All Things Impact.

private capital & the public good

All Things Impact for October 28: passive corporate governance, community development finance & inequality, critiquing philanthropy, and second thoughts on a universal basic income

Brian WalshComment

Hi friends,

Welcome to All Things Impact, a newsletter of interesting things I've seen from across the spectrum of impact: responsible investing (in the public markets),  impact investing (in the private markets), effective philanthropy, and a wildcard topic. For previous posts, to subscribe, and for more information, please visit All Things Impact.

Here are four links worth your time (plus items of note, job postings, and a calendar of upcoming events):

1. Responsible Investing: how do passive funds approach corporate governance?
When people have money to invest in the stock market, and they don't want to invest it themselves, they tend to hand it over to asset managers who charge them fees to "actively" manage their money (deciding which stocks and bonds to buy & sell), or to asset managers who charge them lower fees to "passively" manage their money (through things like index funds, which essentially own the whole market). Bloomberg View's Matt Levine writes about "the pleasing theory that index funds, and diversified mutual funds generally, might be illegal under antitrust law because they concentrate too much power over too many companies into too few hands. Vanguard and BlackRock, on this theory, are the new Morgan and Rockefeller, and they have built an anticompetitive trust to enrich themselves at the expense of workers and consumers. The trust is, like, the S&P 500. Like, every big public company is in the trust."

"How do these new monopolists manage their new monopolies? Mostly by not:

'Vanguard has 15 people overseeing work on about 13,000 companies based around the world. BlackRock has about two dozen people who work on governance issues at some 14,000 companies held in its index funds and exchange-traded funds, and it plans to add seven more in the coming months, according to a spokesman.'
Their shareholder engagement style seems pretty chill. "Rakhi Kumar, head of corporate governance at State Street’s asset-management unit, said she tells her team not to agree to every meeting companies ask for because of time constraints." "It’s not shareholders’ role to second guess what management is doing in every single issue," says the woman in charge of BlackRock's voting. There is some active decision-making, on executive pay and mergers and proxy fights. "We moved from a position of reluctance to make our weight felt to absolute interest in making our weight felt," says retired Vanguard founder John Bogle. “We’re riding in a car we can’t get out of,” says a Vanguard governance principal. “Governance is the seat belt and air bag.”
But there doesn't seem to be a ... theme? Like no one quite says "active managers want their companies to be governed like this, and passive managers want their companies to be governed like this." There are some statistical trends -- companies with high passive ownership tend to have more independent board members and fewer takeover protections -- but there is no radical rethinking of what corporate governance means in an age of passive management. It just means regular established good governance practices, with a lot fewer meetings. In particular, no one seems to be giving much conscious thought to how to run a company when you also own all of its competitors. (Or at least they're not talking about it on the record.) If the passive firms are running monopolies, they seem to be doing it by accident.

2. Impact Investing: How can community development finance address inequality?
Writing in Medium, Antony Bugg-Levine of the Nonprofit Finance Fund and Ellis Carr of Capital Impact Partners ask a series of difficult questions for community development finance:

  • What can we do to become more diverse and inclusive? Let’s be blunt: our industry’s leadership is less racially diverse and gender balanced than we need to be. We miss out on talent and products that can better respond to community need. And focusing on not just the effects of the capital we provide but also who is empowered to provide it can unleash additional hope, when individuals in the communities we serve see this work led by their own.
  • How can we measure and manage our social impact more effectively? When our industry started, many considered the lack of capital in low-income communities to be the problem to solve. So it made sense to focus on counting how much capital we were moving into communities previously considered unbankable. Now we must understand better how our financing can unlock sustained social progress and use this understanding to maximize our impact.
  • How can we stay true to our founders’ spirit of social justice? As community development finance has become an industry, with established ways of working and institutional ground to protect, we risk losing touch with the reasons we were created in the first place. The focus on market share and effective risk management can distract us from developing innovative new ways to uplift the communities we serve. As professionalizing opens up more possibilities for institutional partnership and scale, we must cultivate the same urgent impatience for change that our clients feel daily and which motivated our industry’s founders.
  • How can we build conduits that connect marginalized communities to innovations in impact investing and social enterprise? Private investments that specifically aim to drive social progress, benefit corporations with a twin focus on profit and purpose, crowd-funding platforms — none of these existed when our industry emerged. All have huge potential, yet only a tiny share of their capital and creativity is currently being deployed to drive progress in our country’s most marginalized communities. The community development finance industry, with our collective reach, credibility, and track record can change that by building conduits between these movements and those communities. For example, we can help wealth managers and corporate finance departments provide their clients with access to the high-impact product they increasingly seek, but only if we work creatively and patiently to overcome our mutual constraints.

