By Curt Lyon
An excerpt of this blog post was featured in ImpactAlpha.
One of the most anticipated sessions of SOCAP18 was Anand Giridharadas’s appearance on the main stage Wednesday morning. Coming on the heels of the release of his book Winners Take All, a critique of those with wealth and power for being reluctant to support social change strategies that put their dominance at risk, his speech delivered a pointed criticism of the impact investing space.
Calling on Winners Take All, he questioned fundamentally what impact investors are giving up in their work, if anything at all. If the driving mantra for impact investing continues to be “doing well by doing good,” he asks: Are we fundamentally challenging wealth inequality, racial injustices, resource extraction, disenfranchisement, and lack of political and social agency that have resulted from that mantra? His answer to that question was unequivocally no, due to the unwillingness of impact investors and philanthropists to redistribute power dynamics.
Power, control of assets, the rights to benefit from productivity, and ownership were central themes at SOCAP this year - both in the ways they were talked about and the ways they were not. Whether impact investors admit it or not, the fact that they hold capital and the ability to move it is a position of immense power under capitalism. To be sure, many impact investors do think deeply about the power they have, and some are willing to take on some more risk, concede returns, or rethink the mainstream investing strategy. But in relation to the communities they intend to serve, as a whole investors are not fairly balancing the risk and returns that would result in a more fair and just economy. We see, as Giridharadhas argues, that they will only give up enough such that they still maintain their privileged position - if not grow it. If we are to truly tackle the issues we are facing today, those who wield the power of capital will have to move more than just one step down the spectrum of impact. They will fundamentally have to reconsider their ability to call the shots in the world and take a back seat to communities, workers, and other stakeholders.
Transform Finance has been exploring the investor’s role in power dynamics, risk, and ownership for a while now. This year at SOCAP, we organized a full track on Alternative Ownership - a set of panels that took deep dives into structuring the rights to governance and financial benefit of firms and funds, and how various actors can support these models.
Conversations around alternatives to conventional ownership models are often uncomfortable, given that they challenge the notion that investors should be the only ones with skin in the game. The speakers and participants during the Alternative Ownership track provided structures for spreading wealth and power between other stakeholders of an enterprise: workers, communities, and consumers, to name a few. For these stakeholders, the right to own the entities they engage in every day provides a multitude of benefits: incentives for participation, wealth-building opportunities via the control of real assets and their upside, and agency via a voice in the operations of the entities that they work with and utilize. These benefits are critical to mitigating racial injustices, eliminating the wealth gap, and stewarding the future of communities and the planet.
The most innovative projects and enterprises in this vein were showcased at SOCAP18. Employee ownership is a familiar model in the impact investing space, and many strategies for scaling and accelerating employee ownership models were outlined at SOCAP this year. One particular model that Transform Finance is working on is building a blueprint for a private equity-esque fund that would buy out an enterprise and transfer the equity to workers over a holding period. This project capitalizes on the trend of retiring baby boomer business owners, or the “Silver Tsunami,” and intends to protect the jobs of workers who may otherwise lose them in a liquidation event or shutdown when the current owners retire. After the conversion process, this theoretical fund would leave workers in control of the enterprise they work at, and the ability to participate in the upside and decision-making of the company. The track also looked at employee ownership through a racial equity lens on a panel with Claudia Arroyo of Prospera Coops, Ed Whitfield of Fund for Democratic Communities, Joseph Cureton of the Staffing Cooperative, and Aaron Tanaka of the Boston Ujima Project. Through a variety of strategies, these leaders are placing people of color, immigrants, and the formerly incarcerated at the center of decision making around capital flows, professional development, and business ownership.
Steward Ownership is not a new model, having existed in parts of Europe for over a century (as with the German company Bosch), but the idea was featured prominently on the mainstage and in panels through a showcase of Organically Grown Company, which was converted to a steward-owned company with the help of Candide Group, RSF Social Finance, and Purpose. Steward Ownership is a strategy which establishes a group of elected trustee stakeholders who have enough voting rights to veto decisions that would liquidate the company, such as a sale or merger. This setup protects the mission of the enterprise and cedes control of the company’s destiny from profit-maximizing shareholders.
A final model outlined on the main stage by Transform Finance’s Andrea Armeni, Open Society Foundation’s Robin Varghese, and Beneficial State Bank’s Kat Taylor were variations on traditional equity shareholder structures. Self-diluting equity models are designed to create a new set of shares periodically, such as every 6 months, and distribute them to those stakeholders who have engaged with the company most – such as consumers, workers, owners, and potentially, investors. This model combats the issue of perpetual harvesting, where early investors put capital in and then are able to sit back and reap the rewards of the enterprise’s success without actively helping out along the way. Another similar structure discussed on the plenary was the Equity Cap, whereby the enterprise founder states a certain cap to the amount of money they stand to gain from an exit, and the rest is distributed to other stakeholders such as the workers upon the sale of the company.
