Why "Social Capital Markets" Could Be a Really Bad Idea

A common assumption of the "new philanthropy" is that "social capital markets" will separate effective from ineffective organizations by forcing nonprofits to compete with each other for scarce resources, allocated according to standardized criteria. I think it’s much more likely that important work in civil society will be marginalized, leading to less social change, not more. How come?

First, there are no reliable measures of the "social return on investment," only estimates of the financial value of those aspects of social change that can be quantified, which are relatively few.

That’s because social impact is so complicated, unpredictable, and lengthy that it can’t be captured in a set of numbers.

Second, even if such numbers did exist, how would one apply them across so many different issues, strategies, and contexts? Who is to say that saving the rainforest deserves more support than ending gun crime or racism? Should we direct more money to apples instead of oranges because some of us prefer their taste?

Social goods are incommensurable—meaning  that they have no common measure of social value, so decisions in philanthropy are always based on different views about priorities, like school reform and climate change, or strategies to reach them, like community organizing and the delivery of services. There are no data that can remove these differences, because democracy is animated by struggles and debates about what constitutes the "good."

Third, what is counted as a cost may actually be a benefit, such as the time invested in messy and more democratic processes of decision making and accountability, which have been shown to be important in the success of social movements. What seems expensive now may prove to be cost effective over time, and what produces short-term gains may prove costly in the future.

If our goal is reducing poverty, there are lots of different ways to achieve it, including changing law and policy through advocacy, building capacity in communities so that they can fight for their rights, and scaling up the direct provision of services like microcredit, but there is no possible way of deciding which of these approaches is "best" across all contexts. The complex assemblages of factors that underlie success can’t be transported from Chicago to Mississippi on a magic carpet, even within the same field of grant-making during the same period in time, let alone as circumstances change.

Fourth, rankings imply attribution, which is impossible in the world of social change because results are never driven by one project or organization acting on its own, so who exactly is being rewarded, and is that fair?

And fifth, variations in the same metrics may not reflect meaningful variations in performance, since two organizations may be dealing with similar issues but in totally different contexts, one much more difficult than the other.

If only a limited range of organizations, strategies, and types of social impact can be measured, then social capital markets will inevitably push resources to a subsector of nonprofits regardless of their real contribution to society. The overall result may be the rewarding of donors for superficial results and the penalization of those whose work is most important to long-term social change.

So what’s the alternative? One would be a version of what we have now—an "anything goes" approach in philanthropy that maximizes the freedom of the giver. That’s probably not the best approach, even for a skeptic like me, since it wouldn’t address the resource gaps that plague so many groups, especially the smaller, more community-based nonprofits that lack access to national funders.

More promising, I think, are "meeting grounds, not markets," as I put it in Small Change—"safe spaces," both real and virtual, where nonprofits and their supporters can forge long-term relationships with one another, discuss and experiment with different ideas about impact measurement and performance, and generate diverse revenue streams without incurring the costs of overcompetition. Guidestar, GiveWell, Charity Navigator, Great Nonprofits, and New Philanthropy Capital go some way towards this vision, but are too oriented towards the donors, too narrow in their assessments of nonprofits, and too concerned with ranking who is "best," a nonsensical approach to civil society because of the problems identified above.

Is there anyone out there who wants to invest in something new?

Monday's post: Should Civil Society Be Reduced to a Subset of the Market?

Tomorrow: Welcome to Philanthropy’s "Pandora"

Comments

market-based tools are just part of the solution

Michael, great post and I look forward to reading the book. I had an interesting experience at SOCAP09 (Social Capital Markets) last September. It was a great conference. I learned a lot, met some great people (like Peter Deitz), but everyone (except Peter) kept asking me the same question over and over - why are you a nonprofit? Why aren't you using a market based solution? (Never mind that we have a business model that will be self-sustaining once it it brought to scale.) My answer was and is that we are leveraging the market. Our currency is not money, but impact. Citizen Philanthropists want to go out and have a real and direct impact in the world. They realize that they cannot solve the global food crisis, but they can solve the food crisis in one community. So they bring their friends and family together, leverage their social network (creating civic engagement) to raise the funds to build a small dam in an Indian community. Some may call that a donation because it wasn't a loan. I call it 'buying impact'. It is a transaction where the donor gives money but fully expects to receive information on the impact the donation had one the ground. We have already seen at Citizen Effect (www.citizeneffect.org) that when people receive timely updates and impact reports, they will give again and step up to lead a project and become a Citizen Philanthropist. If information is inaccurate or lacking, people take their donation dollar elsewhere.

