Beyond Extreme Capitalism - Blended Value Investment


intentBlog: Beyond Extreme Capitalism -- Blended Value Investment Philosophy

London, UK - 25 August 2006 - Remembering John F Kennedy's speech -- I am a Berliner! -- or as he said it "Ich bin ein Berliner", which actually translates to "I am a jam doughnut!" , in June 1963, Germany, we watched the collapse of the Berlin wall with some of our faculty at the University of Southampton, England, in the same department of electronics and computer science where Sir Tim Berner-Lee, the inventor of the world wide web at CERN, now holds a Chair. On 9th November 1989, I remember that one of the students queried, "Is this the collapse of Socialism and the Soviet Doctrine?" and one of our our faculty members who had liaised with Eastern Europe and had also worked estensively at the Nobel Prize winners club -- also known as Bell Labs -- in the US remarked, "Yes, and the beginning of the end of extreme Capitalism as we know it." "How long?" shot another query. "The Berlin wall has collapsed because the Soviet Union has failed in Afghanistan and emboldened by their retreat the Eastern European dominoes are falling one by one beginning with the fault line. When Western Capitalism meets its Afghanistan, then we will see the beginning of the end of the present confrontational thinking based around the cold war." Little did we realise that his prediction may be alluding to the real Afghanistan [and Iraq] and not a metaphorical one!

Capitalism has lost its way in some of its ruthlessness, short-termism and down right disregard for leaving people, the planet and its environment in a healthy condition for generations to come. Of this, there is no doubt. However, what will replace it. Totalitarianism based on an ever increasing restriction on civil rights and liberties? Perhaps not. And we may indeed head towards the Blended Value approach, which would require a new way of thinking, accounting and management practices.

Value is what gets created when investors invest and organisations act to pursue their mission. Traditionally, we have thought of value as being either economic (created by for-profit companies) or social (created by non-profit or Non-governmental Organizations, ie, NGOs). What the Blended Value Investment Approach states is that all organisations, whether for-profit or not, create value that consists of economic, social and environmental value components — and that investors (whether market-rate, charitable or some mix of the two) simultaneously generate all three forms of value through providing capital to organisations.

The outcome of all this investment activity is value creation and that value is itself non-divisible and, therefore, a blend of these three elements. The term 'blended value' was coined by Dr Jed Emerson, Senior Fellow at The William & Flora Hewlett Foundation and Lecturer at The Graduate School of Business, Stanford University. Dr Emerson, utilised the term to articulate that all forms of organisational activity have social, environmental, cultural and financial dimensions.

So, there is a fundamental schism in modern capitalistic thinking which needs to be readdressed. The vast majority of people divide the world into business on the one hand, which is perceived to be principally about economic activity and the financial bottom line, and the public sector and civil society on the other hand, which are perceived to be about social and environmental bottom lines.

The reality of "Blended Value" is being increasingly reflected in a blurring of the lines in the 21st century between public, private and civil society activity. Large corporations are becoming ever more concerned about their environmental and social impacts; NGOs are becoming increasingly engaged with private sector organisations, and many are also looking at the extent to which some of their activities can be commercialised through social enterprise activities; while governments continue to increase the reach of public private partnerships, and are now also encouraging the 'social sector' to compete with the private sector in tendering for the delivery of public services.

However, the majority of decision makers still tend to operate with an isolationist mentality and act as if the public, private and civil society sectors are separate worlds. So we live compartmentalised parallel lives, wearing multiple hats and operating according to different rules depending on which hat we are wearing: business executive, family member, counsellor, charitable trustee, and so on. The prevailing mentality remains that business is about making money whereas charity is about addressing social or environmental issues, after one has made the money. So the default strategy of even the more socially conscious business leaders is to make their money in the commercial world first and put it to 'good use' later through

thropic activities. This strategy is frequently undertaken with no apparent awareness of the conflicts and contradictions within their overall portfolio of business and philanthropic activities -- where sometimes the very problems that their philanthropic donations are being targeted at are being exacerbated by their business and investment strategies. How sad is that?

