of the range of investment you are suggesting. If instead, we call it a $6.2 billion, the lower end, in essence, we would divide 6.2 by 350,000. So instead of 1 out of every 350 dollar being invested in impact investing, we would be assuming that only 1 out of 70,000 of all of the dollars invested is going into impact investing. I want to take this back to some of the conversations we’ve been having more broadly. If in my world, 70% of all GNP is impactful, and I’m really just taking out from world GNP the companies which make landmines, cigarettes, and a few other products, I think we have an interesting conversation starter here. Do you think I’m crazy to think that 70% of world GNP is impactful? And/or, do you think the people are being a little conservative who think that only 1 out of every 70,000 dollars being invested should be called an impact investment.
Geetha: The definition has been changing and shifting so rapidly that is often difficult to know what people are saying year over year. Impact investing is not being measured the same way it was even two years ago. GIIN, the Global Impact Investing Network, is trying to keep abreast of what is invested impactfully, and their latest report says somewhere around $15 billion. If you look at the number of actual investments done it is around 8,000. Now this was last year’s data and many of the general partners and the limited partners around the world have said they want to increase their involvement and go further toward the next step of reaching $20 billion by the end of 2016, using the new definition of impact investing.
So this is the commitment people are making. The reports are put together with GIIN’s involvement and using their definition of impact investing. I would be clear that I think the real number is likely closer to the trillion because there are few businesses you can say have no positive impact. But, that is just my opinion.
John: Let’s talk about what your firm invests in. What industries do you really think are impactful?
Geetha: If I could take a step back and say, we can use the firm that I’m in because it will give a bit of context to the conversation. So the firm I’m with, the Abraaj Group, we are investing around $9.5 billion dollars into businesses to grow them in Latin America, Sub-Saharan Africa, the Middle East, North Africa, South Asia and Southeast Asia. For the most part, these funds are going into transactions regarding businesses that we can help grow. At the same time, all of these transactions have very strict ESG requirements (environmental, social and governance requirements) and impact reporting requirements which we have enshrined within our shareholders’ agreements.
We are held to high standards by our investors. We are committed to the ESG standards and to impact investing. But, there would be serious consequences for us if we did not follow in the ways that the impact investing community is headed. More on this later.
We also have a number of other sector-specific funds at Abraaj. I’ll give you an example of one of these funds: The Global Health Fund. The predecessor fund to this was the Africa Health Fund. We raised that fund in 2008 to invest about $105 million dollars into small and mid-cap businesses in Sub-Saharan Africa to increase access, affordability, and quality of healthcare for those at the base of the pyramid.
Is that an impact fund? Absolutely. But the funds we have been investing in the non-sector- specific areas have also been hugely impactful across the sectors we have invested in. The non-sector-specific investments are just part of a much more diversified portfolio.
The next iteration for us is the Global Health Fund. That’s a $1 billion fund, which is investing primarily in Sub-Saharan Africa and South Asia to do five things: increase access to healthcare; increase affordability of healthcare, increase quality of healthcare; strengthen healthcare ecosystems, which means we’re looking at human resources; and address preventative care in non-communicable diseases and mother and child health.
Again, the target here is the base of the pyramid and the middle of the pyramid. We’re fundamentally having to change the way we are investing to address the challenges of the healthcare markets in these economies. Is that an impact fund? Absolutely. But some of the things that we’ve found throughout the years are that certain sectors have more visible impact, and social infrastructure tends to be important in this space. Specifically, I am talking about education as it relates to healthcare.
Just as important, we are in the process of raising an energy infrastructure fund. Is that going to be impactful? Absolutely. We’re going to be investing in renewable energy. We have a business team which will do nothing other than project development because there’s been a big mismatch between the amount of capital that’s been available to invest in mature energy assets versus the number of energy assets that are investible.
This gives you a little bit of a view in terms of, for us, what we consider to be our business. We are focused on the education, healthcare and energy sectors.
John: I want to talk about measurement of impact for a while now. I told people I have several biases coming into this conference. I think measurement of impact has gone a little bit too far and there is a little bit too much spending on measurement, especially in developing countries where if the resources could stay in country and aid people’s lives rather than having a consultant who might live in Europe or the United States take those resources back to those countries with them, the developing countries would be better off. I’m not trying to bias anything you might say, but just talk about measurement, what ought to be measured and how you should measure it if we’re trying to figure out how much impact really is done.
Geetha: I have the same bias as you have, John. I joke with our team that you make more money as a consultant measuring impact than you do with a private equity firm. So we have taken a little different approach.
One of the things that we did that is different involved scenario planning. I learned about this while I was here studying for my MBA at Oxford.
Back in 2007-2008, I took our board through a scenario planning exercise. I told them there was no relevant definition that existed for sustainability. I told them that that was especially true in the context of what we do. I told them that we would be waiting for a very long time if we wanted someone to provide us with a sustainability framework that we would really like.
With that assumption, we defined sustainability for ourselves. We talked about how we would measure it. Part of this process was that we had to be open among ourselves about how we measure it. What you measure does determine, to a certain degree, how you manage. So, we had to be open with one another. And we also really wanted a measurement tool that would give us an ability to understand what was happening within our portfolio.
We developed a number of scenarios for our markets. We decided what we thought constituted impact and we created our own sustainability index. This index helped us measure impact in a way that was completely specific for emerging market private equity. The index has a handful of areas, and roughly 70 indicators. One of the areas is financial performance. One is income performance for the people involved with the companies. One is socioeconomic impact, one is environmental impact. One is management and governance and one is private sector development.
It is important to understand that a lot of our funding was coming from development finance institutions which had mandates and still have mandates to catalyze economic development in emerging markets. We needed to be able to capture that as well. Within the financial performance area, a set of indicators we track is growth of revenues and growth of profit. As you would imagine, if both of those growth numbers showed positive progress, we saw that as measured positive impact.
About two years ago, I updated the logic behind these scenarios we chose and simplified the index. It’s now got 50 indicators. One quarter of the indicators are related to the financial performance of the business, one quarter are related to environmental issues, one quarter are private sector development, and one quarter are based on Amartya Sen’s work on human development.
In particular, we looked at employment in Sub-Saharan Africa, which today has the world’s youngest population. In Sub-Saharan Africa, 70% of the population is under the age of 30. We do not just want a company in our portfolio to tell us how many jobs they’re creating. But, we want them to tell us about the nature of the jobs created. We want statistics on male and female employment. We want to know about youth employment, and how many people are hired and employed doing high level versus low skill level work. This type of data allows us to have a more clear view of the type of impact that is coming about because of the work of our companies.
As a private equity firm, I sit in front of limited partners, our investors, and I say: “when you invest in us, we will improve corporate governance, and we will help get management working effectively together, and we will help take the companies to scale.”
Today, all the companies that we are invested in, that are part of our original impact investments, are reporting against the index we have established. But, for the Global Health Fund, we’ve set things up slightly differently, so they are reporting on the index issues and the issues I talked about earlier. But, for each transaction, before we approve a transaction, we agree on a set of Key Performance Indicators (KPIs).
As we are doing our due diligence on a transaction and we are asking all of our questions before we make an investment, we have already figured out how to measure some of the key elements of impact using our index. We have already figured out how we’re going to cover what we think are the five areas that we talked about in the healthcare space: access, affordability, quality, health ecosystem strengthening, and prevention. With all of this work done upfront, before we invest in a company, it is much easier to know how we are going to do all of our measurement.
For example, I was having a conversation with our team in Kenya this morning. We’re looking to invest in a hospital group there. As we have been going through due diligence for three weeks, we have had no problems thinking about impact measurement. We had already agreed on what we are going to measure there. The measurement is built into the DNA of the whole fund.
What we should not do is measure just for the sake of measuring. We know that investors want to see our measurements. But, we would do them even if the investors did not care to see them. Impact measurement is something that makes sense to each of the businesses in our portfolio. All of our KPIs are related to the topics we measure regarding impact. Even our operating KPIs, the indicators that most closely related to the success of the business are tied to the index framework.
From the onset of the first board meeting at each of our portfolio companies, we make sure through the Management Information Systems that tracking our data is part of what becomes regular business. Collecting this information makes us a lot more confident that the outcome we are aiming to get with these businesses can be monitored on an ongoing basis as part of the business and operations monitoring.
John: If you walked into a company in Sub-Saharan Africa, would you almost immediately recognize that impact was being made there? What I’m really asking is, rather than doing all this expensive measurement, could I hire you to go into a situation in Malawi, stick your finger to the air for a little while, and for 100th of the cost, tell me whether there is impact? I want a yes or no answer to start with. We see some figures being as high as 7% of revenues going to measure impact. I’m talking about flying you down there for 3 days, to a made-up 100-person company. If you did that, would you be able to tell me whether there was impact being made by the firm?
Geetha: But from a governing point of view, “no” because there’s a responsibility that you will need to go back to your LP and have a clear cut definition that this is where you will have your impact and this is how you plan to grow it. But, again, I would say “yes”, working in the field when you go and you meet the right people, you can see impact in their DNA. “Yes” I would be able to stick my finger in the air and would feel comfortable going back to one of your limited partners and saying that. But, I might not be so willing to have this same conversation with my own limited partners.
John: Are you now responding from a governance perspective and a fundraising perspective?
Geetha: This is interesting because you’re correctly differentiating between identifying the impact and identifying where governance and fundraising come in. We are required to ensure that the impact is being measured formally.
John: We understand. Let me interpret, though, for some of the people who are not as close to the industry. So what’s really being said is this: The investors may not put the money in, next time, unless big money is paid for measurement of impact in your current fund.
Geetha: Yes, this is right.
John: Now I want to change the language a little bit and pursue this same topic for a little while longer. Let’s say we now send you to Sub-Saharan Africa as a trustee for impact. Many economies have trustees for bankruptcy. Many nations have trustees for employee stock ownership plans and, by the way, they get paid very little of the total transaction value, but they’re trusted people who investors would actually listen to. But, in any case, let’s say that we’ve made Geetha a trustee for impact now. Would the investors believe Geetha, in not the same way, but almost as much as they would believe those very expensive measurement consultants?
Geetha: I think what I’ve seen is that our investors, even when they use someone who is called a trustee, understand the need to pay these individuals. I’ve also seen these trustees require the clarity of the analysis that comes from the formal measurement of impact, so you end up in exactly the same position. Can I just ask though, John, are you trying to drive towards this question: how can we get the cost of measurement down?
Geetha: Okay, how about technology? Towards the end of last year, I took off about six weeks and went and did a fellowship in the US. Along my way, I met this phenomenal group, it’s a group of 50 people sitting in Silicon Valley. What they have done is they have disaggregated measurement of “stuff” including inflation and impact. They are able to ask questions of people recruited over Facebook.
The 50 people are mostly data scientists. They break down the questionnaires into bite-sized pieces. They pay people sometimes 10 cents, 15 cents, to find out “what’s the cost of milk in your city?” They ask, “What is the cost of bread?” With this data, they’ve been able to do two things. One, bring down the cost of measurement, and two, increase the speed with which they’re able to measure impact. As a result, they’re able to do the World Bank Purchasing Power Parity analysis in a far quicker time with greater accuracy and far less resources. This is a critical adjustment in measurement. When you do formal Purchasing Power Parity measurement, you measure the cost of 3,000 goods. It’s self-reported by governments. Sometimes this leads to problems because the data is not always accurate. Another problem is that you might only be able to get the information within six months of when you start researching.
On the other hand, when the 50 data scientists do the research, they do it much faster, they get the information much more inexpensively and it is just as accurate. So, I think there are ways to bring down the cost of measurement, but it might just not be in the way that some people think it is going to happen.
John: I just want to announce, one of the reasons why I love these types of events, is I get to learn a lot. Please join me in thanking Geetha.
Slaves and Enfranchisement
Steve New and Laurel Steinfield
John Hoffmire: Steve New is Associate Professor in Operations Management at Saïd Business School and Fellow of Hertford College at the University of Oxford. His areas of expertise include supply chain management and process improvement. Steve’s interests lie in developing a more rigorous appreciation of how individuals and organizations construct and interpret their environment and the systems in which they operate.
Laurel is Assistant Professor of Marketing at Bentley College in Massachusetts. She has a PhD from Saïd Business School at the University of Oxford. Laurel’s research focuses on women in developing countries and how corporate programs can assist in helping individuals and families.
John: This is a panel on slavery and enfranchisement. I’d like to start with Steve bringing some facts, definitions and arguments to light that are included in a recent article that Steve wrote on this topic.
Steve: Most of us are aware of the fact that modern slavery still exists in the world. We can contrast this with what we might call chattel slavery, or the type of slavery found, pre-Civil War, in the US South.
Modern slavery tends to be defined as a type of oppression where people are forced to work and don’t have the freedom to leave. It normally goes along with threats of violence, or actual violence, removal of identity documents, debt bondage, and often the threat of being revealed to authorities if the modern slaves are in countries without full legal status.
This is a horrible situation and an extraordinary problem. The estimates vary as to how common this is around the world, but the numbers of people held in modern slavery are currently estimated at somewhere between 20 and 30 million people around the world.
Modern slavery is illegal everywhere. As there aren’t any countries in which modern slavery is legal, it is not something you can quibble about. You can’t really look for any good sides to modern slavery. It’s unequivocally horrible.
One of the things that began to interest me, regarding modern day slavery is how supply chains work. It struck me that thinking about modern slavery and supply chains could provide an interesting test case to our ideas of corporate social responsibility.
I began my research with the assumption that my work would include lots of complicated field trips to distant places, like for example Southeast Asia and the shrimp fishing industry where these problems are very prevalent. Then I came across the idea that this is not something you’d have to travel quite far for because modern slavery exists in the UK, which surprised me. You can just travel to Cambridgeshire, to the agricultural industry in eastern England, to find situations where there are modern slavery in practice.
[I should say modern slavery, as a term, tends to include lots of things, in addition to what I just mentioned two minutes ago, like, for example, domestic servitude, certain types of prostitution and so forth.]
What I was particularly interested in, though, was where modern slavery fed into conventional legal industrial supply chains. So if you go into the super market in the UK, what you will find are vegetables there, and there is a chance these vegetables are produced with slave labor, with seasonal agricultural workers often from Latvia or other Eastern European countries. Eighty percent of the seasonal agricultural labor in the UK comes from Latvia and similar countries.
So, this is an interesting problem. I began by exploring some of the cases where modern day slavery exists with the hope of understanding how it can be tackled. A particularly problematic paradox came to light, which I’ve been struggling with and I’d be interested in hearing anybody’s views about it, which is this: All the major supermarkets have fantastically well-developed procurement processes and supply chain activity for auditing and certifying supplies and they put quite a bit of effort into this. They also have very well developed corporate social responsibility and business ethics policies.
They’re all pretty much interchangeable, you can’t tell much difference between the firms, but they all do things and have lots of people working on these issues at the supermarket companies. On the other hand, these terrible practices go on and they still persist. I was interested in how that could be so.
I think there is a kind of a paradox in that the same kind of organizations that are putting a lot of effort into improving supply chain behavior and so forth are also exactly the same companies which are perpetuating the economic conditions that make such exploitation almost inevitable.
One thing we know about the UK is that we have a small number of extraordinarily powerful supermarket companies which control a vast percentage of the grocery market. These firms are extraordinarily powerful. It’s an extremely competitive market these firms are involved with and this has worked incredibly well for consumers as can be demonstrated by the fact that the prices for food and other products bought in these stores have plummeted over the years.
These prices have fallen to the point where there is a basic fact that most people recognize. The things we buy at grocery stores in this country are absurdly cheap. The consequences of this are that, mapping down the supply chains, the people at the bottom of the chains are really struggling.
There’s also been systematic bad behavior by all of the supermarkets in terms of demanding, for example, certain price reductions from their suppliers. In addition, they have been demanding payments from suppliers in order that the suppliers be kept on the supermarkets’ shelves. Furthermore, the supermarket companies have been extraordinarily slow in paying their suppliers.
Indeed, this has gotten so bad in the UK that the government has set up a government regulator just to police normal contractual behavior between supermarkets and their first-tier suppliers. So, I think this raises a question for those of us interested in poverty and ethics and business, because it points out to me that looking at the agenda of business ethics or corporate morality isn’t just about having good corporate social responsibility statements or ethical employees.
There is something about the construction of the economic superstructure and indeed the concentration of economic power that means that if we want to improve things like modern slavery, we need to look for broader regulatory and political solutions and possibly also societal changes as well. Essentially if we want to not have forced labor and slavery in supply chains, we probably can’t have such cheap vegetables, for example.
John: Just to juxtapose the negative with the positive, I would like Laurel to talk about how some women are being enfranchised through business.
Laurel: When you talk about enfranchisement, I think you have to say that there are three different tiers or factors that you need to address to see it achieved. To accomplish enfranchisement, as Steve noted, one of those tiers you pass through is the tier of legislation. We call that sort of enfranchisement by the name: social or distributive justice. Through social or distributive justice, you’re trying to legislate and regulate the process of work.
Businesses can step in and say, look we’re going to enfranchise women by making sure we pay them equally. That would help to accomplish the first level—distributive justice or an equal access to resources, such as equal pay. But that’s not enough.
You also then need to go to the next tier, which has been mentioned before, related to Amartya Sen’s concept of capabilities to make sure that women and men not only have access to resources but can actually use them. This would include things like skills training or mentoring. Additionally, as much as enfranchising women through business is important, often this doesn’t consider that the majority of women carry a double burden—doing work outside of the home and inside of the home. When we talk about “capabilities” we tend to focus on how we can do it in the formal work or business environment, but we do not think about dealing with the household dynamics that can severely limit a woman’s ability to participate in the first place. So businesses need to not only focus on enfranchisement related to the formal economy but also think through how they can help women manage their “invisible” household responsibilities.
This also gets to the third tier, which I think is often overlooked when we talk about enfranchisement, which is called recognition theory. Recognition theory goes to the way we know each other and the way we perceive each other, or what we expect from each other. It is about the discourses or conversations we have and the things that we think about, or images that we think of representing a specific idea. It captures gender roles and norms that can govern our behavior. Our expectations that women will do the majority of the household work is an example of this. We’ve “naturalized” this assumption—both men and women, and often, women who do not do this are looked down upon. What to do about this is a conversation for another day, but it does make us realize that to try to really achieve gender equality or to empower women, there is more than just a need for equal wages, good working conditions and programs that can improve their capabilities. We need to change our ideals of what a man and woman are supposed to be able to do.
I actually just want to do a quick little exercise with you to drive this idea of recognition theory home. What I want you to do is close your eyes and put your hands up as to whether or not you think it’s a male or female based on the image that first pops into your head when I say these words.
A wealthy entrepreneur. Do you see a man, or do you see a woman?
An informal entrepreneur, how many see a man, how many see a woman?
A successful entrepreneur, how many people see a man, how many see a women?
An empowered entrepreneur, how many see a man, how many see a woman?
All right, so when I asked you to raise your hands, the majority said that the wealthy entrepreneur was male, the informal entrepreneur was a woman, the successful entrepreneur was male, and the empowered entrepreneur was female. These are the images we have created for ourselves or these images have been created for us. All of this tells us a lot about the ways in which we perceive entrepreneurship, our ideal entrepreneur, and our ideas of “empowerment.”
When we talk about the practice of enfranchisement as it relates to business, we can talk about it in two ways. Either, we talk about it as a form of formal employment—so ensuring fair working conditions and wages. Or, we can talk about it as helping entrepreneurs succeed. Often, the beliefs held around entrepreneurship, however, are about high-growth business models. We equate successful entrepreneurs with those people that can actually grow big businesses. But this often doesn’t match up with reality, or necessarily reflect what people want. The risks become that if businesses are trying to measure how much they are empowering people, they might have the wrong expectations and measure the wrong thing. That is, they might measure for women economic empowerment by measuring the revenues generated or the number of employees hired by a woman entrepreneur, but to hold her to achieve high growth might put her at greater risk of failure.
This leads to the last point I want to make. When we’re talking about enfranchisement, we’re not just talking about what businesses can do, but we’re talking about understanding the barriers and also the need for businesses to negotiate unintended consequences and what I call naïve assumptions.
Naïve assumptions are that:
– A) entrepreneurship has to be about high growth
– B) women can’t be successful entrepreneurs
– C) women have to stay within silos—concepts of what they can and should be doing, for example, service or care industries versus mining or high-tech…. which turn out to be the more profitable business opportunities.
When we talk about barriers, this is where businesses can start to really play a role. Businesses can influence women entrepreneurs’ access to finance. The majority of the women entrepreneurs across the world over have lacked access to the capital. They lack the resources and the collateral needed. But even beyond that they tend to be financially illiterate. So, even if they have access to finance, the question becomes: can they actually then use that money wisely, enough to actually get their businesses to grow.
There’s also access to what I call people. Whether or not they have the right employees, whether or not they can get access to skilled people that they need, such as the lawyers, the accountants. Many of these relationships are formed on informal bases. In a lot of societies that are very patriarchal, women struggle to actually engage in “after hour” networks, where men are creating these informal relationships that are meaningful in business. What we have done to make up for that is to formalize women’s access to these relationships, calling it “mentoring.” Andas important as that is, it will still put women on a different level than men, a lower level. Informal ways of meeting people often lead to stronger relationships. And in business, these tend to be the networks that can get you ahead of the game. By only implementing “mentoring” programs, we aren’t breaking the practices that enforce the informal, male-only relationship circles. Rather, we are checking off that we are doing something about the problem, creating a kind of loophole, but not addressing the core issue. In a world with no barriers, it is apparent that women entrepreneurs are able to get skilled people even though they may not play a good game of golf. The question becomes, how can we change the game rather than create more loophole opportunities?
Another key element to enfranchisement for women that businesses can help with is access to markets. One of the things we are contemplating, when we talk about access to markets, is that we’re discussing whether or not a women entrepreneur, who is trying to scale up her business, should start up locally, or globally? What kind of level should she be going for?
I learned about this when I was in Ethiopia. It sounds fairly simple. But, I call this a profound wake- up call. We were there to study women entrepreneurs and to try to help them be “empowered.” But, almost none of the women had even a small small small chance to get access to a global market. It was apparent that the barriers were very very very large. Should we have been holding them to the expectation that they build up to achieve a high growth, global business, even if it increased the risk that their business could fail? Or was it better for us to look at the local market and see where they could grow so that they can sustain their business? This raised profound questions around how we defined empowerment.
Secondly, Ethiopia taught me that we need to shift the way we recognize these women entrepreneurs. Rather than seeing it as us “empowering” them, we need to see them as “artisans” who are looking for access to markets. It’s a profound shift in perspective. To call a woman an artisan means that you are recognizing that she is capable of achieving and doing beautiful work. And that your role is not really to “empower” her but to help her connect to the markets where her workmanship can be appreciated. Gaining access to markets requires the muscles of large businesses who can use supply chains to link the artisan with consumer markets. Progress is being made in this regard, however, the progress seems as if it is a bit piecemeal.
For example, you have banks that are helping or microcredit institutions offering finance. You have mentoring or training programs, such as Goldman Sachs and their program that offered training for 10,000 women entrepreneurs. The problem is that, often, we are not linking what the finance people have to offer to these mentoring programs, and then to market opportunities. So you might have one woman who has financing, another who has mentoring, but what you need is for a woman entrepreneurs to have financing, mentoring, and access to markets. It can’t be a piecemeal approach but needs to be a coordinated effort.
So, the questions that we’re trying to grapple with are: One, how do we get big corporate players together to start creating linkages with all their different programs? And, two, how do we get them to think about their programs in a way that starts to change their expectations, language, their approach to markets, and the way they think about the enfranchisement of women, so that it’s about seeing them as artisans and appreciating their artisanship?
John: In one case, the topic is modern slavery. In the other, the theme is empowerment or enfranchisement of women entrepreneurs. Do you feel that the consumer movement is naïve when we are looking at modern slavery? Do you feel that the consumer movement is naïve when we look at how they try to help women in business. If so why, and if no, why not.
Laurel: I teach a case study that brings home the naïveté of the consumer movement. We did work with Walmart on an ethical audit of a program they supported for women entrepreneurs in rural areas where they were trying to empower women. Ethical audits are related to supply chains. Through these audits, Walmart was trying to get transparency in the supply chains to ensure that standards are being adhered to.
The audits, however, are created for factories. They look at whether people are being underpaid or put into bad working conditions. They are important in certain contexts. But, they have become, to the consumer movement, the definition of whether business is being done in an ethical manner. It protects against things like child labor or unsafe factories and unfair wages.
The problem is that what consumers want to see and what needs to happen in certain communities is often different. Consumer perceptions often don’t jive with what really needs to happen in the supply chain.
For example, we were working with a group of women that were part of the Maasai community in Kenya. They were making necklaces to sell to Walmart and Walmart had to come and do an ethical audit. As part of the ethical audit, you have to guarantee that the women are over a certain age if they are going to work making the necklaces.
Many of the women didn’t even have IDs. But, even when they did have IDs, that really wasn’t the point. We were trying to address root causes of poverty. We were trying to address violence in the home. We were trying to address the fact that women needed jobs. And we were really trying to address the fact that many of the girls were getting married and getting pregnant at 14, 15, and 16 years of age. They were not allowed to participate in the Walmart program.
North American consumers might very well say, “Yes, that’s right, they shouldn’t be able to participate in the program. Girls who are 14 years old are child laborers”
But is it right to exclude girls who might really benefit from the program as it might delay them from being married off, or it might benefit those 14, 15, 16 years old who might already have a family that they need to support?
So, when we talk about the consumer movement, we know we are talking about a very powerful and important stakeholder. Consumers can hold companies accountable and, let’s face it, companies do need to be held accountable.
But I also think that we need to educate consumers and let them know that not everything can be simplified. We need to recognize that, by actually trying to simplify things and saying that something is ethical because it passes an ethical audit, we may be bringing injustice and a disservice to a community.
Steve: I’d agree very much with that assessment. One of the only solutions we might have in understanding problems in supply chains and understanding questions about working conditions and such is more information and more transparency. There are some very interesting technological developments that might make this more possible in the next year or two. There’s certainly a great burgeoning of start-up companies and interesting new ideas about how transparency can work in the supply chain.
Giving people the ability to see down the chain, I think, is extremely important. On the other hand, I have to say, I’m extremely skeptical about the prospect of developing ethical or green consumers. Most of the evidence suggests there is no such thing as an ethical or green consumer, largely because people can’t digest the information, people are inconsistent, and people don’t have the attention span to care about such things. There is a very small number of people who consistently scan the labels for things. I think the decision-making processes should not be on the consumer’s side, but instead, the burden should be on the corporation. Firms have more resources, they are more able to handle information about modern slavery.
John: So let’s stay with this topic. I realize this is a really hard question, but how do you actually get the corporations to do what you just said?
Steve: Well, if you don’t want slavery, there are a couple particular issues that come into play. The first thing is that the normal machinery of Corporate Social Responsibility (CSR) just doesn’t work when faced with the really hard problems of forced labor and modern slavery. The people involved are criminals, so they don’t tell the truth. If you send them a questionnaire, no one sends a questionnaire back with the box checked “yes we use slaves.” So the point is that the machinery of corporate CSR is basically questionnaire and audit based, and it’s not easy to audit around slavery.
Criminals are also pretty nasty and threatening. So, there are great incentives for corporations to turn a blind eye to these things and to not pursue them because it is potentially dangerous for a firm’s employees to do so.
There’s a case study that I use in my paper that has to do with leek harvesting in Cambridge. Two guys who were the principle gang masters have just gotten back from prison two weeks ago. These are seriously scary people. When seriously scary people are involved, CSR doesn’t usually work.
The second thing is that supply chain ethics are often only one or two tiers down the chain. When companies say that they go further than one or two tiers down the supply chain, they usually just talk to the employees of the firm when they reach the third tier. But, in agriculture it is even worse. The people doing the work aren’t really the employees of anyone in particular. They are seasonal temporary labor providers. The group supplies the labor. No one person really has a contract as an employee. So, there is sort of a gap in definition.
The issue with agricultural labor is that there has to be a degree of consistency and follow through. The groups are moving often. It is hard to keep track of them. There are also often language barriers. You are used to this if you go to China. But, if you are working in the UK, you don’t expect a lot of language barriers.
In the end, for certain purposes, the supermarket companies can tell you they know exactly where every vegetable comes from. But, in other circumstances, they organize their affairs so that they don’t know something. This process produces a fracture between the people that are supposed to be aware of ethical requirements and the people who do price negotiations and buy the crops.
