The Path to Funding Social Enterprises Beyond Infancy

By Jennifer Walske & Laura D. Tyson

In our research, we took a deep dive into eight successful social enterprises in order to identify the critical elements of their success.

In our previous post, we discussed the surprising importance of media as an X-factor in accelerating a social start-up’s footprint and growth.

Embrace, co-founded by Jane Chen, developed an alternative to incubators for premature infants.

Embrace, co-founded by Jane Chen, developed an alternative to incubators for premature infants.

In this post, we turn to the challenge of securing early funding, which is crucial to growing a social enterprise beyond its infancy.

We discovered several important strategies to find funders. These include participating in and winning social venture competitions, which build credibility and provide a perfect backdrop for meeting angel investors.

We also found that it’s essential for social enterprises broaden their funder base within the first few years. Though initial financing often comes from philanthropic sources or social venture capital firms, we found that successful social enterprises also draw funding from traditional venture capitalists and other for-profit investors. Indeed, both traditional VCs and social-purpose VCs tend to have a better understanding of the need for product innovation and the kind of investment necessary to bring new products and ideas into the mainstream marketplace.

Rugged Funding Landscape

The truth is that financing a social venture start-up is usually more complex and difficult than financing a standard high-tech start-up. This is because social venture funds, though growing in number and prominence, are usually smaller and less established than traditional venture capital firms. Unlike traditional venture firms, which measure their success based on their ability to “exit” investments through public stock offerings or buy-outs, social venture funds seek both a social and a financial return on investment. Unfortunately, the definition and measurement of that social return is often unclear for funders and the funded alike.

Having said that, we identified several important lessons in raising capital for a social venture start-up. Women have been both founders and early investors in many social enterprises, and we focused on two women-led start-ups: Embrace and Revolution Foods.

Embrace Design Team

Embrace Design Team

The first lesson is that corporate form matters. It is easier to raise large amounts of capital if a social enterprise is a for-profit rather than nonprofit enterprise. That is because equity investments are more common investment vehicles for high-risk start-ups in the product-development stage. In contrast, non-profit donors are more used to funding specialty programs, rather than new product development.

Second, social venture start-ups can benefit immensely from entering targeted business-plan competitions. The competitions themselves provide only small amounts of capital in the form of prize money, but they offer enormous access and visibility to potential angel investors. Winning such competitions can be a valuable pre-qualifier for larger venture firms, especially when the social start-up is very young.

Embrace and the Corporate Form

Embrace was founded by Stanford students participating in Stanford University’s Institute of Design’s course, Design for Extreme Affordability. Founder Jane Chen and her team had been tasked with creating an alternative to the traditional infant incubators, which are often unsuitable in impoverished nations because of their high price, dependence on electrical power, and periodic need for expensive and hard-to-get replacement parts.

Chen and her co-founders designed a special wrap that keeps premature infants warm without the use of electricity. In addition to its simplicity, the product costs a minuscule fraction of the $20,000 price-tag for an incubator.

Embrace got off to a fast start by winning two business-plan competitions early on, which led to seed investments from judges and from Stanford alumni: “We won Echoing Green and Stanford BASES the same day,” Chen recently recounted. “This ultimately allowed us to get more feet on the ground in India, which was our first target market…. Alumni networks are also important, which led Mulago Foundation to invest in Embrace.”

However, the founders of Embrace soon had to re-think their plans for raising follow-on capital.   They had launched Embrace as a nonprofit enterprise, hoping to form distribution partnerships with non-governmental organizations such as the Red Cross, UNICEF, and the World Health Organization.

To Chen’s chagrin, however, the NGO’s deemed Embrace’s product “unproven” and did not place orders. This forced her to turn to philanthropic donors for capital, which easily consumed more than half of her time. The timing of these funds was also unpredictable, with donors deciding when and if they would continue donating. On top of that, Chen told us, donors rarely understood the need to fund product innovation and did not recognize that product development could take years, instead of months. Embrace’s pediatric products needed to go through expensive clinical trials.

The long fund-raising cycle, combined with the lack of advance orders from NGOs, ultimately forced the co-founders of Embrace to pivot in their approach. Chen created a new for-profit entity, Embrace Innovations, which was able to attract a sizable equity investment from Khosla Impact, a social venture fund. That in turn made it possible to ramp up product development and manufacturing.

“In the beginning we thought we could do almost anything with a million dollar and two people,” Chen recalled. “But then you realize there’s manufacturing, distribution, clinical trials and all the other functions of a business.”

