When we think of doing good, we think of NonProfits. Charities, Churches, Foundations, and do-good organizations. Society didn’t always depend on “501 (c) 3” type charities. Charities trace their origins to the beginning of history when the great and powerful were expected to do “good”… giving food and gifts to the poor. But does the ancient concept of charity still work in modern days? Let’s dive in and see!
There is always a need for charity. When everyone was a farmer, there was a surplus of food in good years and in bad years families go hungry. In very bad years, families starve. Famines killed people and destroyed irreplaceable skills. Continuing famines weakened society and opened the door to rebellion and revolt.
Feeding the poor was an important function for the Church and the King. As soon as medicine became effective enough to be a profession that was separate from religion, government hospitals became a new element of charity. 2,000 years ago the first public hospital was built in India, soon followed by Greece, Rome, and China. The Roman Legions added the idea of clinics and field hospitals (Valetudinaria). By the time of the Crusades in 1100 AD, Templars and other wealthy organizations funded hospitals.
In the 18th century, Royalty and Religion were challenged by the Enlightenment. Fraternal orders, labor unions, and political parties could now provide charity and social services. The industrial revolution and the rise of banking created vast fortunes, and a new class… millionaires. The late 19th century 1% spread the concept of… philanthropy. They either directly funded good causes or donated to Foundations, organizations that specialize in raising money and then granting it to the best causes.
The final element of modern charity came in the 1950’s… the 501 (c) 3 corporation. If you met the IRS criteria, donors receive tax benefits in exchange for donations and charities are exempted from certain taxes. This process was designed to create a “virtuous circle”, that incentivizes donations and reduces the cost to operate a charity. Charities were now ready to fix the ills of the world.
Yet, that’s not what happened. While charities do spend hundreds of billions of dollars, the problems of the world have grown. Hundreds of years ago we worried about crop failure. Today, we fear that the entire world’s ecosystem is failing, or that the sea will drown whole nations. No single nation, to say nothing of a single charity, can solve the problem we face today…
Food Security: Lack of food is still a very real issue. But in America, Europe, and the developed world food insecurity is a dwindling issue. Natural disasters can create temporary food shortages, but the ever-present threat of famine is gone. Well, if you live in the developed world. Famine remains a real threat for the rest of the world. We are approaching our global food production limits. The Earth’s population will grow from today’s 7.6 billion to 11 billion (in 2100). Also, the world is increasingly choosing foods (especially meat) that consume more land, water, and resources.
Health: Modern medicine is literally miraculous. Diseases that have plagued mankind throughout history have been wiped out. The human genome has been mapped. Lifetimes are 50% longer than our great-grandparents. Doctors and paramedics routinely bring the dead back to life. Physically and mentally disabled individuals can live full and meaningful lives… if their families can afford the healthcare bills.
Demographics: Japan, with the oldest population in a developed nation, began to see small towns disappear in the late 1960’s. Too few children, too few young workers, and a goring senior population have played out the same way in Europe and now the US. The remaining rural population moves into big cities, and the small town fades away. 40 nations now have zero or negative population growth. Dozens of other nations will join that list in a few decades. If immigration to the United States slows, we too will have negative population growth. In the coming decades, the poorest half of the world may starve while the developed half dies a slower death from lack of workers. Can nonprofits keep our global world together?
Employment: Jobs are being replaced by computers and robots. Charities have always helped the unemployed, working with whole regions where employment has been permanently disrupted… the rust belt, coal towns, Appalachia, Detroit, tobacco road. If technology changes the very nature of employment, can nonprofits deal with these new unemployment issues?
Economic Inequality: Americans once believed that economic growth alone would close the gap between rich and poor. But inequality is more than just poverty. Many benefits come from wealth… better health, more education, gender equality, and reduced violence. The inequality gap began to close in the 20th century, but in the 21st it is once again growing. Wealth has become more concentrated. The richest 1%owns half of the world’s wealth. Does anyone have a plan for global equality?
The Destroyed Environment: The journey to the 21st century provided us with miraculous medicines, new materials, and phenomenal qualities of food. But our society is only beginning to admit to the cost of that journey. Pollution, global warming, species extinction, economic inequality, and on and on. A few decades ago humanity feared that the world would end in a nuclear winter. Political and military tensions de-escalated, and humanity survived. But global warming may be just as destructive. How do we fix a broken world?
Problems are bigger and more complex than in the past. Today’s young philanthropists aren’t impressed with the results of a century of nonprofit work. Millennials want to do good, but are more likely to write an app than write a check to solve systemic problems. Likewise, they are rejecting investments that fund the corporations that are the source of today’s problems (pollution, depleted resources, gender inequality, etc.).
Modern charities and modern capitalism grew up together. They began at the same time, developed together, and were both created by the same groups and people. Evolving throughout the 19th and 20th centuries, both tackled global issues and added the new features and processes they needed for their expanding roles. In the 21st century, Capitalism has embraced Impact Investment. Nonprofits are ready for their next makeover.
Impact Investors are, first and foremost, investors. The difference is that the “return” on their investment is more than just financial. The “something extra” is often called “the double bottom line”. The United Nations calls it “ESG”, or Environment, Social, and Governance. Simply put, don’t degrade the environment. Contribute to your community (create jobs, buy goods locally, reward workers for improving the community, promote gender equality). And have an open, transparent, and fair workplace (no discrimination, fair promotions, whistleblowers feel safe, management followup effectively on complaints).
The old model was that big corporations would make money during the day, and then philanthropically fix the world’s ills at night. Big corporations need to make money AND do good. All the time!
The nonprofit version of Impact Investing is Mission Related Investing (MRI). 20th-century charitable grants were to be spent. 21st-century charitable investments are to be repaid. As more foundations and funds evolve from grants to investments, nonprofits will need to evolve their operations to be functional, profitable corporations. Impact and Mission investors will seek a more modest profit than other investors, but they will still seek a profit.
All of the top foundations are moving assets into Impact Investment. Ford, Rockefeller, and Gates foundations have pages on their websites that explain their new Investment Strategies. This is a necessary stage in the evolution of Foundations, but the combined financial pressure of impact investing and ever-shrinking government funding will likely be too much of a transition for many nonprofits.
Is that it? Is it the end of the nonprofit? Not yet. Impact Investing and MRI are just two of many elements that are shaping the future of the nonprofit. That future is the Neo-Profit, a new hybrid that blends the best features of the for-profit and the nonprofit. Neo-Profits could solve many of the problems of funding and management that plagued the 20th Century nonprofit. Impact Investors provide the capital, the relatively new “Benefit” corporation provides a better foundation for the Neo-Profit.
But we’re still missing one element that ties everything together. How will Neo-Profits pay back investors? For that, we must turn to the newest and most advanced concept in Neo-Profit… the Balanced Risk Revenue Model, or BRRM. And that discussion… is another story, for our next blog!