John: Laurel, what will it take for big corporations to do the right things consistently?
Laurel: We’ve been talking about enfranchisement. What we’re hoping to do is get the big corporations to open up to each other and be more willing to share lessons so that they’re not recreating the wheel all the time. If they talk to each other they can actually find opportunities for shared projects.
What typically can happen is, within one geographical region, you will have a number of corporates and they probably all work with very similar NGOs on the ground. They duplicate a lot of things. But, they don’t even know of the duplication. They’re not tied in together.
What we’re trying to do is tie them together so that they talk and actually map out a more holistic approach to intervention so that you have them all working collectively together. If they did this, they wouldn’t all be making piecemeal attempts.
I think they know the benefit of working together. They are all kind of onboard. They come in to projects because they recognize that women are not just potential entrepreneurs, they are also potential consumers.
We see a similar understanding on the part of a big company like Coca-Cola. Coke understands that if you have a thriving community, you’re more likely to have a thriving company. Their idea is to create communities by investing in good wages. Like General Motors, they want to create a consumer base.
At the end of the day, if we are talking about businesses, we have to recognize that anything they do has to be sustainable from a cash flow perspective in order to actually carry any weight with headquarters.
Alternatively, there is an old way of thinking. It has to with foundations investing money in some things and just throwing money at other things. But, times are changing, and businesses are more and more moving towards a type of Corporate Social Responsibility that is integrated into their business approach, sometimes into their supply chain practices.
John: Can you name an example where this type of coming together is happening and is pleasing to you?
Laurel: We are working on this right now with a number of big businesses. But our work is still in its incubation stage. Part of the reason that this work moves slowly is that we have found you do have to get business to work together that are competitors. You can’t have companies in the same sector working together because, when it comes time to actually open up and share really critical information, they are very private about their business and the way they run things.
So you have to start to build trust among companies that are not competitors. In order to get businesses to share, you have to get them to also rethink the way they think about empowering women or communities at large. One of the ways we did that recently is we brought together a number of representatives or big corporates and we had them do a trial run. We had them develop a theory of change around a potential project they could all get involved with.
I think, in working through that theory of change and identifying what they wanted to change, and identifying KPIs, they recognized they might not be able to achieve stellar results in all of the areas where they had key performance indicators for the project. They also realized that maybe they could create some unintended consequences, that is, negative fall-outs.
On the positive side, we brought an integrated approach to the project. They all recognized what each of them could bring and what they could learn from each other. I think that is the most invigorating thing—when you have them in the room and they are grappling with whether or not a woman can access finance in an area where she doesn’t have collateral and there aren’t banks. You have MasterCard speak up and say “well we can get a card with her fingerprint on it and then invest in infrastructure.” Each had something they could bring to the table. They were already doing interesting things in other places in the world so they could start to bring the lessons they’ve learned globally into a place that is localized and really start creating integrated solutions.
Catalysts of Prosperity
Patrick McDonald and Thomas Magnell
John Hoffmire: This panel will be a little bit more philosophical. Patrick McDonald is Founding Partner at a firm that was historically known as Oxford Catalyst Ventures, which has now changed its name to Openwell. Patrick founded the predecessor company in 2012 and Openwell aims to discover business solutions to social and environmental problems. Tom Magnell is the chair of the philosophy department at Drew University in the United States and has been a lecturer in medical ethics at Harvard Medical School.
John: Tom, what is a catalyst of prosperity?
Tom: In chemistry, a catalyst is something that speeds up a reaction without itself being used up. I am not sure about the using up part, but with respect to prosperity, it makes sense to say that a catalyst is something that promotes prosperity. While there may be many catalysts of prosperity, among the most important are risk-taking, prudential reasoning, moral reasoning, the rule of law, peace, a notion of rights, freedom, including free markets and free trade, and innovation.
Taking good risks is plainly a catalyst of prosperity. What is not always plain is what makes something a good risk. That calls for an evaluation, in the first instance, an evaluation that requires prudential reasoning, reasoning with respect to self-interest. We, as a species, are not particularly good at prudential reasoning. Eighteen-year-olds voluntarily jump out of airplanes to go sky-diving. Eighty-year-olds generally wouldn’t be caught dead doing that, though one American President celebrated his ninetieth birthday by going sky-diving. The problem is that an eighteen-year-old has a bit more to lose than an octogenarian, at least when it comes to life-expectancy, but the eighteen-year-old still takes the risk, while the octogenarian does not. The same goes for risky driving and smoking, for that matter. Of course there may be a self-selection factor here, individuals making it into their eighties perhaps having been less prone to Darwin awards all along.
Moral reasoning, roughly what may be thought of as a matter of community-interest, though the basic notion is broader, can also generate prosperity. Interestingly, sometimes, what is of self-interest is the same as what is of interest to the community. Prudential reasoning and moral reasoning actually come together in that case. Going back at least as far as Socrates, some philosophers have tried to maintain that prudence and morality are at one, that they always come to together, self-interest and community interests being one and the same. This is hard to sustain without an expansive sense of “self-interest” that makes the position uninteresting. But that prudence and morality can come together, and that they may come together more often than is widely supposed, may well be the case. Indeed, recognizing that they often come together and working to do what we can to bring them together has great, positive value for promoting prosperity, even as it is a mark of wisdom. You need to make prudence and morality, and the reasoning that goes along with them, a part of your life for a good life.
Patrick: I was thinking that prosperity is about destiny. It’s about doing what you’re good at and becoming what you’re meant to be. It’s about doing something that is very useful. I think there’s something inherently good about contributing. It’s great when you do that, because it’s a bit like my 6-year-old boy when he presents us with a cake and he is proud of baking a cake. They might not taste very great, but he is contributing.
Tom: Sometimes people talk about enlightened self-interest, which is really a very odd phrase if you reflect on it. It makes it sound as if something is not in a person’s self-interest if the self-interest is not enlightened. But this need not be the case. I am all for enlightenment, and being enlightened is usually in our self-interest. But if something is in our self-interest, then enlightened or not, the thing is in our self-interest. There is no contradiction in saying that something is in our self-interest, though the self-interest is not enlightened.
Patrick: I was thinking about this as well. This is a bit of a stretch. But, stay with me. I’ve been thinking a lot about the process of creating wealth. To create wealth, you have to have property rights. Most people would think of property rights as an expression of self-interest. But, for the poor, they can be an expression of enlightened self-interest.
Tom: Yes, property rights, which are actually civil rights requiring the rule of law, comprise another important catalyst of prosperity.
Patrick: I think property rights are super important. I’ve done a lot of work with orphans and widows and they somehow always lose their property rights. We ran a network of 34 schools in Kibera, a slum on the outskirts of Nairobi, Kenya. We had 12,000 kids involved every day in these schools. The classrooms had mud floors.
Of course we couldn’t improve these schools because they didn’t belong to anybody.
At the same time that the schools didn’t belong to anyone, we had to pay rent for them. All I had to do, when it was time to pay the rent was to show my white face. If I showed up, the rent would go up.
If we received a large grant to improve the property, then the rent would go really high up. So there was a real incentive to not do anything to fix or improve the building. All of this comes back to property rights. So property rights are one of the keys to prosperity.
Another key to prosperity is peace. I remember another project we worked on during the Balkan War. We raised large amounts of money from a foundation and built 10,000 homes. We felt so great about this, until a couple weeks after we finished constructing them they were bombed by the Serbians. So it was one of those project where, when he had to go and tell the foundation, the report didn’t sound so great.
So, the point being that peace is really important. You can’t really have prosperity or progress without peace. Development in places like Somalia or the Congo is very difficult.
Tom: Sustaining peace locally and internationally, along with the rule of law are very important for promoting prosperity. They give a sense of predictability and stability, both needed if we are to get things done. If you can’t count on what you’re going to be able to do the next day or what someone else is going to be able to do the next day, it is hard to be become or remain prosperous.
I mentioned civil rights earlier. It turns out that civil rights in general are as important as property rights. Civil rights are, oddly, at least to the ears of some, an antidemocratic notion. We tend to think of the importance of democracy in discussing prospects of prosperity. We are right to do so, except that there have to be some restrictions holding back democracy. Here we are on the 4th of July, the day when Americans celebrate independence going back to 1776. It is as good a day as any, though the United States of America really began in 1789 not 1776, and it began as a clearly, explicitly, and emphatically undemocratic nation.
The founders of the United States were appalled by democracies—pure, direct democracies. There was a democratic element contained in the United States Constitution, a representative democratic element most emphasized in the selection of half of one of the three branches of the government, the House of Representatives. The selection of the other half, the Senate, was not democratic. The selection of the Supreme Court was not democratic. Even the selection of the President, with respect to majority rule, was not democratic. One of the greatest fears of the founders was the possible tyranny of the majority. They were afraid that a majority of people could and in time would decide to inflict harm on people not in the majority. As has often been noted, democracy pure and simple is two wolves and a lamb voting on what to have for dinner. For that reason, the founders instituted a notion of rights, a modern notion not found in the writings of Aristotle, Plato, or Epicurus. Rights protect us from some things that others might do to us. They restrain others. In doing so, they give scope to freedom, liberty within protective constraints, a particularly important catalyst of prosperity. Historically, generations of the poor have remained poor for lack of freedom, in the most evil cases through slavery.
Patrick: If you build out the notion of destiny, you would first have to create a definition of the word. Let’s say that destiny is about the fact that you were created to do something. It’s about what each of us brings to life as we contemplate our futures.
Let me personalize what I am trying to say. I’m not here randomly. I’m here for a purpose. I’m here to make a contribution. I have something really unique to offer. I’m here to discover what it is that I am supposed to do. I am supposed to discover what part I am to play. I’m here to discover what about my own journey is inherently useful to others.
John: Is there something equivalent for someone who comes out of a different religious tradition? Patrick, I think you are expressing a very distinct and wonderful Christian sense of destiny? Isn’t it a destiny to serve? What other religions or non-religions do we have represented here?
Zahid Torres-Rahman: I have a deep faith in humanity. Deep down I think humanity is good. My work is based on a principle. That principle is that it is good to bring good people together.
John: Tom, you want to say something.
Tom: I want to bring up two other points that have to do with freedom: free markets and free trade. Both are absolutely critical for promoting prosperity for the poor. If you ask the question: Why has the United States prospered so much? There are all the reasons we considered earlier: the rule of law, freedom, rights, including property rights, peace, prudence, morality, and risk-taking. All of these things matter. But there are three remarkable considerations that have not been noted nearly as much as it should be. Two of them are the presumption of free markets and the Constitutional protection of free trade. When free commerce clauses, like the one included in the United States Constitution, are in existence, people do better and there are fewer poor people.
For the United States, the interstate commerce clause of the Constitution meant that goods produced in any part of America could be brought to market anywhere else in America or sent abroad without tariffs. Something produced in the Midwest could be shipped over the Erie Canal or down the Mississippi, or sent by railroads, trucks, or airplanes without incurring government fees so common in the rest of the world. It’s not terribly surprising that commerce grew when, at each regional bend in the road, there was not a tax. Citizens in all states benefitted by the domestic free trade and then benefitted again when it made American goods more competitive everywhere else in the world than they otherwise would have been had there been internal tariffs.
The third consideration, and in some ways most important catalyst of prosperity, is innovation. Today, many of us take innovation for granted. But, it is something that any reading of history shows is not something that can be taken for granted. You go thousands of years anywhere in the world and nothing much changes. Generation after generation, everyone does pretty much the same thing over and over again. The vast majority in one generation are poor, as are the vast majority in the next generation, and the one after that. It’s really within the last couple of hundred years that you have enormous change affecting the prosperity of ever greater numbers of people in successive generations. If you look at the medical advantages in the lifetimes of all of us, they are remarkable. The poor everywhere have benefitted from the changes brought about by innovation. Indeed, contrary to much received opinion, in terms of life expectancy, people in the poorest parts of the world have benefitted more in the last hundred years than people in industrialized countries. Not that we should be complacent, but innovation and its fruits are to be prized. As a catalyst of prosperity, it matters prudentially and morally.
Patrick: Philosophers should notice the importance of telecom innovation in places like Kenya. From a moral reasoning perspective, there is no doubt that innovators who have brought mobile or cellular technology to places like Kenya have done very moral things.
John: I’m going to switch gears pretty dramatically now. Just to review a few of the things that Tom just said: Some of the drivers for creation of prosperity: rule of law, markets, trade, and innovation. What would you like to do next, Patrick?
Patrick: I think we have a tradition of viewing prosperity through a very narrow lens. We view prosperity as having access to money. I think that, at least some of us would recognize we can recognize that as probably too narrow a lens.
The lens of money is a very easy lens to accept. But prosperity encompasses a whole lot of things: it’s about beautiful views, great friends, fantastic meals, a good laugh, these sort of things. I think that’s useful to think about because when you talk about innovation you also have to talk about having 9 or 10 billion people coexist on our planet. This will probably be required during our lifetimes, even though we do not have that many people, yet.
There are some insights we can gain if we change our lens. For example, we can come to understand that, if we only look at prosperity through an economic or monetary lens, we are probably, for the most part, going to see that the poor will generally show the same kind of regard for the planet as the rich have done from a historical perspective.
A good friend of mine runs a conservation institution that looks. She is incredibly bright, articulate and passionate conservationist. She recently went to Madagascar to look at a world heritage site, an amazing rainforest. It was precious, beautiful and full of endemic species, a really incredible place.
She came back a completely different person. She had seen poverty in a way she hadn’t seen before. The point was, for her, that the poor don’t care about endemic species.
If I was poor and living in Madagascar and my 6-year-old boy wasn’t going to have dinner tonight, I probably wouldn’t care a hoot about the rainforest, I would want my child to have food. This was the reality that my friend ran into.
So, I think another factor related to prosperity is sustainable development. It is very important that we don’t just look at money because you could easily cut down all the mahogany and raise a bunch of money, and find an argument for that benefitting the very poor in a community. However this is where we get into a much more nuanced and complex set of issues. As managers and innovators and creators, we have to start observing the world through different lenses. We have to think about prosperity in ways that go way past money. Money is very important; we all need it, no cash flow no mission. However it’s not the sole factor.
John: Patrick, would you be willing to acknowledge that there are people who are poor and who do care for the environment? I accept what you said as a general truth, but I think there are some exceptions to the rule you’re talking about. Would you grant me that? So some people take care of their rainforest, some people take care of their water, even if they’re low income?
Patrick: Oh absolutely. When you look historically at Native American Indians, they were not wealthy from a material perspective. But, they took care of their environments in ways that were remarkable and sustainable. There are many other examples from the present day.
John: Let’s talk for a little while about big corporations that help poor people to prosper.
Patrick: When we talk about capitalists for prosperity, there are a number of companies that are helping others reach prosperity. At Openwell, the business I am involved with, we are increasingly involved as consults to companies like Johnson & Johnson.
We are helping them find approaches that enable them to grow their business by doing the right thing for poor people. So, what J&J does goes way past CSR and codes of conduct. J&J is way past painting fences and giving products away for free.
J&J is actually about discovering how they can become engines of prosperity. They want to figure out how their staff can use their core capabilities in significant ways to do good. And in doing good, they want to grow their businesses.
So, at J&J, it’s not about a trade-off. There is a self-interest expressed by J&J. It is about making money. But, as well, it is about helping others, even poor people, develop their social and physical capital.
Please excuse an interesting digression for a few minutes. Mars, the company that is best known for making candy. They start with a question. That question is this: What is the right level of profit?
This is coming from the leaders of a family-owned business. They have made more billions than they can spend anytime soon. But, their goal is not “we should make many more billions.” They are not interested in that.
So they started thinking, what if we focus more on healing people and the planet. At Mars, there has been a history of thinking about these types of issues. But, their thoughts are becoming even more profound. They are thinking about the world in ways similar to the ways Bill Gates does.
The question, what is the right level of profit? actually leads to a bunch of further questions. I have been talking for a little while now and I am going to stop. But, this conference in opening up all kinds of interesting questions for companies that want to do something useful in the world.
John: One of the sponsors of this conference, Business Fights Poverty, is doing much to help companies take on greater challenges to integrate anti-poverty orientations right into their operations.
Patrick: I agree with that. As Openwell, we work with a number of entrepreneurs, some of whom have MBAs from Oxford. Many of them have cracking ideas about how to do something useful through corporations and our jobs. The hard work is to take these ideas and substantiate them, fund them, advise on them, and make them fly. I don’t think it’s just big corporates that need to do this. You, John, alluded to my past. I spent 20 years on a children’s charity helping street kids in the emerging world. These kids got my heart big time. I developed such a rich tapestry of experiences working with the very poor. I recognize how valuable and important they are, and how little it takes to fan their passions.
The reason I am migrating into impact investing and consulting for Johnson & Johnson or Mars in this case, or working with MBAs on business solutions is because I think we can generate more prosperity for more people if we use corporate models. It is not that I am negative about charitable models.
Presently, we’re setting up an impact fund because the rate at which we think of fantastic ideas is greater than we have time to fundraise for.
We think we can do a lot of good by funding good businesses.
Tom: Yes, though we need to be a bit careful about what we mean here. If moral goodness is at issue, it is necessarily the case but uninteresting that a morally good business is a morally good business. If we mean that a prudentially good business, roughly a profitable business, is a morally good business, is interesting but not necessarily the case. Nevertheless, profitable businesses can be morally good businesses, and many are. This ought not be surprising if profitability requires meeting needs and addressing desires.
Zahid Torres-Rahman: I think getting into the core of the business and thinking about how they operate is a very effective way to make a difference. Multinationals have a huge potential to reach scale, so for us it’s a great way to have a huge impact.
Tom: I think it’s important to note here that, beyond basic needs, if then, there is no clear line of demarcation between wants and needs. Many people would say that they need a cell phone. That is not wrong, inasmuch as they may need a cell phone to realize some further end. But a cell phone is not a basic need, at least not for most of us. We really can get by without them, though that may seem outlandish to anyone under 30. Uttering “I need a cell phone” may be just communicating a want, but doing so emphatically. In any event, both needs and desires are in the domain of moral and prudential reasoning. They matter to us and for us, and so matter, if we are to promote prosperity.
Ownership and Poverty
Colin Mayer and Frank Shipper
John Hoffmire: Colin Mayer is the Peter Moores Professor of Management Studies at Saïd Business School, and the former Peter Moores Dean of the School between 2006 and 2011. He is an expert on all aspects of corporate finance, governance, and taxation; the regulation of financial institutions; and the role of the corporation in contemporary society. He has consulted for numerous large corporations and for governments, regulators, and international agencies around the world.
Frank Shipper is Professor of Management in the Perdue School of Business at Salisbury University. His teaching, consulting, and research interests are managerial/leadership skills development, employee ownership, and collaborative cultures. He has consulted for and studied employee-owned companies for over 25 years. Among other honors, he received a 2014 Regents Award for excellence in research, University System of Maryland’s highest faculty honor. He is the lead author of the book, Shared Entrepreneurship: A Path to Engaged Employee Ownership.
John: Knowing it is difficult to come up with data on one side or the other, is it better to say one type of ownership is better to address poverty?
Colin: I want to bring to light a case with Paul Polman from Unilever. In January 2009, on his first day as executive he announced he was abandoning quarterly earnings and that he was going to put the long-term prosperity of the company as his top goal. He said to his shareholders, “if any of you don’t think that this is the goal of the company, that’s fine, you can disinvest.” There aren’t many CEOs that are willing to say this to their shareholders. It illustrates how difficult it is to be a public company and to pursue a public agenda without undermining your shareholder base. Why is it difficult to achieve this agenda? If you’re one of the largest companies listed on a stock market in the world, it can be difficult – particularly if you have a widely distributed stock market base. Having shareholders who are committed to alleviating poverty or creating environmental benefit is absolutely key to success.
John: What happened to Unilever’s stock the day after Paul made that announcement?
Colin: It went down. Over the period since then it went up slowly. It’s had periods where it comes down, and whenever it comes down you can hear the murmuring “Is this such a good policy for us to be pursuing?” But, so long as Paul Polman and his colleagues deliver returns that are adequate, he and the others will be in place. If they don’t, they won’t.
Frank: I look at it from a little different point of view. I look at the data from Europe, and what I find is the idea of collective benefit versus individualism. If you look at Spain, France, and Italy, you’ll find a relatively large number of co-ops where as in Northern Europe you’ll find that stock ownership seems to be the dominant model of ownership. In the US, you’ll find about 3,000 co-ops and 7,000 ESOPs. The key issue to me is the human side of the equation, which I’ll talk about a little later.
John: Which problem should businesses then focus on, income poverty or savings poverty, and why would one type of ownership over another be better at creating income as compared to long-term savings?
Frank: You have to look at the population with which you’re working. If the population is a low-income one, you have to focus on alleviating immediate pain. Probably co-ops are somewhat better at this than ESOPs because they put emphasis on their version of profit sharing which they call patronage.
If you look at ESOPS, there are three ways that people benefit and build wealth. First is through the contributions made by the company to the ESOP trust. Second is through the dividends paid on the stock that the employees own, and the third way is through the appreciation gained on the stock. Appreciation may or may not occur in a co-op depending on how it is set up.
Colin: I’d put income first. I think you have to get people up to a basic level of income before you can expect to start putting savings together. Of course, both need to be pursued in parallel. But giving people a decent standard of living has to be the number one priority. I want to illustrate this in relation to two of what I think are the most striking examples of how institutions have made a really big difference. Both of them come from within the financial sector.
One of them relates to mobile money. Safaricom, in Kenya, is the institution that has made such a difference. Through mobile money what Safaricom has done is to essentially bring financial inclusion to a massive proportion of the Kenyan population in a very short period of time. That has allowed them to provide mechanisms for effectively moving money around the country. For example, Safaricom allows transfers to take place whereby people going getting jobs in one part of the country can send it back to another part of the country where their relatives live. Remittance constitutes a large proportion of what’s done through this mobile money platform.
The second example is HDFC, the Indian bank which has helped villagers in rural areas to borrow money to finance development of their farms in ways that are affordable. The bank charges much less interest than the money lenders.
In both cases, at Safaricom and HDFC, what they do is essentially help low-income people participate more fully in their economies. Both of these companies provide products that are very important tools for getting people out of poverty.
John: Do you think that employee-owned companies effectively force people to save long-term?
Colin: I think there’s a lot to be said for that. I think the key element in terms of encouraging people to save is trust. In essence, when employees accept shares over receiving even more immediate cash from their employers, they are trusting the managers to do well.
The advantage of good employee-owned organizations is they create an element of psychological ownership that builds up trust in those organizations. Creating savings through employee ownership is one way to overcome a broader problem we have in our societies and in our financial system, which is a lack of trust.
Now regulatory bodies in this country and in most developed countries don’t think in terms of this element of trust. They think in terms of rules and laws. So they haven’t really turned to the issue of how one creates a culture that is associated with the development of trust in organizations. That seems to me to be the number one priority. If one really wants it to develop, thinking imaginatively about forms of ownership that are conducive to it like employee ownership schemes is critical.
Frank: Chris Argyris of Yale used to say, “If you treat people like children, they’ll act like children. If you treat people like adults, they’ll act like adults.” One of the things that many employee ownership companies do is they practice open book management. Before they open their financial books to employee owners, they ensure that their employees have financial literacy.
If you go back to what the John Lewis Partnership did, you’ll find that they have been practicing open-book management since about 1928. To me, this type of training helps not only to develop people who are financially literate, and make good decisions for the company, but also they will make more good financial decisions privately and will perhaps be more engaged in their communities.
John: I want you to talk about paternalism in the best of employee-owned and family businesses.
Frank: I have been into about 15 employee-owned companies, some of them just recently created. Others of the 15 have been around for 50 or more years. In the initial stages there is some degree of paternalism because they are trying to educate people and bring them up to speed. If you want to say that educating people is a part of paternalism, I’m all for it. But the role of a leader has to change as the people are able and willing to become more involved. Managers may start out as paternalistic. But, the good ones evolve toward more of a coaching role, more of a facilitating role. The role of leaders in a mature employee-owned company is different from the role of leaders in a start-up employee-owned company.
Colin: I want to start by picking up on the previous example you were giving of John Lewis. John Lewis, in 1928, set down principles by which the company should be run. Up until that stage it was, of course, a family-owned business. A key component to the John Lewis model involved establishing the principles through which employees’ interests were protected.
The evolution from family ownership to employee ownership seems to me to be a very important component to how employees were to be protected. In particular the part that I think has been critical for John Lewis is that ownership is held in the form of a trust. Trust embeds the notion that it is not just current employees’ interests that are upheld but future generations as well. There is no prospect of selling out and demutualizing for the benefit of the current generation at the expense of future generations.
If you look at another example, Mars, you see that in 1947 the family owners established the principles of mutuality that there should be a mutual sharing of benefits within the organization. In this case, through family ownership, you find the introduction of another form of employee participation. It doesn’t go all the way in terms of employee ownership. But, it goes in the direction of achieving some of the protections that trust-based employee ownership provides.
So, it’s this notion of trusting employees that is so important. Companies that trust in their employees seem to be more successful companies.
John: Do employee owners generally take better care of their environment and their community than outside owners?
Frank: One of my colleagues at Salisbury University has spent over 10 years studying agriculture in the Brazilian rainforest. This colleague was not necessarily studying within an employee ownership context. Her results basically demonstrate that slash and burn agriculture is counterproductive in the long run. It does give some short-term benefits. But, if you teach the farmers how to practice sustainable agriculture, they actually have a better income level. One of the other problems with slash and burn is that it is very hard to build any type of employee ownership cooperative model. You destroy the fabric of the community through the slashing and burning. Not only are you destroying the environment, you are destroying the community.
Colin: I think you’ve been proposing, John, an “either or.” I think it’s a “both and.” That is, if you really want to create a sustainable way of getting people out of poverty, it has to be in the context of sustainable organizations. Those sustainable organizations have to appreciate that destroying the environment is not a sustainable policy. Indeed, I think the most successful organizations in this area not only try to alleviate social conditions, in particular poverty but, they also try to address environmental issues and to do so in a sustainable way. So a lot of the programs we are looking at, for example the Mars program, are about “how does one increase the income levels of rural farmers through ways of improving productivity that enhances both social capital and environmental capital.”
John: I agree with you. Let me, though, change the topic to social entrepreneurship and social enterprise. Will you comment on this?
Colin: I think this is the most interesting and exciting area because, over the last decade or so, we’ve had an emphasis placed, not least at this business school, on the notion of social entrepreneurship and the ways in which social enterprise can address social problems and poverty. There is no question that they play an extremely important role and galvanize a huge amount of energy and enthusiasm.
The problem, though, is that both social entrepreneurship and social enterprise are incredibly difficult to scale. On the other hand we have had big organizations with huge amounts of capital available to them, much of which they don’t know what to do with. For the most part they really have not been engaging with the social change through business agendas.
What we’re beginning to see through organizations like Mars and HBSC is that businesses are beginning to appreciate that the idea of doing good is not inconsistent with doing well. On the contrary, doing good is a way through which big business can do well.
This new practice is not just corporate social responsibility. But it becomes ingrained in the businesses and the businesses utilize their resources to benefit other parties in a way that is also conducive to benefiting the businesses. That sort of mutual benefit offers the greatest potential for companies to make a really significant contribution to the scaling up agenda because it allows them to bring their resources to, for example, providing equity capital.
So much about what has been going on in the developing world has hinged around debt. We know precisely that high interest debt is not the way to get people out of poverty. But the big companies are in a position where they can actually bring equity capital that provides a real form of sharing the benefit that I think offers a far greater potential.
When we ask more broadly, “What are the mechanisms by which the good corporations can do even more,” what we are finding is that a lot of the good activity is based in building up relationships in communities. Partnerships with NGOs, national governments, and local governments are now common. These have not been the traditional partners of big business in the past. To address the ecosystems that are broken in communities and identify what needs to be fixed, partnerships are essential.
Frank: What I see employee-owned companies doing, and even small family-owned companies, is serving as incubators. Zingerman’s Delicatessen in Michigan is a 100% employee-owned company. They claim they are not an ESOP, some people say they are an ESOP. The bottom line is they have some form of employee ownership. They have expanded from just a delicatessen to where they now own eight businesses.
