Last week’s Washington Post has an article that confirms what a lot of people already know: it’s expensive to be poor.
The poorer you are, the more things cost. More in money, time, hassle, exhaustion, menace… "The poor pay more for a gallon of milk; they pay more on a capital basis for inferior housing… [they] actually end up paying more for transportation, for housing, for health care, for mortgages. . . . The poor pay more for things middle-class America takes for granted."
The article mostly focuses on the poor’s relative higher cost of living – caused by things like limited mobility and the predatory practices of many businesses that target them, for example – as a reason people remain poor. One thing the article doesn’t explicitly address, though, is asset poverty: another huge hurdle to overcoming the cycle of poverty.
The fact that asset accumulation is critical to moving people out of deep-rooted and persistent poverty makes these higher prices seem even more frustrating: the more money people spend on higher-cost goods, the less money they have to allocate to savings and investments that will benefit them in the long run. Moreover, few asset-building products are marketed to the poor (instead, you have horrifying ads like this), which makes asset accumulation even more difficult.
In sum, the article is a good reminder that the causes and perpetuation of poverty are often multifaceted and interrelated – approaches to addressing it should be too.
Last week’s Washington Post has an article that confirms what a lot of people already know: it’s expensive to be poor.
"The poorer you are, the more things cost. More in money, time, hassle, exhaustion, menace… "The poor pay more for a gallon of milk; they pay more on a capital basis for inferior housing… [they] actually end up paying more for transportation, for housing, for health care, for mortgages. . . . The poor pay more for things middle-class America takes for granted."
The article mostly focuses on the poor’s relative higher cost of living – caused by things like limited mobility and the predatory practices of many businesses that target them, for example – as a reason people remain poor. One thing the article doesn’t explicitly address, though, is asset poverty: another huge hurdle to overcoming the cycle of poverty.
The fact that asset accumulation is critical to moving people out of deep-rooted and persistent poverty makes these higher prices seem even more frustrating: the more money people spend on higher-cost goods, the less money they have to allocate to savings and investments that will benefit them in the long run. Moreover, few asset-building products are marketed to the poor (instead, you have horrifying ads like this), which makes asset accumulation even more difficult.
In sum, the article is a good reminder that the causes and perpetuation of poverty are often multifaceted and interrelated – approaches to addressing it should be too.
Almost no one is lending out money right now. Or, to be more
accurate, no banks are lending out
money right now. Indeed, in the midst of the ongoing credit crisis the huge
banks that normally provide the necessary financial lubricant for our economic
engine are too afraid to make loans because they are too scared that they won't
be paid back. Where's an upstart small
business owner supposed to go?
Well, if the banks aren’t an option, perhaps the people you
know are. After all, the folks who know you well are theoretically best suited
to know if you will and can pay them back. The thing is, not everyone is
comfortable or good at asking people they know for money.
That's where Virgin Money comes in. The company has already
helped individuals and small businesses get more than $300 million in loans
from people they know by formalizing the loan process. So instead of just
looking your uncle straight in the eye and uttering the words "trust
me" in the most reassuring way possible, you can actually have a real and
legal process in place to make the loan seem credible.
Now Virgin is starting the "Show Us Your Ask"
contest which invites small businesses and individuals to submit videos that
show off the most creative ways to ask friends and family for a loan. As a
small business owner myself, I think it would be fascinating to see how others
went about this not so comfortable process. And as credit dries up in
traditional channels, this might be something more and more of us might need to
get good at.
The ongoing chatter about renewable energy almost always
centers on power generation, evoking images of wind turbines or acres of solar
panels set against green fields and blue skies. Yet power generation is just
one part of the equation. A reliable grid with enough capacity is needed to
transmit that power from where it originates to the populous areas where it gets
used, especially if we are going to increasingly rely on electricity to power
our cars and other forms of transportation. Leave it to Google, which already
seems to own just about every other network in our lives, to team up with
General Electric to identify the opportunity and commit to making it happen.
