I was wrong. These financial institutions, which lent to poor women in emerging markets to start their own businesses, were a damn good investment. Period.

I first became aware of microfinance in the early 1990s while in discussions with several South African banks, which following apartheid were doing a strategic review of potential new customers, including microfinance borrowers. I had left a two-decade career on Wall Street to join Developing World Markets, a boutique investment firm that was in the process of structuring what would become the first cross-border capital markets transaction for microfinance. Eventually, the transaction would serve as the model that brought billions of dollars into the field.

Although I knew the basics of microfinance, back in 2004 it was time for a graduate-level course. I locked myself in a conference room with a stack of annual reports from microfinance institutions and enough food and water to last a week. Fifteen minutes later, and one inch into the stack of annual reports, I had my microfinance epiphany. Although the positive social benefits of microfinance were well known, there was very little information, and significantly less market understanding, about the pure investment features of these financial institutions and their unique customer base.

There were two parts to completing the first microfinance bond offering. First, creating it. Second, selling it. Sadly, despite what we thought was some very exciting financial innovation, the phone was not ringing off the hook with investors looking for “a market-rate, emerging market fixed income investment with low volatility that also had a positive impact on people’s lives.” The same now seems to be true with impact investing, a newer financial strategy also devoted to triple bottom line results that is the subject of increasing buzz. This has made me wonder: Why is impact investing growing so slowly? And is impact investing really something new or just the new packaging of an old idea?

"KUMBAYA" WITHOUT A SALE

Let’s start with a definition. According to the Monitor Group, impact investing is “placing capital in business and funds that can provide solutions at a scale that purely philanthropic interventions usually cannot reach.” Other definitions are broader and include crowdsourced donations, foundation grants, venture philanthropy, and for-profit and nonprofit funding that spans “mission first” impact investors and “return first” impact investors.

But what does this mean in practice? Let’s return to the first microfinance bond for a partial answer. After structuring that bond, we asked a question to find buyers: “Who cares?” It didn’t take long to realize that foundations would be natural targets. I began to contact several foundations with a stated interest in global economic development or poverty alleviation, and I was able to arrange several appointments.

I’ll never forget my first meeting. By the time it was over, we had pushed the desks away and were sitting cross-legged on the floor, singing “Kumbaya.” I knew I had made the sale, or so I thought until I heard the next words: “I love what you’re doing, but we don’t invest. We give money away. You need to meet with Charlie, our chief investment officer. Let me introduce you.”

I picked up my briefcase, straightened my tie, and walked down the hall to meet Charlie. Before I even sat down, I knew I had lost the sale. It was the pictures of the women lining his walls—vegetable growers, bakers, soup sellers, and seamstresses—that did it. I knew investment in these women did not fit his definition of “fiduciary responsibility.” Charlie cleared his throat while he found his words: “We have a fiduciary responsibility to maximize returns and could never consider investing in something like this.” Little did it matter that the only reason Charlie had this job was that the foundation was committed to poverty alleviation.

As I prepared for my next foundation meeting, I knew I had to rework my pitch. I still started out on the program side, and once again we pushed the desks away, sat cross-legged on the floor, and sang “Kumbaya” as we discussed global poverty alleviation. It was not a surprise to hear the same refrain: “We don’t invest, we give money away.” But this time I was prepared.

As I walked down the hall to meet Charlie II, I ripped out the first five slides of my presentation and stuffed them into my briefcase. After the introductory chitchat, I shifted into institutional investor sales mode.

“Do you invest in emerging markets?” I asked Charlie.

“Of course we do. We’re trying to run a well-diversified investment portfolio, and exposure in emerging markets is part of our strategy,” he answered in a patronizing tone.

“Do you have exposure to any banks or financial institutions in your portfolio?”

This time, the tone was almost hostile: “Yes. Of course!”

“Well,” I said, pausing for effect, “would you be interested in investing in an emerging market financial institution that is growing at 50 percent and has a return on equity of 30 percent, a return on assets of 5 percent, and a default rate of less than 1 percent?”

“Yes. Of course,” I heard again. But this time, I sensed that he was hooked.

Although I still didn’t make the sale, I slowly have been able to make the idea of investing in a microfinance institution safer and sexier. It took several years for the phone to start ringing, which didn’t happen with any frequency until after Muhammad Yunus won the Nobel Peace Prize in 2006. It’s amazing how much smarter I became in the eyes of investors that day.

