Not for Profits

About this programme by Peter Day

Considering that Global Business is a programme that is supposed to be about business things, we seem to do a lot about organisations that don’t make a profit at all.

Every year when I go to the Skoll Forum at Oxford University, I am impressed by the inventiveness, energy and intensity of the social entrepreneurs gathered there from all over the world, with the intention of applying the focus of the business person to the world's most pressing social problems.

Americans call these organisations not for profits. The British still think of them as charities. Social entrepreneurs run organisations that are much closer to conventional businesses than many time honoured not for profits.

There is a lot going on.

Fascinating then to run into an important article in the Harvard Business Review the other month which considered the limitations of the not for profit movement and suggested some improvements.

It was called "The Emerging Capital Market for Nonprofits", and it was written by two Harvard Business School professors: Allen Grossman ran conventional businesses before joining the non profit Outward Bound USA as CEO; Robert Kaplan is best-known as a proponent of the influential "Balanced Scorecard" approach to assessing corporate management performance.

Both authors have used applied their own experiences to a particular question: why are there no really large not for profit organisations?

Few American ones reach national scale, they say. But on the other hand, few moderate sized not for profits wither away, whereas Schumpeter's process of creative destruction applies over and over again to corporations: most of the really big American companies were not there at all 50 years ago.

Kaplan and Grossman think that most not for profit organisations stay too small to have a substantive impact on society's pervasive problems.

Dwindle

One big thing seems to be lacking from the way not for profits report on their activities, say Kaplan and Grossman. The NfPs concentrate on the financial results of money-raising, for example. But they find it difficult to produce information on the effectiveness of what they do in and for society.

The professors argue that the non profit sector needs to adopt many of the features of the marketplace in order that efficient organisations can attract funds to enable them to grow, while less efficient ones dwindle, just like companies do.

At the moment, they say, society is earning a low rate of returns on the tax subsidies non profits get and the billions sums invested in them by donators.

But - they add - there are signs that the not for profit world is changing. Big new charitable funds such as the Bill and Melinda Gates Foundation are using private sector methods to evaluate their non profit investments.

The hunt is on for ways of measuring what charities and not for profits are actually doing in society.

A new British coalition government is trying to tackle the shortage of public finance for welfare work in an era of public finance cuts, under the political banner of the Big Society. Britain is turning to social enterprises to help or replace existing publically funded services.

Private investors are being invited to back a scheme to help ex-prisoners not to reoffend. It's a five-year scheme around Peterborough Prison in the east of England.

If the social enterprise organisation running the scheme succeeds in reducing by an agreed amount the number of re-offenders, investors in this "social impact bonds" scheme will get a graded but healthy return on their investments, from the government (which saves money because of the reduced prison load).

Quantify

Another scheme is to create a Big Society Bank in Britain to put to use so-called orphan funds in dormant back accounts, amounting to millions of pounds. The Bank’s investments will (it's intended) form a starting point to attract other investors into social schemes.

President Obama launched a rather similar Social Innovation Fund in the USA in July, using $50million of government money and more than that from private investors.

But to attract more outside investment - whether seeking profits or social benefits - the institutions backed by these new ventures will need to be able to quantify their impact on society in a way which has hitherto been assumed, or vague.

So the Emerging Capital Market for Nonprofits the Harvard Business Review talks about will need new ways of measuring what the nonprofits do.

At a recent London conference I saw some of the enthusiasm that new social enterprises are generating. But I also found it alarming when the bankers on a panel started talking about social enterprises as a "new asset class" for investors.

Is that not also how financiers described the parcelled up US subprime mortgage loans that created such financial disaster three years ago?

When I went to Bangladesh last year, one of the things on my mind was that country's huge success in microlending to the poor, something done by an array of social entrepreneurial organisations such as BRAC and Grameen Bank.

After 30 years of largely self-financed steady growth, western private investors are getting into the act, lending their money to boost the microlending power of organisations with a striking record of repayments and reliability over the decades, at least compared with the train wreck of the commercial banks in many western countries.

But - I wondered a year ago - was that stream of western money going to produce a microlending bubble just like the subprime mortgage one in the USA? No, said the experts I heard from in Bangladesh, not here.

But one year later, the microlending movement in India has been plunged into disarray after regulators moved to toughen lending rules after accusations of high interest rates, strong-arm collection tactics and the suicides of debtors.

What started as a social movement that looked so beneficial is suddenly turning sour, at least in India, partly because of an oversupply of loans.

At the moment, western investors are wary of social investments because of the lack of data about the efficacy of what social enterprises achieve.

That will inhibit the growth of these interesting new organisations. But I think they should also be wary of becoming a new "asset class" for hot money seeking an alternative to the stock market.