I think microfinance is a great tool, but it is not a tool for everything. I think it is possible for people to start businesses that provides their village with clean water, but that is not always the best solution. A well in one community can stimulate economic and community development, but in another it can suck the ground water dry and leave future generations without water. Our Americanism leads us to believe there is a quick fix, one size fits all solution to the worlds problems, but the reality is we have to use all the tools at our disposal. I look forward to reading the book and future posts.
Dan Morrison, Founder, Citizen Effect (www.citizeneffect.org)

Social impact bonds - an innovation for philanthropy?

Michael,

What do you think about Social Impact Bonds, such as being developed by the Young Foundation in the UK? It seems to me that they could incentivize a number of civil society and market-based innovations that measurably change outcomes -- indices of well-being.

Best,

Mark Frazier
Openworld.com
@openworld @buildership

Social impact bonds - an innovation for philanthropy?

Michael,

What do you think about Social Impact Bonds, such as being developed by the Young Foundation in the UK? It seems to me that they could incentivize a number of civil society and market-based innovations that measurably change outcomes -- indices of well-being.

Best,

Mark Frazier
Openworld.com
@openworld @buildership

Social impact bonds

Tks Mark I think social impact bonds are an interesting idea, but like all such ideas will face difficulties in measuring and attributing the social changes that are supposed to be obtained through the activities that are funded. There's no getting around that I'm afraid.

Accounting is Destiny!

Thanks for this blog! I agree with some of your points, and also with some of Sean Stannard-Stockton's response. I have a somewhat different frame from either of you, but first I just want to say, "Basta with the capital market analogies, already!" We already have a social capital market, and and it's...well...the regular old capital market!! It's really neither social nor anti-social, and it's just a market for capital(not revenue)used by enterprises(both with and without tax-exempt status. The largest and richest players get the lion's share of capital, whether they're nonprofit or for-profit, although the nonprofit sector is a much smaller (and intentionally auxiliary, in many cases)part of the economy, so overall, we get less (and we use less. Small enterprises of all tax stati have less access than larger ones. Much of what the field talks about in discussions about the social capital market is really about allocating revenue, not capital. But that's the job of the regular old consumer market (the one where people buy cucumbers and nail polish and orchestra tickets and political influence and an education, rather than derivatives and stock options). Here, individuals make buy/no buy decisions based on whether they like what's being sold or not. I don't wake up and say, "AHA, General Mills' got a good report on Morningstar, think I'll zoom down to the store and get some Lucky Charms (their product) for breakfast." I, like most people and institutions, make buy/no buy decisions independent from the capital market unless I'm buying stock or getting a mortgage. Thus, the capital market isn't used to guide decisions on what products or services to spend money on now in either tax status universe--even when there are good social benefits emanating from companies raising capital through it. Hence, arguably the best thing to do first is to rate for-profit companies for social return, thus giving the real capital market some much needed discipline. I think we already have a social capital market, and it would be odd to try to extend an already tortured analogy to making revenue allocations to nonprofit organizations(or for-profit bodegas, clam shacks or boutiques, for that matter). First, let's have the for-profit sector test social metrics...nonprofits will work on other things. And we sure need to. How do we align resources with effectiveness, where that's paramount. What does money have to do with accomplishing mission. I don't think we know.

I must say, like Michael, I'm skeptical of a marketplace "but for" that is, "but for a social capital market, consumers and donors of social sector offerings would be saying, 'gee, think I'll give to Habitat rather than Harvard this year" or, "Wow, this says the University of Bridgeport is great and their work is undervalued compared with my alma mater--cut them a check, and cancel the alma mater's!" In the stock market, the rise and fall of shares doesn't really directly affect revenue and I don't think that's what we're after, anyway. So at this point, spending untold hours worrying about figuring this out is getting us a little far afield, if not downright lost. It may happen some day, but there's much to be done first. That said, here's where I depart from Michael's argument.

There is an urgent need for social sector organizations (of any tax status) to understand and tell their "numbers" story unashamedly and compellingly. That applies to funders as well as npos. This entails that we insist on and own metrics, including sensible program metrics connected with financial and capacity numbers. In most subsectors, managers already are collecting program metrics, or their regulatory framework requires a set. With these and other measures, we need to create meaningful comparables, and learn from them, or we (and the people we serve) will be vulnerable to a race to the bottom. In some markets, for-profit entrants are building businesses based on suboptimal social outcomes. Similarly, nonprofits with stretched infrastructure are missing the opportunity to exit and declare victory: to turn over parts of our operations to fully scaled and efficient for-profits when this option is the best mission choice. But if we can't tell the story of better quality, longer term positive effects and similar, the cheapest and the fastest and the most politically influential (or the nonprofits most tied in to business as usual) will prevail, undermining quality in services from foster care to education and undercutting the progress of the civil society we all value. In our sector, fear of numbers has allowed us to ossify our programs and business models, fail to learn from each other, and continue to be subjected to the odd amalgam of superstition and medieval barter routines that pass for nonprofit financial best practices.

