All Things Impact.

private capital & the public good

All Things Impact 2016.13: the enduring power of “Shareholder Value”

Brian WalshComment

Hi friends,
Welcome to All Things Impact, a newsletter of interesting things I've seen from across the spectrum of impact: effective philanthropyimpact investing (in the private markets), responsible investing (in the public markets) 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 the All Things Impact Calendar):

1. Effective Philanthropy: what $250mm and Lady Gaga have to do with cancer research
It's always helpful to put philanthropic funding in perspective. “The Federal government will spend $5.2 billion this year on cancer research. Big Pharma will invest even more. By comparison, Sean Parker’s grant of $250 million to advance cancer immunotherapy, announced yesterday, is not a lot of money.”

So begins the coverage by the always insightful David Callahan of Inside Philanthropy of the latest mega-philanthropy announcement. 

"How much progress can a philanthropist wielding a slingshot hope to have against a disease that kills 8 million people a year worldwide?

That question was on my mind last night when I showed up at a phantasmagoric rollout event for Parker’s new anti-cancer effort at his estate in Los Angeles..

I didn’t even want to think about how many malaria nets one could buy for the cost of putting on this shindig, which featured Tom Hanks as MC and cameos by the likes of Bradley Cooper and Sean Penn. Oh, and Lady Gaga didn’t go on until after the Red Hot Chili Peppers and John Legend had finished performing...

In Parker’s analysis, one shared by many, the long and well-financed push against cancer has yielded disappointing results for a combination of reasons. Government tends to be too risk-averse, with the National Cancer Institute gravitating toward sure-thing research that delivers incremental gains, not breakthrough cures...

Meanwhile, cancer researchers tend to be silo-ized, spread out across institutions that don’t talk to each other, guarding findings that ideally should be shared and built upon. These same researchers also spend too much time writing grants and too little time running studies, with the freedom to easily pivot as new information comes in. “These web-like layers of bureaucracy don’t just make it hard for scientists to do their best science, they make it hard for scientists to do science at all,” Parker said.  

Which is where the Parker Institute for Cancer Immunotherapy comes in.

Over recent years, Parker—who co-founded Napster and became a billionaire from a stint as Facebook’s first president—crafted a vision of a new effort that would knit together America’s most brilliant cancer researchers, free them from bureaucratic constraints, and foster the in-depth collaboration and free flow of information needed to make breakthrough progress in conquering cancer. To help advance this vision, Parker enlisted leaders from six of the nation’s top cancer research centers, including Memorial Sloan Kettering, Stanford Medicine, UCLA, and MD Anderson Center. He also recruited a renowned immunologist, Jeffrey Bluestone of UC San Francisco to run the effort. In turn, prior to its launch, the Parker Institute formed partnerships with over two dozen other leading players in medical research…

That initial investment is designed to create a research effort that becomes self-financing over time. The idea is that revenue from commercializing the new intellectual property created by the institute will be reinvested back into more research. “This is an evergreen model,” Parker said.

How else is it different?

“It’s highly focused. While it’s true that $250 million is not much money compared to billions spent on cancer research annually, all the new money is being targeted in one area, financing a level of high-powered collaboration never seen before around cancer immunotherapy.”

2. Impact Investing: Enable Impact launches impact investing deal platform
I’ve written before that in order to accelerate the practice of impact investing, four forces need to come together: 
1. Supply of investable opportunities (“deal pipeline” of impact-focused companies, projects, and funds)
2. Demand from asset owners to put pressure on asset managers to seek impact deal opportunities
3. Market infrastructure & intermediaries to connect the supply of investment opportunities with the demand from impact-intentioned capital
4. An effective enabling environment to support these forces (a smart regulatory framework, metrics & reporting systems, data platforms, talent development, communities of practice, etc.)

It’s not easy work. “The short history of impact investing is already littered with matchmaking platforms that have largely failed to take off,” my friend Jerome Tagger writes in ImpactAlpha

Philip Berber is trying to buck that trend with Enable Impact, an regulated online trading platform that focuses on helping growth-stage impact companies raise $1-2 million in Series A funding. 

“Berber expects the platform to grow to $50 million worth of deals over the next three years. The platform is free for investors: income will come from success fees paid by the companies. Investors will be able to find and fund impact companies in about five clicks, from validating accredited investor status to sending money and completing deals..

The rationale is that investors want to see deals coming from a trusted source. Bringing transactions that already have the imprint of a lead investor helps pass the “credibility hump.” The companies are vetted by the distinct investment committees of North Capital, the broker-dealer, and Enable Impact. Berber says less than 1 percent of the deals reviewed go on the platform.

Impact objectives, as established and reported by the companies, are one of six high level criteria which the committee factors into its decisions. Enable Impact also plans to monitor and track invested companies’ impact performance over the long term for its own impact reporting…

Berber says dealflow will increase as new investors enter the market. He estimates there are only about 30 impact investors currently active. The next group is about three hundred, and the larger potential universe three thousand – all of whom he says are following his platform already.

“Personal relationships are still very important in the process,” he says.”

(Disclosure: I head up impact at Liquidnet, which is an investor into ImpactAlpha through the Liquidnet Impact Fund, a donor advised fund managed by ImpactAssets. Unnecessary disclosure: Yes, the word impact appears a lot in that previous sentence.)