Outside of the Alternative Ownership track, there were plenty of other examples of investors ceding their role as directors of all capital flows and centering the voices of those who cannot afford to bear the risk of failure. For example, Boston Impact Initiative, showcased at SOCAP by Deborah Frieze and Mark Watson, separates different classes of investors (which includes community-based non-accredited investors) into different tranches, providing lower returns to investors who can afford to bear more risk. This idea was spearheaded by PVGrows in Western Massachusetts, and BII is adapting this mode to the context of Eastern MA and their explicit goal of eliminating the racial wealth gap in that geography. The Boston Ujima Project, another model presented in several panels at SOCAP, will also feature similar tranches in their upcoming fund.
All of these models are not radical reimaginings of the way businesses are run, nor do they question the need for capital in helping entrepreneurs succeed in their missions, but they do all question the absolute primacy of the shareholder that we see in conventional enterprises today.
While some of the SOCAP panels gave a glimpse as to how investors can help redistribute power and wealth through ownership, in general the ethos of “doing well by doing good” pervaded the conference. This was true even when panelists explicitly acknowledged that there are typically tradeoffs between return and the ultimate impact of investments. Fund managers touted the financial returns reaped from their investments, leaving the 10x venture capital-esque benchmark unquestioned. The insistence that unicorn deals can provide an important product or service to a marginalized community rang clear as ever. However, is it really making an impact if the wealthy are making off like bandits off the backs of these impact deals? At what point, mirroring the Equity Cap model, should investors limit the amount of extra wealth they are able to accumulate while investing in these deals? Or think about giving up some of that wealth? At the very least, the one question that all investors should be asking themselves, to quote Candide Group’s Aner Ben-Ami, is: “Through my investment, am I redefining who wins and who loses in our economy?”
Beyond the lack of acknowledgement that some of these deals may actually be contributing to the growing gap in wealth and power, in some cases speakers lauded the primacy of capital as the ultimate tool for fixing the world’s problems. Look no further than the mainstage speech of Bain Capital’s Warren Valdmanis, who in a McCarthy-esque sermon cited millennials’ propensity for capitalist alternatives as a reason to double down on the role of investors (and investors alone) in solving inequality. With hardly any specific guidance as to how the power of capital should be wielded, it was a case study in furthering the same investor-first logic that allowed funds like Bain and its primary investors to accumulate that wealth over the centuries. Not once did he discuss whether this capital is crowding out the role of government, let alone the work of organizers and community leaders in the neighborhoods he discussed.
In light of the entry of large actors like Bain into impact investing, it is important to talk about scale when discussing models for impact. While those in the Alternative Ownership track and elsewhere are demonstrating the courage and thoughtfulness of investors willing to cede their power to communities and workers, they are often bespoke and small-scale; Bain itself could probably buy out all of these models outright. These first movers are lightyears ahead of their peers, but that means there is still a lot to do to integrate them into the impact arena. These models – steward ownership, investment tranches, funds repurposing the concept of the exit to provide employee ownership opportunities – are meant to spur the field to to generate new context-specific strategies that contain elements of power redistribution. It is the job of those at SOCAP to take these proof-of-concept models and develop the tools and strategies to take them to scale.
And what of Giridharadas’s message? Will his indictment of throne-protecting and risk aversion ring true for the SOCAP crowd? Or will, in his words, we continue to “put lipstick on the pig of a bad power distribution?”
His speech got a (tentative) standing ovation from the crowd. Yet time and time again we see guilt wash away from the mere acknowledgement of a problem – as if acceptance was a sufficient enough step such that no further action is required. If impact investors are serious about fixing our myriad problems - particularly wealth inequality - they must follow the steps of their peers who are relinquishing their power. They must implement structures, practices, and partnerships that emphasize communities more than investors, and place power and ownership in the hands of workers, consumers, and other stakeholders. They must adopt a lens that acts on the fact that the wealth being invested is built off of a long history of extraction, slavery, and discrimination. They must listen to the voices of communities and structure their investments such that, in acknowledgement of the power of capital holders, they bear risks proportional to the power the have over communities and their enterprises. And, when possible, they must contribute to a field-wide culture that questions capital primacy and places themselves at the services of those they say they seek to help.