If you look at SRC, a company talked about earlier in the conference, they expanded from one enterprise to about 50 firms. If you look at Mondragon, depending on how you want to count, they have over 110 or 160 different co-ops. Mondragon itself is an umbrella organization and they even have co-ops creating additional co-ops. If you look at their organizational chart, it looks like a network of brain cells. Tendrils and neurons spiraling out from the center of this organization. People develop knowledge within the co-ops, they develop the skills within the co-ops, and then they expand outward and develop additional co-ops.
In fact, at Zingermans, there is no centralized control of any of the additional enterprises that have been developed.
End of day 1
Introduction to Day 2
John Hoffmire & Zahid Torres-Rahman
Zahid: Good morning everyone. I want to start off by thanking John Hoffmire and all the supporters for making this event possible. So, for those of you who were here yesterday afternoon, you witnessed John ask me this question in front of the whole audience: “Where do your beliefs come from, and how do they factor into your creating Business Fights Poverty?” I was thinking about this question last night a bit further and I think, it’s not likely due to one religion or one culture, but probably a mix of lots of religions or cultures which are unique to my family experience. My grandmother was Anglo-Irish and German. She went to live in India and ended up falling in love and getting married to a local. She was then disowned by her family for all her life, which happened about 30 years before interracial marriage was legalized in the US. So she was a real pioneer. My own parents fell in love and married across divisions, I was born just before Bangladesh, during a war between their two countries that created it.
In true family spirit I got married to a European, so I’ve kept that tradition alive of crossing divides. Three things I would like to talk about, briefly, from my own experience are these. The first is that I hold a deep belief in humanity; a belief in the basic goodness of people. The second is an idea that despite the differences that are apparent, we actually have a lot more in common than the things that keep us apart; because of this, many of us have a general desire to make the common things we share that much stronger. The third is the idea that we fundamentally have a need to be connected.
When I went into international development, 25 years ago, it wasn’t a big leap for me to believe that poverty reduction was important. I just didn’t know exactly what was going to work. But, specifically, we came up with the idea of wanting to bring people together across sectors and across countries to focus around one core vision, that business could fight poverty, if companies and supportive organizations did so on a collective level.
It was this seed of a thought that led us, over 10 years ago, to start Business Fights Poverty. We gathered people together from a diverse set of places: business, the NGO sector, governments, academia, etc. We started with just three people; we are now the largest network of our kind bringing together people for whom this is their job or goal. We work together to harness business for social impact.
One of the things we’ve done is bring together some of the most pioneering organizations in this space. You’ll hear from a number of them today: David Croft from Diageo, a representative from CARE International, and many others.
I suppose I have two issues on my mind now. The first are the Sustainable Development Goals (SDGs) that were launched recently. What really occupies me is how you turn those huge ambitious goals into reality, into action. The other thing on my mind, since I am a Brit living in a post-Brexit world, has been the rise in what seems to be the politics of division.
On the one hand, we have this big complicated set of goals around the SDGs. We have to deliver on these. We know that we can only succeed together. But, on the other hand, we have politicians and the media trying to drive us apart.
It’s an odd situation to be in. Our reaction, at Business Fights Poverty, has been to create what we call “Business Fights Poverty Challenges.” Essentially what we are trying to do is take that big set of SDGs and other goals and distill our responses to them into very practical actionable challenges that we can take action on.
The other thing we do is to make the act of collaborating much simpler and easier. Behind each of the specific Business Fights Poverty Challenges, which are identified by our community and various organizations we work with, we bring people together to work on that Challenge in a very specific time frame, say three months, six months, nine months. It is through this process that we are trying to make the world a better place in very tangible ways.
Poverty and Insurance
John Hoffmire: Thank you Zahid, I’d now like to introduce our first speaker of the day, Dr. Stefan Dercon. Dr. Dercon is a professor of economics here at the University of Oxford as well as the Chief Economist of the UK Department of International Development (DFID).
Stefan: Good morning. So I wear several hats, I’m an academic here at Oxford, I’ve worked on poverty and development issues ever since I was a graduate student. I am teaching now at the Blavatnik School of Government here at Oxford, as part of my work with the Economics Department. But, as John said, I’m also Chief Economist at DFID.
I want to talk today about some of the things I’ve been thinking of for quite a long time. In recent times, these themes have become really central and crucial. I want to talk about things related to disasters: big natural disasters and how we respond to them. We will talk about how business and the private sector can come into this in a moment.
Among the devastating scenes I want to describe, probably one of the most well-known is the Ebola Disaster. 13,151 people died, 99% of them died in 3 countries: Liberia, Sierra Leone, and Guinea. The outbreak started as Ebola outbreaks usually start, a couple of hundred people died. Usually, outbreaks of these types are contained at this point.
In 1976, we figured out what the virus was, and we thought we knew what to do with it. In February of 2015, the outbreak became known. It took until July, when thousands of cases had been declared, before an actual emergency was announced.
We now know, from evidence, the fact that we declared the emergency late, caused many more people to die. So, as a first step, we have to acknowledge that poor decision making related to these kinds of disasters can cost large numbers of lives.
A second disaster I want to describe is the recent earthquake in Nepal. The sequence, as described in the media, is almost always exactly the same as in the case with Ebola. First, there was breaking news on the BBC: big earthquake, lots of damage to all kinds of things, aid is on its way. Within a day we received appeals from Nepal that came into the international community for help. Within a week we had the UN launching a bigger appeal. In essence, the UN was saying to Nepal, “yes, the world is going to be with you, we are launching the big appeal.” The message to the world and especially the big donors was: bring all the money and resources and we will meet you in Nepal.” Within two weeks, a journalist started interviewing people in Nepal and heard them saying “aid is not coming through and nothing is being coordinated, it’s all very badly planned and there’s nothing happening here.”
In Nepal, in April, right after the earthquake, this was the story that was being told. But, in May, this was exactly that same story that was being told when further quakes happened. The initial response wasn’t too bad but the big decisions—such as about reconstructing vital infrastructure—failed to take place. It wasn’t until roughly December that the political leadership in Nepal made many of the decisions about how the disaster relief money was going to be prioritized and allocated within the country.
Even though there were 7,000 NGOs active in Nepal, even though 35 countries sent their flags to be planted somewhere in the country, this is the kind of response we got.
This set of experiences exhibited terrible preparedness planning. Think of all the earthquakes that happen in Nepal. For those of you who travel to Nepal, that’s what you’ve always talked about. The big one was going to happen. We didn’t know when, we didn’t know where exactly, but we roughly knew that it would happen, and soon. Yet, we weren’t prepared.
This phenomenon doesn’t just happen in developing countries, think of Hurricane Katrina. There was absolutely disastrous coordination between federal and state level government. They were fighting over who is in charge and who was responsible. No one knew who was in charge, nobody knew who owned the risk. No one knew who was going to respond to what. Nobody knew, and they fought over it.
If you read the reports given to Congress, you saw the detail about what happened after Katrina. It’s not just in developing countries that poor planning happens. It’s actually quite mindboggling that these mistakes happen in the same way in an awful lot of places. In fact, if we do the analysis, the symptoms are simple. Time and time again, there is little or poor preparedness planning.
If you read any evaluation report after a disaster, I can pretty much tell you what it is going to say: poor preparedness planning and lack of coordination. These will be the main messages.
After these disasters happen, people will comment on the fact that relief was slow to arrive. Relief was politicized. There was a lot of tactical decision making taking place. And people waiting for one or another nation or agency to come to the rescue.
“Is China going to come? Is India going to come?” These are the questions that are asked. And the responses, about who and what are always very fragmented. Many relief organizations all say that they are going to help. Despite all the positive promises, on average, a UN appeal that is launched will receive 43% of what the appeal asked for. Never will any appeal receive more than 60% of what is needed. So, what’s going on?
I think it is on the planning and the finances side where things go fundamentally wrong. If you wait until after the disaster has happened, and then you go and start appealing for money -whether it’s your local government having to appeal to the national government, or civil society having to appeal to your local government, or indeed NGOs having to appeal to the generous public and to generous governments, it is far too late.
It’s as if, in terms of financing mechanisms, we have not improved upon what was being used in the 12th century. It’s as if there has been no innovation in financial instruments and financial products. It’s as if the best we do is to rely on charity and begging bowls. That’s what we’re doing.
Assume for the moment that global infrastructure around aid and development is totally stuck in the 12th century. Despite massive numbers of people, all wearing their hearts on their sleeves, all going out of their way to help, it’s actually just fundamentally disastrously organized. So one of the learnings you derive is obvious.
If you wait until after a disaster happens to start planning, you are going to have a problem.
Just to repeat: you get strategic delays. You get: “let’s wait to see what other European countries are contributing.” You get only 43% of the UN appeals being fulfilled.
But, of course, one thing that I haven’t mentioned is this. Because everyone knows not all the money is going to come, you end up having attitudes where, “I better ask for more than I need.”
How is that for a planning process? How is that targeting correct response? How is that for being efficient?
One of the things that we do know, is that the aid industry, and associated humanitarian responses, are some of the most inefficient of all programs.
It is almost as if we can assume poor coordination. We can assume that everyone wants to go and plant their flag, even if they do so a bit late. We can assume that in a situation like happened after the Nepal earthquake, that thousands NGOs will show up and there will be little working together.
Is this the right way to respond to a crisis? I could go on and on and on. But, many of the things I would say would sound rather dreadful and depressing.
Let’s be clear though, a lot of good things happen. A lot of lives are saved. But, so many more could be saved. And so many more disasters could be properly dealt with if we planned accordingly.
Whenever we closely examine any of these natural disasters, we will talk about the hundreds of thousands of people who die. But we rarely talk about those who survived. Often, the children affected during such a crisis will be seriously malnourished and their physical growth will be limited: the children will be stunted, with lower height than a healthy person will have in adulthood. They might end up being 6 cm shorter. Does it matter to be 6 cm shorter?
Well, as a matter of fact, it does matter. It turns out that someone who does not grow properly has about 16% less lifetime earnings in an economy where basic strength and power are important.
it is not just about physical strength: 6 cm shorter also tells you something about brain development, as well. Stunted children have less brain development and with less brain development, you can easily understand the knock-on effects that will be felt in the schools, in families, in social support organizations and in other places.
These are some of bad outcomes that follow from our poor response to disasters. That said, there is also much to be learned about what we can do better.
I mentioned earlier that sometimes it seems as if we haven’t learned very much about disaster finance since the 12th century. I might have exaggerated a little, but just a little. In terms of credit and insurance, there was not much sophistication back them. The most common response then if something bad happened was to rely on your savings or to beg. There wasn’t much credit or insurance. Probably the first insurance company was the one formed in 1669 after the great fire of London. So, fire insurance may have been the first insurance product.
Think for a moment about what an insurance contract is. One of the great aspects of an insurance contract is that you sign it before you have a disaster. If you sign an insurance contract, you don’t start begging for money afterwards, you think about and plan for the disaster before it happens. As a contract, it is a credible commitment. The contract says: “If this thing happens that we will define together, you will do this and I will do this, and that is it.” It basically creates an opportunity to have a deal. To go a level deeper, some deals say: “Look, we will give an incentive for risk reduction. You can also get further price reductions for your insurance (or incentives) for clarity about who owns what part of the risk.”
In such a contract, it becomes very clear who is responsible for what, and what the nature of a response should be. It creates the incentives to actually set yourself up ahead of time, before there is a disaster. A contract basically gives you clarity. Insurance is the simple way of saying that “we live in a world of uncertainty. You know that this will happen when something defined that is bad happens.”
So, the question is: how do we bring insurance to very poor regions of countries like Ethiopia and Kenya?
It doesn’t work in Somalia if you sign a standard insurance crop contract that leads you to put in a claim after your crop has already failed and you get some money. By then, you might have starved in a drought. The thing is, in recent times, very different and innovative contracts, parametric insurance contracts, have emerged that can avoid these costs and delays of having to assess—in slow time—the losses. What are parametric insurance contracts, sometimes also called index-based contracts?
Basically, they lead to pay-outs that occur when easily and objectively verifiable facts act as trigger events. For example: rainfall has gone 10% below average or 30% below average. Another insurance contract might pay out in the case of an earthquake – but only when the Richter scale reaches 6.8 or higher.
It is important that when these types of contracts lead to pay-outs triggered by the required event, you, as a victim, can get very, very fast treatment. This is why the trigger is a shortage of rain, not the failure of the crop. When the triggers are activated, people need to get their money very quickly on the ground. The response needs to be handled properly—giving people resources to buy food or rebuild their homes or schools. Over the recent decade, many of us have tried to create such products and sell them to those at the bottom at the pyramid to ensure they are covered when disasters strike. Unfortunately, this move to create micro-insurance markets to deal with crises and targeted on the poorest has been less than successful.
The problem is this. These types of insurance contracts, targeted on poor people, have been tested, and proved to be totally disastrous. This type of insurance doesn’t work, unfortunately.
To create good insurance programs for poor people is incredibly difficult. I spent a lot of time doing micro-insurance programs; these are insurance programs targeted at poor people and thereby often covering relatively small values. They are typically “micro” in another way: relatively small scale for specific target groups. I just don’t think they are going to work at scale.
Don’t get me wrong, there are some brilliant micro-insurance programs. But the real problem we have, when we try to bring insurance to poor people, is that we would like full coverage, because these are really poor and vulnerable people. In reality, though, we never get more than 15%-20% of coverage for people. Poor people don’t buy these products. Insurance is complicated.
If I were to do an evaluation of all the insurance products that you own, I would probably find that you are buying insurance that is short in protecting you against the risks you’re facing. Most people buy the wrong insurance products.
So, how can we expect the poorest people to actually go and buy the right products? It turns out to be incredibly hard to get the right products on the ground for poor people. So, as a result, we have two problems. First, often the insurance is not structured correctly because we can’t offer people something that is affordable and actually has full coverage attached to it. Second, even if we think we have created something that is affordable and actually has full coverage attached to it, poor people still can’t afford it. Nice idea, but it is really hard to sell insurance to poor people.
That is what the research is telling us. Honestly, it is frustrating that the micro-insurance programs are not working out as a means of covering the poorest. But, that is what the research is telling us.
Meanwhile, some other advocates have been saying, “Maybe we don’t insure the peasants, but why don’t we insure the governments? Why don’t we have private insurance for governments, so when something bad happens they have money and can start doing things?”
Alas, we have another problem here.
I was talking to the former minister of finance from Ethiopia and he said, “Look, don’t talk to me about insurance because I have on my desk a pile as big as could be from every single insurance company in the world that has been trying to push me to buy a policy for any imaginable risk. They sell insurance for all risks that I don’t even know that I’m facing. I don’t know what the risks are that I’m facing, and I’m still getting offers for everything from oil hedges, to drought hedges, to rainfall hedges, to earthquake hedges, and so on. I don’t know which one to buy, this is really complicated.” Even for sovereign governments, insurance is really complicated. So government insurance is another part of a tricky equation. It’s not quite working.
So let’s take a step back again. I work for the state now, I work for government. How can we actually think about getting some of the best of these ideas into practice? We know that not every insurance product is going to work. But, I do believe that it is valuable for people and/or governments to buy the best types of insurance.
If we disentangle what insurance does, it probably does three things. It has something that incentivizes a clear decision-making process. The contract makes very clear sense about what it is going to pay for. And it incentivizes planning ahead and good decision making.
It would have been so sensible, in Nepal, if the government knew beforehand the list of priority infrastructure to ensure they were to be repaired if a bad earthquake was to strike. This knowledge, when it exists beforehand is so helpful. It makes so much sense to know what you are going to do if this school is destroyed, or that bridge falls down, or that road falls off a cliff.
In a disaster, it doesn’t help when some someone says: “Everything is destroyed, we need to do everything.” It does not work when you plan this way. You want to have a clear prioritized plan.
This helps you as a minister in another way. If we know ahead of time about priorities, we can say, “these are the target groups that we want to make sure to reach first and support.” Then, we have a clear sense who is protected and we can make it clear what is not going to be covered. A good insurance buying process and a good contract would help you to specify these types of things.
So, this is what we are trying to promote. It’s very hard, but there are a number of countries really buying into it. Actually, even in the UK, we are buying better insurance than we used to.
I realize that I am being a little bit repetitive. But, the lessons are worth repeating. First, it is better to prepare for shocks before they happen, rather than respond to shocks after they occur. Second, let’s do productive risk management by identifying risk and getting incentivized risk reduction pricing. Third, encourage businesses and households to take protection for themselves, but be very clear what you are expecting them to do. Fourth, encourage local and national governments to buy the right coverage and the right financial instruments to actually make sure they are covered for the things they need to be covered for. In addition, make sure governments buy insurance with fast triggers and clear pay-outs. Let me give an example.
Mexico is a country that has done enormously well with this. Mexico has earthquakes. In 1985 Mexico City was destroyed. The political party, PRI, really got in trouble because they did not have a good plan before the earthquake. They lost a lot of political power because of the losses and the blame game that ensued.
The parties that won power in the subsequent election said, “Let’s make sure we set up a proper system so that our public infrastructure is properly protected from earthquakes so that we can have a quick rebuild.” These parties helped set up a private public partnership, and it works as follows: 1) They have very clear lists of all the key infrastructure; 2) Local governments know exactly what the federal government will do in case something happens; 3) They know not only what will be protected, but what will not be protected; 4) Businesses are informed of exactly what is protected and what is not, this allows them to take appropriate policies; 5) It’s very clear who owns the risk; and 6) There is a clear timeframe that is identified regarding when, and how infrastructure will be rebuilt.
Research found that this works and provides good incentives: compared to the counterfactual of not getting this support after a disaster, this type of insurance appears to have added 4% of GDP in the localities affected.
How do you do establish good insurance plans? How do you set them up?
You bring in all different kinds of people together: the bureaucrats, the insurance companies, the business community and the scientists who do risk modeling. You bring people who will be on the ground cleaning up after a disaster, you bring people from the civil society. You bring the political leadership from both the national and local government. This helps the prioritization process.
With everyone involved, you can make a very clear statement about what the risks are, what is being covered, and what is not. This process helps you to decide what should be covered by the public system, and what should be done privately.
In Turkey, this partnership appears to be working well for earthquake insurance for housing, as a part of a public-private scheme. The government have been very clear on what they are covering and what they are not covering. In the UK, our government has done something similar related to flooding, in Flood-Re. For housing built a long time ago in flood plains, the government now, together with industry, will cover some of the costs. Newly built houses in flood plains won’t be covered. There’s no moral hazard and it’s a partnership between private and public sectors.
So these are some places where the opportunities can be found to use insurance effectively. We are in the process now of being able to build more of these good kinds of systems rather than having slow politicized tactical decision-making processes that come with terrible preparedness planning and end up relying upon the begging bowls.
In some cases we have learned to rely upon clear triggers: earthquakes that reach certain levels on the Richter scale, flood indexes, water levels, climatic data, all the things that risk modelers and risk modeling companies use brilliantly.
With all this said, remember what the former Minister of Finance from Ethiopia said. He needs to be able to trust that he will not just have another insurance company trying to sell him a policy. To make this work, we will need to make sure they get good advice, that they are protected against poor sales practices and more. It is crucial that we give honest advice, working with the industry.
We can avoid natural hazards turning into human disasters. We can learn from insurance principles to organize our responses better. We can also use insurance to ensure that these responses are financed. Governments and private companies should work together that the poorest people are much better protected.
There is much more to be said on how to make this work, and what problems we still need to overcome. I wrote a book about this with Daniel Clarke, called Dull Disasters: How Planning Ahead Will Make a Difference. Thank you.
Abdulrahman Al Dabal and Alex MacGillivray
John Hoffmire: Abdulrahman Al Dabal is a prominent businessman in Saudi Arabia and has diversified investments in firms providing solutions to oil and gas, water, energy, petrochemical, construction, real estate, transportation, insurance, healthcare and food industries. He holds a degree in Business Economics from Ferris State University and an MBA from King Fahad University of Petroleum and Minerals. Abdulrahman has business interests in a number of countries.
Alex MacGillivray is Director of Development Impact at CDC, the UK’s development finance institution. Alex’s background is in sustainable development, competitiveness and business strategy. Before joining CDC, he held senior positions at AccountAbility and the New Economics Foundation, and has worked with a broad range of businesses, governments and non-profits. Alex has developed and embedded evaluation and management systems for innovators of all shapes and sizes around the world, particularly in emerging markets, and he has a keen interest in low-carbon innovation.
John: This particular panel is about creating employment. I think this is one of the greatest things anyone can do, to create a job. Please welcome Abdulrahman Al Dabal and Alex McGillivray. Will you both describe your institutions for us in two minutes?
Abdulrahman: Good morning, ladies and gentlemen. Basically, I work for my family company in Saudi Arabia. I went to school in the States. When my father passed away, I went back home to take care of his business, which was in construction and real estate. But I had to come back to finish my degree, which I did and then returned to Saudi Arabia again. My first venture started out of curiosity. When I was in my MBA program, a famous and prominent banker came to recruit us at the end of the year. He was telling us how good his bank was, and why we should work for him. It was interesting because I had already worked for my family business, and I knew all his colleagues, and I knew their paychecks. So, I asked him, “What is the package you are offering us?” and he refused to answer. I kept asking and he kept avoiding it. After the session he learned from his colleagues that I was very familiar with his business, so he called me to chat. After three years, he recommended me to be a partner at a regional franchise of Budget, a rental car company. We started that company with 10 cars; today we are public and have 32,000 cars on the road.
Alex: I’m with the CDC Group, the UK’s development finance institution owned by the Department for International Development for the UK government. The acronym doesn’t stand for anything now but it used to stand for the Commonwealth Development Corporation. The reason it doesn’t stand for Commonwealth anymore is because, since 2012, we have only been mandated to invest tax payer money in Africa and South Asia. Unfortunately, not the Caribbean!
Essentially, the company was set up in 1948 and the original goal was to help bring more food to Britain as well as to help develop the colonies in the post-war period. At that time, we in a position where there was still rationing. Returning servicemen couldn’t find work. There wasn’t enough food, so the idea was, help food production along in the colonies by investing in businesses in those nations. Once the food was produced, import part of it to the UK.
So, our projects and our orientation have changed substantially over the last nearly 70 years. These days, we invest in growing businesses in Africa and South Asia. The mission of the organization is, in fact, to grow businesses so that they can create good jobs. So we have job creation at the core of the organization. CDC itself is quite small, we have about 180 people although I’m very proud to say that I’ve created two jobs just this week in my little department. Our area did have two people and now we will have four people on our team.
John: Will you talk about how it feels to create jobs on a regional level in Asia or Africa? What does it mean to you personally to do that?
Alex: I love hiring people and I love interviewing people, particularly if you have a great job for them. So I always find that a privilege.
Thinking back over the businesses I’ve worked with in my career, it seems to me entrepreneurs absolutely love creating jobs—until they get to about position number 49 in their business. Then, position number 50 might be an administrative or advertising function. The entrepreneur didn’t ever imagine that type of job creation. But, he or she had to in order to grow. I’ve noticed with a lot of startups that you can track their progress and they take team photos when they have 12 employees, particularly if they get bought by a big company for several billion dollars. Then, they continue on and make t-shirts for everybody up until about the size of 50 and then it gets quiet. All of the sudden, the organization changes and the entrepreneur starts to worry about space, headcount, wages, and retention. You don’t really hear about how many people work for Instagram anymore. You heard a lot about them as they were reaching 50 employees.
So I do think there is huge pride but a diminishing personal return to job creation as a business transitions from small to medium. I don’t know whether that has been your experience?
John: Abdulrahman, how does it feel for you?
Abdulrahman: I have been very lucky to have personally been in so-called “developing” countries to recruit people. It is very interesting to see the level of poverty in these places and then to try and see what you can do. This can be especially true when you come from places like the UK and other so called “developed” countries. Seeing places where they don’t have enough basic amenities like electricity, or where the transportation is maybe an animal and a carriage behind it.
You see so many individuals ready to work, and hungry to put their skills to use. The impact employment has in these places is substantial; often, by offering a job, you are helping people secure the basics like access to food, electricity, safe water, and shelter for their families. I think this makes creating employment in these regions particularly satisfying.
John: Will you both talk about the tension that exists in this context. I’m sure you’ve both had the experience where you were traveling in developing countries, you were staying in nice places, and you were eating safe food. How does it feel to know that you are probably going to be okay, when you wonder whether the people you are trying to assist are going to make it through the day?
Alex: Well that’s really on my mind at the moment. I just got back from Bangladesh. There were several things from that trip that struck me. The first question I have is about how strong individuals must be to observe Ramadan, which is pretty difficult to do this time of year, when an observer goes 18 hours without eating or drinking water in a hot place? I was amazed to see factory workers, and construction workers observing Ramadan.
The investment I was specifically looking at was in the textile sector. There has been a lot of attention on labor standards in the garment sector over the last 10 or more years. It’s interesting, one of the four factories we visited has 4,000 people and 2/3 are women. Related to pay, there is a regulated minimum wage in the textile sector that is pretty low by our standards, but it’s pretty high by Bangladesh standards and there are a lot of sectors where there is no minimum wage.
Ceramics, for example, does not have a minimum wage. If you can get a job in the textile sector, the pay is considered better than most. It doesn’t stop people from protesting. There’s lots of activism. The week I was there in the country when three people were shot by the police for protesting the overtime they were legally entitled to at another factory.
So, it is dangerous working in these factories and standing up for your rights. The turnover in these factories is quite high. People can leave and do leave. However, talking to the HR people in the factories, one of the things I found really interesting was how many women return to work after taking maternity breaks.
It used to be the case that women wouldn’t return to work. You’d do a couple of years and then you’d start building your family. These jobs are now so highly prized that women come back and often return to work after starting a family.
One big challenge is that the wages in the Bangladesh textile sector are roughly double the comparable rate for workers in Ethiopia. So factory owners are now looking to Ethiopia because labor is half the cost and there are no tariffs on jeans going to the US. So, even Bangladesh is not the low-cost destination for investors now. That gives you a sense that globalization hasn’t finished yet, there’s a long way to go.
Abdulrahman: Bangladesh is definitely an interesting country. I went there when the per-capita income was $120 per year. Most of us can’t imagine $120 being our entire income for the whole year. There are some that spend this much in an evening for dinner. For the companies present there, questions have been raised about whether they are doing enough to alleviate poverty. There are ethical issues that have been raised around employment and low wages. I think awareness needs to be raised around the exploitation of workers in these regions, as well, when having this discussion.
John: Will you talk about other people who you know who have created jobs? What kind of appreciation came back to those entrepreneurs?
Alex: Yes, the person I’m thinking about now is in Tanzania. My answer is not so much about how someone was appreciated. Instead, I am going to answer from the perspective of how much I appreciated what someone was doing and could do.
We have an investment in a commodities business in Tanzania that started off importing food into East Africa to deal with a natural disaster some 25 years ago. The company gradually moved over to working with smallholders in Africa to export pigeon peas to India to make dahl. It was a success story in terms of turning East Africa from a recipient of aid and food into an exporter to Asian markets.
This commodities business has a big warehouse in Dar es Salaam and, while I was looking around with the managing director of the factory, I asked him how many women worked in the warehouse. You would think that this would have been a very male dominant workplace. The temperature was high, and people carrying heavy bags of lentils and such. He told me he had seen a large increase in the proportion of women working in the factory.
Then, I asked him how that went and if that impacted on the productivity. He said on the contrary, it led to the men having better behaviors and he was quite expressive about how the men had changed. He noted that, before the women started working there, men were not using the toilets in the factory. This stopped once more women had started working there.
Then, I asked him if he employed any disabled people, and he said “I’ve never employed any disabled people, in fact I’ve never been asked if I have employed disabled people and now that I think about it, I could certainly employ them in security and logistics and in bookkeeping.” The striking thing to me was that walking around Dar es Salaam, you see a lot of disabled people.
So sometimes just asking questions can put an idea in people’s minds.
Abdulrahman: It is very interesting now, when you go back and visit, you see that indeed there is development in these countries as global connections are made and grown. Moreover, the companies are offering some good training to the people who get hired. This naturally helps their families. As workers are better trained and are better paid, their children go to better schools, get better medical facilities, and their socio-economic level rises.
The question about whether or not these opportunities are available to disabled people is an important one.
John: I want you to think about a child or a group of children from one of the countries you’ve talked about how life was better because of one or more family members getting a job.
Alex: In the Democratic Republic of the Congo, we have an investment in a 100-year-old oil palm plantation that was originally set up in awful conditions in the early 1900s, with concessions from King Leopold. I could say several things about the vestiges of early colonial experiences, but I won’t.