3. Effective Philanthropy: differentiating between philanthropy and speculation
In an opinion piece in The Guardian, Evgeny Morozov offers a scathing critique of the Chan Zuckerberg Initiative, a vehicle for the couple’s good works set up as a limited liability company rather than a traditional foundation: 

 “A world where billionaires were blunt and forthright, where they preferred pillaging the world to saving it, was far less confusing. The robber barons of the industrial era – from Carnegie to Ford to Rockefeller – did eventually commit some of their riches to charity but there was no mistaking one for the other. Oil and steel brought in the cash; education and arts helped to spend it…
Today, when five of the world’s most valuable companies are technology firms, it’s very hard to see where their businesses end and their charity efforts begin. As digital platforms, they power diverse industries and sectors from education to health to transport and thus have an option that was not available to the oil and steel magnates of yesteryear: they can simply continue selling their core product – mostly hope, albeit wrapped up in infinite layers of data, screens and sensors – without having to divert their funds into any nonproductive activities. ..
To speak of “philanthrocapitalism” here – as many have done, either to praise or bury it – seems misguided, if only because such projects bear so little resemblance to philanthropy proper. One doesn’t have to admire Ford or Rockefeller to notice that their philanthropic endeavours, whatever their real political goals, were not supposed to make extra cash. But is it really so with our new tech barons?
...We should be careful not to fall victim to a perverse form of Stockholm syndrome, coming to sympathise with the corporate kidnappers of our democracy. On the one hand, given that the new tech billionaires pay very little tax, it’s not surprising that the public sector would fail to innovate as quickly. On the other, by constantly giving the private sector a head start through technologies that they own and develop, the new tech elites all but ensure that the public would rather choose slick but privatised technological solutions over quaint, but public, political ones.
That we can no longer differentiate between philanthropy and speculation is an occasion to worry, not celebrate. 

4. Wildcard topic: second thoughts on the Universal Basic Income
Economist Tyler Cowen now has second thoughts on a "Universal Basic Income," the idea of providing all citizens with a basic level of financial support “to combat income inequality, slow wage growth, advancing automation and fragmented welfare programs.”  He has several concerns, including questioning whether this approach actually “addresses the real problem":  

Consider the millions of prime-age males who have dropped out of the labor force. Many are capable of working, yet these individuals typically are not taking the jobs that immigrants might end up filling. Either they shy away from hard work, don't want to move to where jobs are, or don't like the low social status of those jobs, among other possibilities.
I no longer see getting money to those males as the central social problem. Instead, the core issue is how to make the work that's available to them sufficiently rewarding, in cultural as well as economic terms.
That's hard to do. For instance, a lot of those men are not employable in the military because the military doesn't want them, and in an age of high-tech warfare can't really use them. Jobs as health-care aides are available, but they're low paid and many men won't take them. Government make-work jobs are a possible option -- think of a modern version of a Civilian Conservation Corps -- yet it's not clear whether those jobs would be taken and whether they'd feel futile rather than like a career ladder to a brighter future.
If the kinds of jobs created by the modern service economy can be made more attractive, I think much (not all) of the work problem will take care of itself. Most people do wish to work in jobs they enjoy, as a source of pride, money, and social connection.
Unfortunately, I don't have a good answer for how to get there, but I worry that permanent subsidies for those who don't work wouldn't lead toward solutions. That means effective safety-net policies will continue to be messy and complex. Although the universal basic income idea sounds like a good direct fix, it probably leads in the wrong direction.

5. Items of Note

6. Job Postings

7. Upcoming Events
Nov 3-5  Net Impact (Philadelphia) Various
Nov 9-11  Sustainable, Responsible, Impact Investing (Denver) Responsible Investing
Nov 16-18 Independent Sector (DC) Philanthropy
Dec 7-8  Global Impact Investing Network (Amsterdam) Impact Investing
April 7, 2017 Wharton Social Impact Conference (Philadelphia) Impact Investing

That’s it for this week. Help me spread the word about #AllThingsImpact to your friends and colleagues, who can sign up to receive this newsletter at All Things Impact. Please also send me any job postings, items of note, upcoming events, or compelling links you discover in your own journeys across the web (even things like like this chipmunk who was totally busted stealing from a birdfeeder). 

Until next time, thanks for reading!

Brian Walsh
Head of Impact at LiquidnetFull Bio.