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Commercializing the Public Good

June 08, 2011

(Mark Rosenman, a longtime nonprofit sector activist and scholar, directs Caring to Change, an effort in Washington that seeks to promote foundation grantmaking for the common good. In his last post, he wrote about the need for foundations to think beyond advocacy. A version of this post appears on the Huffington Post.)

Rosenman_headshot A couple of decades ago, with the nonprofit sector approaching 5 percent of GDP for the first time, you didn't need a crystal ball to see that the market would eventually find ways to peel off some of the larger and more profitable parts of the "charity business." And it did.

The first to fall was nonprofit health care, with everything from medical insurance programs to hospitals and clinics being converted to for-profit status. Next came higher education, as colleges, universities, and vocational schools were acquired or started by for-profit corporations. After a while, one had to wonder how long program areas such as human services and anti-poverty efforts would be spared. We need wonder no longer.

Led by the United Kingdom's Conservative government and mimicked by some in the Obama administration and various state governments, there is growing interest in something called "social investment bonds," which are intended to replace government funding for social problems with newly created opportunities for private capital looking for significant returns. As a quick look at the recent history of capital's efforts to do good while also doing well makes clear, it's but the latest in a series of efforts to substitute market models -- and values -- for altruism, philanthropy, and government responsibility for the common good.

The first of these was cause-related marketing -- arrangements in which for-profit enterprises try to boost sales and brand equity by tying some small portion of their profits to a charity or social need. Arrangements like Product RED, while generating some good, always seem to benefit the commercial enterprise more than the nonprofits they were intended to help. Indeed, studies have shown that many such arrangements actually reduce individual consumers' donations to the causes they ostensibly support, as well as altruism in general. As tax-evading Product RED spokesperson Bono once famously said, You don't have to give money anymore, you can just shop. Similarly, when corporations try to build their customer base by crowd-sourcing their contributions programs, it is only the corporations and, for the most part, tech-savvy charities that win.

Cause-related marketers were followed by "social entrepreneurs" –- business people determined to use the discipline and real-time feedback provided by markets to rationalize the charitable sector and bring it to higher levels of efficiency and impact. Often backed by "social venture capital," social entrepreneurs are committed to having their cake and eating it, too: leveraging private resources for public good while still achieving significant returns on investment. While many of these efforts have generated positive outcomes, too often they have washed up on the shoals of arrogance, with entrepreneurs discovering that the economic and social spheres are characterized by profound differences which are ignored at one's peril -- and the peril of those they seek to help.

Next came Low-Profit Limited Liability Corporations (L3Cs) and B (as in benefit) Corporations hoping to obtain special protections and preferential tax treatment for capital investors in commercial enterprises that serve a double or triple bottom line (i.e., make money while driving social and/or environmental good). While corporations have always benefited from tax deductions for their philanthropy, recent years have seen altruism replaced by the profit motive, with donation programs increasingly serving corporate marketing departments rather than the larger society. Unfortunately, as history has demonstrated, when the elements of the double or triple bottom-line come into conflict with profit, shareholders' interests almost always win.

Which brings me to the new scheme du jour: social impact bonds. The notion here is that instead of using their general revenues to fund much-needed public services, governments will issue investment-quality bonds in private capital markets to fund those services. Social service organizations funded by the bonds will be rated according to a "pay for performance" model, in which metrics are used to determine the economic value of the outcomes achieved by nonprofit programs. Charities that are able to demonstrate they provided a net positive financial benefit to the bond-issuing government entity will be retroactively compensated for some of the savings realized by the public sector, while bond investors will receive interest payments on the principal. The model is being touted for fields such as early-childhood education, job training, and anti-recidivism efforts for criminal offenders -- all areas where spending on early intervention and prevention can yield significant downstream savings.

But haven't we've always known that, as our grandparents taught us, "an ounce of prevention is worth a pound of cure." And yet the public sector is either reluctant or unable to provide sufficient funding for such programs. Why? Maybe it's because politicians are afraid to "throw good money after bad people." Or maybe it's because we're a short-sighted society that bases its reward systems on quarterly profit-and-loss statements and is unduly skeptical of nonprofits' ability to produce results over the long haul.

Still another plausible reason is that individually-focused prevention and intervention alone doesn't make a whole lot of sense as an approach to broad-based social problems. Indeed, many of the most vexing problems we face are the result of the failure of institutions, not individuals. It's not people who need to be fixed; it's society. In which case, does it make sense to create new capital investment opportunities that generate profits on the backs of the needy and disadvantaged individuals that our society continues to produce in large numbers? And what do we think we is going to happen if these bonds start producing significant investment returns?

Certainly individuals in need should be helped, and charitable programs designed to help them ought to be funded. But let's not turn those people or programs into profit centers. It's absurd that at the same time our political leaders are cutting program budgets, they steadfastly refuse to generate the revenues government needs to do what needs to be done and instead favor an increasingly inequitable distribution of wealth in society, creating new investment opportunities for capital at the expense of the poor.

While there is much to be commended in the thinking behind social impact bonds (such as taking a long-range view of outcomes and employing reasonable and coherent metrics to improve program evaluation and accountability), there is no reason that these ideas cannot be more broadly applied under the auspices of the public and nonprofit sectors. Yes, we need to improve and greatly expand funding for these efforts, but we would be foolish to commercialize them.