Anyway, fast forward 100 years and the plantations were kept going by a group of Congolese managers through the civil war. They worked through this period with no pay, in very remote locations. So the company was barely functional when some private equity investors took a stake in it. The CDC, later, supported the company when they ran out of money.
So, there are three plantations. In each, there are, let’s say, a thousand people who are employed by the business. The average family associated with one of the plantations would typically have eight dependents per household. In the rest of the community, surrounding each plantation, you can assume, there is almost no other formal economic activity.
Each of these communities is probably made up of 50,000 people living together. If there are a thousand employees associated with the business, then you have about the same number again of contractors. Everybody else is in the community is, in one way or another, dependent upon the plantations.
The interesting thing about the people that work for Feronia, the business, is that they have big families. So the impression that you get is one of going back to the 1960s Africa. Average family sizes are now smaller in other communities. The fact that family sizes are so big around the plantations makes me feel somewhat worried for the future.
Nonetheless, this is clearly a community where having a job is very valuable. These jobs are situated in one of the poorest countries in the world. So having a secure job enables you to care for five or six kids, perhaps more.
For the time being, that is a positive indicator. 18 years from now, a child born in one of the planation towns is going to be entering the job market. If the economy of these towns is still dependent on these singular businesses, there is going to be trouble.
On the one hand, there will be pressure to create more jobs through the plantations. On the other hand, the business will probably have mechanized over the next 18 years. So there will probably be fewer jobs at these plantations 18 years from now. So in addition to safeguarding the existing jobs, a major challenge is to help these remote communities diversify their local economies.
Abdulrahman: I want to talk about two siblings, one boy and one girl. They are the children of one of our employees. The man I am talking about is from India and he started as an administrator in middle management. He has grown with our business and is now the Assistant Vice President. Six years ago, our company’s COO called me and said that the family of this assistant to the VP are having a celebration for one of their children. They told me that his son had been named the best in mathematics of all children his age in Asia.
He ended up winning the regional championship in Singapore. So I went to the celebration and brought him a gift also.
I told the father “Now I know I picked the wrong guy, I should have chosen your son.” Anyways, two years later it was his daughter who won the same honor. So both of them, the boy and the girl, were the top two mathematicians in Asia.
To me, the feeling was terrific. It is really about the family and what they accomplished. But, I know that the job my employee has is important to him. Partly because of his job, he was able to raise his children to perform at these stellar levels. I am sure that it is incredibly rewarding for them. But, it is also rewarding to me.
A few years ago, we were in a meeting in Boston. The same gentleman I just spoke about was with us. He met my children who, at the time, went to school in Boston. It turned out that he was asking me about the schools. I asked him why he was curious, and he told me he was thinking of sending his children to study in the States.
A while after, we were talking and I found out that one of the kids was accepted to Stanford’s summer school program the year before. This was a huge success for one of our employees and we were happy to be a part of it.
John: Alex, you prompted me to think about a conference I was at maybe 9 years ago, oddly enough in Boston. The topic was business and poverty. We spent two days talking about the problems. On the last day, in the last hour, literally in the last minute, the most senior of the professors from Harvard raised his hand and whoever was moderating called on him. The professor said, “I just want to go back in history a little bit, and look at the role of some businesses, especially in rural areas in the US. Many of these firms created what were called the “company towns.” In a company town, an employee might work in a mine, shop in the company store and they might pay a huge percentage of their salary just to buy their food.” He said, “Things are changing. After listening for 2 days, I wonder whether the company town isn’t something we will see more of in the future—where education, healthcare, senior services are all provided in these company towns.” Does this concept of a “good company town” make any sense to you, Alex?
Alex: I think it does in the case that I mentioned. It is rare for CDC to invest in very remote locations. Because of our mission of job creation, we found that investing in projects in the extractive industries are capital intensive and therefore there’s less opportunity for employment generation. We believe that investing in urban locations: industry, health, education, power and financial sector will create more and better jobs.
John, there are several potential opportunities with what you just mentioned for “company towns” in remote areas. In the DRC case, health clinics are provided by the company and there is no alternative to them. The company also provides stipends for education. Education is provided by the state but you have to pay for it, it’s not free. So the company gives employees a certain amount each month if their kids to go to school, and that money pays for education. So I do think there is a benign version of the company town concept that can work.
I think, in urban areas, the interesting question is this. When workers start getting higher wages and have some discretionary income, how do they spend their money? In our impact measurement work, we spend a lot of time looking at this question. We also ask and try to answer whether there is, what we call, second order job creation?
These days, when firms grow their direct workforces, they are also, often, having to pay people more to retain talent they have. Many of these people leave anyway. If you want job creation, then you’re going to have to be looking a bit harder for it because you won’t necessarily find it on the payroll. You’ll find it on the knock-on effects of the supply chain and in the wages and in broader community influences.
John: We talked a fair amount yesterday, during the first day of the conference, about employee ownership. Let’s say we added this employee-ownership component to the company store question I just raised. Let’s assume a rural non-extractive industry, let’s say it is an agricultural company that provides services to their employees and the families: education, healthcare, senior services, etc. Can you imagine something like that working?
Alex: CDC in London is based in the same building as John Lewis Partnership, so we hear a lot about the benefits of that partnership model. We also have a meeting room named after the Kenya Tea Development Agency. That is a company that is in part owned by smallholder tea farmers in Kenya. It appears to be a very successful model and has endured for decades now as a company. Before that, the farmers were part of a government run program. In any case, there was a point in 1980 when 1 in every 10 cups of tea drunk in Britain came through KTDA, so we’re very proud of it.
So I think, yes the model worked, it definitely worked 20 years ago. It might still work now in some cases. It certainly works for John Lewis.
John: I think one of the interesting questions about impact investing is: “Who’s going to buy these companies that have impact now?” I think if the employees buy them, they will be impactful for longer. If they’re just flipped to other private equity shops, I’m not sure the impact is going to stay. Abdulrahman, I’m wondering if, particularly in the petrochemical industry, you’ve seen some of these types of company towns develop out where the oil is. Have you seen examples of where people have better lives where many of these services were brought in to take care of children’s education, healthcare, senior services?
Abdulrahman: Yes, definitely. In Saudi Arabia we have two sample or idea cities that were created by the government, through the Ministry of Industry. These were fishing towns, small towns—previous to the construction of the petrochemical plants. There were no industries there, no available housing.
The government created petrochemical industry bases in these places and when they opened, the employees who worked for these industries had to come to work from nearby cities. One of the plants was an hour and a half away from the city by car. It was difficult to live there or to spend the weekend there because there is nothing in the region where the industry was based. Those who did settle there didn’t have colleagues; they didn’t have anyone to mingle with. For families, there were no schools.
Now, the population has grown so large in these two cities that you find a lot of schools, a lot of housing, and a lot of different industries. There are currently second and third phases of the city that are developing and you see now that the whole area has changed. People have started traveling here to use the beaches, they have developed the city well for shopping. So it is amazing how development can change the way a region contributes to society.
This is one set of examples that we have in Saudi Arabia, and they come directly from the petrochemical industry. But, this set of examples has nothing to do with employee ownership.
First Audience Question: We’ve seen time and time again how large corporations hide behind corporate social responsibility at the expense of vulnerable communities. The oil sector in Uganda comes to mind off the top of my head. What is the role of governments in ensuring corporations follow through on their stated values around corporate social responsibility?
Alex: I can’t talk firsthand about the oil sector because CDC doesn’t these days invest in the oil sector.
One area where corporate social responsibility has become a bit more impactful is in Saudi Arabia. In Saudi Arabia, it is known that not every company employs women. In 2009, I worked on a project with the investment authority of Saudi Arabia and the King Khalid Foundation, and it was a kind of CSR initiative which tried to get companies to think about their responsibilities.
One of the questions we were very insistent in asking the companies was about what their position was in terms of employing women in the direct workforce. We got some pushback as you can imagine.
We worked with National Commercial Bank, NCB, and at the time they found that about 5%-6% of their workforce was made up of women. Just by asking the question and by having a competition, we made a difference. Part of it was that we handed out prestigious awards to businesses that performed best.
So NCB now has 15% women. So, it’s still very much unequal, but they have tripled the number of women in the workplace in a 5-year period. I think that could be considered dramatic progress.
As a result of this experience, I’m not so negative about the benefits that can come from incremental approaches. The fear I have is in India, where they have a government mandate that 2% of profits be spent on corporate social responsibility. My feeling is that, at the moment, there is a feeling that this is something they have to do. In processing the 2%, they’re not really strategic.
As a result, it’s typical for an Indian company to support half a dozen initiatives, including a sponsorship of a local football team, and a bit of this and that. None of these things are wrong in themselves, but they are very often not connected to the core capabilities of the business. They aren’t participating in the types of projects that are being discussed at this conference.
Abdulrahman: I think we have in the audience a Saudi woman that works in the Saudi Arabian oil industry. I would like to have her say something. It would be better for her to speak than to have me do so.
Answer From Audience: When they first started employing women in Saudi, it was very difficult for many to accept. The government incentivized companies by giving them two credits for every Saudi female that gets employed compared to one credit for every Saudi male. The credits were tied to a financial scheme. That is how companies were encouraged to start employing females, and how the government incentivized the process.
The Business/Poverty Message
Rupert Younger and Don Barden
John Hoffmire: This is a bit of an unusual panel. I think communication is so important. Understanding things like reputations and how to communicate reputations are really important. We have with us two of the best people in the world to talk about these particular types of themes. Neither of them focus on poverty as a huge part of their work, but both come from professional backgrounds that help us to better understand how to communicate the business/poverty message.
Rupert Younger is Director of the Oxford University Centre for Corporate Reputation, which he founded in 2008. He is a leading commentator on reputation matters relating to corporations and institutions around the world. He has over twenty years of experience in financial communications, working with major UK and international companies on their financial communications, investor relations, and reputation engagement programmes. He is a specialist in international IPOs and M&A, having led many of the Finsbury Group’s major transactions.
Don Barden is a classically trained economist who earned his MBA in Global Technology Management and International Business with an undergraduate BBA in Economics and Finance. He is currently completing doctoral studies and is ABD with a PhD in Finance. He resides in Atlanta, Georgia and focuses on international business affairs and the “business of business.” Don specializes in creating global “servant leadership” within corporate and other organizational cultures.
To understand what types of messages we might want to send to business about poverty, I think it’s important to first understand what people in business tend to prioritize. What do you think drives their decisions and how does this influence the ways in which they think and act around issues of poverty?
Rupert: It’s tricky to generalize. I think if you look at it from the perspective of organizations, the history of the way in which firms have been governed and constructed would lead to a sense that part of the problem is stakeholder dominance. The ultimate owner of a company, the shareholder of a company, has had a much more dominant stake in the way business organizations have dealt with problems like this, or contextual issues like this. The profit motive tends to dominate in the balance between different stakeholder relationships.
That having been said, I’m going to be a little bit more upbeat about what I think is changing. I think that concept collapse has made it harder for companies to only focus on profit. By concept collapse I mean the way in which 20 or 30 years ago organizations could parse out the different stakeholder groups and deal with them individually. They could deal with employees, customers, investors, and so in a way they could diffuse the issues around social issues of inequality and poverty.
I think this concept collapse which I’m referring to has made it much harder to do that. That’s a positive development. I think investors and owners are starting to understand that the way in which you behave with all the different stakeholders actually really matters. It matters not necessarily in an immediate financial context. In fact, in the immediate financial context, focusing on the poor might be negative for your company. But, over the long term, you might build brand loyalty through being seen as a company that cares about low-income people.
John: So I work enough with Rupert that I can ask him really hard questions and he doesn’t mind. So let’s take McDonald’s as a case here. Think through exactly what you just said in the McDonald’s case with us. Low-income workers, potential strikes, negative publicity created by food that is not all highly nutritional—these are some of the issues they face. How do you think through those types of things as a corporation like McDonald’s?
Rupert: I think what I’m saying probably relates rather well to McDonald’s because if you take a look at what has happened since the new chief executive, Steve Easterbrook, came in, he has prioritized a much more engaged stakeholder approach. He doesn’t just have this idea of “it’s profits above all else.” He’s worked through a series of initiatives on workers’ rights, he’s worked through a considerable change in the way the governance of the company is organized. Smart companies understand that it is in their interest to balance stakeholder relationships and stakeholder requirements and that’s a slightly more positive environment than we’ve seen before.
Don: I agree wholeheartedly. The intent is to find out who the company is, not exactly what they do. McDonald’s, for example, is one of the world’s largest real estate companies. They fund that through selling hamburgers and French fries. Imagine if you owned every corner of every exit of every interstate highway in the United States, and most of the world. You would have bought some great assets if you had done that. So, you have to ask who they are and what it is that they really do?
About 20 years ago, I was funded by one of the world’s largest companies at the time, it was the 19th largest in the world. The question they asked me to research was really simple: What makes elite performers in the world different than everyone else? We were fortunate to really answer that question by discovering that it is really all about mindset. The “who” for themselves is different, radically, from everyone else. We used to use the term the “elite 1%,” though now the 1% brings a different thought to mind.
I can tell you this about the top 1% of the performers in the world; the “who” of who they really are, is dramatically different from everyone else in regard to their mindsets. The mindset of those top performers in any business or leadership role, is that they are out there to serve others. Everything they do from a corporate position down, is about servitude.
What they do is sell hamburgers, or chairs or desks. But their purpose is to serve other people. How does this reflect back on poverty?
If you want to eliminate poverty, stop studying poverty. Study what the other end of the spectrum does and figure out what makes them radically successful and create an environment where people that are impoverished can get to that level and mindset. In other words, teach the poor an alternative mindset. That mindset is about serving others through your full, God-given potential.
We were talking before the session started about the enormity of this conference, and I celebrate your willingness to embrace such a subject in just two days. The answers, though, really boil down to mindset and communication, and their ability to serve other people. It really allows something to happen within people, organizations, and communities that separates them from everything else. So, the mindset of servitude and understanding that “who” you are is different from “what” you do, allows you and others an enormous opportunity to make an impact.
John: In addition to servitude, let’s say that we want self-reliance to be one of the main messages. How do we share that message in an effective way?
Don: I think Frank said it yesterday when he was talking about his work in Detroit. He created a safe environment.
When a safe environment exists, people are allowed to be who they really are. They’re allowed to be creative and feel the need to go out and push themselves to do something differently. I think in a lot of cases of oppression, the key to being a successful dictator or tyrant is to take away people’s opportunity, and create an unsafe environment so they have to lock down and get into a protective mode. When Frank was talking about how he brought the gang leaders together, he said they would only set the place of the gathering 15 minutes before they were to start meeting. This was all about creating a safe environment. When they were in that safe environment they opened up and talked about what they wanted and who they wanted to become. The opportunity to create a safe environment and allow people to be who they really want to be, gives people permission to be their best.
Rupert: I think that’s really important. I’d add that the interesting question that arises from this is: “How do you change people’s expectations about what they’re able to achieve?” That’s a really critical question and it’s a question that has occupied minds for hundreds of years. This idea that you’re constrained by the fact your forbears, your community has always done things in a certain way, or there’s a limitation in terms of the ambition you can reasonably achieve…it is something which is very difficult to break out of.
In the end, what’s more realistic is multigenerational change.
Don: I agree with Rupert 100%. The impact of a generation lasts for six to come. Whatever you do and whatever you believe today, is going to be passed down. So the flip side of that means that part of you today is a product of your parents, your grandparents, your great grandparents, etc. I always joke that the only thing worse than being born in the Great Depression in the US is being born to parents who were born during the Great Depression, because it still affects them.
My 80-year-old parents still struggle with this every day. They live in a world of scarcity even though that world is long gone. I realize part of their mindset has been passed down to me. Sometimes, in my decision-making processes, employing hundreds of people and working all around the world, I’ll find myself stuck in that trap sometimes. I have to consciously break out of that trap.
My wife and I made a conscious decision that, in our communication with our children, we won’t encourage them to feel there is scarcity. We will consciously break the chain and teach them that it is about abundance, creativity, serving other people, and knowing that you don’t have to feel restrained. So mindsets last for a long time. It is very difficult to break out of a mindset. But, if you make a conscious decision to recognize that you are restrained by a mindset, you can break that going forward, you can make progress. How you do that on a mass scale is more difficult. But, it can be done.
John: I’m not a cynical individual. I’m able to work hard because I’m optimistic. I’m also incredibly aware that in certain countries you can go out and poll people and ask, “Do you think your kids will be better off than you are?” and they’ll come back in a majority and say “no.” How in those nations do we kick start this process of helping people believe that being generous will actually help make their lives better as well as the people they might want to serve? I want you to be a little more particular about not just the big picture here, but what do you actually say to a parent who doesn’t believe their kid’s future will be better than their own?
Rupert: I’m going to address that in two ways. The first way is in regards to what you say to your kids. I challenge the idea that the kids are going to have it worse off than their parents. My gut feel is that it is the other way around, most people feel that they are going to have it better than they did. So much has happened in with technology, social empowerment, the ability to move much more freely, etc. So all of these macro dynamics would lead me to be much more hopeful for the opportunities.
Again, this all ties into this context collapse. I think it is now much harder to just parcel people off into certain pre-defined areas and say “that’s your future.” I don’t think that’s as easy as it was before, and thank God for that.
But, let’s bring this all back to businesses. I think businesses are recognizing and adapting to this challenge through a fundamental reassessment of the purpose of values. If there’s one good thing that has come out of the financial crisis over the past 10 years, it’s that businesses have been forced to go back and actually ask themselves: “Why are we doing what we do? What is our purpose?” It is absolutely not good enough, I’d argue, to say: “My focus is making money.” That’s just simply not good enough, no one buys that anymore. Making money is an outcome, it’s not an actual purpose for why you do business.
John: If it’s not right for corporations to say: “We’re just in it for the money”, is it alright for individuals to say: “We’re just in it for the money?”
Rupert: I don’t think so, but I’m on the liberal end of the economics faculty here so some of my colleagues would likely disagree with me. I take the view that it should never really be about the money. The money is an outcome.
Don: I agree 100%, it goes back to who you are. I’ve done a tremendous amount of work with the Hilton organization and “who” they really are, is radically different than the message that comes out through a social media outcast person like Paris Hilton. She is doing something radically different on her own. The problem is, people seem to associate Paris Hilton with the Hilton organization.
Conrad Hilton, the founder of Hilton Hotels, must be rolling over in his grave. His vision was that he wanted people to be able to see the world. He wanted people to feel they could go anywhere and have a place to sleep and rest for the night. His motto was: “Please travel, please leave, please go, and I will be there to produce a safe environment for you.”
Unfortunately, with Paris Hilton’s antics, the messaging seems to have gotten changed.
Going back to the original question about whether the next generation is going to be better off, I can’t imagine how anybody could say the next generation isn’t going to be better off than the current generation. Just look at the technologies and advancements. If you were born 110 years ago, you were going to the bathroom in an outhouse, there was no electricity. Today everyone here owns an iPad. So, we will continue to progress and it will continue to be better, it always has been so far. I’m not concerned about that at all.
John: Grace cited yesterday a statistic that 630 million people have come out of poverty just in China since Mao died in the summer of 1976. So, there are a lot of reasons, even if we just are talking on the economic side, to be optimistic. I want you both to go a level deeper on this purpose concept. With low-income people in mind and thinking about how we can inspire them to be more self-reliant, how do we, either on a mass media basis or in individual conversations, help communicate that potential purpose for them and how do we communicate that to upper income people who are looking for purpose, many of whom are lost?
Rupert: Again this is a huge question. Let me give you a couple of examples. I think the power of narrative story telling is a really fundamental thing. If you think about the development of hip-hop and rap, this was a very complex narrative created by a group of people who were in a very marginalized part of society and they were struggling to get their music and their culture understood. They told that story really powerfully through music, and it became a mass global phenomenon.
That is a great example, in my view, of the power of positive narratives to help people to escape the confines of expectations whether they are in Brooklyn or Compton or wherever. This music and culture grew out of ghettos that were very difficult to escape. Rap music was a route out, and it has had an aspirational narrative woven into it.
John: You mean that for the listeners, as well as for the people that became rap stars?
Rupert: Yes, I think it was a lifestyle movement which started with music and then moved clothes and many other products. It was about the music. But, it was also about the way they lived in their communities, it was their social license, all of these things. There’s a fantastic description offered by a fellow called Steve Stoute in The Tanning of America which addresses this great concept and what happened in this wonderful movement. In a short passage he describes how rap’s narrative has managed to create an expectation frame that things can happen if you believe. If you believe that you can change, you can. Narrative storytelling is key to that.
John: If you could give us both a framework and a story around helping people understand their community purpose it would be great.
Don: I think telling a story is probably the single most important thing we can do. We go out and highlight these great organizations and these individuals and say “look at this story, go be like this.” We understood, when we came out with our study, that if people begin conversations with an attitude of gratitude, they bond with people in a way that is so intensely different than everyone else.
One of the great corporate stories is about Chick-Fil-A. Chick-Fil-A is a chicken sandwich company. They support charities. The support orphanages. It is absolutely amazing what they do.
One of the interesting things about Chick-Fil-A is that they’re closed on Sundays. The reason they’re closed on Sundays is, if you go back 80 years ago, the gentleman who started the company wanted a day off. He was having to work intensely by himself, single handedly running this company as most entrepreneurs do, and he just needed a break. So, he said: “We’re just going to close on Sundays.”
Several weeks ago, I’m sure everyone heard about the horrible things that happened in Orlando with the shootings there. That was on a Saturday night. The next morning, all the Chick-Fil-A’s in the area opened up on Sunday morning, even though they were closed, and produced an enormous amount of food, and took it to the first responders without charging them anything. It was a gift. They also took it to the people who were grieving.
They went out and they did everything they could and didn’t charge a dime because that’s just who they are. They’re truly servant leaders. Did the media pick up on that? No. But if you look at them and say “Who are you? What it is that you do to serve? What is your purpose?” you see that their purpose is to serve other people, even if it means stepping outside of their own boundaries to do it. So, I think the biggest thing that we can do is continue to tell these stories and talk about the impact these types of things have on other people. These are the type of stories we need to speak of.
Don: I think the important thing is to know that everything in life is about mindset. What matters is what you believe and who you are. For you who are students, if you keep an open mind, if you are creative, and if you center your work around serving other people, whatever it is that you’ll do in the future you’ll find ways of reducing poverty. If you think you know what you’re going to do right now, you’re wrong. 10 years from now, 80% of you will be working in industries and deriving income from careers that do not exist today. So, do not be set on knowing what you want to do. How can you possibly know? All you can do is make a commitment to “who” you really are and to go out and serve other people.
John: Thank you Don and Rupert. One thing I want to point out as everyone gets ready for break is this. We’re getting ready to start the next phase of the conference. This is where we start the discussion of action. Yesterday we described problems, now we’re talking about how to communicate around these issues, and some of the next panels and keynotes will discuss some of the tangible things we can do to make things better.
Behavioral Economics and Poverty
John Hoffmire: Mungo Wilson is Associate Professor of Finance in the Department of Finance at Saïd Business School and an associate member of the Oxford Man Institute of Quantitative Finance, both in the University of Oxford. He specializes in asset pricing and mutual funds. In particular, his work is centered on assessing how risk affects asset prices. He also studies mutual funds, analyzing how their behavior is affected by growth, and credit risk.
Several of our speakers have mentioned elements of behavioral economics several times. The assumption often is that everyone is rational, but if we ask ourselves: “are we always rational, or are the people that we know always rational?” we know the answer. A lot of us, and our compatriots, are not that rational. During this hour, we are going to explore how teachings around behavioral economics play into the whole business and poverty situation.
John: Mungo, we all know that people do irrational things and behave in unreasonable ways, regularly. Traditional economics has taught many things about explaining we’re supposedly rational. It seems to me that economists are changing their assumptions about how rational human beings are. Will you tell us a bit about that?
Mungo: I think traditional economics doesn’t say that you’re supposed to be rational, it says that you are. Then it has to specify what that actually involves because it is easy to say “you are not rational.” What that actually requires is to accept a modern economic model.
It is possible to modify the assumption of rationality without unwinding it all the way back to the assumption of stupidity. Dick Thaler, who is the world authority on the assumption of rationality, has a clever way of explaining this. He notes if you draw a line mapping out rationality, you’d have at one end someone who chooses completely randomly, who is 0% rational. At the other end he would always put Gary Becker, who is an economist who is so rational that he successfully proposed that crime, discrimination and marriage, among other things, can be explained using the assumptions of rational agents.
You’re right, John, this topic has been discussed more in the economics field recently. I can date the discussions to 2003, when a paper came out by Xavier Gabaix and David Laibson. If any of you have taken economics, early on in your economic careers you were taught something called the model of perfect competition in which marginal costs equals price. It’s about the most boring thing possible to endure, ever.
You have to learn it, though, to get to what comes next. Gabaix and Laibson modified one assumption, it’s an implicit assumption, a hidden one in the perfect competition model, which is that consumers in the model of perfect competition are assumed to be perfectly informed and particularly that they observe prices and that they observe the attributes of the products that they’re buying. Gabaix and Laibson pointed out that this isn’t always true.
I can remember when I first hired a car. It was in Munich in 1994 and I was with my then girlfriend, now wife. So we hired this car and we drove it around Austria. When we gave it back, we gave it back with the tank empty. I hadn’t thought about it. Then I saw the bill on my credit card when I got home to England and I realized I had paid £300 for a tank of petrol, which even for then was a very large sum of money. What I had done was, I had bought a tank of petrol for an extremely high price. Gabaix and Laibson call this a “hidden add on.”
The reason why I’m laboring this point regarding Gabaix and Laibson’s first paper on this topic is that it gets to an important theoretical point. It is that, if people aren’t terribly good at making economic decisions, one of the immediate consequences of that is that businesses will be exploitative.
When you go around making poor decisions, generally it doesn’t affect you very badly. If it affected you very badly, you would learn better.
We expect people to make decisions badly when either it is a decision they don’t get to make very often, like getting married, choosing your career, or buying a house. You don’t make good decisions on these topics, because, by the time you get feedback about your decision, it’s too late.
On the other hand, there are decisions which don’t matter very much—where the immediate cost of getting it wrong is very low. The long-term cumulative cost may be high, like having another Big Mac, having another cigarette, having another can of Coca-Cola. These are low-cost mistakes from your point of view but when we see people making low-cost mistakes we discover that businesses, which make a lot of money from your low-cost mistakes, are very good at encouraging you to make these low-cost mistakes. These decisions can especially influence the poor in very negative ways.
There are lots of businesses out there which do something called wedding planning. In India a middle class household can spend a third of its total wealth on a wedding. These wedding planners may not all be there not to help you stick to your budget, but to help you deviate from your budget. Supermarkets are particularly good at exploiting frequent low-cost errors. They put the candy by the checkout. Why is that a good idea? It isn’t a good idea if you don’t want to buy candy.
I’m sure you have all seen and many of you have experienced being with a child after an exhausting and very boring trip around the supermarket with a parent, who is usually tired, fed up with the child, and trying to remember the washing powder. The parent gets to the checkout, stands in the queue, and at this stage—it becomes absolutely apparent that the parent can’t stand the children and the child can’t stand the parent.
The child starts whining, “I want candy.” So the parent says, “Ok, you can have some candy.” That is exactly what the supermarket is expecting you to do. So that’s a form of exploitation much like what Gabaix and Laibson describe.
So, Gabaix and Laibson’s theory has some very troubling implications which should make you very pessimistic about retail financial services. In a competitive environment, if some people make bad decisions and businesses exploit those bad decisions, what happens is not that the businesses make lots of money. The businesses end up subsidizing the good decision-makers. Essentially what happens is that poor economic decisions made by dumb people end up subsidizing the smart economic decision made by the smart people. A good example of this are fixed rate mortgages in the United States.
In the United States, unlike the United Kingdom, when you get a mortgage to buy a house, for historical reasons the mortgage is often given in the form of a fixed rate. This is to say that when you enter into the mortgage agreement, you agree on an interest rate that you will pay the mortgage lender and that interest rate will never change over the lifetime of the mortgage, which is usually 25 or 30 years. Now, if the rate is 3.5%, and then interest rates in the market go up, you’re locked into a nice low rate, forever. But if you lock in at 3.5%, and interest rates in the market go down, now you’re paying an interest rate that’s a bit too high. You tell yourself, “I can get myself a lower interest rate if I wait. So that’s fine, you could refinance.