Calling all Venture Capitalists

Revolution Foods, which produces high quality school lunches and consumer products, got its initial boost by placing first in the Berkeley-Haas Global Social Venture Competition. The prize money provided co-founders Kristin Groos Richmond and Kirsten Saenz Tobey with a small amount of prize money, but more importantly it led to a $50,000 investment from angel investor, Dick Beers, and then to a $500,000 investment from DBL Investors.

nutrition_education1

Those investments allowed Kirsten and Kristin to get a truck, lease kitchen space, and hire four additional employees, including an executive chef, two prep cooks and a driver. That in turn enabled them to run a pilot program, which provided the proof of concept for their business model and paved the way for additional investors. Nancy Pfund, founder of DBL Investors, told a recent Berkeley-Haas colloquium on social finance that she quickly saw the potential for Revolution Foods, leading her to supply meaningful early stage funding.

“I met Kristin and Kirsten at Haas, and immediately saw the value of their idea,” Pfund said. “Providing large amounts of early capital is extremely important for founders who are proving the field.”

Another key lesson from Revolution Foods is the value of seeking funding from traditional for-profit venture capital firms. Revolution Foods began as a for-profit enterprise, though one with social goals, but it raised money from both kinds of investors.   The social venture capital firms included DBL Investors, Catamount Ventures, New Schools Venture Fund, Physic Ventures, and the Westly Group. But they also garnered significant financing from traditional VC firms, led by Oak Investment Partners. Revolution Growth, the venture capital fund created by AOL founder Steve Case, recently invested $30 million.

One hurdle for social venture capital investors is the lack of standardized metrics for assessing social impact. According to Kirsten, Revolution Foods developed its own metrics rather than relying on frameworks developed by its investors. And, now that Revolution Foods is B Lab certified, which provides some standard guidelines for social impact, the process of social impact measurement has become even easier.

In closing – what are the steps social entrepreneurs should take to find funders? Winning competitions is clearly important, because it allows an unknown and unproven start-up to catch the attention of serious angel investors and experts.   If winning a competition leads to media coverage, which it often does, so much the better: the company can establish a “larger than life” presence that is crucial to establishing credibility with investors and business partners.

Our research also suggests that philanthropic donors and nongovernmental organizations may not be the best sources of capital. The experience of Embrace indicates that nonprofit donors often have a limited understanding of the need for product experimentation and innovation. Venture capitalists, both the social and traditional kinds, are far more likely to understand those imperatives, as well as the size and kind of investment that will be necessary to accomplish them.

The X-Factor for Social Ventures: Media

By Jennifer Walske and Laura D. Tyson

As more and more social entrepreneurs launch new ventures to address social and environmental challenges, it has become increasingly important to understand the factors that have allowed a select few social start-ups to scale up rapidly.

While many social ventures have impressive ambitions and good business plans, the unfortunate truth is that the overwhelming majority do not become self-sustaining and never grow much beyond their original size.

What is it that distinguishes the few social enterprises that expand into large organizations and become financially self-sustaining?

To answer that question, we conducted systemic interviews with the leaders of eight highly successful social ventures that were either founded by alumni of Berkeley-Haas or were finalists in the annual Berkeley-Haas Global Social Venture Competition.

These firms included d.light, Embrace, World of Good, Kiva, Fair Trade USA, Back to the Roots, Revolution Foods and Sanergy.

In these interviews, three driving factors stood out as critical to early success. The first two may not come as a surprise: raising sufficient financial capital and developing solid supply and distribution channels. The third element was more unexpected: media attention, which amplified the other two factors.

Although research into the scalability of social enterprises has increased in recent years, very little attention has gone to the role of media in the early expansion of SE’s. That role includes raising brand awareness, establishing an organization’s credibility, bringing visibility to specific social issues, and strengthening relationships with investors and mainstream corporate partners.

In the early years, most of the social entrepreneurs we interviewed said that becoming a “media darling” was key to reaching take-off velocity. And, if well timed, media attention crystalized commitments from funders and helped the SE’s build their supply chains. Equally important, however, many social entrepreneurs said that the media focus needed to shift to more of a back-burner effort as their organizations evolved and as they put a higher priority on executing their operational plans.

These sentiments were echoed by Ned Tozun, founder of d.light, and one of Forbes’ top 30 social entrepreneurs.  “We got a ton of attention pretty early on,” he told us. “It was tremendously beneficial because it gave us a lot of credibility with distributors, with manufacturing partners, and to some degree with investors. But, at the end of the day, you have to build a solid organization that delivers stuff.”

Kiva, which today is a thriving microfinance non-profit, received a flood of early funders due to its exposure on national television, in part due to the Nobel Peace Prize being awarded to Muhammad Yunus, the microfinance pioneer who founded Grameen Bank. Kiva’s first wave of attention included coverage on PBS’s Frontline. The true break-though, however, came after being featured on the Oprah Winfrey Show. After that broadcast, traffic on Kiva’s website became so high that its servers crashed from the rush of people eager to make micro-loans to low-income people with business ambitions in developing nations.

