Do Well and Do Good

Compartamos' Microfinance Operations in Mexico Sparks Debate: How Well is Too Well?

In the evolving world of doing good and doing well new tensions emerge all the time between the 'old' players that used to occupy the social impact space and some of the new faces on the block. The example that keeps coming up on my radar is that of Compartamos, a Mexican company that since 2000 has taken the micro-lending model into the for-profit sector and in so doing has made a bundle of money.

 

In April of 2007 about one third of the company was offered to the public in an IPO that generated nearly $500 million. The IPO created waves, not just because it placed the company's value above the billion dollar mark, proving that there is money to be made in servicing the world's underserved, but also because a host of critics vocally denounced the company's tactics and operations. The media attention ensued from the likes of The Economist, The Wall Street Journal, and of course The New York Times.

 

Criticism of Compartamos generally focus on two things: the moral argument that they are making too much money off the poor; and second, that Compartamos charges such high interest rates that instead of 'replacing' the  local money lender, they have actually become one.

 

Advocates of Compartamos point out that micro-finance has had limited reach and effect to date because non-profit models are simply not as scalable as for-profit ones since they don’t have access to the same large sums of capital. Also, they note that interest rates on Compartamos loans have decreased steadily over the last several years as Compartamos' cost has decreased due to its for-profit orientation.

 

While I think there are some valid concerns and a debate is always welcome, it is hard for me to believe that the negative here outweighs the positive. A lot of the emotion has been stirred up here and in my mind it's not really because of the interest rates but because of the idea that someone is making money off the poor. After all, as The New York Times point out Compartamos's interest rates are in line with what other non-profits charge in Mexico, saying "Compartamos’s rates are only a few percentage points higher than Pro Mujer’s [a non-profit], for example".

 

That Compartamos cost in providing the loans is actually lower than it used to be and then it is for your typical non-profit only proves the point that we must have for-profit institutions entering spaces like these to lower cost and increase competition. Yes, for now interest rates on the loans have not decreased. But with a $1 Billion dollar valuation I have to believe that someone out there is saying "I can do that". As soon as they do, competition will take over and with it interest rates will likely come down over time as will profit margins (as they do with almost every industry as it matures).

 

Last, I think there is validity in asking "how much is too much" profit, especially when a business is targeting poor customers, but the greatest moral question in my mind should not be around how much money is being made, but rather how well the customer is being served compared to what services were available to them previously. Since businesses had largely ignored these customers until very recently, to me the answer seems clear.

'Nudge' Your Way to Doing Well and Doing Good

I've been hearing a great deal lately about Nudge, the new book by big name economists Richard Thaler and Cass Sunstein that explores how people can and should be 'nudged' into making better decisions since, as it turns out, we often don't make the choices that are best for us.

 

The works comes out of the tradition of behavioral economics first formalized by Amos Tversky and Daniel Kahneman that claimed that people don't actually act like the rational robots that traditional economic models take them for (surprise, surprise). While I have not read the book yet, what does seem fascinating to me based on what I have read so far is that Thaler and Sustein propose that rather than trying to ignore or overcome our irrational tendencies we should actually create policies and incentive structures that use these irrational tendencies to push us in the 'right' direction. The easiest example would be a policy that requires employees to 'opt-out' of 401k retirement plans rather than to 'opt-in' (which is the case today). Such a policy would likely significantly increase participation in these programs. I've also written in the past about behavioral economics since some of my personal heroes including Warren Buffet and Charlie Munger have often talked about how irrational decisions affect investment choices in particular. Finally, there are some pretty interesting examples also on the Nudge blog.

 

But what is most powerful about the ideas behind Nudge to me is that the book is part of a larger trend that seeks to carve out a middle path between market forces and profit motives on the one hand (doing well), and social objectives on the other (doing good). The old way of thinking took for granted that you had to let people choose freely for the market to work and for their rational self-interest to take hold. In this old mindset any 'social objective' overlaid on top of this would distort the free market. No longer. Today more and more businesses, non-profits, and academics are acknowledging what perhaps we should have known all along: there is a third way, all it takes is a little nudging.

Deloitte Survey: Doing Good Makes Employees Better

In thinking and writing about the convergence of 'doing well' and 'doing good' I tend to focus on money. Perhaps that's my nature as an investment manager. Or maybe I focus on money because in today's burgeoning cause-marketing filled environment that also tends to be how companies approach their social initiatives.