3. Responsible Investing: the enduring power of “Shareholder Value”
The Economist recently explored the framework of shareholder value, suggesting that for all its shortcomings there isn't a better model for how companies should be run.

“Technically, shareholders do not own a company: the firm is a legal person and a share represents a bundle of entitlements to dividends and voting powers. But a doctrine of “shareholder primacy” had been outlined in 1919, when a Michigan court observed that “a business corporation is organised and carried on primarily for the profit of stockholders”. The new science of corporate finance revolutionised the pursuit of that goal. Managers realised that by working out where firms employed capital and using it more efficiently they could increase their value. Outsiders had a methodology with which to second-guess incompetent managers…
Yet at this moment of ascendancy in the business world, shareholder value is under fierce attack beyond it, fuelled by a sense that Western economies are not delivering rising prosperity to most people. The criticism falls into two categories. The first is that shareholder value is a licence for bad conduct, including skimping on investment, exorbitant pay, high leverage, silly takeovers, accounting shenanigans and a craze for share buy-backs, which are running at $600 billion a year in America…
The second criticism is weightier: that firms should be run for all stakeholders, not just shareholders. In a trite sense the goals of equity-holders and others are aligned. A firm that sufficiently annoys customers, counterparties and staff cannot stay in business. Some bosses, such as Paul Polman of Unilever, and Joe Kaeser at Siemens, say that pursuing social and financial objectives is consistent. But it is disingenuous to pretend conflicts do not arise. A firm with a loss-making factory cannot shut it without destroying jobs.
The trouble is identifying a goal that could replace the pursuit of shareholder value. If firms had to promote employment they would be less productive and riskier borrowers, as China is discovering. The objective of maximising wealth is deeply embedded in the global savings system, with asset managers obliged to protect clients’ money. Asking firms to adopt objectives to solve inequality loads a giant problem on their shoulders.”

4. Wildcard Topic: "If you eat food, you are being lied to everyday"
In a classic sketch from the satirical indie show Portlandia, two diners at a ‘farm to table’ restaurant inquire not only about the provenance but also the personality of the chicken they are about to eat: "He looks like a happy little guy running around...did he have a lot of other chickens as friends?"

Laura Reiley, the food critic for the Tampa Bay Times, breaks the story about how many of the area restaurants which advertise as being “farm to table” are far from that.

“This is a story we are all being fed. A story about overalls, rich soil and John Deere tractors scattering broods of busy chickens. A story about healthy animals living happy lives, heirloom tomatoes hanging heavy and earnest artisans rolling wheels of cheese into aging caves nearby.

More often than not, those things are fairy tales…

People want “local.” and they’re willing to pay. Local promises food that is fresher and tastes better; it means better food safety; it yields a smaller carbon footprint while preserving genetic diversity; it builds community…

Servers are likely to start proceedings with a mini-disquisition on how all the food comes from within a couple hundred miles of the restaurant (mileage may vary).

If you eat food, you are being lied to every day...

Everywhere you look, you see the claims: “sustainable,” “naturally raised,” “organic,” “non-GMO,” “fair trade,” “responsibly grown.” Restaurants have reached new levels of hyperbole.

What makes buying food different from other forms of commerce is this: It’s a trust-based system. How do you know the Dover sole on your plate is Dover sole? Only that the restaurateur said so.

And how can you be sure the strawberries your toddler is gobbling are free of pesticides? Only because the vendor at the farmers market said so.

Your purchases are unverifiable unless you drive to that farm or track back through a restaurant’s distributors and ask for invoices.

I did.”

Through extensive research - including performing DNA analysis on fish served to her - she concludes that “Just about everyone tells tales. Sometimes they are whoppers, sometimes they are fibs borne of negligence or ignorance, and sometimes they are nearly harmless omissions or “greenwashing.” 

One of the facts that stood out to me: on an average week, 530,000 head of cattle are processed in the United States. Fewer than 12,000 of them are naturally raised and antibiotic free.

5. All Things Impact Calendar
Here are some events I'm keeping an eye on. Please send me any I should add to this calendar.

April 26-27  Impact Capitalism (Chicago) Impact Investing

May 1-4  Milken Global Conference (LA) Various

May 2-4  Grantmakers for Effective Organizations (Minneapolis) Effective Philanthropy

May 4-5  Ceres (Boston) Responsible Investing

May 10-12  Mission Investors Exchange (Baltimore) Impact Investing

June 7-8  Social Innovation Summit (DC) Various

June 23 – July 2  Aspen Ideas Festival (Aspen, CO) Effective Philanthropy

Sept 6-8  PRI in Person (Singapore) Responsible Investing

Sept 13 – 16  SOCAP (SF) Impact Investing

Sept 26 - 28 ANDE Conference (Lessburg, Virginia) Impact Investing

Oct 9 – 14  Opportunity Collaboration  (Cancun Yucatan) Impact Investing

Oct 18  High Water Women (NYC) Impact Investing

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

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 compelling links you discover in your own journeys across the web (even things like these series of drawings about a single father doing his best to raise a daughter).

Until next time, thanks for reading!
Brian Walsh
Head of Impact at LiquidnetFull Bio.