Defeating Global Poverty

There was an interesting article in this weekend's Wall Street Journal's Weekend Journal called "A New Dawn" which featured too very different perspectives on climate change. One article by Ian McEwan focuses on how developed countries should focus our budgets on climate change and the second article by Bjorn Lomborg focuses on how we need to focus our budgets on doing things which will have the broadest impact for humanity and the world.

I think both articles are a good read and both articulate very strong perspectives and arguments. I am most intrigued though by the arguments made by Bjorn Lomborg as they are more global in nature, so I'm going to focus more on his ideas in this article. Lomborg is a professor at Copenhagen Business School and the organizer of the Copenhagen Consensus, an interesting gathering of some of the world's smartest scientists and economists which attempts to gain a "consensus" on the priorities for doing the most good with our investments. I wrote about this process earlier.

Here are a few of Lomborg's facts/observation of climate change forecasts:

• The UN science consensus expects temperature increases of 3 to 7 degrees Fahrenheit by 2100, leading to sea-level increases of 0.5 to 2 feet. This is similar to the 1.5 feet of sea-level rise experienced in the past 150 years.
  
• Warming in this time-frame will mean about 400,000 more heat-related deaths globally and 1.8M fewer cold-related deaths according to Ecological Economics publication.
• Economic models estimate a decrease in global GDP of about 3% by 2100. The UN expects that in this same timeframe the average person will be 1400% richer.
• Kyoto compliance requires spending of ~$180B per year through 2100 with an eventual reduction of global temperature of an eventual estimated 0.3 degrees Fahrenheit.

He points out that these climate change-related investments might make sense as the top priority in a world of infinite resources and no other major issues. The reality is that we face many other moral decisions ... life and death decisions affecting 10's of millions of people ... which must be considered. Here are some of the other potential priorities:

• Agriculture output. Climate change is expected to reduce agriculture productivity by 1.4% by 2100. By 2080, global agriculture output is expected to more than double. If we did nothing to reduce the impact of global climate change, this doubling would be delayed until ... 2081.
  
• Malnutrition. Global warming is forecasted to increase the number of malnourished by 28M by the 2100. Today there are 900M malnourished people. We expect to add about 3B more people to the planet by 2100. By that time, the number of people malnourished is expected to drop to 100M. This is more of a political will issue than a financial issue.
• Kyoto vs. Hunger. Spending $180B per year through 2100 on Kyoto will avoid 2M hungry by 2100. Spending $10B per year, the UN estimates could save 229M people from hunger today. Spending directly on hunger (vs. indirectly through carbon reductions) is 5,000x more effective. Climate change (if fully realized) would only address 3% of the hunger problem.
• Foreign aid effectiveness. Focusing foreign aid on areas such as direct malnutrition policies, immunization and agricultural R&D would return value of 15-20x the good than the cost.
  
• Innovation vs. reductions. Incentives for creating new technologies (a cornerstone of Obama's proposed plan) which offer low-carbon alternatives will deliver 11x more good than the cost. Whereas simple CO2 cuts produce $0.90 return on the dollar. He encourages countries to spend 0.5% of their GDP on low-carbon innovation incentives.

I am not an expert on the numbers quoted, so that requires further review and validation. I do admire intellectual honesty and a genuine debate with all of the facts on the table as we have some very important priority decisions to make now with a new President and Congress. I'm hoping we'll put aside philosophical arguments and let the best ideas win out ... especially for the sake of the world's poor who have no voice.

In October, I had the opportunity to travel to Indonesia to participate in a leadership event (sponsored by Unitus) for CEOs and senior managers of some of the world's most innovative and fastest-growing social businesses. Most of these businesses are in the microfinance sector with a few in other emerging social business sectors. Countries represented at the gathering included India, Mexico, Philippines, Cambodia, Tanzania, Kenya and Indonesia. We had great discussions on bottom-of-pyramid (world's 4B poorest citizens) topics including: savings products, insurance products, mobile banking/payment, serving ultra-poor and capital raising in our current financial crisis.

I had the opportunity to lead a discussion on the topic of distribution of wealth created by social businesses. There were a number of interesting discussions and examples of how these leading social entrepreneurs are thinking about and acting to implement broader wealth-sharing initiatives. Here are some of the highlights:

Starting as a non-profit operation. SKS Microfinance, the fastest growing microfinance institution in the world with 3M clients based in Hyderbad, India, started in 1998 as a NGO. When they transformed a few years back into a financial company, they setup a trust to hold the cash generated during this process plus shares of the new finance company. The trust is managed by a group of trustees elected by the finance company's borrowers with a mission of serving the borrower's community. One of the issues they've faced is the ownership dilution of the trust's shareholding in the finance company as the finance company has raised new equity capital. The trust does not have sufficient cash to invest to maintain their ownership level as the finance company valuations have grown, so by default they would own a smaller % of the outstanding shares after each new financing round. SKS's management team and earlier social investors have creatively sought to reduce the trust's dilution impact by issuing stock options to the trust. This has allowed the trust to maintain a 20% ownership stake in the finance company without having to buy new shares. The impact on the existing and new investors (including founders/management) is that they are effectively giving up some of their upside to allocate more upside to the trust. I believe this is a very interesting model for social businesses in similar circumstances.

Starting as a for-profit business. Equitas, a fast-growing (0-100,000 clients in less than 1 year) microfinance company based in Chennai, India, setup from their start in 2007 as a shareholding finance company. The founders were upfront with their investors that their mission was to build a social business. At the start, they setup a separate trust which was granted 5% of the stock of the finance company with the mission of serving the educational and other needs of their target segment of the working poor. In addition to setting up a management stock ownership program, they setup up a employee stock option plan which reaches to all levels of employees. This is almost unheard of in India. Additionally, the founder is planning to allocate additional future options which he is granted by the board to the trust. These are a number of innovations which others can learn from.

Stock options for all employees? There was a lively discussion on whether it made sense to grant stock ownership opportunities beyond the senior management down to the broader employee base (in the case of microfinance, this would include entry-level loan officers.) Some leaders argued that junior staff: (a) were much more motivated by additional cash than stock options; (b) that giving something to employees which they didn't value and cost the company something didn't make sense; and (c) would develop expectations that the stock was worth something and if that didn't materialize they would be angry. Other leaders argued that there are still very good reasons to offer stock options to entry-level employees and these above issues can be addressed through education and setting up share sale opportunities back to the company ... with the goal of giving some significant upside sharing to these employees.

How to avoid mission drift. I was asked by one of the CEOs what I recommended they do to ensure that an organization continued on it's social mission once outside investors got involved. After first stating that I felt like I was the least qualified person in the room to answer that question, I shared an observation ... investors are first and foremost investing in the capabilities and potential of the executive team to deliver the results promised during the fundraising process. This means that the social business CEO has a LOT of power. You have the power to set very clear mission and performance measurements with your investor upfront. So, use that power to be very clear in setting expectations about what success looks like. And then make sure your investors are aligned with these objectives.

Please share additional examples in comments of creative approaches that social businesses are taking to share the wealth created when/if their business is successful.

Labels: social business, wealth distribution