You refinance by calling up the mortgage broker and they send a guy to drive past your house and make sure it still actually exists. The broker runs a quick check, which you pay for. Then you get a new mortgage. You then use the proceeds of the new mortgage to repay the proceeds of the old mortgage, and now you’re locked into a lower interest rate. That’s called refinancing. It sounds a bit inconvenient to refinance, you have to remember to do it. There are small fees involved and lots of paperwork.
Michal Brennan, who is a professor at UCLA, had the bright idea of having a self-refinancing mortgage. It involves a fixed rate mortgage that automatically refinances whenever it is optimal for you to refinance your mortgage. If such a mortgage existed, you would find out after the fact that the mortgage just locked you down into a lower interest rate. The idea was a little bit like the John Lewis Partnership’s idea of never being knowingly undersold or of a credit card that always charges you the lowest interest rate. But the latter doesn’t exist, and neither does the automatically refinancing mortgage. Why not?
In America, you can patent these ideas. You can’t do that in the UK. So Brennan did some research about filing a patent. This was in 2004. As he did the research, he found that someone else had already filed for the patent of the idea for the self-refinancing mortgage in something like (I believe) 1911, 93 years before. How many of these self-refinancing mortgages have ever been issued? Basically: None. The reason is very simple. For a lender to break even on this self-refinancing mortgage, you would have to charge an interest rate that is actually slightly above the interest rate on a standard non-self-refinancing mortgage because there are two kinds of people: Smart people, who refinance whenever it is optimal to do so, and everybody else who forgets to refinance.
There is also some research done by John Campbell at Harvard, looking at who fails to refinance their mortgage. He found it is people who are older than the average mortgage borrower, people who are less educated than the average mortgage borrower, and people who are poorer than the usual mortgage borrower.
Very often if you ask people what interest rate they are paying on their mortgage, they don’t know. The same people are making more profits for the mortgage lender, which it is passing on in the form of lower interest rates to the smart borrowers. So if you went to a smart borrower and asked if they wanted to borrow on a self-refinancing mortgage, they’d say “well no because I’m getting a lower interest rate than that.” If you went to somebody that was naïve, and asked if they wanted to borrow on self-refinancing mortgage they wouldn’t see the advantage. So financial innovation doesn’t drive out crappy financial products. Bad products are not replaced by good products because of what we call shrouding.
One of the first empirical studies on this was done by two PhD graduate students who were on the same program as me. They looked at the economics of health clubs. Basically, a health club works like this. You wake up on the 3rd of January, you go the bathroom and you see your belly and say “It’s a new year, time to turn over a new leaf. I’m going to join a gym.” So you head down toward the gym and they see you coming and they say “Hello Mr. Wilson, how would you like to enroll? We have two plans: One is a monthly fee, which is £10 per month or you can sign up for a year for £60.”
I say to myself, “The second option sounds like a really good deal, because £60 over 12 months is half of 12 x £10.” So I say: “Brilliant, I’ll go for the annual plan.” You go for a month, real life kicks in, and you never go again. You just paid £60 for a one-month membership when you could have paid £10. The health clubs understand this and they know you are greatly overestimating your ability to commit to things.
All of us know this for another reason. It is because anyone who went to school or university knows that over the course of the year one should be keeping up with the work. It doesn’t happen. I was the same way, (and I became a professor). There is a very good book on this now called Phishing for Phools. It’s all about the economics of poor decision-making and the economics of the exploitation of poor decision-making by businesses, by politicians, and others. The idea behind Phishing is that it doesn’t just happen on the internet, it is universal. The exploitative behavior of putting the candy in the supermarket by the checkout is a form of phishing. Trying to get you to vote for the wrong thing, is a form of phishing.
John: So we started from the old assumption of rationality, we’ve moved to the more modern notion that behavioral economics teaches, which is people are not always rational. We have unemployment situations that are affecting individuals in many different countries in very negative ways. Now I want to add extra stress to the situation.
What happens if people are hungry, or their kids are hungry and they have to make decisions about economic issues? Mungo let’s talk about stress. If I told you there’s a study out there that starts out by saying to low-income people “do this math problem,” would you believe that people would actually participate in the survey? They actually do. Here’s the two part problem. First, the low-income person is told: “Do this math problem.” They do the math problem. Then the same person is told, “You have to come up with $200 that you don’t have.” It turns out that the individual does much less well when answering the second question. Mungo, first of all, do you believe this research is pointing in the right direction? And, do you think stress of this type, even though it is pretended stress, has such impact on people?
Mungo: I don’t think I’m qualified to answer that question. I’m not a psychologist. I personally am prepared to believe that the results of an experiment that had been done were the results you just told me, but I’m not at all certain what it means. I’m prepared to believe that stress causes you to make poor decisions, but I’m also prepared to believe that stress can make you make better decisions.
I was talking to my daughter’s music teacher last night at a party. I said my daughter was very nervous going into her music exam yesterday morning. She told me she had forgot some of the words to one of the songs she was singing. Okay this is not life threatening. In fact it is of very little importance at all. But she said, “Well I think it’s very important for people to be nervous before a performance because otherwise they don’t perform to their greatest ability.”
So we get stressed for a reason, right? I think if you didn’t get stressed, you might not perform as well as you’d like on some occasions. So I’m not sure what that means. Daniel Kahneman wrote a book called Thinking Fast and Slow. I’m sure you’ve heard of it. It’s all about this kind of thing.
There are some brilliant problems presented in that book. You will get many of the answers wrong. The book’s point is to say to you, “Here’s a quick math problem. Solve it quickly.” You solve it quickly, and you realize you got the wrong answer, which is what he wanted you to do.
We should learn from the ‘right’ things that people do. This reminds me of a paper called The Prudent Peasant. Oddly enough we were taught in school in England that in the Middle Ages, medieval farmers were inefficient because they farmed their fields in little strips, probably as a consequence of inheritance laws. In a world without refrigeration, it’s a really good idea to have diversification in your land holdings.
If you’re a king, you diversify by having your estates in Scotland, France, England, etc. On the other hand, if you’re a peasant, you diversify your land holdings by having some on one side of a hill and some on the other side. So, if frost wipes out half your crop, it’s only half. That’s an example of people being more rational than we might at first think.
The assumption that you don’t necessarily realize you’re making when you talk about rationality is the assumption of common knowledge. The assumption of common knowledge is best expressed in ascending parts. This combination of assumptions is very strong. First, if we’re playing a game, common knowledge says the following: I understand the rules of the game and I am trying to win. Second, it says that my opponent understands the rules of the game and is trying to win, also. Third, I understand that my opponent understands the first statement. Fourth, my opponent understands that I understand that the second statement. Fifth: we both understand the last two statements. Sixth, we both understand the previous statement. And so on – forever. Those are the key assumptions behind common knowledge. This helps define what is rational.
But, you can also play games where it is very easy to see that, whether there is stress in a situation or not, it is very difficult to really be rational in the sense required by common knowledge. You can play a game where you get everyone in a room and get everyone to pick a whole number between 0 and 100. Everyone enters their own number onto a computer. The winner is the person whose number is closest to half the average of all the numbers picked. Now the over-smart ones, like me, who don’t understand the real world and have been in universities for too long, we solve the problem by using fixed point reasoning, which reasons: “everyone will choose the right answer, which must therefore be half of itself.” It turns out that the only reasonable number for everyone to guess on that basis is 0. I am very satisfied that the only number that satisfies the mathematical requirements is 0. So I decide 0 is the winning number. The PhD students pick 0.
Basically, the PhD students never win. There is usually somebody in the room with a background in trading, who picks around 14, and they win. The reason is some of the people in the room don’t understand the rules of the game and are not playing to win. They were watching football on their mobile phones.
Now the problem in this example is not so much whether people are rational as much as not knowing if other people are rational or not. You’re rational, but is he rational? This makes the idea of common knowledge much harder and in fact it makes the problem very difficult to solve. That’s when you require experience, and learning, and knowledge of your fellow man, and all the things that we hate in economics because we can’t model those variable very well. We can’t measure many things. Now let’s get back to talking about stress and how we react.
John: I want to draw some contrasting possibilities here. Imagine three players. One set of players are poor people (let’s assume they are young poor people just to make the point even more strongly). The second player is a store. The third player is a regulator or a parent. The questions are: Who is to blame when there is a rip-off? Can it ever really be the people’s fault? And, are there ways for the regulator to be involved without messing things up? Mungo, we are not going to have time for you to give a full-throated defense of systems that rely on less regulation. But give us, from a behavioral economics perspective, some thoughts about how poor people can be protected within a free enterprise system.
Mungo: I don’t think you necessarily need a regulator for much of what has just been discussed. Applied mechanism design often involves game theory. Game theory is the idea that the players can write the rules of the game that they play in a way that can make them do the best thing from a social point of view. Applied behavioral mechanism design would often be very useful.
You know how people justified studying basic sciences? For example, the basic justification for studying chemistry was that it allowed you to make some really cool stuff. Economics didn’t have that ability historically. But now we have applied mechanism design and sometimes it can.
The great practitioner of this is Alvin Roth who wrote a book called Who Gets What and Why. In this book, he talks about his experience helping people design better mechanisms. Admittedly, he worked mostly with people who were not trying to address poverty. Some examples related to school choice.
In particular, he wrote about how schools choose pupils, and how pupils choose schools. The good schools want the smartest pupils, and the smartest pupils want to go to the best school with all the other smart people. This process leads to a race where, if a great school makes offers before anybody else, that school can get the smartest kids first.
This means that in some cases in New York, until recently, kids were going to school interviews at age four or five. This is ridiculous. However someone behaves when they’re 4 or 5 will be completely different than when they’re 12 or 15. That is what he called market unraveling.
He originally discovered this process in the market for matching medical students to teaching hospitals—but then he realized it was a universal phenomenon and you can fix it. You can fix it by getting everyone to buy into a system which allocates people in a way where people can’t unravel, where it’s really hard to find a better match who wants to match with you than the match you have, using this thing called the deferred acceptance algorithm. This is clever stuff. I wish I had time to explain it all. You can find out more if you Google the name, Alvin Roth.
So, we don’t have to be too pessimistic about this. This is an area where economics can help. By redesigning your mechanisms you can make it in people’s interest to do the right thing. The right thing for them, and the right thing for the other people involved in the game as well. The specifics vary in every single case.
One of the things I learned from reading these studies is that the details really matter: Another example in this context involving poorer and less well-educated people, differences in the way that government-owned assets were or are handled in transitioning economies matters.
For example, in Eastern Europe, after the collapse of the Berlin Wall, there were many countries where economies transitioned. Many of those countries had mass privatizations. There was a realization that there was a need to get government-owned assets into the private sector where entrepreneurs and capitalists could get to work making them perform better. The mass privatizations that came about in the Czech Republic, Poland, and Russia were all very different and some of them were much better than others and were better designed to protect people from making bad decisions and the consequences. The details mattered a lot.
Similar transitions are almost certainly going to take place in other countries in the coming decades, so this is an area to watch and try to influence.
A Foundation Addresses Poverty Through Impact Investing
John Hoffmire: Mohamed Amersi is CEO and co-founder of Emergent Telecom Ventures, a London- and Dubai-based Emerging Markets Consulting, Advisory and Asset Management firm specializing in Telecoms, Media & Technology. The Amersi Foundation was incorporated in 2012 and has actively supported causes and charities in education, poverty reduction and religion in Africa and Asia. Mr. Amersi has been a featured speaker at various forums on topics relating to telecoms, the internet, media, private equity and international corporate finance. He is also one of the sponsors of our conference.
Mohamed: Good afternoon. Before I begin, I would like to apologize for the person who was supposed to be speaking during this time, Jamal bin Huwaireb. I just received a text message from him. Unfortunately because of the Muslim festival of Eid, he was not able to leave Dubai to fly out to here today. He runs a very important foundation called the Mohammed bin Rashid Al Maktoum Foundation which has been given the single largest philanthropic gift in history….that gift was worth $10 billion dollars and it was given to alleviate poverty through education.
Unfortunately he cannot be here today.
What I would like to do today is to talk about my own personal experience in the space of social impact investing. My view is that philanthropy, to some extent, is being reinvented. The challenges that the world faces are large and we must know how best we address them.
Before I came to Oxford to study for my executive MBA, my days were spent doing two things. 80% of my days were spent on for-profit activities mainly involving telecoms, media, technology, emerging markets, and private equity. The 20% was focused on our family foundation where we concentrated on areas such as education, healthcare, conflicts, and social housing.
Very soon after starting the foundation, we realized that we really didn’t know what we were doing when we came to running the foundation well. If anybody came to our door, asking for money, we were happy to throw money at them without really understanding what we were doing and whether the money was actually being used in ways that it was supposed to be if it was going to create social benefits.
After 20 years in telecommunications and after a few years of running the foundation, I came to Oxford to do my MBA. I was probably the oldest student to do an MBA here in the history of the school. I must say the experience was an amazing one. I met some very intelligent people. John Hoffmire was my professor. Mungo Wilson was my professor, as well, and I learned a lot.
I can say honestly, the one thing I learned, that I knew absolutely nothing about before I arrived here, was about the whole social impact space. I am especially thankful to John for helping me understand more about impact investing. This university and this business school are on the cutting edge of development in the social impact space.
What is social impact? I’m sure most of you know what it is, but when I was researching this topic the definition that I came across and the definition I use when I talk about is this: Social impact is actively placing capital in enterprises that generate social or environmental goods, services, or ancillary benefits such as creating jobs with expected financial returns ranging from the highly concessionary to higher than market. This last bit of the definition is very important because the skepticism that most people have is that it may be impossible to reconcile making market returns and also generating social impact and making sure the environmental box is checked off.
An easier definition is this one. What we are really looking at are the three p’s: people, planet, and profit. Depending on who you are and what your mindset is, one takes precedent over the other because it is very rare to come across a situation where you have a perfect balance of people, planet, and profits.
This is the mission statement which guides me and those I work with: We start by standing with the poor, listening to voices unheard, and recognizing potential where others see despair. It demands investing as a means, not an end, daring to go where markets have failed and aid has fallen short. It makes capital work for us, not control us. It thrives on moral imagination, the humility to see the world as it is, and the audacity to imagine the world as it could be. It’s having the ambition to learn at the edge, the wisdom to admit failure, and the courage to start again. It requires patience and kindness, resilience and grit: a hard-edged hope. It’s about leadership that rejects complacency, breaks through bureaucracy, and challenges corruption. Doing what’s right, not what’s easy, it’s the radical idea of creating hope in a cynical world—changing the way the world tackles poverty and building a world based on dignity. This was a mission statement that many impact investors drew up together, and it is one that we and other proponents like Acumen fully subscribe to because it captures, in a nutshell, the very essence of what social impact investing is all about.
I would now like to talk about timing. The question is: Why now?
People at this conference have started talking about it being time that we start to do good, when we have done so well for so long. Because of this type of commitment, we now live in a world where “conscious capitalism” is starting to sprout.
At the same time, the disparity between the rich and the poor widens daily. We have a huge perfect storm descending on us because the world’s population is growing, resources are getting tighter and tighter, we have challenges approaching with climate change, we have environmental degradation, and the bottom of the pyramid are slowly beginning to demand their fair share of the earth’s resources.
In many ways, social impact will be the answer. But, it won’t just be for-profit businesses that make a difference. If will also be the non-profits that help. I also think that we are now at the age where governments are beginning to wake up and to promote the whole CSR agenda and I think businesses are starting to become more and more conscious of their responsibilities to people, as well as to the environment.
There are many global thinkers, like Bill Gates, who talk about creative capitalism. There are writers such as Thomas Friedman who talk about the Green Economy. Whichever label you put on this movement, you will find that there is someone nearby trying to address the same problems through impact investing. The goal is to create an environment where you ensure that it is not just about making money but it is about taking care of people and taking care of the environment.
While I was here studying at Oxford, we started a firm which is called Inclusive Ventures. Before I came here, as I said, I didn’t know anything about social impact investing. I was a leading deal maker. All I knew in life was how to make deals. Then someone told me, “you start to have to put the letter “I” before your “deals” and you start to focus on “ideals” rather than deals. The person said, “Using this language and lettering will start to change your mindset.”
So in many ways Inclusive Ventures was born to focus on ideals, and not only the deals. If you look at our logo, you will notice that the inspiration came from a story that resonates very much with me. This is the story of Aleppo.
Aleppo is in Syria. It is the 1,000th city that has been completely destroyed by war today in Syria. In its heyday, it was a city that had Muslims, Christians, Jews, everybody living side by side, everybody living happy. It was a very entrepreneurial city. One day, the PM of Aleppo came to the ruler and he said “look my Muslim population is asking that we throw the Jewish people out because they cannot live together. What should I do in answer to that?” The ruler said to him, “Tomorrow, please come back and bring me a bunch of flowers. Flowers that are red in color, blue, green, purple, etc.” The PM didn’t know what was going on, so he brought this bunch of flowers and asked the ruler what he should do next. At that point, the ruler said to him, “So now put the other flowers on one side and the roses on other side. Look at the red roses, and then put these red roses back in the bouquet of flowers and you will see how beautiful these red roses look in comparison to every other flower in the bouquet as opposed to stand-alone.”
The point was that a bouquet of flowers allows you to appreciate the beauty of each individual flower. If you are by yourself, it does not quite work the same. So our logo is designed with the colors of the rainbow which are absolutely inclusive. We celebrate diversity in all that we do. We do not discriminate on the basis of class, of color, of race, or religion or creed. It doesn’t matter to us where people come from.
I am going to move now to a completely different subject. One problem for me, when we just had our foundation, was the situation I observed where we were creating a culture of dependency where we gave gifts. People learned to always expect things from us.
There are many thinkers that have said that, in their view, charities are all ripe for being converted to social enterprises. We need every charity to think hard about how they can create social enterprises.
Often, when people are giving money away, nothing happens. But by investing money, even at lower returns, we are teaching people how to convert that capital into businesses that give them confidence and the ability to provide for themselves as time goes by.
The challenge that we face in this space is encapsulated in this question: “Is it right to make money off the poor?” In any social enterprise environment, there are people that are making money, and there are people whom you are making money from. So that is one challenge that we find. The key is not to have exploitative relationships.
The second challenge we find is a lot people tell us, “I’m a successful private equity investor, I would like to make money and gift it away. I don’t really care or want to know what happens to the money after I make it.”
When you look at it, those sort of attitudes are the problem. When you look deep down into their foundations and you analyze some of these charities that take their money, you realize that 20%-30% of the money that they receive is used on organizational overhead. You also realize that there is very little discipline used in terms of measuring impact or seeing that what you give out creates a benefit.
By the way, I sit on the board of 4 or 5 very important charities and foundations, some of which are funded by His Royal Highness, the Prince of Wales. His charities do measure impact. His charities are very aware of overhead.
But, I want to go back to what some other foundations and charities do. Because the less well-managed foundations are not instilling financial discipline into the charities they fund, the managers of the charities don’t really have or feel a sense of responsibility or obligation.
So, in a way, the impact investing space is really improving the overall situation of foundations and charities because, in my view, the discipline that impact investing requires of people to account for what they are doing with their money, influences the charities and foundations.
Of course, it’s up to you when you make a lot of money as to whether you want to take it away, or you want to recycle it, or if you want to give it back, or do more projects with it. That is your choice. You will always have a choice. But, charity and philanthropy are often associated with creating a culture of dependency where people are living off you forever without helping to do things for themselves.
The millennium goals established by the UN have now been superseded the SDGs, and have identified poverty reduction as a key target. The World Bank estimates that to be able to achieve the resolution of these goals by 2030, it will require roughly $3 trillion dollars of capital per year. $2.4 trillion of this money will have to come from the private sector and the rest from governments.
So, this requires a complete rethinking of the way in which business is conducted. It requires a completely new way of thinking on the part of governments. Governments must help businesses share money with stakeholders, instead of dominating the stakeholders in ways that just benefit the businesses.
We have identified a number of sectors where we are interested in investing. As we choose sectors, we prioritize education and fields in which we can create valuable employment. We look at how one could provide quality education for all regardless of income or social standing.
The financial challenge we face with some of our portfolio companies is: how do we provide access to finance and basic consumer services to our employees, regardless of location.
More broadly, the challenge is to provide food and water. The even bigger challenge is to provide safeguards for the food production systems for future generations. We also want to provide clean water, energy, healthcare, higher living standards and housing.
Unfortunately, it is difficult to do everything at once. So we tried to focus on two things. Number one is the education industry, and number two is that whatever other industry we invest in, we want to see that the jobs created are sustainable.
In my view, the two are connected because you can’t just go out and educate people. You can educate them up to primary level, secondary level, and then to the university level. But, if you have no job to go to, once you are done with your education, what is the point of it? So the two are intricately linked. You’re not going to eliminate one unless you can solve the other problem.
So the particulars I still need to address in this lecture, if I am to complete my assignment, are related to impact investing in the African and Asian context. I’ll tell you about two case studies so you can see how we approach impact investing and what challenges we face.
The first case study is about impact investing in India. India is an amazing country where 70% of the 1 billion people live in 620,000 villages. You can imagine how big a population that is and how large the issues are. These 70% of the Indian people generate only 30% of the economic output. 40% are illiterate. And jobs in the villages where they live are scarce.
The company we are working with that addresses the lack of jobs in villages is called RuralShores, This amazing company was founded by some IT specialists. They said, “Look, we understand the concept of offshoring, we understand the concept of on-shoring—bringing jobs back rather than moving jobs out to India and China. So, now let’s focus on rural shoring. Let’s see how we can bring jobs to all villages of India.”
Their mantra is “love all, serve all.” They are countryside-based, but they are nationwide in scope. They set up, in Indian villages, rural business process organization outfits where they take villagers and they educate them for four months.
Because many of the people in the villages do not speak English, they teach them English. They also teach them social etiquette, and then they teach them IT skills. Once trained, the villagers perform business process outsourcing at a quality on par with consultants from some of the big firms and they do the work at prices 60% below the market price.
When you look at the impact RuralShores brings, it is tremendous. One person comes to work at RuralShores. But, they come from a family of six. Each village probably has about 1,000 families. You can see how many people are positively influenced through this process.
When you look at the multiplier effect of the impact, it is huge because by getting people jobs you are training them to be successful. Through this process, you are basically supporting a whole ecosystem.
But, RuralShores doesn’t stop there. Once they’ve got 250 to 500 people working in a business process organization center, you can talk to them about business enablement. What are India’s challenges today? Distribution is one. Distribution of consumer products and distribution of financial services. The scope of the problems in India are so vast.
You cannot have a bank in every village. You cannot even have an ATM machine in every village because it is very difficult to transport cash in and out of those ATM machines. So, how do you solve these types of problems? How do you get the farmer and his family access to money?
These are the types of issues RuralShores is addressing as the company goes through an evolution to help enable their employees to do more and be more.
When we first invested in this company, many were skeptical. They said it would take 10 years for the company to get to a point where its cash flow was break even. Now, having studied the cash flow, I can tell you, it appears that this company has broken even from a cash flow perspective much sooner than the naysayers expected.
Now, the company has another tension. Because it has become so successful, the investors who were alongside us to begin with, are starting to focus on financial returns. The social impact of the company is decreasing because some investors say the objective should be 20% returns rather than accepting 10% returns and having social impact.
This is one example of a reason why impact investing is hard.
But there are solutions to these tensions. But, each of these solutions have their own tensions. Other speakers at this conference have discussed how India passed legislation that mandates large corporations set aside 2% of their net income for investments into CSR. Companies like RuralShores, and so many others, could do so much with this money. This new money from the CSR coffers could be patient money—money that would not demand a 20% return.
But if you look at the bureaucracies that control CSR money inside the biggest corporations, those bureaucracies are not allocating monies to non-profit organizations that help companies like RuralShores. From among the biggest corporations’ CSR budgets, I’m not aware of a single rupee being used to support the types of NGOs that aid sustainable development companies such as RuralShores.
Think of the ramifications of this. There is so much hope and so much still to do. First, I would love to see it that every country in the world today pass legislation mandating that companies set aside 2% of their net income to help promote CSR. This would be a responsibility that corporations would take on that would make a difference over time. In the best of worlds, the corporations could set up a pubic private partnership that funds needed infrastructure support related to education, food, transportation, sanitation, health, or water. But, if such laws were passed, we would have to avoid the types of failure that so many government and business projects see. We would need to rise to the challenge and solve the types of problems the CSR program in India is experiencing.
The second example I have is based in Africa. In Africa we decided to look at education. We found this amazing company called Bridge which is focused on providing primary education to families that cannot afford to pay more than $6 per month in school fees. Today, it is the largest school operator in Africa and in 1 or 2 years it will be the largest operator of schools in the world.
They have a very clever technology platform that they use to train teachers. They also use the platform to measure and evaluate how teachers are doing in classroom. It also measures pupil performance and it incorporates the use of mobile telephones as a way to take and communicate these measurements.
The United We Reach Foundation currently funds 10% of Bridge’s 150,000 students by making sure that families that cannot afford $6 per month in school fees are not being denied the right to have their children be well educated.
The company was so successful in the last two years that it has been featured on the cover page of the Economist and impact investors including the Bill and Malinda Gates Foundation and the CDC, (the who’s who of the impact world) are all invested in it.
But, you also have to look at the reaction a company like Bridges causes.
The Kenya National Union of Teachers, which helped to start the company, decided that they were not happy with its progress. So, they started strikes and said, “No, the company can only employ unionized people” and “you have to maintain minimum wages,” and they communicated with the international organization of unionized teachers. They started to lobby the World Bank, they looked and said to the investors “look, instead of your investing money and making money out of this, why don’t you instead, give a free grant to Kenya. Then we can take that grant and use it to support our primary education system.”
These are some of the challenges that we are facing. At the same time, there is wonderful potential for the impact investing community to make a real difference in Kenya, India and around the world.
John: Will you tell us, on those two investments, how you would do if you had to cash out of these two companies today?
Muhamed: It is working very well. We will definitely not lose money on either of these investments and it’s very likely that we will make double digit returns.
Shared Value for Small Holders in Agriculture
Zahid Torres-Rahman: David Croft is Global Sustainable Development Director at Diageo. Previously, David was Director of Quality and Technical at the UK retailer, Waitrose, and before that Global Sustainable Agriculture Director at Kraft Foods Group. David is an active member and in a leadership role as a supporter of Business Fights Poverty. David’s firm is also one of the sponsors of our conference.
David: I want to share with you the story of my recent work with Diageo and try and give you sense of where corporates come from regarding business and poverty and why the companies I’ve worked for have found it important not just to think about profit but to think more broadly about how that profit is generated.
I’d like to give you a summary of the way Diageo approaches sustainability to give you an idea of the thematic approach of the company. Sustainability is visible end to end at Diageo. It is not just about the environmental footprint, significant as that is for our business. It is not just about what we do in the supply chain and the communities that grow some of the raw materials to brew beer, like barley and such.
It’s also about how alcohol is consumed. We’ve tried to think consistently about how we create a positive political, social, and environmental impact. It’s a stretch, I’ll be honest. But if you don’t begin with that aspiration and try to give something back while working as responsibly as possible, then I struggle to see how corporate social responsibility actually has any licence to operate. These three areas, (social, political and environmental), all connect fundamentally to our core business.
Let’s go back to the origins of some of the companies that are now known as Diageo. People like Arthur Guinness and Alexander Walker were important. Arthur Guinness you’d have heard of. I’m certain he was around when the Cadburys were well-known. For these men, business building was all about shared value and thinking long term. Arthur even signed a 9,000 year lease for the St. James’s Gate Brewery in Dublin.
We’ve now got a lot of land in Dublin that we don’t need to use because we’ve become more efficient. Our brewery is now one of the most energy efficient in the world. We’re now able to put some of those buildings and some of that land back into use for communities within Dublin, particularly for entrepreneurs looking for startup opportunities. That’s the sort of ethos of shared value that comes with what we’re trying to do.
As I have said, part of the shift we’ve been making at Diageo is to build these social, political and environmental components of our company into our core activities. My rationale for this is that, if our business wants to contribute to the utmost, to the full potential that we can, then we should not just put a lot of money into granting aid through a foundation. These attempts have impact and work well, don’t get me wrong. But, we can make far more impact if we just shift the direction of how we work, integrate it locally and globally into a way of operating and thinking not just putting $10 million into a charity pot.
With the billions that we spend each year and the billions that we influence through our supply chain, we can make a bigger difference.