As Kiva became more established, the role of media lessened in importance. The emphasis shifted to other barriers to scale, such as setting up reputable microfinance institutions to manage their funded entrepreneurs in distant parts of the globe. But without the early impact of media in establishing Kiva’s brand, it is not clear the organization would have become the most well-known U.S.-based microlending platform. Premal Shah and Matthew Flannery were named Fortune magazine’s “Top 40 under 40″ and were designated as Skoll Social Entrepreneurs in 2008.

It was a similar story with Back to the Roots (BTTR), founded by Haas undergraduates Nikhil Arora and Alejandro Velez. These entrepreneurs attribute much of their organization’s early growth to the extensive media coverage that it received from the Wall Street Journal and on television programs that ranged from The Martha Stewart Show and The Rachael Ray Show to NBC’s Today and the CBS Evening News.

In BTTR’s particular case, Alejandro Velez was even featured on the reality show, The Bachelorette. Media exposure was instrumental in BTTR’s ability to scale to its level today, with wide distribution of its mushroom in a box and its fish tank products through Whole Foods and Costco. The media attention allowed it to connect with millions of consumers almost overnight, something that would have otherwise been almost unthinkable, and it dramatically raised public awareness about the organization, its mission and its brand. These co-founders were also recognized by Business Week’s Top 25 Social Entrepreneurs and Inc. magazine’s 30 Under 30.

Paul Rice of Fair Trade USA shared that media coverage from national news organizations played a major role in developing the Fair Trade label as a brand. At the time of Fair Trade USA’s launch, there was quite a bit of media attention about the plight of coffee farmers, who were unable to earn a substance living because of the worldwide drop in wholesale coffee prices. Media outlets aggressively covered this issue, putting pressure on the larger coffee retailers to find a solution. With mainstream news organizations publicizing the need for change in the coffee supply chain, Rice’s Fair Trade USA offered a unique solution and became a natural part of the story.

Fair Trade USA soon became financially self-sustaining and expanded the Fair Trade certification program and label across a wide array of other products. Rice also revealed that media coverage provided important indirect benefits by generating favorable publicity for Fair Trade USA’s major organizational partners, such as Dunkin’ Donuts and Whole Foods, that sold Fair Trade Certified products.

“We quickly realized that if we could get ourselves into the press, we could also get our partners in the press… which is big time,” Rice told us. That favorable publicity increased the attraction for other corporations to partner with Fair Trade USA. Similarly, Fair Trade USA benefited from ongoing media campaigns by its larger partners. Keurig’s Green Mountain’s “Great Coffee, Good Vibes, Choose Fair Trade” campaign features the country singing star Kelly Clarkson. Rice himself was named Social Capitalist of the Year for four consecutive years by Fast Company, from 2005 to 2008, in addition to numerous other awards.

Media attention often creates the perception that start-up social enterprises are larger than they actually are. This provides them with enhanced credibility in the marketplace, with distribution partners and retailers as well as consumer and investors.

Although media attention may not seem like a driving factor to many social entrepreneurs, having a media plan and being media savvy have clearly been central to the early growth at many of the most successful social enterprises.  In today’s heightened focus on social media, the amplification effects of public attention are more pronounced than ever.

Given that most social start-ups struggle with raising capital, attracting public attention to the mission of the organization can be pivotal to scaling up, allowing them to rise to a level that ensures enduring and far-reaching impact.

Remembering John Whitehead: The Conscience of a Leader

By Richard Lyons

Dean, Haas School of Business

Credit: Goldman Sachs

Berkeley-Haas and the Center for Responsible Business lost a close friend two weeks ago, when John C. Whitehead passed away at the age of 92.

To the public, John Whitehead was best known as a legendary former co-chairman of Goldman Sachs, as a tireless philanthropist, and as a Deputy Secretary of State under President Reagan.

But John also became entwined with Berkeley-Haas, thanks in part to his close friendship with another remarkable friend of Haas – Paul Newman, the late, beloved actor and pioneering social entrepreneur.

John provided major financial support for the Center for Responsible Business — the first graduate business program in the United States devoted to the broader role of business in solving social and environmental challenges. Perhaps more important, John provided inspiration to us on what it means for a business – and a business school – to have core values.

John embodied the idea of “Beyond Yourself” even before we embraced that phrase as one Haas’s four defining principles.

It was Paul Newman who initially brought John into the Berkeley-Haas orbit

The year was 1999, right at the time of the Enron collapse and an epidemic of other major corporate accounting scandals. Paul had been campaigning for years to increase corporate philanthropy, and he had become deeply alarmed by the evidence of sliding business ethics.

Laura D. Tyson, who was Dean of Haas at the time and is now director of the Institute for Business and Social Impact, wanted the school to address the same problem. Liz Robbins, a close associate of both Tyson and Newman, urged them to team up and create what is now the Center for Responsible Business.