Still, in perusing Cone marketing's always interesting Do You Stand for Something? blog I came upon an item about volunteerism. According to a 2008 Deloitte Volunteer IMPACT Survey 91% of Human Resource professionals surveyed say that skills-based volunteering does or would add value to corporate training and leadership development programs. I can think of few other examples that so clearly illustrate win-win situations. The organizations receiving the volunteers get additional resources but with a specific skill set they can use and the companies enabling the volunteerism get more effective employees over the long-term. 

Add to this the fact that such volunteer programs can actually make employees happier and can be an effective recruiting tool especially now when younger generations of workers consider giving back a core part of what they want to accomplish in life. I found the videos that are part of the Wall Street Journal article on this topic pretty compelling, as Ernst & Young employees pretty sincerely talk about their experiences with the company's volunteer programs.

All in all this reminds us all that in the quest to find the spaces where economic and social value overlap we need to think broadly about all the opportunities in front of us and leverage all the resources we have, not just money.

Advertising Age: Doing Good Does Generate Returns for Business

Perhaps little else indicates the widespread adoption of an idea more than its transformation into a 'gut sense' that is easily accepted as truth. In that case, it seems that the benefits of cause-marketing are no longer up for debate and are now part of conventional wisdom, or at least so was my impression after reading this recent article in Advertising Age whose title "Yes, There is an ROI for Doing Good" promises a wealth of supporting data for its bold headline.

It turns out that most of the executives interviewed for the article hadn't really 'crunched the numbers' that would help quantify ROI for cause marketing initiatives, but they did indicate that there was little doubt in their mind that these programs can yield big returns when done right. So while the debate around the true motivations of cause-marketing lives on (whether or not companies are just in it for the money and if so does it really matter?), it look like the greening of our TV networks will continue.

Most interesting to me were the cause marketing examples called out in the article, especially the HelptheHoneyBees.com program by Haagen-Dazs that addresses the problem of the disappearing bee populations. What I liked about this effort was the seemingly sincere reason for choosing this cause (turns out most Haagen-Dazs ice cream flavors contain ingredients pollinated by bees) and the beautiful execution on the site and even in the advertising that really tries to not only inform you but even to get you to act. Amazingly, the print ad for the campaign (pictured here) actually ran on recycled linen paper embedded with sunflower seeds so that you could just tear out the add, plant it in your backyard and presto: you are planting flowers that help bees survive. Now that's what I call full circle.

Rockefeller Family Resolution Gains Support of 40% of Exxon Shareholders

Just a few weeks ago I blogged about the Rockefeller family taking on the management of Exxon Mobil, the company their iconic patriarch founded. I pointed out that it was heartening to see shareholders taking an active role in the companies they have a stake in. As might have been expected, however, the Rockefeller family sponsored resolutions did not pass and investors rejected the proposals, even the one that was seen by most experts as having the greatest chance of actually passing: the splitting up of the Chairman and CEO roles at the company, both of which are currently occupied by Rex Tillerson.

Most headlines I saw related to this focused only on the negative here, pointing out that in an era of record oil profits most shareholders seemed pretty happy not to rock the boat. I don’t think that captures the really interesting part of this story. Nearly 40% of the vote went against Tillerson by supporting the measure to split the position in two.  Plus, ISS (Institutional Shareholder Services), the third party independent party that makes recommendations to institutions on how to vote on shareholder resolutions, also recommended that the position be split. And all this happened despite record oil profits.

The truth is that many, if not most, shareholder resolutions don’t get anywhere near 40% of the vote, so in some sense this was a real success. If you are Rex Tillerson it can’t feel great that 40% of your company wants you to give up some power. Plus, there's always next year and one has to wonder how Exxon and Tillerson will fair if oil prices recede and with them company profits while other companies begin to capture the value from the new energy sources.

I currently do not own a position in XOM as of the date of this writing – this may or may not change in the future. Under no circumstances should any of the comments stated above be viewed as a recommendation to buy, sell or hold any security.  A decision to invest or not invest in any particular security should be made in the context of the financial situation of the individual or entity involved and, as such, this communication should not be construed as a recommended action.Please see conditions of use for important legal disclosures and information relevant to this post

"Don't Be Evil" Really Does Pay

Google's now somewhat famous and informal company slogan "Don't be evil" can be more than just an expression of corporate values. At least that was my main take away from a recent Wall Street Journal article about a study that seeks to determine if companies that are perceived as 'ethical' can command price premiums for various products.

What was most interesting to me about the findings was that consumers actually penalize 'bad' companies more than they reward the 'good' ones. For example, when asked how much they would pay for a pound of coffee, consumers who were told they were buying from an ethical company were willing to pay $9.71, compared to the $8.31 regular consumers who had no information were willing to dole out. That adds up to a 14% premium. But consumers who said they were buying company from an unethical company said they would only pay $5.89. That's a whopping 40% drop in the price.