“Hey, Roger, what was that ‘micro stuff’ you were telling me about?” asked several people who previously had led me to their office door.

MONEY, NOT SOCIAL CAUSE, TALKS

So why are Charlie and Charlie II, my would-be investors in microfinance, important to an understanding of impact investing? They show that the language of finance is a one-way street. The vocabulary of impact investing, with its emphasis on helping people rather than earning money, tends to make commercial investors skittish.

Although understanding the issue of language is a start, what’s philosophically new about impact investing? Does it significantly differ from many examples of commercial finance? To answer this question, let me provide some examples.

I started on Wall Street in 1986, when the number of international investors based in the United States could be counted on one hand with a few extra fingers to spare. One of our analysts at Moseley Securities started to cover a then obscure Mexican phone company called Telmex that was selling for 6 cents a share. We could never tell what earnings per share were going to be, because Telmex had a policy of giving away shares with each new telephone. We still had enough information, however, to make a palpable investment case. We sold the stock on the basis of growth, opportunity, market potential, and, yes, limited financial information. Through the rearview mirror of impact investing, I’ve often wondered how much stock I would have sold if my pitch had been: “We’re trying to create economic opportunities and enhanced social networks by providing an improved telecommunications network.”

My experience in the fall of 1998 provides another example. The Russian markets had blown up that summer and the capital markets were virtually shut. We had a problem. The Polish government was trying to raise a billion dollars by privatizing its phone company, and my firm, Wertheim Schroder, was the leading broker selected for this herculean task. I’ll never forget the month I spent traveling the continent in a private jet with the management of TPSA, the Polish telecommunications monopoly, including the day I had each meal in a different time zone. We were able to complete the transaction for more than $700 million and reopened the Eastern European capital markets in the process. I wonder how much stock I would have sold if my pitch had been: “We’re trying to support a young democracy and foster a free and civil society through an improved telecommunications network.”

Although these commercial examples had strong social benefits, there is a confluence of trends that bodes well for impact investing, notably the growth of socially responsible investing, corporate social responsibility, and environmental, social, and governance reporting. Impact investing has brought attention to the fact that addressing a basic need through a commercial enterprise is fundamentally a good idea. What has complicated the more widespread acceptance of impact investing is not the concept—it’s the introduction of “new” investment vocabulary, “new” nonfinancial objectives, and “new” legal structures, which are all obstacles to attracting capital from traditional, risk-averse investors.

I think I got my answer to the question about whether impact investing is emperor’s new clothing the day I started helping my 12-year-old son prepare for his Bar Mitzvah. We were reading Leviticus 23:2. A farmer, in planting his field—a very commercial enterprise—was instructed by a Greater Authority: “And when ye reap the harvest of your land, thou shalt not make clean riddance of the corners of thy field when thou reapest, neither shalt thou gather any gleaning of thy harvest: Thou shalt leave them unto the poor and to the stranger.”

Sounds like impact investing to me.

Roger Frank is one of the founders of Innovare Advisors LLC (formerly i3 Advisors), a specialist investment firm focused on developing and managing portfolios of private market investments within the global alternative agribusiness sector. Before founding i3, he was one of the pioneers in commercializing microfinance, a Wall Street analyst, a global traveler, an artist, a teacher, and an entrepreneur.

Yet many contemporary observers have commented on the blurring of these sectors. Nonprofits earn revenue, companies produce environmentally beneficial products, and the government invests in social innovation. We have commercial vendors of charitable giving products, nonprofit producers of some of the world’s most widely used software products, and networks of mobile phone crisis responders who don’t fit into any circle. The creation of new corporate forms for good and the impact investing movement have become standard parts of philanthropy conferences. And the Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission has unleashed a new era of nonprofit activity in campaign politics.

Although all of these examples are contemporary, none of them is fully new. Olivier Zunz’s book, Philanthropy in America: A History, tells a 100-year story of how we got to where we are today, focusing on the political choices we’ve made to shape nonprofit organizations and philanthropic foundations. Zunz braids together the tales of small and large donors. This is not an institutional history of major foundations, though many appear in its pages. Nor is it the tale of workplace giving, federated campaigns, or direct fundraising appeals, although those also make appearances. What Zunz does is to set the story of the Easter Seals campaign alongside the founding of the Carnegie Corporation of New York and encircle them with the public policy decisions that make both possible.