Paul readily agreed to contribute $500,000 in seed capital, but there was a twist: he didn’t want the project named after him. Instead, he proposed that we use his money to create the John C. Whitehead Distinguished Fellowship, which would fund the new center’s director.

Video: Paul Newman talks about corporate responsibility at Berkeley-Haas.paul newman

John was as surprised as anyone about all this — Paul had forgotten to tell him about the Whitehead Fellowship until it was a done deal. But John had helped Paul on the philanthropic front, opening doors to countless C-suites and offering shrewd advice about whom to approach, and John strongly supported a push for greater corporate accountability.

John quickly became an enthusiastic supporter of our efforts. Within a few years, he contributed $300,000 of his own money to the Center for Responsible Business. After Paul Newman died, he convinced Newman’s Own Foundation to contribute yet another round of funding.

But John did much more than give money. At Goldman Sachs in the 1970’s, he had enshrined what became the firm’s 14 principles. John believed that culture was crucial to a firm’s success, and values were the foundation of that culture.

John’s first principle was the most important: “Our clients’ interest always comes first. If we serve our clients well, our own success will follow.”

The second: “Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and the spirit of the laws, rules and ethical principles that govern us.”

Note the primary importance that John placed on moral and ethical standards. For him, it wasn’t enough for a business to comply with the literal dictates of the law. A good company should embrace its spirit and purpose as well: integrity, accountability, the broader public purpose.

Given the calamity of the recent financial crisis, it’s tempting to dismiss such declarations as window-dressing. But John was serious, and he enforced his principles long before anybody was talking about a crisis of ethics in American business.

John lived and breathed the principle of “Beyond Yourself.” During World War II, he commanded a landing craft during the invasion of Normandy on D-Day. After the war, when he was at Goldman, he served for years in the Navy Reserves. Over the decades, he gave to countless philanthropic causes and served on innumerable foundations. He spent years on the board of the International Rescue Committee and received its Freedom Award – twice. He was a tireless supporter of public schools, especially New York City’s public schools. After the 9/11 terrorist attacks, when he was fast approaching 80, he chaired the Lower Manhattan Development Corporation to rebuild Ground Zero as well as the foundation in charge of creating a memorial and museum.

I was inspired by John Whitehead’s ideas many years before I met him in person. In 2006, I took a leave from the Berkeley-Haas to join Goldman Sachs as its “Chief Learning Officer.” John had retired almost two decades earlier, but much of my job was to reinforce the culture and the principles that he had established. I immersed myself in John’s own book, as well as several others on Goldman’s unique “culture of success.”

Upon returning to Berkeley-Haas in 2008 as dean of the school, I immediately searched our website for references to “culture” and “core values.” To my dismay, I came up with nothing. Not a word. And this was 2008, just as the financial system was collapsing under the weight of outrageous and reckless behavior from so many quarters of business.

To be sure, Berkeley-Haas has always had a distinct culture of social consciousness and a well-deserved reputation for social responsibility. But these were like passive characteristics of the school, rather than core values that people consciously articulated and actively pursued.

Because John had become such a close friend of Haas, I visited him at least twice a year in New York City after I became dean. He was always personable, always eager to hear what we were doing. I came away from each visit loaded with fresh ideas and a renewed motivation to clarify our own core principles.

On one visit, I told him that we were working on a new mission statement. Given all that had happened during the financial crisis, I said, it seemed to me that we had an obligation to train a different kind of business leader.

John’s blue eyes lit up.

“Don’t be too narrow,’’ he said. This wasn’t just about training a different kind of business leader, he told me.  It was about training a new generation of leaders for all purposes – nonprofit institutions, the public sector, you name it.

That was a big idea. We weren’t simply training business executives. We were training leaders.   To do that, we needed to identify our own principles and embed them in our culture.

It was what John had done back at Goldman Sachs, and it was what he continued to do as a public servant and a philanthropist. For me as a person, and for Berkeley-Haas as an institution, John Whitehead bestowed a gift of inspiration that will live on as long as we are around.

Laura Tyson: Promoting Gender Parity in the Global Workplace

Writing for the McKinsey Global Institute, Laura D. Tyson offers a list of steps that would increase the economic participation of women and increase long-term global growth.

tyson_laura photo

Tyson notes that women account for half the global labor supply and 70 percent of consumption demand. But even though women have largely closed the gender gap with men on health and education, they continue to lag on economic participation by 10 to 25 percent — even in the world’s most gender-neutral nations.

The Organization for Economic Cooperation and Development has estimated that achieving parity in  labor-participation would increase GDP growth by 12 percent over the next 20 years.