Across all companies, just shifting the direction by one or two degrees is absolutely critical to leveraging the trillions of pounds that business invests on an annual basis in order that we can, collectively, meet the UN’s Sustainable Development Goals.
The gap at the moment, if I remember the numbers, sits somewhere around 1.5 and 3.5 trillion dollars per year of assistance across a number of targets. No one will sign a checque for that amount, no business can do that. But if we can just shift how we work a small amount, then we can meet the goals that have been set.
What we’ve, therefore, been trying to do is make sure all the work we do on these different areas is core to our business. I have four ways that I try to think about this. The first has to do with access. It’s sometimes about access to resources in the communities “where we work.” Our business will thrive if the communities “where we work” also thrive. When I say, “where we work,” I mean: where we source materials, where me make our products, and where we sell our products.
It’s very simple. It’s absolutely in our interest to help those communities thrive.
But it’s also about playing a different role in society and really understanding shared value. Firstly, shared value is about helping the people in the communities where we work have confidence to achieve aspirations and do something different. It is especially important to us to help women to have confidence. In some ways, this is about access to aspirations and empowerment.
Another of our access outreach efforts is our Water of Life programme. This is about basic access to water. We work on this particularly in Africa and increasingly in India. We’re a drinks company, water is important to us. We have to think how business exists in society, not in isolation.
The second way I like to think about linking our core business to our anti-poverty work and our shared value work is through the concept of skills-building. Through our Plan W program, we’ve reached 160,000 women with individual empowerment projects working with local NGOs. This is about getting not just the skills, but the confidence that sits behind building those skills.
We know from experience that economic empowerment for women changes their roles in the communities where they live.
One of the things we have learned is that you can’t just talk to women about empowerment, you have to talk to men, as well. Often the blocker is the man. I sat in a meeting in one of our factories and we were talking to male supervisors. We asked them, “Would you allow your daughters to go to university?”
As you know, tertiary education is a real issue for women. The number who said “Yes, we’d like them to go to university” was large. That was a big step forward for that plant.
So we said, “What are your thoughts of your daughters going to university outside of this town?” We found that to be a tougher question for the men to answer. One said, “All they’re going to do is come back and get married and have kids, why would they leave town to do that?”
Sorry to be blunt, but that is a prevailing attitude. That’s what we’re trying to shift through some of the work we are trying to do. Both with men and women. We want to change the dynamic a bit. So far we’ve reached 1.2 million people through the program.
The third example of where we are defining shared value and trying to tie our business operation to anti-poverty goals is through a programme called “Learning for Life.” It’s about helping people gain access to employment, in our case in the hospitality sector. We focus on young people who have been out of employment or never even been in employment.
A part of this course is bartender training. Some might say this is in our self-interest. Well yes, of course, it connects to our core business. What we do with this is give them skills so they can get a job. About 80% of them get a contracted job which is a big step forward if you’ve never had one. What they get out of this is not just the hard skills that get them that job, they get phenomenally improved soft and social skills.
You can put values on these things. The hard skills are worth about £2,000 per year in this construct. The social skills they will carry with them for the rest of their lives are worth about £8,000 per year. That’s a lifetime worth of returns we are talking about.
Many of those who go through the course end up running their own businesses. Some of them become world class bartenders and are celebrities in their sphere. It gives them a sense of confidence to go after their aspirations and the programme allows many of the participants to turn their dreams into reality.
The fourth thing I’d like to talk about is related to smallholder farmers, a programme called Sourcing for Growth. Instead of explaining this impact I’ll show you a short video highlighting some of the farmers we’re supporting in Ethiopia. From a business point of view this programme gives us a really strong and local supply network, where previously ingredients would have been imported to Ethiopia.
Honestly, this programme is a challenge for us. You can sometimes buy barley cheaper on the global market and ship it to Ethiopia. Actually over the long term, however, particularly with where we think foreign exchange rate changes will be, we think we will be better off working through local suppliers in Ethiopia.
What we’ll tend to do is produce a local brand using local barley. When you now walk through the airport in Addis Ababa, in Ethiopia, you’ll see all the other local Ethiopian beer companies advertising that they do exactly the same thing. We were the last people to start talking about this, when we were the first people to do it.
The type of experience we are having in Ethiopia gives us in confidence in our supply chain. That’s hugely important for any manufacturing business.
From a community point of view, the type of locally-based supply chain we have brings a whole host of benefits. Through our Sourcing for Growth programme, farmers get a package with six or seven elements to it. Fundamentally what it means to them is they usually are able to double their productivity, which means they double their income. This makes a massive difference for the lady we saw in that video because it means, as a single parent family, she could support her four kids and keep them in school because of the increased productivity we help her achieve.
It is when you start to see the people you work with improve their lives in their local contexts that you start to see the impact you create. Our goal is to take it further. We currently have just over 6,000 individual contracts with individual smallholders. We’d like to see that grow not just to 10,000, which would be the number of farmers required to supply the barley we need in Ethiopia. We would actually like to grow the number upwards of 20,000.
Then the next step would be to find the right partner to work with on the rotation crop so that we actually improve soil health by managing rotation crops. The challenge is you have to find a rotation crop with the same economic value because otherwise why would a farmer opt out of planting barley at every opportunity? You need them to opt out otherwise they have to spend more and more on fertilizer, and, even with the greater use of fertilizer, their productivity goes down over time.
These are the things we’re trying to work through, and that’s why partnership is very important.
One of the other partnerships we have is with the co-op unions. We’ve helped to organize and disseminate training and materials about seeds. Partnerships with the communities help us to understand what their needs are, what their aspirations are, and what we can do to best help. It should be about us helping, not us giving.
As somebody else said earlier in the conference, that sense of dependency that you can create is the wrong type of development. It is particularly worrying. That’s why we work very closely with NGOs in setting up the programmes we sponsor.
I mentioned farmer training. One of the things we have learned to do is to train farmers in groups, rather than individually. That way you can reach the whole group, rather than the first person who puts their hand up.
What we also find that it is important to understand the situation that women farmers face. Often, they are not seen as the farmer even though they do lots of the work. This is because they’re not always the land owner. You can start to play a different role in terms of female empowerment if you understand the difference between who owns the land and who works the land. With this understanding, you can create better balance in your work and more effective economic empowerment with and for the women.
The other key partnership for me is with the government. In the past, I have met leaders from the Ethiopian government agricultural sector. In working with them, we were able to think about what the curriculum could be that needed to be shared with wider groups.
When we started working through the government, it forced us to say to ourselves, “How do we stretch from our fairly narrow value chain view to a view that could incorporate broader influence and the ability to improve productivity and food security more widely?” Part of that is related to some of the work we’ve done with another NGO called Self Help Africa. Self Help Africa has helped us think about where our seed comes from—as for example, in Ethiopia getting good planting material is a problem right now.
Self Help Africa are helping us to propagate seeds with another group of farmers so we get better varieties and, through this process, we’re bringing new farmers into the value chain. So it’s a win-win for us all ways around. We are also bringing in a new part of the farming community into a new market and into our supply chain. This is helpful to us and helpful to them.
When you put together a network of communities, co-ops, collectives, government bodies, businesses, and members of the civil society, you start to head toward a model of collaboration that is both building communities and contributing toward achieving the Sustainable Development Goals.
Although our company’s targets aim toward achievements by 2020, that’s just because most businesses usually plan for three to five year time frames. Our goals are benchmarked and aligned to the UN Global Goals. Specifically, we’re very focused on 11 of 16 goals. Number 17 is about revitalizing the global partnership for sustainable development, something we naturally subscribe to.
I hope I’ve been able to give you a flavour of why doing this type of work, using our core business to create shared value in collaboration with these wider communities, is so important. Thank you for your time and attention.
Two Views of Poverty Reduction
Oren Sussman and Marc Ventresca
John Hoffmire: Oren Sussman is Reader in Finance at Saïd Business School, University of Oxford. His areas of expertise include macroeconomics, international finance and financial distress. His research focuses on financial crisis, financial constraints and the business cycle, economic analysis of insolvency law, cross-border insolvency, sovereign debt, and exchange-rate volatility. Much of this work combines insights from macroeconomics, law, finance, and economics. Oren has a valuable international perspective and has undertaken research and held teaching positions in Israel, America, and Europe.
Marc Ventresca joined Oxford in 2004 and is by training an economic sociologist who works on innovation, institutions, and infrastructure at Saïd Business School. He is a Governing Body Fellow of Wolfson College and also Senior Research Fellow at the Oxford Centre for Technology and Management for Development. His current research investigates institutional politics, innovation, and governance in knowledge-intensive industries, including work on inclusive markets in Bangladesh, ecosystem services markets in Amazon Peru, and the global growth of financial markets in support of high tech industries. He has done work on the creation and diffusion of innovations in developing economies and on organizational change in higher education.
John: Oren, will you share your thoughts with us?
Oren: I would like to start with a personal story from when, sometime in the early 1980s, I was just starting my studies in economics in Israel. During that period the translation of Milton Friedman’s Capital and Freedom came out. Milton Friedman wrote a special introduction for the Hebrew translation and in it he asked the question: “Why is it that Jews who (in his view) have always benefited from the market have also led some of the greatest political movements to shut down the markets and were so hostile to the deregulation of markets?” That is a very important theme in the Chicago School. The Chicago School taught that markets operate for the benefit of the underclasses and that the regulators who tried to limit their scope are really in practice monopolizing these markets to the advantage of the elite classes and against the poor.
I remember that argument made a huge impression on me. I still don’t know if I believe it or not, and I think that many people in this room and outside of this room don’t know whether to believe this or not. So because I’m an economist, I suggested to John that maybe I should summarize some facts if you will give me permission. I will go through data from the World Bank, and try to explain what has happened to the income of the rich and the poor in China and America over the last 30 years. I have adjusted for inflation as well as for the cost of living. I would like to, just as a footnote, say that people make generalizations about what happened to income distribution and what affected income distribution.
In practice we are talking about the fortunes of some 7 billion people in the world. It’s not so easy to make generalizations; it’s not even that easy to know what is going on. According to these data, which I believe are the best that we have, the following is happening:
In the last 30 years, the poor of America have improved their income, adjusted for inflation, by 57%. The rich of America have almost doubled their income and therefore the gap between the rich and poor in America have doubled.
If you look at China, the poor of China have managed to increase their income by 350%, while the rich of China have managed to increase their income by 643%. So income inequality in China has also increased.
If you look at the whole picture, what happened is that China has become closer in wealth to America and it is not only that the rich of China have already taken over the poor of America.
30 years ago, the poor of America could say “yes we are poor, and this is unfortunate. But we are actually very lucky because we are still 2x as rich as even the richest people in China, or those in the top decile of the population of China. Now it is flipped. The poor of America are poorer than the rich of China. So what kind of light does this shed on Friedman’s proposition?
It says that economically, he was right. Trade and globalization have created a huge amount of wealth. It also says that the most substantial part of that wealth has really gone to the poor of the world. You can even say that because the people who benefited more from that wealth creation were A) more numerous, and B) poorer, somehow globalization has worked to diminish the amount of poverty in the world. That is, of course, only half of the story. The critical point here is that the boundaries of the market and the boundaries of politics are completely different. They don’t overlap.
So the relevant question for the poor of America is not whether poverty has decreased in the world. The practical question for them is, “Can we do anything to use our political power in order to improve our situation?” That situation might be better off if the amount of trade with China was limited. That’s a very important point. We sometimes forget that capitalism is a creation of the state. It is a creation of a strong state. It all started in the middle ages when a wise prince said, “Why not create conditions with safety, with rule of law, and with low taxes that will convince the merchants of other countries to come over and have their trade centers in my city state? Then I can impose a little bit of taxes on these merchants. Having a little bit of taxes on a large number of rich merchants will generate more revenue for me than trying to exploit my poor farmers even more.” So, just as the state can create the conditions under which markets can flourish, the state can also shut down markets. That will happen if globalization, trade, and markets fail to get the political support that they deserve, at least under my analysis. So this is really the point that I’d like to emphasize: That the tension between what is valued from a pure economic point of view, and what is relevant from a political point of view, will ultimately determine which directions poverty will move.
John: This is one of the things that I love about Oxford. We have the chance to think big thoughts. We may not all agree with the big thoughts. We’ve got a proposal to look at trade perhaps as something that should be limited, a radical proposal. Marc, what would you bring to the table?
Marc: I want to raise several other issues. I’m a social scientist at heart, and I don’t study poverty or inequality, per se. But, I spend a lot of time reading about people who do. Oren has said that capitalism is really important in the market and is a powerful machine of wealth creation. But, there are limits to that and states actually build markets. I think one of the things John asked us to think about today was the nature of business and the role of business in regard to poverty and poverty reduction specifically. So far, we have these two proposals.
One is that we need to make corporations and people in corporations more directly accountable, and the other, along the historical perspective, says “The origins of relative market advantage were created by wise leaders and wise politicians who made it more appealing to come and make wealth locally than to go somewhere else.” Also as Oren said, “It is a better strategy to allow merchants into your city state and make low taxes from them than it is to squeeze the poor for more and more.”
The gist of what I want to add is related to the findings of a lot of different studies in the social sciences over the last 30 years which say, “Poverty is a dynamic process. It’s not an end state.” A number of remarkable empirical studies have followed families for 30 years or more. These studies help us understand that families fall in and out of poverty regularly. Poverty is not an absorbing state, it’s not a moral state, it’s an outcome with lots of other activities and lots of other contingencies. So what I want you to think about is not a thing, it’s a process. It’s something that happens to families and different people for lots of reasons. That’s probably the main point.
What I’d add to what everyone else has said is that in the last five years, we’ve noticed there has been a large conversation around income inequality and the changes in Western countries and other parts of the world in the relative levels and trends in income inequality. I’ll also acknowledge my college here is just going to become a host Thomas Piketty, who is one of the people who opened up this conversation. One of the things I think about is whether poverty is the same thing as income inequality, and in terms of intervention by the state or business, do we want to think about poverty, or do we want to think about income inequality?
Depending on which one we choose we can go in many different directions. I also want to introduce another insight here. I do some work with colleagues around the university who are interested in humanitarian innovation and I do some work with the UK and US militaries’ civil affairs people who go in after either violence or disasters and pick up. One of the things I’ve learned from them is that they typically think about what people need to stay alive for five days, what they need to stay alive for a month, and what they need to stay alive for a longer period of time.
So I want us to think about, when we talk about poverty, what is going to let people stay alive? That minimalist view of literally physical survival has shaped a lot of conceptions of poverty, particularly government and political interventions. So one model says “What do people need to stay alive? Mostly they need water and after they have water they can get along without food for five to 10 days, but after about 10 days people need food, as well.” There is something about sanitation, mostly because lack of sanitation spreads disease. These kind of interventions in disasters or post conflict settings have a very clear understanding of what it takes to stay alive. A lot of government policy is built on that. In the US, for example, the conceptions created in the 1960s, the measurement systems which were built, asked the question, “What does it cost a family of four to stay alive?”
That was based on a particular understanding of, “What does it take to fill a market basket to physically keep those people alive?” There were also questions asked such as, “Relatively, how much of a family’s budget is spent on food, housing, and energy?” So the idea of poverty that is encapsulated in that famous Mollie Orshansky definition from 1962 was that we should take that minimal food basket and multiply it by what proportion food is of housing and heat. This was then used to understand, “What is the minimum weekly amount of money a family of four needed to stay alive?”
Fast-forward from 1962 to 2016 and one of the issues within these conversations is that the cost of food relative to housing and energy has changed. But, most definitions of poverty have stayed the same. They are based on the same conceptual models. Why? Because we wanted time series data for policy analysts to understand how to intervene.
If you follow this kind of thing, in the last 10 or 15 years there have been a number of powerful, very contested, efforts to redefine and conceptualize time series data on poverty and other key indicators. You may be following the very interesting conversations about GDP that critique the entire national accounts framework. These give us our statistical representation of things like wealth and poverty. They are fundamentally flawed both in their original conceptions and in the assumption that economies are monetarized. Very few economies in the world today are fully monetarized. So there is a disquiet at the level of measurement tools and conceptions as well as the data that we have.
I mention that because we could spend forever debating the numbers. I don’t want you to do that. I want you to think instead about these more basic ideas: Is poverty an absolute state, or is it relative? Is the measurement of poverty about physical survival or is it about thriving? Again there are enormous and very interesting conversations on these issues. Similarly, is it absolute wealth or income inequality that we are concerned about?
Both of these measurement tools can be used with individuals, families and communities. I want us to think about, when we think about poverty or inequality, what sort of analysis are we thinking about? Is it about an individual, is it about a group, is it about a family? Is it a category of person? Is it a physical location?
What I’d like to contribute to this conversation is a deeper understanding of what we mean when we say “poverty,” and those different mental models really shape what we assume about our potential interventions. This is true whether we’re talking about interventions made by the state or business, or by an individual. They give us a different vocabulary and a different approach to analyses.
Mostly I’d like you to think about poverty as something that is a dynamic process. Very few people are poor all the time. There is in fact a small number of people who are poor, by whatever definition, but mostly it is a dynamic process. People fall in and out of it. Families fall in and out of poverty. That opens up lots of issues about how we think about where and how to intervene as well as who are the actors who should intervene: states, businesses, individuals, cities, etc.
John: I’d like to take the rest of the questions for this panel from the audience.
First Audience Question: What are some practical ways that business can actually reduce poverty? Is it just about job creation, or is it something more?
Marc: Charles Tilly was a well-known historical sociologist who wrote a book 20 years ago called Durable Inequality. In this book he said, basically, “What’s interesting in the world are the durable inequalities. Why is it that some people are relatively short in stature, and then when they have diets with more meat in them they get taller?” So he was interested in long-term inequalities that configure whole populations. He said, in so many words, “That’s a tough issue. How do we address problems where whole populations have been deprived of nutrition, or health, in ways that have physically compromised them?” That is a kind of durable inequality. Then he talked about systematic structures that make some people water poor or electricity poor or whatever and those are also systemic problems. I think you’re raising a question that says, “Some people are poor because they can’t get work, or there aren’t good jobs.” A lot of initiatives today are about what you’re saying, they’re bringing an enriched view that you don’t just give people money, you try to create ways for them to work that give them self-respect, that give them energy. I think one of the trends that this movement describes is that we understand a lot of what needs to be done comes under the area of building skills in people.
You want people to flourish, and have jobs, and be able to provide for themselves. But, the systemic sources of poverty are so complex that getting individual people jobs, as important as that is, is not all that has to be done.
So, for example, I have spent a number of years in a school of education and I do a lot of work in education. Most of us think education is a good thing. I’ve been working with a group in Vancouver, Canada lately which has been given money by a group of entrepreneurs with the purpose to “hack the Canadian economy” for inequality. One of the first things we discovered was that education is a great idea, but it takes 20 years for education to matter. So education is not going to change the inequality that exists in the economy today.
Instead, these groups of entrepreneurs are thinking about things like, “Wow, 80% of the mission driven, mostly religious, properties in Canada have mortgages, that were taken out in the 1970s. Those mortgages are now being paid off and the churches that took out the mortgages now want to sell that land off because they need the cash.
Who’s going to buy that land? Mostly developers who buy it for very little and build condominiums create enormous wealth for a few people.
So the entrepreneurs are interested in saying, “If we want to really think about wealth and poverty in Canada, we need to think about ways to influence financing protocols so that mission-owned properties, now fully paid, that go on the market aren’t sold for 10% of their real value. The entrepreneurs are saying that, “It’s not fair that some developers make several hundreds of millions of Canadian dollars just because the churches can’t build condominiums.” With the right types of discussions and policy interventions, what the entrepreneurs have raised may change inequality and poverty in Canada. So, I think the individual-level solutions around education are powerful.
I also think there’s a different conversation to be had about interventions that address systemic kinds of changes.
Oren: I think that Marc was right when he said that poverty is so much of a richer phenomenon. We can’t describe it using single numbers.
I would like to add a distinction between poverty in the developed world and poverty in the developing world. So, if you’re talking about Ethiopia, as we just heard before this panel, maybe someone could go there and set up a crop rotation that will boost agricultural productivity and lift people out of poverty. If you are talking about poverty in the rich world, I think its causes are predominantly a result of the decline of some old economy or industries like mining, textiles, ship building, etc.
Manufacturing is its own category. Germany has been able to keep its manufacturing. But, Britain has not. Poverty in this country is very much related to the unskilled people who were in these industries and didn’t pick up new skills. Worse, even their children and sometimes their grandchildren didn’t pick up skills. I think that for these people, education is the only solution. It’s true that it will take 20 years, at best, and maybe we’ll have success rates which are much lower than 100%. But, I don’t see any other solutions. Lastly, an economist went to study the county here in England where the highest vote went in favor for Brexit. The place visited was somewhere in Lincolnshire. It turned out that 75% of the population of the county left school at age 16. I don’t think there’s any chance that these people will not be poor. They will be poor even if real-estate is being sold at higher prices, and they get a share of that. Even so, they will stay poor. The only solution for them is education.
Second Audience Question: How does trade factor into this discussion? Would removing trade barriers decrease, or increase, poverty?
Oren: This is directly related to the data that I presented. It is very likely that removing trade barriers and facilitating trade is going to elevate poverty for the poor. But when jobs are moving from the rich world to the poor world, poverty is created in the rich world and poverty is relieved in the poor world. It doesn’t matter how on paper we say, “Oh trade is good because it alleviates poverty.” Politically, you will never convince the people who lost their jobs in the rich world. This is the mismatch that I talked about between markets and politics. It’s not enough that on paper trade alleviates poverty. You have to do something so that the losers in these processes will gain in some other ways, otherwise they will simply block it in political ways.
Marc: The reason I want you to think about poverty not as an absorbing state, is because if you change your perspective, it really changes, analytically and politically, what we try to do about it. Of course, there are whole parts of the world where there is lots of poverty. I think the idea of a poverty trap is compelling. I think if we begin to pull that apart, that has historically to do with how resources were used. It has to do with the lack of infrastructure, it has to do with a lot of things. So I’m not saying that there certainly aren’t places where everyone is poor. I guess I’m asking us to think about it in more dynamic terms rather as just a state.
Instead of saying, “How did they get there?”, we could ask, “How could they get out of that situation? Or, “What changes season to season, family to family?” I do not diminish the fact that many people live in very dire circumstances and have few opportunities to generate external resources. But, there are two things that I think are relevant to this.
The first is we’re in a time where a lot of people here, in the Western world, celebrate entrepreneurship as the solution. Partly because entrepreneurship is seen as an expression of individual vitality, it’s also understood to be connected to job creation, and job creation is understood to be good at reducing poverty. Those are both really compelling statements, but they’re probably not empirically very true. What I would say is that most people in most parts of the world are entrepreneurs if you think of entrepreneurs as people who are trying to use resources that aren’t their own to create value and capture value. So most people in most parts of the world are entrepreneurs because there aren’t formal jobs, there aren’t stable well-structured economies. With formal, recognizable jobs, in ways, many of us in the West, we have come to pay attention to and expect famous entrepreneurs to create jobs. But, most entrepreneurs in poor places don’t create many jobs.
The other thing relates to a basic question. Very few people in this room are at risk of starving to death. There are a lot of people who are starving to death, right? Is it enough to feed them? Does that mean they are no longer in poverty? Both of my colleagues mentioned spirit, aspiration, thriving, and well-being. Those words bring to our minds conscious efforts to get us away from thinking about poverty alleviation as just being about survival. That’s where these conversations are going. It is not only about intervening when people literally have nothing. Although, there are times when emergencies last for months, or years, or for whole lives. But the real goal has to be framed by beginning with a question like this, “Why in the midst of such affluence can we have people with such meager access to a good life?” Asking such a question may lead us to a different way to think about poverty.
John: I know that what I am about to say is odd. My concluding paragraph will be an odd way to end a great panel.
But, I want to admit failure. I’ve probably had more success than most people working on antipoverty programs in the last 42 years. But, I have failed more than I have succeeded. The people I have worked with have failed more than they’ve succeeded. I think that there are some people in the room that are frustrated by the fact that we’ve talked about big thoughts here during this panel. But, I would really urge you to take a percentage of your working time, as you do for anti-poverty work, to just have big thoughts. Challenge the assumptions you make. Try to find new ways to think about this type of struggle. If the answers were easy, we would have solved poverty problems around the world a long time ago. Let’s give the panel a round of applause.
The Internet of Things (IoT), Social Impact and Poverty
John Hoffmire: Ahsan is currently the Executive Director of WORLD MEDIA ONLINE, a London-based B2B publishing and media house focused heavily on the emerging IoT Market, where he oversees company strategy for expanding into the M2M and IoT segments, working with both global multinationals such as Qualcomm, Huawei, IBM, Cisco, Oracle, as well as early and mid-stage IoT start-ups like Dizmo. Previously, Ahsan was head of global PR and Marketing at Connect-World in London. Ahsan is also the Founding Director of Impact Investing World Forum (iiwforum.org).
John: We keep having conversations that touch up against technology, education and networking. But, we have not talked a lot about the Internet of Things. Yet. Ahsan is one of the people in this country who is reaching out globally to try and connect people to the internet. We’re going to have Ahsan now give us a keynote related to the Internet of Things (IoT) and its social impact on poverty.
Ahsan: As John said, my name is Ahsan Zaman, and I’m the Executive Director of World Media Online. We are a publishing house based in London since 2005. What we do is produce conferences, publish magazines, and also do contract publishing for global multinational corporations including IBM, Cisco and others. The reason I am here is because I founded the Machine to Machine World Congress in 2012. I am also here because, for the past four years, there has been such huge talk about how machines and the Internet of Things are going to create and generate revenue for economies across the world.
I am an alumnus of Oxford University. I care about issues related to poverty and I have come here to speak for 15 or 20 minutes to raise some questions. Before I move into the technological part of my talk, I’ll just run you through, briefly, what global poverty looks like in three basic numbers. Of these three, the third one, about women, is especially important to me. Poverty, on an international basis, is defined by the figure $2.50 a day. 50% of the people of the world live on less than $2.50 per day, and about 80% of people live on less than $10 per day. 70% of adults who are in poverty are women.
Why these numbers are important to us, and their connection to the Internet of Things (IoT), I will come to shortly.
In 2005, India, Bangladesh, and China were where most of those living in poverty resided. Now, the number of people living in poverty in each of these countries is getting smaller and we are told that these numbers are being successfully reduced at rapid rates. When we look at the numbers, we see that poverty is greatest in Asia, Africa, and the Southern Hemisphere. Somehow, though, when we talk about poverty, we often only talk about these countries and regions from a monetary perspective.
There is no doubt that money matters. But, as we move forward, we also see health risks and water scarcity adding to the poverty of many countries. Even if these regions have more money, they won’t be able to address these problems completely. Where I come from is Pakistan, where Karachi is the largest city. In Karachi, water is often sold in containers. You would tell me that delivering water in containers is not the most efficient way to get water to someone’s house. The poor spend an inordinate amount of their time getting water in whatever way they can.
So the impact of water on global poverty is going to be huge. It will be huge from a scarcity perspective and it will continue to be huge from a delivery perspective in 2025. The US and China will also be facing water crises. From 1995 to 2025, water withdrawal as a percentage of total water available will have risen significantly to 40% in many parts of the world – with the US and China rates also coming in between 20 and 40% withdrawal rates.
Moving on from water scarcity, I want to take you through some quick statistics on what people do for a living globally. 1.4 billion are involved in agriculture. 800 million work in industrial jobs, almost 2 billion don’t work for pay, and 1.7 billion work for government and for various service companies.
It’s becoming evident, when it comes to water, those working in agriculture, especially those living in the Southern Hemisphere, are going to be affected the most.
Now when people talk about the minimum wage, it actually fascinates me because in Pakistan there are areas in Sindh, Baluchistan and Frontier in the north, where people don’t earn. A $2.50 wage/day is actually a lot for people living in these areas. When we discuss global poverty, metrics and trends are fairly generalized. The on-the-ground reality, the world over, is completely different.
Why I am taking you through these issues is simple. The IoT – Internet of Things – (a concept that wasn’t very popular a few years back) will impact global poverty. Why are these poverty numbers important to the Internet of Things (IoT) community? What is the connection between poverty and the IoT?
Let’s spend a few minutes talking about IoT market numbers and technology. The IDC predicts that, by 2020, there will be 4 billion technologically-connected people. There will be $4 trillion in revenue opportunities because of the Internet of Things, and you will have 50 trillion GB of data and 25 billion IOT-related chips embedded in intelligent systems. This is great, because it’s creating opportunities across all industries.