In the years between 1913 and 1920 we fought World War I, amended the US Constitution to allow for a federal income tax, and incorporated several major foundations. The connection among these events is not the one you might expect. The foundations preceded the taxes. The income tax financed some of the costs of the war, but a large part was paid for by the voluntary purchase of bonds. And the sale of war bonds by community groups and the fervor with which neighbors engaged around this cause laid the groundwork for direct mail, workplace giving campaigns, viral fundraising, and many of the other mainstays of today’s charitable world.

Zunz begins his history in the late 19th century, with the ofttold story of Julius Rosenwald financing the construction of schools for blacks living in the South. He is careful to note that Rosenwald enabled the education of hundreds of thousands of blacks, but not by challenging segregationist state governments to change their ways. This relationship between private philanthropy and public policy is the story that really interests Zunz. Through each of his chapters, from the turn of one century to the next and with close looks at community philanthropy, civil rights, the war on poverty, and international giving, Zunz returns to the political questions that surround the use of private resources for public good.

Zunz tells of presidents from Hoover to Kennedy seeking to control, influence, or partner with large foundations to provide social services, health care, and education. Not until the late 1950s do we hear stories of foundations pushing back against government policy. Once again, the issue is the education of blacks in the South.

Zunz makes rich use of a limited resource—foundation archives. So few foundations make their records available that the history of American foundations is drawn from the history of a few dozen organizations. Zunz mixes the institutional sources with biographical material, congressional record, court documents, and media coverage to capture both the contributions and contested nature of American philanthropy.

Zunz ends his book in the late 1990s and doesn’t really look into the role of technology in changing philanthropy. This raises an interesting question about the historiography of organizations. Our current communication technologies will change not only how foundations work but also the public record they leave behind, which will be largely outside of their control.

The author’s interest in the political privileges and limits of philanthropic institutions takes him far beyond grantmaking record and internal memos. He begins with 19th-century probate court decisions and folds in the steadily diversifying cast of regulatory characters from state attorneys general to the halls of Congress to the IRS up to the 1969 Tax Reform Act. What unfolds is syncopated progress toward an ever-elusive definition of public good. The tension comes from a public desire to promote charitable assets, while limiting the use of such assets to influence public policy. This produces what Zunz calls the “arbitrary” divide between political and educational activities.

Zunz includes an illustrative anecdote about Lyndon Johnson. Shortly after championing the political independence of Jewish philanthropists to support Israel against the wishes of the Eisenhower administration, the senator faced a tough election challenge in the 1954 primary in Texas. His opponent, Dudley Dougherty, had the support of two nonprofits backed by an oil millionaire and a newspaper magnate. Upon his return to the Senate, Johnson abandoned his support for the political independence of nonprofits and inserted an amendment into the IRS code forbidding them to “participate in, or intervene in … any political campaign on behalf of any candidate for public office.”

This battle is, of course, ongoing. The political economy we’ve created over the last 100 years is a mixed system in which philanthropic resources, public agencies, and commercial enterprise all contribute to our shared social goods. Zunz shows us that the lines of our imagined Venn diagram were never as clear or static as we thought. With impact investing, social enterprise, and social business we’ve increased the tools we use to apply private resources to public good. If Zunz’s historical arc extends into the future, the battles over the rules for those tools will be a defining character in the philanthropic story of the 21st century.

Lucy Bernholz is a visiting scholar at Stanford University’s Center on Philanthropy and Civil Society and a managing director at Arabella Advisors.

In the ER, a nurse asked Meyer if he had ever heard of Healthy San Francisco. The answer was a veritable lifesaver. San Francisco is the first US municipality to offer universal health care through the city’s Department of Public Health. Uninsured people like Meyer, between the ages of 18 and 64, some with jobs, with preexisting conditions, even without citizenship—some 64,000 San Franciscans in all—are now able to see a doctor and avoid debt.

Meyer belongs to the ranks of 50.7 million US health care outsiders who are too young to qualify for federal Medicare health insurance, earn too much to qualify for state Medi-Cal, and do not make enough to pay for private coverage. To join Healthy San Francisco, he picked from 32 “medical homes.” He selected one in his neighborhood, the Chinatown Public Health Center, and was issued a medical ID card with the name of the doctor who would oversee his care. The card entitles him to routine checkups, referrals to specialists and mental health therapists, X-rays, and lab work. Dental and vision care are not covered.