Tyson offers a list of policies that would help close the gender gap.  Among them: equal legal rights in land ownership and inheritance; equal access to educational opportunities, from basic literacy through postgraduate training; the abolition of  discriminatory practices in recruitment, retention, pay, and access to credit; and the elimination of tax policies that are disincentives to the labor-force participation of spouses.

Building a Sustainable Social Business: Three Key Lessons

Christopher Tang

Generations X and Y are passionate about starting social businesses to address pressing social problems, from alleviating poverty to improving access to clean water. Every social entrepreneur hopes that these businesses will be operationally and financially sustainable, and perhaps even profitable. However, the failure rate for social businesses is extremely high. The problem is not a shortage of hope or good intentions, but rather the absence of an appropriate business model.   Can we identify ways to help social entrepreneurs to improve their chances for success?

Based on my study of more than 100 social businesses during the last five years, I have identified three major lessons that social entrepreneurs may find useful:

Beware of ideas that sound too good to be true: no pain, no gain.

Playpump

Consider PlayPump, a social enterprise that was founded in late 1989. The co-founders, Trevor Field and a professional engineer named Ronnie Styver, co-designed an innovative product: PlayPump — a child’s merry-go-around that pumps potable water from a deep borehole to a 2,500-liter storage tank that is seven meters above the ground. As children spin the merry-go-around, PlayPump pumps water up from the borehole to the tank. The idea of providing playground equipment for children that also provides clean water to the community generated over $60 million in support from the US Government, the Case Foundation, and other agencies. By 2008, more than 1,000 PlayPumps had been installed in five countries across southern Africa. Unfortunately, the PlayPumps failed miserably. Among the problems:

  • Unreliable equipment and exorbitant costs for installation and maintenance. The pumps failed frequently and needed both specialized repair workers and specialized replacement parts. Both were difficult to find and very expensive for rural villages.
  • Inefficient water supply alternative. While PlayPumps had initial successes in helping the poor to gain access to clean water in countries such as Malawi, they became increasingly ineffective as more and more pumps were installed in adjacent communities. In Mozambique, the large number of pumps began draining the supply of groundwater to the point that some of them could not meet demand.
  • Unhappy children. When the installed pumps could not generate enough water, there were reports that children in some communities were being required to spin the merry-go-around 24 hours a day. Far from providing an opportunity for children to play, the pumps raised concerns about forced child labor.

 

Economic development requires sustainable efforts exerted by the poor: effective screening is essential. We often try too hard to help the poor by providing resources to them for free, hoping that they will utilize these resources in a responsible and sustainable manner. The problem is that providing resources for free can create moral hazard: you cannot screen out which poor beneficiary is truly committed for the long term. Therefore, aligning compatible incentives between the social business and the poor is critical.

arzu
For example, to enable Afghan women weavers and their families break the cycle of poverty, Connie Duckworth founded an online portal called Arzu that sells the weavers’ traditional and custom-designed rugs. By providing a market for the women, and by offering them a fair price, Arzu creates jobs in rural Afghanistan and provides the women with steady income and access to education and healthcare. However, to screen out those weavers who are not truly committed, Arzu imposes certain direct and indirect costs for those who join the program. First, to provide an incentive for the weavers to stay with the program over an extended period of time, Arzu provides looms on a rent-to-own basis. Second, to enable weavers to improve their skills and their future earnings, Arzu provides a 50% incentive bonus for those weavers who attend Arzu literacy classes and send their children to school full-time.  As recognition of the impact that Arzu has made, former President Jimmy Carter presented Connie Duckworth with the Skoll Award for Social Entrepreneurship in 2008.

Social impact requires scalable operations: the network effect is powerful.
kiva

The network effect has enabled firms such as AirBnB, Alibaba, e-Bay, e-Harmony, and Uber to scale up their operations without incurring major increases in operating costs. This concept of network effect is powerful, and it can certainly enable social businesses to make bigger impact. Matt and Jessica Flannery, for example, co-founded an online person-to-person (P2P) social micro-lending platform called Kiva in 2005. Kiva is an online portal that enables ordinary people in the developed world to lend money (as little as $25) to individual borrowers or groups in the developing world who want to start or sustain businesses. By 2008, Kiva had over 350,000 lenders and had made more than 37 million Euros in loans to 67,000 borrowers in rural Africa.

 

There are many surprises and setbacks when developing a sustainable, scalable and impactful social business. The above three lessons may ease some pains for bigger gains!

 

CRB Hosts White House Dialogue on National Action Plan for Responsible Business Abroad

If the United States government wants to promote or require responsible business practices by American corporations operating abroad, what combination of carrots and sticks should it bring to the task?

That was a core issue on Friday, when the Berkeley-Haas Center for Responsible Business hosted a regional “dialogue” at the request of the White House on President Obama’s call for a National Action Plan for Responsible Business Conduct.

