Charities and Foundations do good, across the globe. Schools, hospitals, museums, environmental groups, senior homes, and animal rights… not-for-profits get the job done! Not-for-profits have a special place in society because they do so much for society. But not-for-profits are struggling. Big changes in the economy could close many not-for-profits, shredding America’s social fabric. Can not-for-profits be saved? Will the good guys win in the end? Let’s dive right in and see!
For the last thousand years, Charity meant the Church. But 200 years ago, the Enlightenment arose. The age of Kings ended and the age of the citizen dawned. Citizen groups… fraternal orders, unions, public charities… offered alternatives to Church charity. The American Revolution rebelled against the King and separated Church from State, giving birth to a hundred constitutions around the world. It was also the age of Capitalists. Replacing Kingly decrees with Capitalist fundraising. And “good works”.
Early Capitalists were strange creatures. By day, Robber Barrons mercilessly crushing competitors, destroying unions, and manipulating financial markets. By night, donned the robes of Philanthropists… aiding the poor and forging a better world. J.P. Morgan, John Rockefeller, Cornelius Vanderbilt, Andrew Carnegie, the list goes on and on. It was their support that created the world’s great museums, libraries, hospitals, and schools.
Some truly wanted to do good. Others did good because their fortunes REQUIRED a better world. Andrew Carnegie built over 2,500 libraries across America. Not because it was a nice thing to do, but because Carnegie’s factories (the world’s most technologically advanced) needed literate workers! In fact, he needed more literate workers than the market could provide. So, he took steps to change the world on his own.
Henry Ford famously paid workers twice the standard wages of the time. Good guy move? Sort of. Henry Ford paid more but wanted more. Ford wanted to best workers AND he wanted workers that could afford to buy his products. Capitalism didn’t accidentally uplift humanity, it was a conscious and intentional outcome of capitalism since it’s earliest days.
Then there’s Milton Hershey, the Chocolate King. He didn’t just build an orphanage, but hired those orphans as managers, eventually gifting the orphanage with his candy empire. Why? Because Hershey believed in the Protestant Work Ethic. That work ethic says a lot more than, “Everyone should work hard.” This philosophy included support of the community, being charitable, and never becoming TOO rich. Up until the 1800s, protestant communities regularly had Jubilee years, when personal debts were forgiven.
Capitalism and Charity worked hand in hand. Some philanthropists funded charities directly, while others funded Foundations, ensuring that good ideas would survive long after an individual philanthropist passed away. While building bronze statues to immortalize yourself was popular at the time, funding social good was seen as a better way of achieving immortality by some of the world’s greatest Capitalists.
Capitalists regularly placed the good of the world before their own interests. Pharmaceutical companies cured the great killers, diseases that regularly claimed millions of lives. Often with minimal profits. A diagnosis of diabetes was a death sentence. Desperate victims would pay any price for insulin. Yet the patent for insulin production was sold in 1920 for just $1. Insulin creator Fredrick Banting said, “Insulin belongs to the world, not to me.”
Nor was banting was not the only scientists to give away his life’s work for the good of the world. The Polio vaccine was also given away for the same reasons. Altruism was not just an oddity in the medical world. John Walker, the inventor of the humble friction match, gave away his patent. John Walker went on to make a fortune selling his own brand of matches. But, it was his concern about protecting the people of the world from fires caused by earlier and more dangerous types of fire starters that caused him to give away his patent. Golden Age Capitalists regularly weighed personal vs. public good and often chose to put the good of the public first.
Compare entrepreneurs from a century ago to the ever-smirking Martin Shkreli. He manipulated the price of insulin to boost profits, killing patients who could no longer afford insulin. Or, the sociopathic Elizabeth Holmes and her decade long, $7 billion medical scam, selling medical diagnostic equipment that never existed. Just a bunch of bad capitalists? Or did Capitalism itself become tainted, ignoring its own origins, and becoming something less than true Capitalism?
Capitalism and social good always worked together, but the relationship continues to evolve. Just like biological evolution, sometimes you end up with a dead-end. Like the Saber Tooth Tiger. At first, it makes perfect sense. Bigger tiger, bigger teeth. You get a superior predator. Up to a point.
Beyond that point, the biggest and most powerful may no longer be the most efficient. As Capitalism evolved along strange and unexpected paths, the assumption that Capitalism cannot help but do good, and the relationship between Capitalism and Social Good, may no longer ring true.