Since Mayor Gavin Newsom launched Healthy San Francisco in 2007, more than 54,000 people have enrolled, comprising 84 percent of the city’s estimated uninsured. The program is not insurance; it’s a revamped system of health care access that uses the city’s network of providers at neighborhood clinics, community hospitals, public health centers, and state-of-the-art resources at the University of California, San Francisco. Since 2009, Kaiser Permanente and the Brown & Toland Physicians health plans have agreed to provide services to Healthy San Francisco patients as well.

The program has become the rare solution for the laid-off tech worker who gets a kidney stone, the bike messenger who gets hit by a car, or the immigrant family whose small corner store covers the rent but nothing more. As more people join the “patchwork force,” Healthy San Francisco is emerging as a replacement for the traditional model of full-time employer-provided health benefits. “When this first started, I saw mostly poor people, in the 40 to 64 age range, signing up,” said Sharon Kong, an eligibility worker for the Department of Public Health. “Now, because the economy changed, it’s more people in their 30s to 40s, people who work five jobs, work on call, or on contract.”

EARLY PUBLIC HEALTH IMPACT

At first, Healthy San Francisco was available only to those living at or below the poverty line. By the third year, people making 500 percent more than poverty wage could sign up, ensuring the working poor also would be covered. San Franciscans are amazed to learn they can make up to $54,480 a year and still qualify, Kong said. Many homeowners assume they won’t make the cut until she tells them only liquid assets are counted in calculating income. For those earning less than $908 a month, almost three-fourths of those enrolled, the program is free. The rest pay $60 to $450 per month, based on income.

The bulk of Healthy San Francisco’s $164 million annual price tag is covered by public monies: nearly $100 million from the San Francisco city and county general fund, and $23 million in federal funding. Private providers, such as California Pacific Medical Center and St. Francis Memorial Hospital, pay $23 million. Patient fees add $5 million and another $14 million comes from a city requirement that businesses with more than 20 workers pay up to $2 per employee per hour toward some form of health care: either private insurance, a flexible spending account, or Healthy San Francisco. Some restaurants now pass that cost on to diners through a health care surcharge on their bills.

Early reports show that Healthy San Francisco is already having an impact on public health. Hospital admissions among plan members have dropped 14 percent, and the average number of hospital days has been cut in half, suggesting that chronic illnesses such as diabetes, asthma, and hypertension are better controlled. But the real eyepopper can be found in the emergency room. The whole point of investing in universal health care is to pay now so that the community doesn’t pay later—in overuse of the emergency room for nonemergencies, or for urgent ER care that could have been avoided with routine checkups.

“Statewide, 18 percent of the adult Medi-Cal population is using the emergency room for nonemergencies, and in our program it’s 9 percent,” said Tangerine Brigham, who runs the Healthy San Francisco program. “When we allow people to select a clinic, they develop relationships with their providers, so when they get sick they are more inclined to return to those providers.”

Dr. Albert Yu is doing less episodic care at the Chinatown Public Health Center, now that he has assigned patients. Before, most Healthy San Francisco members got some sort of care on a sliding scale for the indigent at the city’s network of public clinics, but it was difficult to diagnose and prescribe accurately when patients had no coordinated medical records.

“Before, I’d give a referral, then never know if the patient followed up,” he said. “It was hard, because most of us who choose to work for the Department of Public Health want to serve people with little or no access to health care.”

POLITICAL WILL PLUS INFRASTRUCTURE

San Francisco’s health care experiment has won numerous national awards, has been replicated in Howard County, Md., and most notably was used as a blueprint for President Barrack Obama’s $938 billion Health Care Reform Act, which aims to bring universal health care to the nation by 2014. Brigham estimates that up to two-thirds of Healthy San Francisco users will take advantage of expanded Medicaid under Obama’s plan. But there will still be people who don’t fit into any of the health care boxes—the homeless and undocumented people are not mentioned in the health care reform talks, for example.

“In large part, national health reform will cover 30 million people in the United States, and estimates are that there will still be over 20 million people who will be uninsured, using county delivery systems,” Brigham said. “It’s still important to ensure access to health care on a local level.”

Will the most disenfranchised sign up for Healthy San Francisco? The program already requires annual membership renewal, something that has proven difficult for some. In the 2009-10 fiscal year, 17,311 participants were dropped from Healthy San Francisco because they didn’t fill out their paperwork, despite multilingual reminder letters, phone calls, and some home visits. Public health workers are crunching the numbers now to see if their solution—a lottery-driven Safeway supermarket gift card for people who turn their paperwork in on time—was an incentive to stop the outflow.