NAP Scott Busby

Scott Busby, Deputy Assistant Secretary of State for Democracy, Human Rights and Labor

The main focus was on US business practices in other nations, though one frequent theme was that the United States must set a strong example with its own domestic policies and practices.

NAP Gathering

The five-hour conference brought together senior officials from the State Department and the Department of Labor; leaders from business and organized labor; international civil-society groups; and scholars in the field from Berkeley-Haas.

The over-arching question: How should the US government promote global business practices that protect human rights, improve workplace safety across global supply chains, and enhance environmental sustainability?

When it is complete, the National Action Plan is expected to provide a blueprint for government policies to address corruption and bribery; human-trafficking and discrimination; labor rights; transparency and accountability in global supply-chains; and environmental sustainability.

The goal of the five-hour conference wasn’t to make specific policy recommendations. Rather, it was to collect divergent views about the scope of a National Action Plan, the tools available for promoting best practices, and the best process for hammering out the actual plan.

“Our mission was to foster the dialogue,’’ explained Robert Strand, Executive Director of the Center for Responsible Business.   The CRB served as the convener to bring together voices from industry, government, and civil society to discuss and debate how policies of the U.S. government can best encourage responsible business.”

Robert Strand, Center for Responsible Business

Robert Strand, Center for Responsible Business

Scott Busby, Deputy Assistant Secretary of State for Democracy, Human Rights and Labor, led the Obama administration’s contingent, along with Melike Yetken, the State Department’s senior advisor for corporate responsibility.

Speaking for international business was Mark Hodge, executive director of the Global Business Initiative for Human Rights. GBI’s members include 18 major multinationals, including General Electric, Chevron, HP and Coca-Cola. Participants also included leaders from major non-governmental organizations and watchdog groups. These included the International Corporate Accountability Roundtable; the Responsible Sourcing Network, Accountability Counsel, and the AFL-CIO. Executives from institutional investors, including CALPERS and Black Rock, participated as well.

In general, the participants all shared a basic agreement about the core priorities, such as combating bribery and corruption; promoting sustainable environmental practices; and protecting human rights down through the supply chain.

But to be effective, several participants emphasized the need for policies to be precise and, where appropriate, to impose accountability. “Responsible business” is a broad and often amorphous goal. But a goal of reducing carbon emissions can be specific, and it can be promoted with both “sticks,” such as a carbon tax, and “carrots,” such as subsidies for alternative energy.
While most participants endorsed a “smart mix” of incentives and hard requirements, they quickly revealed disagreements about what that mix should be.

“The reality around the world is that businesses are often faced with sub-optimal choices,’’ cautioned Mark Hodge, of the Global Business Initiative on Human Rights. Identifying exactly what is happening three tiers down in the supply chain can be very difficult, he noted.

But Amor Mehra, director of the International Corporate Accountability Roundtable, warned that business groups often hang back from discussions about regulations and rules and then sue to overturn regulations they don’t like.

Transparency about supply-chain practices and access to relevant data was a recurring topic. The State Department and Labor Department both keep lists of countries with high violations of human rights and labor rights.

Industry and civil society groups have developed their own databases and tool kits. The Sustainable Apparel Coalition has launched the Higg Index, which assesses the environmental sustainability of materials and packaging. It is also developing a tool to assess the social and labor performance of manufacturing facilities.   The Electronics Industry Citizenship Coalition helped launch the Conflict-Free Smelter Initiative, to prevent the sourcing of metals and minerals produced with forced labor. Cisco Systems has developed an expansive code of conduct on labor and environmental practices for its suppliers around the world.

Many participants called for a higher level of “integrated financial reporting” that includes data on a company’s performance on environmental and social responsibilities.   In a workshop on responsible investment, several participants said that both institutional and individual investors could exert significantly more leverage on companies if they had more access to such data.

The United States is not the first nation to pursue a National Action Plan for Responsible Business Conduct. Denmark, the Netherlands and the United Kingdom have already developed plans, and the Obama administration is studying them closely.

The Obama administration has convened six inter-agency working groups to prepare recommendations on key aspects, from labor rights and procurement practices to anti-corruption measures. But the administration is seeking input from stakeholders on all sides, and the dialogue at Berkeley-Haas was the second of several regional sessions to that end.

The administration is soliciting written comments at each stage in the process, and the next round of comments are due by April 24.

The Hidden Jewel in Obama’s Budget: Public-Private Infrastructure Partnerships

President Obama’s budget proposal this week includes $478 billion for infrastructure over the next six years, a one-third increase over current levels.

Most of the media attention has focused on the political tug-of-war over taxes and spending, but the bigger story here is the untapped opportunity for a new investment alliance between private business and the public sector.