Still, it is clear that we are just at the beginning of understanding the complexities behind how ethics affect consumer purchase behavior. How does this look across various industries or types of products? How do different types of ethical or unethical behavior affect this? What is the risk of ethical activities being perceived as insufficient and doing more damage than good? While there are many more interesting questions that could be asked here, I applaud the efforts at generating hard data that for-profit businesses can begin to use to justify, expand, and become more strategic about their ethical activities.

Movies for Change: Pangea Day

Just as the market's ability to improve and solve social problems is being explored more than ever before, so too is the power of media and the arts being re-sharpened in this direction. Enter Pangea Day, an event that took place this past Saturday in multiple locations across the world in the style of Al Gore's LiveEarth but focused entirely on telling stories about the things people from drastically different places have in common: things like hope, love, and dreams, among others. The event was the result of filmmaker's Jehane Noujaim's (most known for documentaries Control Room and Startup.com) wish at the ever-influential TED Conference in 2006.

I've been following news about this for a while now through the well-crafted website but must admit that I was initially skeptical about the initiative since documentaries have been around for a long time and seemed like they were doing a fine job of telling all sorts of stories about people and cultures from around the world. Having watched the 1-hour highlight movie from the event on the website, I can see that my skepticism was completely misplaced. Bringing all these stories together in one place with a strong point of view and message makes all the difference. Plus, the fact that many of these movies were made by real people in their own communities lent a sincerity and power that isn't always there in even the best of documentaries. I found even a small movie from India shot entirely on a cell phone that showed a pair of dancing fingers on a table mesmerizing. While some moments like the first Pangea day 'laugh together' moment seemed a little hokey, one cant help but appreciate the effort at moving past the kind of self-conscious irony that often keeps us from seeking or pursuing real change. I'm looking to see what happens next year.

Rockefellers vs. Exxon Mobil

The descendants of John D. Rockeffeler, the man who founded the company that would become Exxon Mobil, are taking on the company's current management for its refusal to focus on renewable sources of energy.

The family is sponsoring four proxy resolutions aimed at changing various aspects of the company. The first seeks to change the corporate governance structure by separating the roles of CEO and Chairman, both of which are currently held by Rex Tillerson, the man Forbes called "The Defiant One" in an article last year about Mr. Tillerson's refusal to 'get in line' with the shift in public sentiment toward renewables and away from oil and coal. 

Other resolutions aim to increase the company's emphasis on understanding and responding to climate change, such as one resolution which seeks to establish a task force to investigate and report "the likely consequences of global climate change between now and 2030... and to compare these outcomes with scenarios in which ExxonMobil takes leadership in developing sustainable energy technologies..."

I currently do not own a position in XOM as of the date of this writing – this may or may not change in the future. Under no circumstances should any of the comments stated above be viewed as a recommendation to buy, sell or hold any security.  A decision to invest or not invest in any particular security should be made in the context of the financial situation of the individual or entity involved and, as such, this communication should not be construed as a recommended action.Please see conditions of use for important legal disclosures and information relevant to this post

Earth Day Part 2: Make Me Sustainable

With Earth Day recently gone I thought I would take some time to re-up my commitment to the environment. Happily, a friend recently shares a link to a website called Make Me Sustainable that is helping me keep my promise.

What I liked best about the site was that it made me realize that I could change small things in my daily behavior and feel like I am really making a significant difference. Something like "Say no to double bagging" asks pretty little but gives back in spades. Some suggestions they made actually made my life significantly better, such as signing up to reduce the amount of junk mail I receive using a service called Green Dimes. Less junk mail and help the environment -- sign me up.

It's great to see technologists thinking creatively about how to help solve big issues. All I have to do is remember the people I know who drive a Prius with their eye on the gas meter all the time trying to optimize their MPG numbers as if it were a game to realize how important it is to show people what their impact is before asking them to reduce it. Make Me Sustainable does just that. This, coupled with some smart suggestions on how to reduce that impact left me little choice but to keep my post-Earth Day promise.

Earth Day Part 1: The Skeptic

It's hard not to get a little skeptical about the Earth Day celebrations. The bloggers over at Tree Hugger may have said it best when they questioned: "Is Earth Day the New Christmas?" Or a quote by Advertising Age in an op-ed, saying "It's nearly Earth Day: Time to consume more to save the planet." Indeed, with every major corporation now pushing 'green' products and every network on TV advertising 'green' shows, it's hard not to feel that the true spirit of the environmental movement has been co-opted for the service of something altogether different.