How did this happen? Through a thousand small changes. Globalization unanchored corporations from communities, and community resources… people, workers, the environment. Private corporations became public, driven by the short-term profit demands of stock analysts rather than the vision of a company owner.
Charities still work with philanthropists, but a new generation of billionaires is less interested in old Foundations and Charities. Instead, they want to change the world through their own efforts. With software that makes hailing taxis slightly easier. Or an app to vacation in someone’s apartment. Or maybe a better dating site. The social good expectations of new Capitalists have fallen very far indeed.
But there are exceptions. The 21st century gave birth to Impact Investment and… perhaps… Capitalism 2.0. Impact Investing (green investing, social good investing or good guy investing) isn’t just soft-hearted or misguided investing. It is a return to the Golden age of Capitalism, with a twist. In the last Century, social good was implied in Capitalism. In our less innocent age, Impact Investors come right out and tell you that they are so interested in social good. And that they will pay for it.
That payment might be a lower rate of interest or making an investment in an unusually risky project or even supporting a project that no one else understands… IF a project can materially improve the world. As Impact Investing becomes increasingly popular and research departments have more case studies to examine, it looks like Impact Investing is a profitable way to invest.
Good guy investments are good partially because… well… bad guy investments are bad! It seems too obvious to state, but when you consider the history of bad investments on Wall Street, maybe we do need to be reminded!
Bad investment ideas and bad investment partners often show up with very bad ideas, that have very tempting (and very unrealistic) returns. These investments often end badly. Ask tobacco investors. Firms that hide or distort information are bad for investors. Big oil and coal held back knowledge of Global Climate Change, and those firms may soon see a huge hit to their valuations. Sometimes you just have straight-out frauds, Bernie Madoff. For a long time, people thought that he was a legitimate stock trader, who just happened to deliver mathematically impossible returns.
B (Benefit) corporations are a recent innovation and a new type of corporation. They must explicitly state their “benefit” (reduced pollution, developing low-cost housing, education for the poor) as part of the certification process that gives them”B” status. Your goals are then enshrined in corporate filings, and your benefit (not your shareholders) will receive the first distribution of profits. Yet, the B Corp can be very attractive to Investors.
Companies like Danone. At $24 billion in sales annually, they are one of the largest food companies in the world. Or Natura, a Brazilian based cosmetics firm that acquired Avon in 2019, making them the world’s 4th largest cosmetics firm. Both firms have transitioned to B status, and many other major corporations are starting the process.
If your firm ever plans on attracting employees or investment dollars from Millenials or Gen Z, attaining B Corp certification should be a top priority. These generations are cynical and want a lot more social good than their predecessors. B Corp status will be as important in attracting human capital (in both definitions “capital”) as “Certified Organic” has become in attracting in consumer purchasing power.
But what about Charities and Foundations? If Charities do the heavy lifting in social good, they are n the businesses that Impact Investors should invest in! But there is a problem. Even “good guy” investors are primarily built to work with for-profit corporations. Impact Investors could lend money at zero or nearly zero interest, but they need to get back their capital so that it can circulate through other investments. Government contracts are often very specific, and many exclude for-profits.
Banks can loan money to both for-profits and non-profits, but many lenders are less comfortable working with non-profits. Whether it is an Impact Investor, a Bank or a private lender, non-profits all lack a fundamental tool for raising capital… the ability to sell equity.
Interestingly, I’ve been working with a not-for-profit called Nicky’s Gardens of Hope, an organization created to build long-term residences for disabled adults. We ran into this very same issue. We could have incorporated as a not-for-profit or a for-profit. But each option created different limitations. Even a B Corp, was not able to address all of our issues.
So we created something new, BRRM (the Balanced Risk Revenue Model). This starts with a for-profit B Corporation and then combines it with a not-for-profit. The two operate in a unique, but highly efficient way. This resulting structure provides the benefits of both types of organizations while making it easier for Impact Investors to invest in it. By reducing these barriers to investment, Impact Investors can fund Charities as easily as for-profit corporations.
B Corps and BRRM are just the newest tools for Impact Investors to realign Capitalism with its originals goals. Impact Investors, B Corps, and BRRM could be the team-up that Capitalism has been waiting for… at least, that’s my Niccolls’ worth!
Want to be a superhero? Write a comment, tell us about your work with Impact Investors or look me up on LinkedIn!