Public-private infrastructure partnerships have soared in Europe over the past 20 years, but they are still scarce in the United States. In the United Kingdom, according to the Brookings Institution’s Hamilton Project, PPP’s accounted for 32 percent of infrastructure investment between 2001 and 2006. By contrast, PPP’s have accounted for only 2 percent of US infrastructure investment since 2007.

President Obama’s new budget plan, released this week, calls for a Qualified Public Infrastructure Bond that would give public-private partnerships access to the low interest rates and federal tax benefits enjoyed by municipal bonds.

The idea is similar to an existing program, the Private Activity Bond, that has been used to finance more than $10 billion in roads, tunnels, and bridges. But the new bond wouldn’t have a dollar cap (the PAB is limited to $15 billion) and it would be available for a wider array of public projects – from airports and mass transit to solid waste disposal and water-treatment facilities.

By all accounts, US public infrastructure is sorely in need of fresh investment. As Laura Tyson argued last August, US investment in highways, bridges, mass transit and other public infrastructure has fallen to less than 2 percent of GDP – the lowest level in at least 20 years. The American Society of Civil Engineers gives a grade of D+ to US infrastructure, and it estimates that it would take $1.7 trillion in spending through 2020 to reach a passing grade.

Public-private partnerships in infrastructure come in many variants, but they usually entail a bargain between government agencies and private investors. The government identifies the project, based on a rigorous analysis of projected costs and revenues in the decades to come. Private investors provide much of the funding for construction and maintenance, in return for a stream of revenue from user fees or future taxes over a specified number of years. Ideally, PPP’s can tap into the same low-cost financing available to state and local governments.

Public-private partnerships hold an obvious allure for cash-strapped governments. But as the Hamilton Project cautioned in a 2011 report, PPP’s are not free. They can still involve wasteful spending, especially if the investors are to be paid back through future taxes rather than through user fees. The Hamilton report outlines a list of best practices, gleaned from the experiences in other nations, for selecting projects, structuring the deals and properly over-seeing them to completion.

One crucial element of success is a coherent legal framework that is uniform across states. In a report last August, President Obama’s Infrastructure Finance Working Group cautioned that one of the major obstacles to PPP’s in the United States is “a patchwork of legal environments and procurement practices across states…[that] increases uncertainty and transaction costs.”

Eighteen states currently have broad enabling legislation that allows public agencies to enter into PPP’s, but that leaves two-thirds of the states with either no enabling laws or very limited ones. And because the rules vary widely, investors can’t transfer knowledge from one state to another.
That said, the untapped financial opportunity is substantial. The Bank of International Settlements, based in Basel, argued in a recent paper that there is substantial pent-up appetite for PPP’s among global institutional investors, from pension funds and insurance companies to sovereign wealth funds. In fact, the California Public Employee Retirement System, or CALPERS, recently committed $485 million to a global infrastructure investment partnership.

Supporters argue that PPP’s offer more than just a source of capital. Because private investors are putting their own money on the line, they have a big incentive to make sure their projects come in on budget and actually deliver the kind of value that ultimately produces a return on investment.

All in all, PPP’s offer a unique juncture between business and social impact. In principle, they could easily appeal to Republicans in Congress.  Could this be an opportunity for bipartisan collaboration?

Ben Mangan: Obama’s Post-Presidential Speech?

Was President Obama’s State of the Union Address actually his first post-presidential speech — a framework for shaping the national agenda after he leaves office?

Ben Mangan, executive director of the Berkeley-Haas Center for Nonprofit and Public Leadership, argues that this is exactly the case in a commentary for Huffington Post.

“In my view, this particular SOTU kicked off what I imagine will be a life-long campaign to shape the country according to his values, and he’s decided to start building momentum now,” Mangan writes.

At the core of that post-presidential campaign, he argues, are the president’s continuing belief in the American Dream, tempered by hard data on widening inequality and the struggles of ordinary Americans.

“Obama will leave the White House a healthy, vibrant middle-aged guy with decades of work ahead of him,” he Mangan argues.  “At his core, he’s a campaigner and an organizer, and he’ll want to embrace his opportunity to shape the nation and the world as an ex-president.

Growth vs. Equality? Laura Tyson speaks out at Davos

Laura D. Tyson, director of the Institute for Business and Social Impact, spoke out on the link between economic growth and inequality at last week’s World Economic Forum in Davos, Switzerland.  Here is a transcript and audio file from an interview she gave afterward.

tyson_laura photo

Among her points:

*When asked whether inequality is likely to keep increasing, most people in the forum were resigned to the idea that it will.  Few people even wanted to use the word “inclusive” in talking about the issue.

*Technology is probably aggravating inequality, but it isn’t getting enough recognition as a contributing factor. Tyson agrees that technology often creates new job opportunities, but says the trend of late has been for advances to create part-time, low-income jobs that displace full-time jobs — especially in service industries.