Just to give you a few real-life example, I sit in my car and I can both readily communicate through it with infotainment, and I can access smart home services from it. Similarly, in my house, British Gas has now installed a new thermostat called Hive. So, on my app, right from where I am right now, I can control the temperature in my home, I can shut off the whole heating system, and I can even control my boiler. That is the connection between the internet and the things!
The opportunities that will come as the array of Internet of Things expands will be great. It will create millions of jobs, you will see development of smart buildings, smart cities, and smart health. All of these are part of the IoT ecosystem.
So the reason that we need to focus on global poverty and the Internet of Things right now is that the IoT could actually make poverty worse. The IoT is creating jobs now. But, in a few years, the opposite could be true. The IoT could be credited with eliminating millions of jobs. So, the two topics, IoT and poverty alleviation may not be converging in a positive way.
What is going to happen next? We are going to end up in a situation where industries will be disrupted, jobs will be lost. And you will see in the Western world, in a very short span of time, disruptive technologies and solutions that will literally wipe out large numbers of basic jobs.
Beginning with connected cars, you will then see driverless trains and driverless cars/trucks. A lot of transportation jobs will become obsolete. At the same time, Robo-Advisors will start advising us on our mortgages and loans, wiping out many call center jobs.
The process will continue, eliminating many distribution center and other transportation jobs. Amazon is already launching trials to deliver mail and packages through drones.
IoT-related automation will move through healthcare as you see digital health, and robotic assistance in surgery and nursing, have a huge impact on how we look at our health, how we diagnose disease and how we cure disease.
There will be further advances in genomics which will further digitize healthcare. Connected digital devices that measure and monitor blood pressure, glucose, temperature and heart rates will all lead to less need for labor. All of these changes will happen very rapidly within the next five years.
Wearable devices made by Fitbit, Jawbone and Nike, will all have more sensors in them. Why do you think Nokia bought Withings, a company that makes connected watches, for $195 million? Simply because that is the next best thing Nokia can do in terms of saving itself from disruption, and get out in front of what the IoT is going to do in the next few years.
Moving forward, we will see that IoT will enable: new business models, real-time information on mission-critical systems, diversified revenue streams, global visibility, and intelligent operations. Literally, every company that I know (and my company has worked with everyone from Nokia, to Cisco, to IBM — all come to our conferences) are looking for new solutions that allow them to monitor real time information and gather data. For some, the goal is to make a city safer and smarter. For others, the goal is saving money or making money – or both.
So what is going to happen next? In a nutshell: job losses! IoT-related automation will eliminate a lot of basic jobs!
Now a good way to think about the future is also to think about what has just happened. With this information, you have some notion about what will happen next. Just go to BBC or CNN “past news” websites and type in “Jobs Created”. How many of us might then read about how, in the recent past, that “TESCO is creating 10,000 jobs in England” or “Pharmaceutical companies have created 15,000 jobs in Ireland”? You will find these stories.
But, what will you find when you search news archives at BBC and CNN for “Job Losses” or “Job Cuts” (and not “Job Creation”)? You will find a lot more articles about big employers cutting jobs than you will about jobs being created.
What I am trying to say is that this connected infrastructure, the inter-connected ecosystem, which is created by the IoT (Internet of Things), will very rapidly eliminate large numbers of basic jobs in many industries.
Look at what is happening with financial services. Moving forward, a lot of bankers who are now working in the City, they won’t be here. And it will not be just because of Brexit. It is because the banks now have algorithms.
Algorithms allow banks to do a far better, far smarter job than a typical banker was able to do five years ago.
Moving forward, IBM will use Watson even more effectively. IBM Watson is the artificial intelligence arm of IBM which will use data and make something out of it. IBM Watson is now working in healthcare. IBM Watson is working in smart cities. You name it, any industry, IBM Watson will be working there. This is a good thing. Our lives become better, and we are hopefully going to live longer and safer because of IoT and AI (Artificial Intelligence).
The question is, how are those put out of work going to earn money? Most of us here are going to do great. But what happens when all the sudden interest rates for some odd reason jump up to 4%? Will everyone be able to pay their mortgages at 4%? What happens if three years down the road we are told by the NHS, they don’t need so many GPs and surgeries. Then all the sudden you have 10-20% of GPs without jobs. What happens when the postman loses his job? The cab and truck drivers lose their jobs. Do they have any other skills they can fall back on? For the most part, “no.”
Beacon Research writes good research reports. They have come up with amazing work that tells how certain devices, applications, locations, industries, and service sectors are going to be impacted through the Internet of Things. I just want to run you through, briefly, a few of the things that will change. Think about pumps, pipelines, motors, planes, signs, and cash registers. Each of these will be impacted through the IoT.
Now, I like this. I think it’s great. Eventually we will evolve, but if you look at the MBA curriculum of Oxford, or Cambridge, or Harvard, what do they tell you? They try to make you focus on the net present values, discounted cash flows, and accounting ratios. All good things. They try to get you to understand macro and microeconomic models and frameworks.
I like that. It’s great. But, when an MBA goes out and he or she ends up looking for a job and finds out that for some strange reason, five years down the road, companies are not really looking for net present value anymore, they’re not really looking for micro and macroeconomic models, and what they’re looking for are new skills, the MBAs are going to face disappointment.
What are those new skills? Two of them are data analytics and big and small data analysis. The people who will benefit are those who understand how the connected ecosystem works, how to monetize it, how search engine optimization works, and how SEO can help you generate value. They are going to benefit the most. People who understand how Amazon, Google, Uber, and all these companies are disrupting and making money—they are going to be the ones who make money.
Already the Internet of Things is having a huge impact on us. Uber is a great example of IoT’s positive impact, because what it does is it connects us through a system to Uber taxis and we’re able to use them in real-time. However, can such disruption have positive impact in other industries and other sectors?
The IoT is a multi-trillion market opportunity. Which means a lot of jobs with new skills will be created in the Western world. At the same time, a lot of currently basics jobs will be eliminated. And this is only the impact in the western world.
If this is the impact in the western developed world, then what will happen in the developing world?
Due to IoT related automation in the West, factories could eventually shut down in the Third World and many parts of the Southern Hemisphere. Jobs will be lost. Why? Because they will become automated. You will not need as many workers. There are many in the West who want to bring all sorts of manufacturing jobs back to Europe and the US. And, with the Internet of Things, that is going to be a strong possibility.
And if that starts happening soon, then what do you think is going to happen to the factories in India, Pakistan and Bangladesh? The factories will cut back on the number of people they employ as more jobs are automated. Just like in the West, IoT will also create efficiencies in these parts of the world and dislocations.
The key question is: will the Third World be able to absorb IoT-related disruption? Will people living in the developing world be able to create new skills and new jobs for the unskilled laborers who will be displaced?
I wish I had a more optimistic message to leave you with. You are the experts on poverty. I just wanted to share a few thoughts with you about how the Internet of Things will have a social impact on poverty. Social impact after all – can be both positive and negative.
Now, last, but not least I will leave you with this interesting video just to create an analogy of what the IoT is. REMEMBER, Charlie (the baby), in the video, is the Internet of Things, and the other boy is the global economy.
Richard Barker and Jarrod Ormiston
John Hoffmire: Richard Barker is Professor of Accounting at Saïd Business School. He is also the Academic Director of the Oxford MBA and Tutor in Management at Christ Church. Richard has won teaching awards at both Oxford and Cambridge, including in 2013 “Most Acclaimed Lecturer in the Social Sciences,” awarded by the Oxford University Student Union.
Jarrod is the Co-Director of the Entrepreneurship and Innovation Research Group at the University of Sydney. He is also the course coordinator and lecturer for various units of study within the Business School and the Faculty of Science focused on social entrepreneurship and sustainability. His current action research projects involve various activities with the Entrepreneurship Development Network Asia (EDNA) and working with social enterprises to enhance their impact. Jarrod has recently completed his PhD exploring the role of impact assessment in social entrepreneurship and social impact investment.
John: Let’s start with how broad measurement of a business impact should be and why.
Jarrod: The way I like to think about it is that it’s more about creating a culture of measurement within an organization. So, as a place holder, I would posit that business should be measuring its impact on all different sorts of economic, social, and environmental indicators. What I think is important is developing rigorousness and robustness around evidence.
The work of NESTA in the UK, for example, (the National Endowment for Science, Technology and the Arts), is the best I’ve seen in terms of not describing something like GRI, (the Global Reporting Initiative), a reporting initiative which says you have to measure “this” and “this” but rather encouraging organizations to be able to keep an account of their impact. NESTA encourages looking forward to what you’re trying to achieve, and then thinking about how one can then show some correlation between what one is doing and what outcomes are occurring. When one can get to this stage of correlation, the next stage usually involves a more robust experimental design, one that can show a real causation between what one is trying to do as an organization and what is experienced through an intervention.
Richard: I always struggle with words like impact or sustainability because these things mean whatever you want them to mean. So, for me, clarity over what those words mean is absolutely fundamental before even starting to think about what you might measure and how you might measure it.
I just came from a session where we were talking about corporate purpose. We talked about Unilever in that context and Unilever is kind of a poster child for a responsible corporation. Unilever’s mission describes itself as focused on something related to the long-term sustainable development of Unilever or something like that. This could be taken to mean either: (1) a focus on the long term sustainability of the profit generation capability of the corporation, or (2) designing and running a corporation that is consistent with the long-term sustainability of society and of the natural environment. Those are potentially quite different objectives. You can read the word sustainability to satisfy either of those two. They are potentially conflicting, but they can also overlap. So clarity of purpose I think is fundamental.
The second thing is there’s no use measuring things that people don’t care about. So, most measurements, most of the time don’t go anywhere because no one is interested in the data. My particular area of interest is accounting and corporate reporting. If in corporate reporting you report to your investors about something that matters to them in their role as investors, they will pay attention. If you report to them something that does not matter to them in their role as investors, it makes no difference at all. So that requires not just thinking through how you measure something, but how you make that measurement meaningful given the way the users of that information will use that measurement. I think the great majority of metrics don’t pass that test.
Third comment, and finally. Notwithstanding all that I have said, metrics really matter. It is a necessary that you measure stuff. People will focus on things that you measure and they will not focus on things you don’t measure.
John: Take your favorite impact business, either real or imagined, and tell us what your favorite measurement for that impact business would be.
Jarrod: So, I do a lot in the Australian context related to social enterprises. Much of my work is about trying to come up with strategic approaches to understanding impact. So shifting away from impact measurement for external accountability is helpful. I am most excited about any measurement tool used to advance the wholesale movement of an organization toward having measurement be part of the firm’s culture.
A specific organization is called Baptist Community Services. This organization works in the homelessness space. It’s not a religious organization. But, it is religiously funded. We talked with the management team about using a strategic impact measurement approach. We sat down, they spoke about their mental health programs they were providing, and the other health services that were available, education training programs they encouraged the homeless to take advantage of, job placement services that are offered, housing services that would be helpful. We tried to build metrics around each of those services.
All of the programs are about wellbeing. All of measurement variables were essentially wellbeing indicators. They were material wellbeing and quality of life indicators.
Our approach is very much focused on participatory models. So, we went and spoke with the homeless people that were engaging with the services, asking why they use the service. Many of them said they used the services because they could use a shower at a facility. The organization hadn’t put that in intentionally, it wasn’t meant to be a hygiene service. They didn’t mean to have a showering service as part of what they were offering. But, this discovery was probably my favorite part of the metric-forming experience because it totally shifted the view of management and what they should be doing. And remember, we only would have discovered what we did about the showers because we adopted a participatory research approach. We let the metrics be defined by the people that they were trying to have an impact upon.
John: I really want to draw attention do this. So this is a case where measurement actually changed strategy and tactics. I think that is really valuable.
Richard: WWF, the World Wildlife Fund, comes to mind when you ask this. It is not a commercial organization, but it is a business. It generates income, it employees people, it’s a large organization, it’s very successful in ways that you can measure, it is global, it’s hugely impactful, it has a very clear sense of what it is trying to achieve, and has been very successful at achieving it. Like any commercial organization, it may or may not make a surplus, but it needs to be economically viable to be successful. It strikes me that that is a business actually.
John: Richard, throughout the conference, we’ve been making the argument that environment and poverty have to be thought about together. Tell us how you think about this.
Richard: Think about Jane Goodall’s work in Tanzania. There was the Gombe National Park which was protected. And there was a massive area around the national park which was not protected by law and regulation. If you’d have flown above 20 or 30 years ago, within the national park boundary you would have seen dense green vegetation and outside the national park, massive deforestation. The line of the national park is the boundary of deforestation.
On the face of it, this was just destructive and disastrous. If you fly over it now, you’ll see that all is substantially green. The reason it is substantially green is because Jane Goodall’s foundation began working with the people living in the communities outside the park who were engaged in deforestation. They had deforested the surrounding area for short term economic reasons. After Goodall’s foundation intervened, they began reforesting, also for economic reasons. There are tons of examples like that. You can’t think about the management of forests without simultaneously thinking about the questions of people, poverty and economic wellbeing.
John: Jarrod, You’ve raised an issue about a relatively small organization when you discussed the case of the shower and Richard talked about a very large organization in the case of the World Wildlife Fund. Do you think that, by necessity, large and small organizations need to measure differently?
Jarrod: Many of the organizations we work with, constantly say that besides the fact that they are resource poor, they don’t have the time, people, or money to be spending on impact measurement. There are many small organizations which are so connected to their clients, the beneficiaries, and the communities in which they are working that they have a really good understanding of the impact they’re having. They have anecdotal evidence of the impact they’re having and from that anecdotal evidence it’s not hard to start collecting some more rigorous examples through interviews, through focus groups, and through surveys.
Another element of smaller organizations is that they often have a more focused theory of change. They know what they are trying to achieve. By way of comparison, large organizations are more complex. There are so many different pieces of work that many of them are doing, measurement becomes harder. Despite the fact that these larger organizations have more resources, have big accounting teams and sustainability teams that could be doing this type of measurement, often the people doing it are so disconnected from the everyday impact of the activities that it becomes harder. So I’d like to flip what would be the normal logic and say it is easier for the smaller organizations. When we have worked with larger organizations, we tend to start with a small element of what they’re doing. We work with one specific program, one specific team, and then build a measurement framework from that.
Richard: I would agree with that.
John: Jarrod was probably here during the impact investing session we did yesterday. You heard me ask the panelist about sticking one’s finger to the wind, in an impact situation, and saying whether there was positive impact, negative impact, no impact. What do you think of this?
Jarrod: I find it problematic. I was reflecting with a few people after the session. I’ve got a paper I’m writing at the moment that I’m calling the empty rhetoric of social impact measurement in impact investment. I am framing it around the problems venture capitalists have in measuring impact. In this paper, I say it’s problematic for the ex-venture capitalist who is now the CEO of a social impact investment fund to do his own measurement. One day I asked him, “How do you measure your impact?” He said “Finger in the air.” But, I think it’s more complex than that.
It’s one thing to potentially know that you are being impactful. But, I think it’s different when you know for sure that what you’re doing is having an impact.
Take the example of something we’re doing in Asia where we’re running a relatively large 130- employee nonprofit organization in Myanmar called the Entrepreneurial Development Network Asia. We’ve got 10,000 grassroots entrepreneurs going through our mentoring program there. I think if you talked to people there they would say “yes, that’s impactful.” Doing the impact evaluation and impact measurement at the moment though, I’m a little bit worried about what we find out on Wednesday. A big element of the education program that we’ve done focuses on risk management. Myanmar is a booming economy at the moment. We’re a little bit worried that we’ve created these risk averse entrepreneurs.
It’s going to be interesting to see the control group. Perhaps we’ll see that despite the mistakes we are making, we are still impactful. On the other hand, as we have been training people in this emerging economy about entrepreneurship, business skills, and risk management, we might actually find that the metrics we’re trying to achieve, have not been achieved. Maybe we taught the entrepreneurs too much about risk management. Maybe they haven’t taken risks in this booming economy and that has had a negative impact on them and their business.
So I think it’s problematic to put our fingers to the wind. We see a lot of organizations that aren’t impactful, despite working in impactful areas. We see a lot of organizations working in the homelessness space that aren’t doing anything to address the underlying causes of homelessness. So, I think just saying “I think that’s impactful” because I feel it is doesn’t quite work in a few situations.
John: We’re going to come back to you on cost in a minute, but Richard to you, same question. Do you believe that wise people should put their finger to the air to measure impact? Could any of 10 people here be trustees over impact at an impact investment company in a situation? Could they be asked, in the same way that a bankruptcy trustee might be asked, “Is this the best thing?”
Richard: I think inevitably there is uncertainty, ambiguity, a lack of clarity about whether a certain aim is being met or not. So part of the appeal of metrics is polluted. It’s sort of “let’s try and measure something that we know we really can’t.” So you can’t get away from that inability to actually put your finger on something that you know is there or you think might be there. One of the difficulties again, in this space, is that it opens up the possibility of being able to convince yourself that there is positive impact regardless of whether or not there is.
An associated problem is that, with or without data and measurement, groups love to develop their stories. The plot of a story may not be convincing to an outsider, because it’s not precise. But, the group loves it.
I’ll give you an example. I went to a presentation about six months ago. It was at a major bank. They were talking about the focus of the bank being one of rebuilding consumer trust after the credit crisis. They had a whole social impact story. The social impact story was, “Don’t think of us as being a profit maximizing organization, we’re an organization that enables young people to be able to afford to buy their new home, we are enabling businesses to be created,” etc. So they created this whole narrative of social impact around enabling people in society to do what they wanted to be able to do and creating opportunities and all the rest of it. This is another way of saying that the business model of a bank is loaning money, right? So they constructed the notion of social impact to suit them.
That particular case was very transparent. But you can see people really believing that, working for the bank and thinking “we’re all about social impact, that’s what we’re here for” and it’s just not compelling, it seems to me.
So the main hurdle in that space is the risk of delusion that comes by way of deliberate and disingenuous self-promotion. This is why I picked WWF as an example of a business because its purpose is one of social impact rather than its purpose being something else. Its whole purpose is to have a positive social and environmental impact. That tension I think is an incredibly difficult tension to resolve and leads to wishful thinking.
John: During each of our panels we’ve run out of time way too quickly. But, I want to get to cost. Let’s assume we are talking about a 500-employee impact business mainly in a nation that is developing. What would it cost to measure impact if a private equity group had invested? And, let’s say that the measurement was being done because the private equity firm’s outside investors really wanted to have a really objective view of impact. Give a range if you feel more comfortable with that. Maybe it’s a percentage of revenue, a number of dollars, or pounds, however you want to state the cost.
Jarrod: I don’t usually give numbers on these types of things but I know what it costs to measure the impact of the work we’ve been doing in Southeast Asia. We have often built in 10% to do the measurement and evaluation work. But, that’s coming from the aid agencies that are supporting the non-profit activities or business activities we’re setting up there. It’s important to have some budget if people are wanting something rigorous. I think there is something more I want to say that is important, though.
I find it problematic when impact assessment and impact measurement are left as separate organizational practices.
Some say: “We’ve got the consultants coming in, telling us what our impacts are.” I see some value in this in terms of trying to understand whether certain approaches work. But, what I think is more important is trying to embed impact assessment within the everyday rhythms of the organization. So it’s not just a separate research practice functioning on the outside. It’s best when you’re collecting your own information as your organization goes about its everyday activities.
Going back to the Entrepreneurial Development Network Asia, there are elements of what we’re doing in our accounting that should be feeding into our own understanding of our impact. In our strategic planning, in our strategic conversations, in our strategic thinking, we should be talking about elements of impact. In our marketing activities, we should be drawing upon stories and episodes of impact. Our impact measurement should not just be about statistics. There are elements of measurement and assessment that should be built into organizational learning. We should be bringing up these topics when we are onboarding new employees.
So, I think we should not perceive impact measurement as a separate activity that we need a certain percentage of the budget reserved for. If we can think about how we can actually embed it within our everyday rhythms, it’s going to be cheaper and more relevant to our activities.
John: I like your answer. I love the fact that you started, at the very beginning of the panel, by speaking about a similar point. I know this is important to you to imbed the measurement practice in almost all parts of an organization. I know that you don’t just believe in doing evaluation through outsiders.
I think what you were talking about with the 10% figure, you were mentioning that as an amount that you received from a development aid organization. If, instead of receiving money from a development aid organization, you were talking about the cost of evaluating impact of an impact investment, will you, in round numbers give us a sense of what percentage of annual revenue would be spent on measurement?
Jarrod: I think I’ll stick with the 10% number. But, that is including all the costs of collecting data, including setting up and running accounting systems.
John: By the way I’m very comfortable with that number. I think that’s my estimate, as well.
Jarrod: The problem is, I work with a lot of social impact investment funds and they should be factoring these costs into their budgets. It’s not fun for anyone when the impact investing funds are not providing anything to their investees to actually do rigorous impact measurement. So I think we need to shift the onus onto some of the investors, some of the investment funds, to actually provide the resources for this. Maybe the total amount is something like 10% when all the costs of accounting are included.
John: To be really clear, I know Jarrod to be a good person. So as I make this next point, this is where another tension comes. Most businesses run on about 10% net profit when measured against their revenue. So, if you assume you’ll pay 10% for measurement, you’d see potentially 100% of the profit going to measure in some of these situations. Now, neither Jarrod nor I would be excited to see that continue and my guess is that as you imbed the culture of measurement and shift more of the costs over to the impact business rather than paying costs to consultants, the total percentage that goes to outsides comes down. But it is very difficult from a transaction cost perspective to see some of these measurement costs be so high in the initial stages. Richard do you want to add anything to this?
Richard: Yes. Just to agree and extend the comments about measurement being off to one side. I think that’s exactly what you don’t want. But, in many ways having some of the measurement be done by those outside of your organization is often required. By following investors’ instructions, you get to what you want.
We just recently completed a series of interviews with sustainability managers, broadly defined, in large organizations. One of the striking features of that field work is the extent to which external reporting off to one side, disconnected from the business, is actually being done. This is because there’s some vague notion that perhaps it ought to be done, for some not particularly clear reason, with no particularly clear audience in mind.
That starts off a process. So, the company starts reporting on impact metrics of one kind or another in ways that have no impact on the organization itself. But, having started to do that, having employed someone to do that, and having that person then defining their role in terms of influencing within the organization, you get some gradual diffusion from that external reporting into a situation where it’s no longer separate. So there is a bit of a journey that you take. So I wouldn’t completely belittle the part about having some separate, outside measurement, especially for a larger organization.
Crowdsourcing and Funding
Matt Novak and William Conner
John Hoffmire: Matt Novak was a finance lawyer at Clifford Chance and then moved into investment banking where he joined one of Dresdner Kleinwort’s emerging market divisions and went on to run the Emerging Markets team at Commerzbank AG by way of succession. Matt has also been involved with several investment companies where he deployed capital to emerging markets through debt and equity investments. He now serves as CEO of InvestDen, an online investment portal which gives clients access to innovative companies which are looking for debt or equity investments.
Bill Conner is a founding partner of Conner & Associates and a Fellow of Wolfson College, University of Oxford where he is the Development Director. Current and recent clients include the Jubilee Sailing Trust, the Hellenic and Roman Library, the Institut d’études avancées, the British Racing Drivers’ Club, the Royal Drawing School, the Oxford Technology and Innovation Fund and the Global Leadership Foundation. His expertise is in leading organizations through institutional strategic planning for large fundraising campaigns, building high-value relationships leading to successful fundraising, and crafting institutional visions and associated narratives to support them.
John: Let’s start with some definitions. What is crowdsourcing, what is crowdfunding?
Matt: Crowdsourcing is used by a group of people for a common purpose, whether that purpose is to further an idea, to solve a problem, or to raise financing. Crowdfunding specifically is the process of raising funds from a network of people which may include friends, families, investors, customers or others. Often that funding exercise is done to raise a smaller amount of money per person, but the total aggregate result leads to raising the funds you need.
So, by way of example, if I’m an Ethiopian farmer, looking to raise $100 from one individual, I can raise $1 from 100 people.
Bill: I come at this from the philanthropic point of view. We pioneered crowdfunding for academic purposes here at Oxford several years ago. I work off of the basic ideas that Matt mentioned. But, we’ve worked with matching funds where, if the crowdfunding is successful, a donor will put in a matching amount of money. With crowdsourcing I’ve done a bit of experimenting with engaging alumni by sourcing memories. Through this, we have developed a history of relationships within the college.
By asking them for memories first and then asking for money as a follow-on, we make the whole situation more comfortable for everyone.
John: Matt would you tell us about what you’ve been working on?
Matt: In addition to what you mentioned in your introduction of me, John, I also have a role with Duet Group, which is a $6 billion asset manager based in London. My responsibility there is to further their Africa Imitative on the private equity side in settings very pertinent to those referenced by David Croft. If you were around for his presentation, you will know he referenced the need for big corporations to focus on using their core operations to create social good. At Duet, obviously a very alpha hungry machine, we are spending 5% of all profits generated by giving back to projects in Sub-Saharan Africa, in particular. In fact, if anyone has specific causes in mind, please get in touch afterwards because we are looking to allocate funds to causes in that region of the world. In particular, we address issues related to poverty, medicine, education, and the empowerment of women.
John: Bill anything else you want to tell us about what you’ve been working on recently just so people have a little more context?
Bill: I have two projects completed and I have one that is probably going to launch by Friday. The first one is related to Tibetan Malayan Studies. We picked this for a variety of reasons. One, because we have a large network of Buddhist groups associated with the college, many of whom I’ve worked with for many years on a personal basis.
We have a history of having hosted Tibetan Monks at Wolfson College. What came out of this fundraising effort was about three dozen new donors. It turns out two of them are high net-worth individuals who we are now working with to provide matching gifts. We also landed a large gift to match the original matching gift. So, in essence, we have been experimenting with a combination of high net-worth fundraising and crowdfunding.
Taking on this project created a framework, and it created a deadline. It also created an opportunity to get the word out there that we were building on our work in the area of Tibetan Malayan Studies. Clearly, the effort paid dividends in many ways.
The second campaign involving crowdfunding was for our new building. We raised about £136,000 pounds in new money. This was an alumni campaign on the back of the engagement process I mentioned a few minutes ago. It was called: Send a Memory, Send a Contribution. We could have called it: Buy a tree, buy a shelf, buy a work station, so on and so forth.
This campaign generated a lot of attention from lost constituencies. So, on the one hand, we used what was a very old fashioned philanthropic approach. But, we also used new technology and digital communication to do it more cheaply and to have a greater impact.
My next crowdfunding campaign, which I hope will launch by Friday, uses a different approach and a different platform. We’re looking for a revenue stream as opposed to a large pot of money. I founded a harpsicord academy in southern Tuscany about 10 years ago. We ran out of money last year, so we are creating an income stream on a platform called patreon.com. It’s mostly used by artists, writers, and other individuals—more so than institutions.
John: Matt staying with the private sector side of your work for a few minutes, will you tell us if you think the crowd is usually right when it comes to investments and give us some examples, if you will.
Matt: We’re all making decisions daily and constantly. We make these decisions based on imperfect information. The reason behind why we use imperfect information is that any individual has a unique set of experiences, biases and prejudices. The logic that follows from this is that a vast array of individuals making decisions will bring a vast array of their own unique experiences, biases and prejudices. Through this process of collectivizing experiences, science shows we actually make better decisions on a collective basis.
That’s one side of it. Having said that, we fall prey to confirmation bias and herd mentality. Crowdfunding has also seen some losers.
Crowdfunding has maybe a 5-year history. This is relatively immature industry. But, in the last two years, it has rapidly matured. Five years ago, the average failure rate for a crowdfunded company, within the first 12 months of being funded, was approximately 24%. Five years forward, the average failure rate within 12 months of the funding, if we look at last year, was 6%.
So, statistically, we and the crowd are getting better at choosing the right projects.
The reasons we are getting better are probably directly attributed to more information, more access to information, and more integration within the ecosystem.
John: Matt, do you want to take a guess at what a comparable statistic for failure might be in the startup world where crowdfunding is not involved?
Matt: It’s difficult to make the comparison. Often crowdfunding campaigns now receive some sort of strategic guidance. So rather than someone saying “go ahead and do what you want” we specifically offer incubation services. We’ll look at an entrepreneur and say, “You have a great idea but you lack some of the business acumen you need.”