We do have competition, fierce competition, but it has been largely unacknowledged or avoided and that tendency makes us weaker as a sector. The most important competition, of course, is with mission failure: the child that will not learn to read, the social justice campaign that fails, the creative vigor that fades, and much more. Thus, our habit of protecting ourselves from competition and denying that it exists is particularly unseemly. On the one hand, we are self referential, all too often non-rigorous, and wedded to exceptionalism (we're so special here in River City that we're not going to adopt practices that metrics show have dramatically reduced the bedsore count in nursing home patients), or, equally likely, "we at the Symbolic Word Foundation only invest in special projects for unique, exemplary social sector leaders...so why would we want to acknowledge anyone else's existence?" Rigorous, comparable, self-reported metrics that are subsector specific will help us move away from that particularly damaging set of habits.

I certainly take Michael's point that we're a hugely diverse sector and one size doesn't fit all. Moreover, the commercial flaws we address are diverse, and that makes a big difference with respect to critical business needs such as capital access, revenue reliability and timing of results. And Sean makes some great points about the inherent messiness of experimentation and maintaining small scale as we embrace transparency. But first things first: accounting is destiny! If we do not insist on, and own, social metrics, someone else will own them for us.

Democracy, not destiny.

thanks Clara, great post. It certainly helps to clarify why social capital markets are the wrong way to go, but if "accounting is my destiny" I might as well throw myself off the nearest bridge! I have much more exciting plans for the future, thank you very much, and most of them don't involve "rigorous, comparable and self-reported metrics that are subsector-specific." Instead they focus on liberating ourselves from the audit culture that increasingly imprisons us, shrinks our imaginations, and gives too much power to technocrats. Your points are very relevant to discussions of the social economy, but not so much to civil society, as I pointed out in my first blog post last week.

It's often said that "what gets measured, gets done", but I think the reverse is closer to the truth - "some of what gets done, gets measured." So the key question is who decides and how, and that's a matter of politics, not technics. You're right that "someone else will own our metrics for us" if we don't own them for ourselves, but the same applies to this conversation as a whole. So why not change the terms of the debate completely and make it story of social transformation, not just a game of numbers? Then we might really get somewhere.

Ways to invest money

This is really exciting and I am happy to see that the Austin community is getting energy around social entrepreneurship.I think the big challenge of social capital is measurement. How do we measure value? How do we measure good? and how can we apply the same rigorous metrics that entrepreneurs must meet to a process in which financial return is no longer the single driver?
These are important questions we must answer (I believe) before investors–even socially conscious ones–will feel confident that the money they invest is meeting their core values while ALSO being leveraged by sustainable and effective business processes.As a side note, as an attorney who specializes in intellectual property, it always amazes me how few social ventures manage themselves as a start-up would in the legal realm. While I realize securing patents seems antithetical to the notion of community, leveraging these same tools of business for social good would be yet another example of a community that is growing up and creating recurring and sustainable value and not just a bunch of do-gooders for a cause.

Ways to invest money

Invest money in corporate bonds or bond mutual funds. Having bonds in your investment portfolio provide a safer vehicle than investing in just stocks. Bonds and bond mutual funds tend to go up when interest rates go down and down when interest rates go up. This type of investment can add stability to your overall investment plan.

non profit organization list

www.nonprofitlist.org is not as geared towards the donors as the other sites. They also take reviews from people who have knowledge of the non profit.

market is a market

Since there is competition for time, talent and other resources for socially motivated ventures, decisions about which ones to invest in are still made by a market. I believe the question is whether we should try to make these markets more efficient.

I think the Copenhagen Consensus nicely illustrates the arguement that there are limited resources and pressing concerns. Perhaps it is in our interest to examine ways to improve efficiencies and allocate resources.

In addition to establishing more structured "social enterprise" markets, I think equal priority should be given to recognizing that all traditional corporations are subject to new scaled up forms of social capital (social media) that mean they must realign their enterprises with social value.

I introduced this discussion in the wake of SoCap08: http://bit.ly/apJ08B

And have more related thoughts here: http://bit.ly/bFRxPr

Great post!
Thanks,
mc