*On a more positive note, Tyson hears very strong support for the importance of increasing gender equality and for the view that gender equality contributes to stronger economic growth.

Confronting Corruption: Advice from the Front Lines

On Feb. 6, at the request of the White House, the Berkeley-Haas Center for Responsible Business will host one of four regional dialogs on President Obama’s call for a National Action Plan on Responsible Business Conduct for US companies operating abroad.

One issue high on the agenda will be how US corporations confront corruption and bribery, a problem that can be pervasive in some countries.

How does a corporation deal with demands by a government official for “speed money” to get a license issued or a permit renewed? What about a politician who demands money to settle a labor dispute he helped engineer? How does a company combat internal corruption, such as employees who demand kickbacks from vendors?

Ravi Venkatesan, a former chairman of both Microsoft India and Cummins India, offers tough-minded insights on exactly these kinds of problems in a recent article for the McKinsey Quarterly.

“The hardest issues for ethical multinationals…are rarely the big-ticket scandals and scams that make the headlines,’’ Venkatesan writes. “Rather, it’s the subtler and more pervasive forms of fraud and corruption, such as pressures for payments on routine transactions.”

He calls these the “quiet killers of ethical business practices,’’ and warns that small and seemingly innocuous lapses can snowball into very big problems if they become viewed as just the cost of doing business. Corruption breeds more corruption, which is bad in itself for a corporation, but it also exposes companies to political backlash and prosecution by the host country as well as by the United States.

Indeed, the US Justice Department and the Securities and Exchange Commission have stepped up prosecutions under the Foreign Corrupt Practices Act. The government collected $635 million in penalties under the FCPA in 2013, and in 2014 two of the biggest FCPA settlements of all time: $772 million from Alstom SA and 384 million from Alcoa, both for alleged bribery in Bahrain.

You may not be surprised at Venkatesan’s broad conclusion: the best way for corporations to protect themselves is by going well beyond the letter of the law and establishing a culture of ethics from the top down.

But Venkatesan offers a number of shrewd insights and practical tips for dealing with demands for bribes and “speed money,” extortionists who make threats against companies, and corrupt employees inside the company itself.

The first step, he argues, is that a corporation’s CEO and other top leadership send an utterly unambiguous message about what does and does not constitute acceptable practice and about enforcement.

That means establishing a detailed code of conduct, and making sure that everyone inside the company understands it. It means making a sufficient investment in compliance, especially in countries where corruption is widespread. And it means taking swift and firm action against managers who either violate the rules or turn a blind eye. (A fraud survey by Ernst and Young found that only 35 percent of companies had taken action against employees.)

Venkatesan acknowledges that resisting corrupt demands can entail real costs: lost business, approvals that take more time, angry government officials. To that end, he offers practical advice.

*If a company’s local CEO faces demands by a politician who makes “credible threats,” such to stir up a violent labor confrontation, he or she should not deal with the problem alone. Country managers should discuss it with their global chief executive and the legal counsel at headquarters. They should also have a strong network of local advisers, perhaps even a special board of advisers who know the landscape.

*Don’t assume you have to capitulate. ”Bear in mind that extortionists are usually solo actors without institutional backing: it is often possible to call their bluff, which, in my experience, helps a company cultivate a reputation for honesty and acts as further protection against future demands.”

In some countries, Venkatesan acknowledges, it is almost impossible to carry out routine business without running into demands for “speed money” or grease payments. This often spawns industries of “facilitators” who act as intermediaries for making payments.

“Almost no one will officially admit to paying speed money, but the uncomfortable reality is that there may be no alternative for a business that needs to keep operating,” he writes.

If a company can’t avoid hiring a “facilitator,” Venkatesan urges it to be clear at the highest levels about what is happening. The company should make sure the intermediary is providing a real service, beyond making payments. Second, it should explicitly account for every payment to an intermediary and have all transactions vetted by legal experts at the company’s global headquarters. “From the perspective of the multinational,” he writes, “nothing should be under the table.”

Venkatesan also cautions companies against under-investing in compliance or skimping on compliance staff.

Compliance enforcement is a cost-generator, not a profit generator. But even companies that are serious about ethics may allocate money for compliance on a rigid formula, such as a particular ratio of the business unit’s revenues. That formula may be appropriate for operating in Germany or Switzerland, but it may be woefully inadequate for an emerging economy where corruption is more endemic.

Ultimately, it’s up to a corporation’s top executives at the global headquarters to establish a culture and a track record of uncompromising ethical compliance. Indeed, a reputation for rejecting bribery demands can go a long way to inoculating a company against them.

“CEOs must ensure that every employee in every part of the world is utterly clear about what conduct is acceptable and what is not,’’ he writes. “Over time, people will know what is acceptable here and what’s not. Social memory is many times more effective than a bunch of policies.”