That business acumen may be related to any of the following fields and issues: legal, regulatory, accounting, search engine optimization, marketing, etc. So we equip them with appropriate skills and information to help them leverage their good ideas. Success has a higher probability of appearing when you add ancillary services to the crowdfunding.
John: Were the figures you were citing global figures?
Matt: Those figures are global figures. The incubation relates to what we do, specifically. I think many of the crowdfunding platforms have tapped into incubation/consulting services and therefore the failure rate has been decreased.
John: That’s what I would have said. The 6% figure, in particular, is below the rate of failure of startups globally. Did you want to add to that Bill?
Bill: I’m afraid I do things that guarantee my campaigns will be successful before we start them. But, my experiences have been with small non-profit crowdfunding campaigns. We are dealing with small money compared to anything commercial. So, perhaps my experience is not relevant in this context.
John: Let’s talk about digital engagement for a while. How does it work and what do you think are the main measurements that matter when given certain industry constraints?
Bill: I went to a seminar about a year ago that the mother of the young man who launched the Ice Bucket campaign gave on how they succeeded. It’s probably the most successful philanthropic crowdfunding campaign I have come across. Something like $200,000,000 was raised in the first 12 months of that campaign. I was very impressed by this woman’s presentation in as much as it was all about using social media to communicate across a wide spectrum of constituencies and bringing on board all kinds of high profile people.
You have to remember, everyone from George Bush to Bill Gates participated in that effort to raise money to fight the ALS disease. It seemed to work entirely because of the fact that this lady and her neighbors sat in her kitchen and liked and shared and liked and shared, day and night, until they created the kind of critical mass of having a campaign go viral. It was very clever and impressive in terms of how it was done as well as the low cost.
Matt: I absolutely agree. I think it’s never been more cost effective to communicate your proposition. We’re living in an era where 40% of the population is connected. So that’s nearly 3.5 billion people online. With the click of a button, you have the potential to absolutely penetrate your idea, your request, your fundraising objective to that many people. The questions are: How do you do it? What is the best method? How do you measure your success with the method you choose?
Clearly there are costs involved with crowdfunding. There is such thing a thing as a cost for acquisition of contacts. But, you can minimize that—as Bill said—through social media campaigns ensuring that you at least give yourself a chance of going viral.
Everything from search engine optimization, to digital ads, to the marketing—all needed. You can do crowdfunding on a very cost effective basis if you do it properly. I think it’s very important, though, to educate those individuals who have a constrained budget. You can be successful with crowdfunding with a very small budget to work with. But, it is easier when you have some resources to spend.
Bill: What interests me is the reach that is possible with digital communications. Going back to my Tibetan and Himalayan studies project, there’s a very large network of people I work through called Live to Love International which is a secular fundraising mechanism that serves the Himalayan region. I know the people who support this organization, I know there’s a lot of wealthy people among their supporters. But, reaching them is virtually impossible, I don’t have their email addresses and I don’t know them personally.
So, we work to find them through groups formed on LinkedIn and Facebook. In fact, the three high net-worth people that we came up with, one from Mongolia, one from western China, and one from London, all came as a result of a source in Mumbai. In mysterious ways, they popped up and there they are.
Matt: The days of putting a huge billboard in Times Square or Piccadilly Circus are effectively over for certain types of campaigns. Now you can geo-locate and target your specific user. With certain types of data analysis tools, you can find who you want to target, how old they are, what location they are in, and what their interests are. Psychological studies on consumers’ behavior suggests that you need to see something seven times in order for them to actually convert. So you can manipulate your proposition to give you high chances of conversion.
To go a step further, it’s absolutely incredible. You have the ability to, on a very cost effective basis, synthesize information constantly and pivot every single day to make your chances of success higher. In essence, you now have the ability to do the equivalent of taking that billboard and moving it to Piccadilly Circus one day, and moving it to Leicester Square the next day, and moving it to Oxford the next day to make sure you have the exact audience you want in order to drive your best outcomes.
John: I have a choice in these types of situations when I set up a panel. Would I rather have real experts in crowdfunding and crowdsourcing, or would I rather have people who have less experience and have worked on poverty-related things. I know that, in neither Matt’s nor Bill’s case, are they focused 100% of the time on poverty-related things. But, every now and then it is better to hear from the experts because most of what they work on crosses over. What’s just been discussed crosses over clearly from normal crowdsourcing and crowdfunding, to the crowdsourcing and crowdfunding related to anti-poverty work.
What I’d like to turn now is ask about the bad side of the crowdfunding world. Matt, how do we keep the bad actors out?
Matt: Let’s start with where we are now and where we’re going to go and then we’ll talk about how we prevent the bad actors from infiltrating the industry. So where we are now? In the last year, there was £3.2 billion invested in crowdfunding. That includes all donations, equity investment, as well as debt investment. That number is exponentially increasing. It’s increasing 295% year on year and on the donation side. In excess of 400% for equity crowdfunding, and on the loan side, it is growing at over 200%. Not only is it increasing because it is becoming more mainstream, people are accepting it, and individuals want to take control of their investments to actually get higher yields.
If your money is sitting there in a UK bank account, you’re effectively losing capital. You’re eroding it based on inflation. In Germany and Switzerland you are actually paying the banks to hold your cash. You make less money in interest than you see disappear as inflation eats away at your savings.
So, people want to do better on their investments. They’re willing to add some risk to get more return. Moreover, the government is being exceptionally supportive. They’re being supportive in two capacities and there is no end to their support, particularly in a post-Brexit world. But, that’s for another day and another conversation. The world really is changing quickly, isn’t it?
The government’s support in the UK comes in two forms: First, ISAs, similar to IRAs in the States, are now able to invest in crowdfunded assets. Second, on the equity side there is a scheme which is not very well utilized. But, it is called the Seed Enterprise Investment Scheme. It effectively allows an individual to invest and receive a 50% rebate, providing they have the offsetting income tax liability. Investors also have to hold the investment for three years. If they do, capital gains made on the investment are tax free. And, if the investment fails, they get a further rebate so what investors actually put into the companies through this plan can cost them as little as 25% of what is invested. The government, in effect, is putting in the rest.
That scheme was started in the UK for two reasons. 1) Job creation, and 2) To help commerce flourish. Having said that, we have an exclusive partnership with KPMG. We had a deep discussion on this last year, and my question was, “Why aren’t more people using this plan?” The question arose from the fact that, I think it was, £50.4 billion pounds was paid by the UK citizens in capital gains taxes in a recent year. That number should not be so high. Investors should be recycling their resources back into the UK through the Seed Enterprise Investment Scheme and creating jobs.
The answer that came back to me from KPMG was, “It’s simply a lack of education.” So we’re trying to educate people in real life and suggest to them that using this scheme is a very low cost way to invest and the benefits are extraordinary. So, back to your point, the industry continues to flourish, and we will continue to grow from strength to strength, but there will be bad actors. Those bad actors will show up in a number of ways.
The first is through money laundering. Money laundering’s negative effects on crowdfunding can be very easily mitigated by having the right technological platform at your crowdfunding company and having the right money laundering officer in place, as well.
Crowdfunding platform companies are FCA regulated. FCA stands for the Financial Conduct Authority. There’s an inherent obligation to the regulator that every crowdfunding company has to vet the source and origin of the funds they take in. So, that can be put to bed.
The second concern is about bogus businesses. People putting up bogus businesses or bogus causes have effectively misappropriated those funds. That is the hardest issue to resolve, and the only way we have found to keep bogus companies and causes off of sites is to do excessive due diligence, or research, on those who try to put things up on our sites.
The key is understanding who the actor is on your platform. You have to understand their cause, or their business. You have to do a deep dive on the details of their plans and ensure what they say is, in fact, correct.
Platforms will never take on a fiduciary obligation to their underlying investor or donator. But, there should be a moral obligation. That’s what my position is and I stand quite firm. At InvestDen, we have several investment banking analysts that use investment banking-style analysis on candidates to be placed on our site. They do a market competitive analysis to understand what the business is. They find out who the managers are. They find out who the directors are. They know what their history is. We meet them and get to know them to such an extent that we feel comfortable before we put their companies forward on our platform.
While our model does not a guarantee success, it effectively minimizes the risk and I think every platform should do the same to help eliminate bad actors.
Bill: If I could just add to that in terms of cost. The problem related to causes collecting money for non-causes is an old problem. Many times, outside of the crowdfunding world, money that was supposed to go to a cause ended up going for personal benefit. There are regulatory mechanisms that will help prevent this type of problem.
John: On crowdfunding for businesses, I give a fair number of speeches on this topic each year. While no one can have data on the future, I sense that when the crowdfunding equity market gets big enough, there will be more problems with graft. One way to address graft is to have insurance companies step in and play a significant role.
Matt: Let me ask you a question, in what capacity do you see the insurance companies having a role?
John: All big businesses have to have some form of insurance. Sometimes the insurance is bought to protect board of director members and officers. Other times it is bought to protect the operations of a company. The key issue will be the pricing of the insurance.
Matt: I don’t see the insurance company’s ability to torque up the pricing as being a problem for the crowdfunding industry. Rather, I see the platform company’s responsibility being that they have to do good due diligence. It has to ensure that the entry of bad actors is controlled appropriately. If the insurance companies torque up the prices of the insurance they offer platform companies, there will be an interesting impact on the entrepreneur’s ability to receive funds in cost effective ways.
I don’t think that new investors will be happy if a higher risk percentage of money raised on crowdfunding platforms has to, in essence, be spent on insurance. When an entrepreneur comes to an investor and say’s “here’s my business, here’s my plans, these are the financial forecasts and this is my sort of cash flow runway we project,” then an investor will look at that and say, “Ok, I believe that the risk involved makes sense, I’m happy to participate.” Then, all the sudden, if there’s a huge additional cost for insurance, I think it will end up stunting investment.
John: Right now people can still get insurance, it is not an issue, and you don’t see this becoming an issue anytime soon, correct?
Matt: That is correct.
John: I have a particular pet peeve because I’ve helped run the venture fund here at Saïd Business School for a number of years at SBS. One of the investments we made was in a crowdsourcing portal that “helped” graphic artists to bid on projects. When I initially heard about it I was saying “Oh man, this is great. We’ve invested in a way for artists to get work!” As we looked into the details of the business, what we saw they were doing was going out to every graphic artist they could find and getting literally hundreds of graphic artists to bid on small projects.
What we saw was that the bids graphic artists made just dropped and dropped. What happened was that graphic artists who were incredibly hungry were winning bids. And then they were finding that they were having a really difficult time living off of the contracts they got through this particular crowdsourcing platform. I’m as pro market as anybody you’ll find, but this bothered me. It was the first time that I asked myself, “Is crowdsourcing really always the best thing for people? It also made me start to wonder whether some market mechanisms don’t go astray every now and then.
Bill: I had the same conversation about Brexit with someone the other day. The subject you have just raised is very similar to one many have been having over whether Eastern European builders are taking away all the good jobs away from British construction workers. Is bidding for construction work a form of crowdsourcing? I suppose, on some level, it could be thought of that way.
One thing I’m very concerned about is the fact that classical musicians are making ever poorer incomes because the perceived value of their performances has gone down. That’s not formally a crowdsourcing issue, but I think there is a danger that any time people can’t make a living, you blame the system.
Matt: I think it’s a question of how markets work. Crowdsourcing and crowdfunding enable, through technology, people to have access to markets. That access in a free market and access to a free market should result in appropriate price discovery. So, I think you find the right price through crowdsourcing and crowdfunding. So the question really is: was a price that was high for a service or good that had been offered, before crowdfunding or crowdsourcing, really fair? Will technology reduce price? Probably, yes. Will technology expand my number of potential investors? Probably yes. Will people always be happy with the way supply and demand influences prices? That will depend on which side of the equation they are on.
Venture Philanthropy in Growth Market Pakistan
John Hoffmire: Ahsan Jamil is a founding trustee and former CEO of Aman Foundation, a Pakistan-based nonprofit founded in 2008 to focus on health care, education and nutrition. Prior to working with the Aman Foundation, he founded Ecopack Ltd. in 1991. Ecopack, a PET bottle manufacturing business, became a market leader and the primary supplier to both Pepsi and Coca-Cola in Pakistan. Jamil successfully took that company public. With a strong interest in both education and health, he holds a diploma in counselling and addiction alleviation, and has counselled at the Karachi Central Prison. He is an advisory board member of Acumen Pakistan and currently serves as the CEO of Aman Networks, specifically focusing on international stakeholder engagement.
Ahsan: Aman Foundation focuses on supporting the development of education, healthcare, and nutrition in Pakistan, a country with a population of over 200 million. The female literacy rate is well below 50 percent. Pakistan also has the second largest number of out of school children in the world.
We chose to start our work in Karachi, a city that is a microcosm of Pakistan, with an estimated population of 24 million people—this is an estimate as the country has not had a census in about two decades (this exercise is now finally underway). That makes this city, population-wise, larger than 165 other countries.
Karachi contributes twice as much to the national GDP than any other part of Pakistan. And it contributes disproportionally to the exchequer—63% of the country’s taxes are collected here.
There are 60 different ethnic groups in Karachi, which in many ways is a microcosm of Pakistan. Given that about 60% of Karachi’s residents live in slums, building models of positive change in Karachi will provide a great platform to replicate solutions developed here.
The Foundation’s mission is to champion dignity and choice for the underserved. This is something we have undertaken to do in an entrepreneurial way, reflecting the founders’ ethos. That is what the founding trustees are—Arif Naqvi, Fayeeza Naqvi and myself. The Foundation’s thinking has from the outset been to “use the money we have as seed money” and view this as an investment that provides sustainable social returns, rather than an endowment.
When I started my business, it was friends and family who seed-funded me and helped me get going. This is typically what happens for most people when they start a business. They have an idea and obtain support from near and dear ones. If they do a good job, market credit comes their way. Banks get interested in lending to them. The business grows, and before you know it, you could be doing a joint venture or listing your company in the stock exchange. In this way, $10,000 of seed funding grows to become a hundred million dollar plus business.
We applied this very entrepreneurial approach to our Foundation. With seed money of $100 million, we invested like social venture capitalists. We built our track record by creating an ambulance service for Karachi, a vocational training institute, Teach For Pakistan, and several other initiatives. We planned for and attracted local and international co-investment and partnerships.
Our ultimate goal is to make the government a client, which is how scale through systemic change becomes possible. That to us, is the social entrepreneurial approach—our $100 million investment can lead to $100 billion worth of impact when the government uses our models and scales them up.
Measurement is another critical factor to provide evidence for serious scale up. This is not straightforward or simple; it proves to be the Holy Grail for many of us at this conference.
The question is, how do you change the health profile of a country?
At the outset, we got McKinsey, the consulting firm, to come in and help us, because we had never launched a not-for-profit organization. The idea was to think through our own values, our passions and ideas, and bounce them off a team of global experts.
One of our challenges was to overcome the prevalent trust deficit. This is evident, for instance, in the amount of money American foundations give to India compared to Pakistan although the two countries have similar issues: India gets six times as much money as Pakistan on a per capita basis.
Coupled with the trust deficit is the issue of absorptive capacity. National health and education budgets, small as they are, often are returned unspent due to the paucity of well-executed service delivery.
To build the Foundation’s track record, it was important for our strategy to address the trust deficit as well as demonstrate our capacity to effectively spend funds towards high quality service delivery.
So we put our money into significant projects in key parts of the city of Karachi to show that change is possible. And we did this transparently.
Meanwhile, we donated a lot of money to organizations that had been operating successfully for a long time. This allowed our grant money to immediately strengthen existing initiatives and make positive on-the-ground impact. Additionally, by working with these organizations, we expanded our network of partners—critical to our future absorptive capacities.
That was the first leg of the strategy—to make positive impact quickly with good partners. Once we had shown a good track record and started building a good network of partners, we embarked on the second leg of the strategy: to engage with international partners and to collaborate in bringing best-practice into Pakistan in areas like mental health and family planning. All this was being done with the goal of ultimately making the government a client and catalyzing scale-up through systemic change.
We invested in two areas, health and education. On the health side we took a health ecosystem approach and created a community health worker program in low-income communities, a telehealth call center as well as clinics. If a community health worker was unable to provide the necessary help, we encouraged calls to the telehealth center so those who needed it got better quality advice. Ultimately, a patient could also be referred to a clinic care providing quality health care.
The idea was to provide a replicable model for a preventative healthcare system with early-stage primary intervention, cost-effectively operationalized with streamlined SOPs.
The Aman Ambulance is the only life-saving, tiered emergency medical service in Pakistan. Each ambulance has cardiac life support, advanced life support, and basic life support. The unavailability of trained paramedics in Pakistan led to the establishment of Aman Foundation’s Urban Health Institute. The UHI was essential to develop competent, high-quality human resources for the ambulance and for the command and control centers.
The ambulance service is also the connection point between the preventative healthcare system that the Foundation built and the tertiary healthcare system in Karachi.
The Foundation’s investment in ambulances is perhaps our most expensive one. While it meets the international criteria of ambulatory care, it exists in only one city, Karachi. We are proud to report that the Aman Ambulance service won the Best in Asia Award for social investment. This is a program that we are scaling up currently in partnership with the Sindh provincial government with the aspiration to scale up all over Pakistan.
On the education side, we focused on vocational and skills training, particularly critical in a country where 65 percent of the population is under the age of thirty. “Upskilling” the youth for better livelihood prospects is an urgent and important matter whether we view this from an economic, social or human rights perspective.
In our vocational training initiative, AmanTech, we partnered with City and Guilds, UK to focus on underserved youth who have not made it through high school. The project comprises internationally-recognized six-month certificate and one-year diploma courses. An important partnership with GIZ of Germany was developed in parallel to create a two-year training, in which students spend half the training in actual factories and work-places. The aim is to ultimately embed vocational training into the secondary school system. Overall, this is an important part of the systemic change we aspire to.
Additionally, by setting up first-class facilities that any young man or women would like to be a part of, we are hoping to destigmatize vocational training, as well as encourage secondary school enrollment. Along the way, these young people also learn critical soft skills and self-management competencies and gain confidence. This has proved to be an invaluable part of the training.
One of the critical success factors is employer intimacy—ensuring that the employers contribute to the curriculum and training design, so that it meets their changing needs and improves the chances of employment for our graduates.
Aman Foundation has also invested in Pakistan’s health infrastructure and the skills development infrastructure. In a short span of time, we have attracted key partners like the Bill and Melinda Gates Foundation and the Packard Foundation. With such investment partners, we have established the Sukh Program, providing family planning to a population of one million in Karachi.
Sukh provides access to modern methods with the intention of growing the contraceptive prevalence rate by 15 percentage points. We have also joined hands operationally with international partners like DKT and JHPEIGO, as well as local partners like Aahung and AKU, allowing for a high impact program.
So what has been our impact? To summarize, Aman Foundation has created a capability for 110,000 life-saving and threatening interventions each year. Cumulatively, we have done 770,000 interventions since 2008. The ambulance service was also able to respond to the floods of 2010 and 2011 by operating like mobile clinics at the edge of the floodwaters.
Similarly, Aman’s community health worker program is providing care at the doorstep. Vaccination rates have gone up from 60 to 90 percent. Sukh’s work with family planning has led to the government becoming engaged in this project, with the potential to replicate the work on a larger scale.
This project has thus led to progress on our goal of working with the government on real systemic change.
In addition, our skills training and telehealth call center programs are extendable platforms for health advice and education. We structured them for Karachi but have been getting calls from around Pakistan. We have thus been able to provide health advice over the phone to people outside Karachi.
All this brings us to an interesting question, of whether and how we exit ensuring the future of the programs and projects we started. Aman Foundation is a philanthropy. We don’t have a stock exchange to help us exit what we have started.
But a pathway to scaling up systemically through a public-private partnership requires a longer runway, to be able to ultimately make the government fund this work growing across the country. This is beginning to emerge.
Local philanthropies and corporations are stepping up to support several programs. Some are contributing towards meeting the ambulance service organization’s budget and some are funding skills training of youth in Karachi and different parts of Pakistan. Local partners include Coca-Cola, Honda, and domestic textiles companies, who also hire our trained graduates.
The government is asking us to set up similar vocational training institutes in other parts of the country, including five AmanTechs in the Punjab.
The government has taken over our ambulance service and has started “owning” them, having us operate them in two other districts in Sindh province. The intention is to ensure that this ambulance service extends to the entire province.
The outcome of our family planning program in terms of government engagement is that they have asked us to take over about 40 of their community health centers all over the city. Additionally, they want us to train their community health workers, starting with a pilot project targeting 250 workers. The government has 100,000 community health workers employed in this program, alone.
To conclude, the Foundation aims to make real sustainable systemic change. For this we see the public-private partnership model as the pathway to scale up our initiatives on a nation-wide basis.
Zahid Torres-Rahman and John Hoffmire
John: I’m just going to start off by thanking Zahid. It’s helped to have a partner on this conference who I can talk with and get feedback from. Zahid arranged many of the speakers and helped raise much of the money to pay for food and rooms.
Here’s my first question for you Zahid. What question should we be asking ourselves as we go off and start thinking about a new project related to business and poverty?
Zahid: My viewpoint here is that the most important question to ask yourself is: how can I do good by doing what I do best? I mean both on the organizational level and on the personal level. So at the organizational level we heard from lots of speakers about bringing the core of your business to the problem and that’s how you can have the most impact. We also heard a lot about purpose, and authenticity and bringing what you’re doing as an individual, what you’re being as an individual to the problem. So if you’re a lawyer, or if you’re a marketing expert, or finance expert, bring that to the problem. So I think doing what you do best is what’s most helpful.
John: So you brought Diageo to the conference and David did a wonderful job talking about bringing the core of your business to problems related to poverty. Please talk about other companies that bring the core of their business to problems related to poverty.
Zahid: Let me talk for a few minutes about GlaxoSmithKline (GSK) for example. GSK is a large pharmaceutical company. What’s interesting about GSK is the CEO is obviously very big on these issues. But actually any member of staff you meet at GSK, I find, is also very passionate about these issues. They signed a partnership agreement with Save the Children and in fact we are running a challenge with GSK.
So what’ve been looking at is their partnership with Save the Children. That partnership has gone in all sorts of directions—including toward strengthening health systems. The aspect of that partnership that really strikes me is about what they’ve done around innovation. They brought together people from Save the Children and from within their (GSK) R&D department to develop new products.
One of the products that is currently in the approval process has to do with an initiative started by Save the Children which identified that lots of women died of infection associated with the umbilical cord. GSK had just the right ingredient. It was found in their mouthwash. So they formulated something using that same ingredient. GSK clearly brought their commitment to have a social impact into their core business.
They also have other programs that address problems of poverty through their core businesses. The PULSE Volunteer Partnership is a skills-based volunteering initiative. Through PULSE, eligible employees are matched to non-profit organisations for three or six months, full-time, contributing their skills to solve healthcare challenges.
John: Let me change the topic slightly. What are the broader traps that people fall into as they get involved in this field?
Zahid: Our business is about collaboration. We try to bring people together to solve problems. The biggest trouble I find, in my personal experience, is that it’s amazing how many people get caught up in taking an organization’s position. I’ve worked with lots of big brands, big companies, and NGOs, and government agencies. It’s very easy for people to say, “Well I represent this company. This is my official view.”
When this happens, we become less effective. What we try to do through the Challenges we run, is to try to break down those very artificial boundaries and just let people see a person from another organization as just another human being. We help people to see that we all have a shared purpose.
We have found that, by giving people a clear target and a deadline, magic is made in terms of building human relationships. In these types of settings, people realize they’re on the same side. It is amazing how, when you ask people to solve a common problem, people really do know how to work together.
So I think just focusing on partnership is one way to avoid the traps. Having a shared vision, clear leadership, and, of course, accountability. All of these are key. Fundamentally, the way to avoid traps is that you remember good relationships really matter.
John: You answered my question about traps from the perspective of a leader of Business Fights Poverty. That makes sense. What are some other traps you’ve seen others fall into?
Zahid: What I am going to talk about is less the case now. But, ten years ago, there was a tendency for companies to throw money at poverty. One of the traditional traps had been about creating a nice quick project. A project that might have been funded might have involved digging a well. There would be no thought given ahead of time about who was going to maintain the well. Those types of projects and those types of CSR are not sustainable. Luckily, we don’t see those types of problems as much nowadays.
My current pet peeve, I suppose, is when people see a problem, whether it’s related to nutrition or education, their instinct is to create a new organization to deal with that problem. I see this all the time. There is an organization that is created, of course it costs lots of money to create, it’s not going to close down very soon because it needs to prove to the world that it worked. All too often, these types of organizations end up running conferences. I don’t see much getting done by some of them.
John: So, you’ve been with us for two days. What do you think the main takeaways of this conference have been?
Zahid: I won’t try and summarize but this is my personal reflection. I think one of the things that really stood out was a phrase on the first day about honoring the entrepreneur. Many entrepreneurs essentially set out to make the world a better place, they don’t set out to make a lot of money. I think the heroes of international development will be those entrepreneurs who have taken that passion and taken that innovative approach and solved things at massive scale.
Another concept I would point to is that of celebrating the mentor. This came up a lot. It came up related to how we support entrepreneurs.
Still another is connecting to a company’s core business to try and address problems of poverty.
I suppose the final part I’d add is about being authentic and being true to yourself. I think one of the failures that we’re guilty of ourselves is that we spent a lot of our first ten years focused on technical skills. We focused on how to measure impact. We focused on how to make a partnership work. It was all very mechanical and procedural.
I think there were some things that we didn’t talk about that are important. We didn’t cover them at his conference but, perhaps I will mention them now as a way to get us thinking about what to include next year.
One has to do with resilience. We can talk about capacity building. But, that takes us back, sometimes to the technical, mechanical and procedural. What we need to do more of is focus on belief systems.
At times, it is really difficult for our individual corporate partners to do their work inside really big organizations. It’s a tough journey, and we can do a lot more to help people on that journey in a much more rounded and balanced way.
I think about times in the past, when some of the individuals we work with were having problems within their own organizations. Many companies have very complex organizational structures and some people are more successful that others in navigating them. At times, it’s very difficult. So, next year, maybe we can focus on that a bit more.
John: What do we do to help those individuals? Without stealing the thunder from next year, what would you recommend briefly?
Zahid: So I think everyone in this room is at an advantage because you all have a sense of purpose. Lots of people in the world of work are struggling to find a sense of purpose. So in a sense that’s the hardest thing we have to teach. But I think once you’ve got that purpose, you have to learn personal resilience.
This may all have to do with personal belief systems, perhaps one’s spirituality. It’s also tied to our health and relationships. Often one has a partner who is incredibly encouraging.
I used the word rounded a little while ago. I think we need to teach people at conferences like these how to take a much more rounded approach to life. A book that I recommend, that’s currently on the New York Times best-seller list is called The Code of the Extraordinary Mind. It’s been very beneficial for me. It promotes a very rounded view and gives me a sense of purpose that I can then utilize in many ways.
John: We haven’t decided yet to do a conference next year, but let’s say we did decide to do another conference. What else would we do different?
Zahid: I would really like to hear that from people here. But, my own perspective is that I’ve really enjoyed Ahsan’s presentation on what their foundation is doing in Pakistan. I’d like to hear other presentations from people who go out and do this type of work on the front lines around the world.
Probably I’d like to see more of a developing country focus next year. It’s great to get people from the US and the UK to speak. But I think more examples from the developing world and more Ahsans would be nice to see.
One thing we’ve touched on indirectly is the idea of intrapreneurship. I know we got a summarized story from David Croft today. But I know that Diageo is a big organization. David has managed to navigate there and get things done. So learning from people like him about how he goes about his intrapreneurship work would be good.
John: Suggestions from the audience?
First Comment From The Audience: Today I was wondering, what potentially could be the role of actually bringing or connecting live to people who are in poverty so we can have a more intimate connection with them and learn face to face what we can do to bring the benefits of business to them.
Zahid: I think that’s such a good point. I’ve gone to so many conferences on poverty, and you barely hear from or see anyone who’s actually experiencing it. So a couple of times we have had events in Uganda where all of the speakers and participants were from this one village. The whole thing was livestreamed. That was very interesting and I’d love to do more of that.
Second Comment From The Audience: This is a comment for next year. I think we’ve had some great panels the past few days. We have had a couple of discussions on poverty and female empowerment. Actually, the ratio of female to male speakers has been better than at most conferences. But, having gender balance among the speakers at this forum would be great.
End of Conference