The two companies announced a collaboration on technology
and policy initiatives (i.e. coaxing the US government) to try and update
the country's outdated grid. Both stand to gain serious revenue if it becomes a
reality since GE makes many renewable energy technologies such as wind turbines
and Google has software solutions for more effectively managing power
transmission across the grid and is also looking to lower one of its most
significant operating costs for its data centers.
It is amazing that amidst all the financial turmoil of the
last weeks this is still happening. After all, if the initiative gains momentum
it represents a need for some serious capital commitment. And that's one thing
that seems to be in serious short supply these days. Still, the unfortunate and
tough financial situations that we find ourselves in today with the bank
failures, the high cost of energy, and the political cost of our dependence on
foreign oil come together to create an opportunity too. It's an opportunity not
only to do the right thing, but also to make a lot of money. Happily, Google
and GE recognize that, and they recognize that it will take collaboration with
government to make it all happen.
New York Times coverage of the announcement is here.
WorldofGood.com is eBay's new do-gooder shopping portal. I
haven’t been that attuned to the latest happenings in this ecommerce niche but
a new eBay product definitely makes me look twice.
A few minutes on the site and I quickly gathered that it
seems well designed and friendly. Still, I can't help but feel a little
disappointed. The fact that a company like eBay is stepping into this area
could be a real legitimization of what might otherwise be considered either a
fad or a really small retail niche. What eBay could have done was signaled that
social attributes of products are important enough for everyone to consider
when they are buying a product. Instead, WorldofGood.com seems very much in
line with, rather than a departure from, some of the existing green commerce
sites like EcoSeek or Greenzer, among others. To be clear: there's nothing
really wrong with that, except that it continues to work within a paradigm that assumes only people who regularly buy handmade drums from Indonesia really want any social
info about the products they buy.
Of course, the site has just launched and it may evolve into
much more than what it suggests right now. On the positive side, the labeling system that the site employs is valuable and transparent, breaking things down into
'People Positive', 'Eco Positive', 'Animal Friendly' and 'Supports a Cause'. Along with more specific attributes within each of these categories, the system really captures the social value of most any product out there. Plus, these labels do a great job of giving consumers clarity on exactly what is good about
the products they are buying rather than making them take it on face value just because
something might be made of bamboo.
Similarly, WorldofGood.com put into place something they
call 'Trustology', which is essentially a marketplace for third party validation of the various businesses in the value chain that bring the product to
your door; from the producer to the seller.That may be confusing to some, but it
provides real transparency and real value.
All in all, I think these labeling systems are what are most
interesting about the new site. After all, people couldn’t choose to eat
healthy until labels were placed on foods. Same goes here.
I stay pretty connected to some of the schools that I worked
with as a Peace Corps volunteer in rural Costa Rica many years ago. Every
now and again I still get calls asking me to procure a certain product or to
help arrange some US
related matters. So when my good friend Joaquin called me up and told me that I
had to find a way to get my hands on a DVD-based English language course called
"Disney's El Mundo de Ingles" I was happy to oblige. After all, if
kids were pining for things that would help them learn, I had better get on it
quick.
A scan of the Mundo de Ingles website led me to the phone
number at the bottom where it said "Llame 01.800.699.0000." Perfect,
I thought. They have a convenient 1800 number that I can use to order up a few
copies pretty quick and then get on with my day.Those Disney folks think of
everything...
Then I dialed the number and, shockingly, this is what I
heard. (For those who don’t mind you can play the clip below to hear what I
found but WARNING: THIS IS OVER 18 YEARS OF AGE MATERIAL).
Essentially, I unknowingly dialed up a phone sex line. I quickly realized this was a Mexican 1-800 number, not a U.S. one. Still, I shudder at the thought of any 10 or 12 year old kids making this same call. The only consoling factor is that their English probably
isn’t so good if they are calling this particular number.