Philanthropists feel good because they may donate around 5% per annum of their capital base to charitable causes -- helping to build a better world -- whilst growing their main capital pool by 7% to 10% per annum by investing in projects that may be busy destroying, damaging or disabling the world. Where is the sanity in that?

Would it not be better to invest ethically in the first place keeping blended value in mind and execute the "building a better world" strategy through prudent investment so that 100% of their capital is being employed judiciously to achieve harmony and well being. Although the returns may be somewhat lower as a result, this would still be better than giving less than 5% amounts away to charity to clean the conscience, whilst Rome burns. Using the lever of properly directed investment can change a lot more than "charity peanuts".

These contradictions are often most apparent within large existing foundations. What are they really? Mostly they are investment management businesses that donate 5% or so of their profits to charity every year. When we are in private dialogue with such foundations, It is an uphill battle to persuade the trustees and asset managers of many of these foundations that it makes sense to ensure that their investment activities do not merely consider the maximisation of financial returns within certain risk parameters, but are also in sync with the social mission of the foundation. Speaking to the founder of the foundation can be an entirely different story!

When one considers the scale of the complex social and environmental challenges that the world faces today, it is clear that we have no hope of moving ourselves off the losing trajectory we are now on without mobilising the business and finance sectors in a more serious way. According to multiple sources, private philanthropic activity amounts to only 2% of GDP in the US, 1% in the UK, and less in much of the rest of Europe and elsewhere. So while it is commendable that Bill Gates and Warren Buffett are giving away their wealth to address social causes, ultimately it is highly unlikely that such gestures will ever amount to more than a drop in the ocean compared to what we could achieve (and need to achieve) by mobilising the full weight of business behind our greatest social and environmental issues.

This is not about the 'corporate community involvement' activities under the banner of PR -- Public Relations -- and CSR -- Corporate and Social Responsibility -- that operate at the fringes of corporate activity, commendable and self-serving as they are -- but rather it is about the more serious efforts of all businesses, from large multi-national organisations through to entrepreneurial start-ups, in putting their financial and intellectual firepower into finding innovative commercial opportunities to address social and environmental issues.

The Philanthropia

Encouragingly there is a small but growing band of private investors who are beginning to understand that these worlds need not remain separate as exemplified by The Philanthropia approach. This is the vision of The Philanthropia for 21st century wealth management, which is bringing together over 1,000 ultra high net-worth philanthropists and family foundations from across the world. In Greek, Philos means Love and Anthropos means Humankind so The Philanthropia means love for humankind. The Philanthropia was founded in 2005 by myself and my wife -- Surinda -- and focuses on The Trinity Club, Uni-purpose Investment Syndicates and Ethical Investment Funds dedicated to clean energy, sustainable technologies, micro-finance, water and eco-friendly infrastructure. The Geneva Chapter was inaugurated in Switzerland in May 2006. As more and more wealthy investors and philanthropists get their heads around the idea of a blended value approach to investing and philanthropy, we feel we are truly making some progress.

Long Term Vision

In the long term, The Philanthropia wishes to empower an integrated approach towards wealth management -- beyond the traditional Private Banking approach honed by UBS, Credit Suisse, Goldman Sachs, CitiGroup, HSBC and JP Morgan -- that looks at financial, social and environmental objectives and then takes a holistic approach to asset allocation across all classes of investment, including philanthropic donations viewed as an asset class, as well as sub-market social investments, micro-finance, sustainable technologies, clean water, clean energy and eco-friendly infrastructure. Rather than focusing purely on the risk return profile an investor seeks, what sort of creative thinking could Blended Value wealth managers inspire by asking their clients: "How would you like to build a better world for the next generation and beyond by utilising the resources you have at your disposal to help create that world?"

What are your thoughts, observations and views?

With all good wishes


DK Matai
The Philanthropia, ATCA, mi2g.net

intentBlog: Beyond Extreme Capitalism -- Blended Value Investment Philosophy

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