Of course, social impact bonds raise a host of other questions. Where will nonprofits get the initial funding needed to provide their services? How far out in time do the performance metrics need to go before the charity is repaid its expenses? What happens in a situation in which a nonprofit is providing critical services to a population in a highly effective manner while other institutions and/or variables are negatively affecting the outcomes for that population? What happens to the funding streams of nonprofit programs more interested in focusing on the production of social good rather than the maximization of investment returns? To whom do we turn for leadership when elected officials, despite evidence to the contrary, insist on cutting taxes on the very wealthy and push private markets as the solution to every problem? And, perhaps most importantly, where do we find the public will and resources needed to address societal problems caused by large-scale institutional failures?

If we really want to generate the resources needed to solve the many complex problems confronting us, government and people have to embrace their responsibility for the common good and leave profit-seeking and greed in commercial markets, where they belong.

-- Mark Rosenman

Comments

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Mark-

I think your idealogy blinkers you somewhat on this - there can and should be a place for everything in this area. We obviously want to avoid situations like the debacles that took place in the microfinance area, but the fact is I see absolutely no reason to make a blanket exclusion on ideas that may potentially be of help just because there's an element of profit-taking. We can debate if "greed" is bad or good, but there's no denying that it is a powerful motivator and driver of innovation.

Hi, David.

My principal concern goes to the source of funding for the human and other services needed by our society. My argument is that primary responsibility for advancing the public good should be held by government and the philanthropic sector, by civil society, and not the market. To turn to private commercial investors rather than to depend on public agency is to institutionalize reward systems to generate profit in addressing human needs rather than to develop more popular and progressive models to frame and finance necessary services.

To suggest, as do some, that we must turn to capital markets to fuel needed services is to accept as an immutable driver the current state of public finance -- which political leadership in fact created and maintains with strong endorsement from the market and those holding capital. We need to deny the current situation its power to define the rules of the game and the universe in which we must cleverly respond. We need to question critically the underlying assumptions and actions that brought us here. We need to work on changing those institutional dynamics and structural forces instead of just being clever in finding new ways to finance services for the individuals who suffer as the consequence of societal malfunctions and inequity.

The essential question, it seems to me, is whether we wish to create new private profit centers in service to human needs or accept and address shared public responsibility for addressing social problems that cause and exacerbate them.

Mark,

You've obviously thought through this issue and have a wealth of insight, experience and history behind you to make your case.

Presently, I work with both the corporate and nonprofit parts of the equation, but most of my work over the years has been with and in nonprofits.

In light of my own background, I have a couple of thoughts that came to mind while reading your article (which was excellent by the way, I tend to skim online, but yours was worth the read).

First, I think it's pretty early to dismiss new ideas for addressing social issues. While no one would disagree that there is more than enough failure and examples of poor thinking in the past, it would be impossible to relegate such criticism to the commercial markets alone. Governments and international aid organizations have the most spectacular failures to date. An example of this is the poisoning of Bangladesh by the UN and the World Bank Unicef. The World Health Organization called it "the largest mass poisoning of a population in history" - http://bit.ly/lkPMov

Second, I'm not sure anyone is talking about abdicating nonprofits, governments and the obligation of citizens to contribute to the common welfare of humanity. These innovative ideas are looking to contribute to future success, not obviate existing successes.

Third, there are those who would contend that the large charitable infrastructure in western cultures actually redirects much needed resources back to the middle class. In his book, 'The Careless Society: Community And Its Counterfeits' John Mcknight argues that many nonprofits 'best efforts to rebuild and revitalize communities are in fact destroying them.'

Finally, there is a premise within your article that posits a dichotomy that I'm not sure must exist - 'investment opportunities for capital at the expense of the poor.' I fully expect to see such a reality played out here and there. But no less than it is played out through charitable organizations offering tax breaks to wealthy company's and then seeing that there is little to no meaningful impact (for the poor) resulting from those investments. So then, the 'poor' become a type of commodity allowing wealthy citizens to keep more of their money.

Ultimately I believe your article raises a number of legitimate and important points to consider as we move forward with these hybrid social models. And while the 'health for profit' model is fraught with deficits (I'm Canadian by the way) I don't know if I've met anyone who wants to see their hospital returned to the administration and oversight of the town church.

I guess I'm saying that I agree that there is a lot of bad thinking baked into these ideas. And certainly what's working now is good. I just don't think it's good enough.

We can do better.

Thanks for your very kind words and comments, to which I offer a few quick responses (delayed by computer problems):

First, I’m not dismissing new ideas for addressing social issues; I’m challenging the notion that those efforts ought to be financed through market mechanisms designed to generate profit. While certainly, government and nonprofit efforts to address problems have at times failed spectacularly, I would argue that many of the very problems being addressed have themselves been created, exacerbated and/or perpetuated by the sometimes destructive and inequitable operation of the very market that now seeks financial gain for working on their resolution.

Second, my piece speaks to the increasing reliance on private market models by the government and nonprofit sector. What I argue is that instead of developing clever schemes that reward investors for engagement with social issues, that those with capital ought to behave more responsibly both by being more philanthropic and by supporting public institutions instead of opposing any increase in government revenue. In other words, those who have grown wealthier and wealthier as most in society lose ground, those with the capital, ought to do what’s right for the common good instead of seeking new routes to profit.

Third, we do need better and more appropriate decisions about which charities to support and how to hold them accountable for successful performance on critical social issues, but that can be accomplished through governmental and philanthropic funding mechanisms and does not require the capital markets to drive it.

Fundamentally, it comes down to a question of priorities and values. I stand for public responsibility and agency rather than private greed in addressing social problems and the dynamics that cause them them.

Sorry, RealizedWorth -- I just reread my response and want to be clear that I didn't mean to suggest that you were advocating greedy profit-seeking. But I do want to contrast the choices that our society needs to make....

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