I can't say that there is a valuable lesson about doing well
and doing good here. But this definitely does seem to underscore some of the
challenges one faces when doing business internationally. With the internet,
you just can't assume that only kids in South America
are going to your website and dialing your phone numbers. In business school I remember professors citing famous cases of international business efforts gone wrong. This seems to rank up there to me. Perhaps Harvard Business School can link to my blog for a lesson or two?
My secret confession with this post is that I'm hoping
Disney, as penance for its mistake, will offer to send some well deserving kids
in Costa Rica who can't otherwise afford it a few copies of their much desired language
class. At least this way when they get older they will be able to make that
call themselves and actually understand what's being said on the other end of
the line.Then again, perhaps they are
better off without it?
I often talk about how access to capital is one of the basic
human needs for building a better life. So I've been tangentially following the
online peer-to-peer space because it promises to help provide capital
particularly in instances where traditional channels for loans (such as banks)
might fail.
P2P lenders create online marketplaces or tools that connect
individual borrowers to individual lenders. In so doing they provide individuals
access to credit and capital that otherwise might not be available to them and
at rates that theoretically can be better than what the banks would provide
since they are 'cutting out the middleman'. Sites like Prosper, Lending Club,
and Zopa enable P2P lending between pretty much any borrower and lender. You
can actually go on their sites and look for individual loans to 'invest in'
based on target returns that you want and the borrower's credit worthiness.
Virgin Money has taken a somewhat different approach. Instead of enabling
lenders to make a loan to any borrower, they focus on facilitating the informal
loan process that often already exists between families and friends. Basically,
they help borrowers formalize and administer loans they get from people they already
know.Finally, players like Fynanz focus
on just a specific segment of the loan market, in their case being student
loans.
But for all the wonders and promises of this new source of
capital and credit, there are some key remaining questions about how P2P
lending can and will move forward that will likely determine the true economic
and social value of this space.
First is the question of how big an impact P2P can actually
make. While it is clear that the Prosper/Zopa/Lending Club model has potential to
bring larger amounts of capital into this space because it is not constrained
by the borrower's personal network, it also raises the
question of if these models will lead to ill-advised borrowing and speculative
lending. And even outside these concerns, can this model really scale without
going to the traditional capital markets to supply the funds needed for loans? In this light even
the Prosper model has a glass ceiling on how big it can grow in my view. If that is true, what
is or can be the real economic and social impact here?
One powerful idea is that P2P loan histories could be a
useful proxy for credit worthiness for someone who might otherwise not yet have
a credit history and not yet be able to access more traditional loan products.
The assumption here is that if you can actually capture the 'informal' loans
that are often made between family and friends or via P2P you can really smooth millions
of people's transition to joining the traditional credit-worthy world.
This is especially important since it is often those who are ignored by the traditional financial
institutions that are making and taking these informal loans.
In this light, then, the most interesting question is how P2P eventually integrates into the traditional financial
framework. Another example of this integration might be around what traditional
banks might learn about assessing risk from the P2P loans. Should the social
networks and social capital that are being tracked by these sites be integrated
into the calculation of credit risk? Does a low default rate for a loan from a
family member or friend translate into better credit risk overall?
Finally, before all this moves forward the P2P industry as a
whole (at least in the Prosper model of linking most any borrower to
any lender) needs to figure out if it is selling regulated securities. While
Lending Club has taken the view that they are selling regulated securities,
Prosper and Zopa have not. I couldn’t help but notice then that on theNew York
Times Freakanomics blog post about P2P there were a lot of disgruntled former
Prosper lenders claiming that the site's practices aren't totally above the
board. The fact that Lending Club is part of the regulated SEC regulated process means
that their practices will be subject to external audit and regulation, perhaps
lending an air of credence to their default rates and other information that
will be necessary to take P2P to the next level.
All in all, it's a fascinating space with some key
challenges ahead. I'm hoping they get solved in a way that truly enables the
social power behind the idea.
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'
thelocal 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 TheNew 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.
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.
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 Journalarticle 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.
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.
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
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.
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.
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