Still, I can't help but try and step back a bit and note the positives here. At the end of the day, consumers vote with their dollars. If there truly is a concerted effort to buy things that are actually made with fewer resources and are better for the environment, corporations will respond to the market demand and will adjust accordingly. And that's not a trivial shift. Yes, there is an irony here at play, since the most environment friendly thing one can do is not to consume so much in the first place. But since consumption isn’t going away soon we need to give companies and market participants a reason to pay attention. There's no better way to do that than to make them follow the green.

Motely Fool: Microsoft Shouldn't Swing for the Fences

There's enough excitement in the technology industry these days to get your head spinning. Yahoo! (Nasdaq: YHOO), fighting off offers from software behemoth Microsoft (Nasdaq: MSFT) since February, is now in talks with former Internet juggernaut AOL, the Internet division of Time Warner (NYSE: TWX). Microsoft hasn't given up hope, though: Some reports say Mr. Softy is considering a joint bid for Yahoo! with Rupert Murdoch's News Corp. (NYSE: NWS), owner of MySpace.

Read the rest of this article on the Motley Fool.

I currently do own a position in TGT but in no other companies mentioned here as of the date of this writing – this may or may not change in the future. Under no circumstances should any of the comments stated above be viewed as a recommendation to buy, sell or hold any security.  A decision to invest or not invest in any particular security should be made in the context of the financial situation of the individual or entity involved and, as such, this communication should not be construed as a recommended action. Please see conditions of use for important legal disclosures and information relevant to this post

Carbon Credit News: TerraPass Sets Transparency Standard as JP Morgan Acquires ClimateCare

A number of interesting things happening in the carbon credit world these days. UK-based ClimateCare, (one of the earlier pioneering carbon offset providers), is being acquired by JP Morgan and merged into their environmental markets group. This move signals the pending arrival of carbon trading as a big business that can generate real profits for some big players.

Simultaneously, I found this interesting tidbit through Treehugger, about a program TerraPass has begun in order to make transparent which projects the company supports with carbon credits purchased through its programs. TerraPass will post the projects on its site and actually open it up for comments from users and purchasers for a 30 day period prior to supporting the project.

You are What You Measure: GDP Accounting Up for Debate in Senate Hearings

It was after business school that all the finance people realized they should have paid attention more in accounting class. After all, if you understand how something is measured and you will likely have a real solid grasp of this issues, complexities, and realities behind it. Reading a company annual report when you know what's behind the numbers makes all the difference, and the same goes for extrapolating implications from changes in our Gross Domestic Product (GDP).

I only recently started paying attention (thanks to World Changing) to the sub-committee hearings of the Senate Commerce Committee, where the GDP deficiencies in accounting for the overall health of our economy and society are being debated. Robert Kennedy first brought attention to this issue 40 years ago. You can listen to his comments in this video.

Bear Stearns and Market Transparency

I suppose that I am young enough to have been shocked as I was watched the value of a major Wall Street bank dive 85% in one day. In the aftermath of the Bear Sterns collapse there are many different questions being asked. What was the proper role of the Federal Reserve in bailing out (or not bailing out) the bank? Which bank, if any, will be next to fall? What are the implications for moral hazard?

 

I currently do not own a position in BSC as of the date of this writing – this may or may not change in the future. Under no circumstances should any of the comments stated above be viewed as a recommendation to buy, sell or hold any security.  A decision to invest or not invest in any particular security should be made in the context of the financial situation of the individual or entity involved and, as such, this communication should not be construed as a recommended action.Please see conditions of use for important legal disclosures and information relevant to this post

Motely Fool: A Classy Stock for the Stingy Investor

It's not often that my father is enthusiastic during a shopping trip to a department store. So when he recently raved about happily shopping for shoes while sipping apple martinis, it struck my attention.

In an intense retail marketplace, these are the stories that are the key to determining a store that differentiates itself from competitors to continuously attract new customers and retain the old. His experience at Nordstrom (NYSE: JWN), coupled with its nomination for best customer service firm last year, encouraged me to dig in and check out the financials.

Read the rest of this article on the Motley Fool.

I currently do not own a position in JWN as of the date of this writing – this may or may not change in the future. Under no circumstances should any of the comments stated above be viewed as a recommendation to buy, sell or hold any security.  A decision to invest or not invest in any particular security should be made in the context of the financial situation of the individual or entity involved and, as such, this communication should not be construed as a recommended action. Please see conditions of use for important legal disclosures and information relevant to this post