Back in 2013, my note to the field discussed myriad ways in which we were overhauling our business practices (from merging investing and grantmaking operations to getting a Bloomberg terminal so we could use widely available data to assess the social performance of our holdings). In 2014, our goal continues to be “full philanthropic engagement” — that is, to make our mission the central animating factor in all of our work and for all of our resources. This pertains to investing capital, engaging with a range of colleagues and publics, measuring our performance, and more. To get there, our operating model must fully support that goal (and we’re still working on it).
I realize that talking about Heron’s evolving business model may seem removed from the real nitty gritty of philanthropy. But after three years of fundamental change here at Heron, I am more convinced than ever that resetting our operating model will sharply increase the good we are able to do.
Not that things are perfect! We have a growing list of “to-dos” and “re-dos” of our own making. We have discovered a number of “needs improvement” tasks as we test emerging theory and practice. Along the way, we have noted some sector-wide orthodoxies — myths, in our experience — that create barriers to progress. These myths have the unintended effect of reducing the muscle and reach of the field generally. In this note, I share three classic myths that we’ve encountered, along with newer operating principles that we are finding to be more promising.
In 2014, we continued to push forward on our core operating principle that “all investing is impact investing,” meaning that we believe that all investments (spanning the range of debt, equity, cooperative shares, warrants, and hybrid instruments) have social as well as financial repercussions. These social and financial repercussions can be positive or negative and vary over time. Bidden or not, intentional or unintentional, all of the enterprises that we invest in have impact that goes well beyond a financial return to an individual investor.
Not everyone doing impact investment takes such a broad view — in fact, some of the leading voices in the field see “impact investment” as an asset class apart from the mainstream. We applaud (and invest alongside) these investors in nonprofit and for-profit enterprises whose sole purpose is social improvement. But at the same time, we believe that we also need large public and private companies to be instrumental in both preventing and solving the wicked and systemic social problems that we face in the 21st century. Anything less is bound to fail.
And this brings us to a related operating principle: “Accounting is destiny.” If we believe that all enterprises, regardless of tax status, should be aware of (and accountable for) their contributions to and extractions from society, then we must work to assure the integrity and comparability of social impact data. This will take us beyond the customized metrics that rule reporting inside our own philanthropic walls and get material social performance measurement into the DNA of the economy (as financial measurement now is). By doing so, we aspire to compare social as well as financial performance of all enterprises (including foundations) to their peers, in the spirit of learning and field-wide improvement.
We know that this isn’t really true, but it seems to persist as an unstated operating assumption — that the investor and investment (or grantmaker and grant) are the prime movers in creating impact. But while invested money is an important tool, it doesn’t actually do anything except symbolize expected value. We can’t tape dollar bills to people’s foreheads and expect them to instantly become employed, literate, or healthy. There’s something in between the person and the dollar — and for an investor (or a customer, for that matter), that “thing” is usually an enterprise (e.g., a company, school, or hospital).
One way to describe this is as the “Rumpelstiltskin Effect” of enterprises. Just as Rumpelstiltskin spins straw into gold, a group of enterprises (employing people, skills, market savvy, reliable income, and more) “spins” a variety of ingredients (including gold) into social and financial value. We might call it realized gold. And these enterprises can be nonprofits, for-profits, cooperatives, S-corps, partnerships, C-corps, public companies, governments — you name it! Furthermore, the investor is only one in a constellation of important actors (including owners, managers, customers, suppliers, and more) that make successful social impact (and successful investment) happen.
Thus, we invoked another operating principle (“know what you own”) as we continued our Portfolio Examination Project (PEP) in 2014. In my 2013 President’s Letter, I cited “the heroism of entering 7,700 separate positions into a database so we can track social and financial gains in real time in our equity portfolio.” Well, in 2014 we took a look at the underlying enterprises, and here is what we found:
A take-away: Even with the best will in the world, most individual and institutional investors likely own positions in companies whose business practices undermine their philanthropic or personal values, simply because of the way these funds are put together. Our work in 2014 helped re-emphasize that we should all, at the very least, know which enterprises we own and avoid unwittingly turning a blind eye. Our continued focus on the “enterprise view” helped shape our new Investment Policy Statement, which we adopted in 2014 and hope to refine annually.
The idea that “our money is the special catalyst” is sacred scripture in most of the sector, so our point of view may be unpopular if not heretical. Nonetheless, our experience has reinforced the view that the specialness strategy is by and large a form of whistling in the dark.
Our money does not, by itself, make a real difference unless it influences and is influenced by others — hence another operating principle: “Investing is in itself an influence strategy.” And real influence is hard to come by. Our experience emphasizes that the “but for” is elusive and by definition exceptional. Shining examples tend to accentuate the uncomfortable reality that all is not well with most of the world, and most of the world is not touched by nonprofits or grants, especially the most targeted and restricted.
As a capital investor, we know that our money is valuable only if it is deployed in concert with others’ money — and I mean lots of others, including individuals, philanthropies, corporations, traditional capital providers and, most importantly, regular customers who come before us and will follow after we are gone. When investing directly in any enterprise via any asset class (including grants), our guiding question has become, “If we (and others) provide capital, how will you use it to attract reliable revenue, and how will this allow you to provide more jobs and other benefits to society after our capital is gone?”
Needless to say, we have in practice faced challenges to staying disciplined about our financial role. We know there are great enterprises that we don’t finance directly just because of their size, stage, or business model. This is because we have chosen to be growth-capital providers — not because we think that start-ups are unneeded, small companies that stay that way aren’t important, or that growth is always good. Most enterprises — of any tax status — don’t, shouldn’t, or can’t grow past a certain point. And growth is the exception, not the rule, for both for-profits and nonprofits. As the estimable Fran Barrett once put it, “Not everybody wants their favorite neighborhood Italian restaurant to become an Olive Garden.”
Find Part II of the President's Letter here.