Sandra Hernandez, the city’s former health director who was given 100 days to implement Healthy San Francisco after she took over as CEO of the San Francisco Foundation, said what makes San Francisco unique is also what it makes it one of the handful of places—along with the state of Massachusetts—where universal health care works. San Francisco had the political will, a previously existing network of public health clinics, and the benefit of being both a county and a city so the two entities were not in competition for funding. Previous attempts at universal health care in San Francisco had failed because the unions were not at the table, so Hernandez made sure to invite them this time, along with small business, medical providers, politicians, doctors, and patient advocates.

“We always felt, how could it be that here was San Francisco with a world-class academic medical center, a world-class public health department, some of the best federally qualified health centers in the country—yet we had tens of thousands of uninsured adults with no access to these amazing services?” Hernandez said. “We were determined to make it better.”

After he joined Healthy San Francisco, Meyer quit smoking and stopped socializing with his drinking buddies. He changed his diet and lost seven pounds. Now he checks in regularly with his assigned nurse practitioner. “I have somebody to talk to now, to ask questions about all this stuff that’s going on,” Meyer said. At a recent visit with his nurse, he said he had bouts of shortness of breath, typically when he was hunched forward playing videogames on the city bus. She checked his lungs and heart, and found both to be clear. He told her it might be anxiety—he’s worried about getting laid off because the sushi business is slow.

“Do you have a relaxation practice?” she asked, like yoga? “I’m not a yoga person. I go gambling. I’ll drive all night to Nevada and play the slot machines for three hours, that calms me down,” he said. He asked if it was normal that he kept losing weight. He was also worried about becoming diabetic, so he had started skipping meals. She advised him to eat smaller portions, but not to skip meals, because that could make him dizzy. She got on the intercom, and a behaviorist appeared in the doorway to talk to him privately about calming lifestyle changes.

“I don’t know what I would have done about all this before,” he said, as he followed the therapist to her office. “It feels like someone is looking out for me now.”

Meredith May is an award-winning feature writer for the San Francisco Chronicle and a journalism teacher at Mills College in Oakland, Calif.

Some 16 countries have already made sustainability reporting mandatory. Serafeim and his co-author used these countries, and 42 that don’t mandate the reporting, as an experiment to see whether sustainability reporting makes a difference to socially responsible management practices. “Reporting can have a real impact on how organizations behave, and mandatory reporting can have an effect at the country level, because collectively all organizations change their practices and their behavior,” he says.

The IMD World Competitiveness Yearbook annually ranks countries on criteria that include environmental, social, and governance issues. Looking at the changes in these ratings after each country’s reporting laws went into effect, and comparing countries to each other, Serafeim found that when sustainability reporting is mandated, corporations introduce more ethical practices, increase their investments in human capital, and have more credibility as well as less bribery and corruption. This is more true in countries where enforcement is stronger.

With sustainability reporting increasingly on the public agenda—several groups worldwide are working to establish standards, and the G20 is due to discuss integrated reporting at its November meeting—it’s good to know that it is effective. “Becoming transparent on how you’re performing along these dimensions creates awareness, and as a result it is a driving force for improvements and real change,” says Serafeim. “It’s a process by which you are disciplined to think in a rigorous way about what is going on inside the organization, and for people outside the organization to question what you are doing.”

Robert Eccles, a professor of management practice at Harvard Business School, has been encouraging this revolution for decades. “Before the US Securities and Exchange Commission, before the Great Depression, there were no accounting or auditing standards. It took regulation to make that happen. And today we sort of take it for granted, but we wouldn’t have the capital markets that we have today without mandated financial reporting, to a set of standards, with some kind of verification,” Eccles says. “I think we’re at that next stage.

“If you’re going to have not just sustainable economies but a sustainable society, you need to have this information. Otherwise people end up just focusing on short-term financial earnings, and there are all kinds of problems that come out of that.”

Ioannis Ioannou and George Serafeim, “The Consequences of Mandatory Corporate Sustainability Reporting,” Harvard Business School Research Working Paper No. 11-100, 2011.

The Social Innovation Forum became a program of Root Cause in 2004 and has grown from a volunteer-led experiment to a Boston-area institution. I have watched its market-minded approach change the relationship between nonprofits with innovative ideas and the people who provide resources to them. The forum is organized around social issues and culminates annually in a showcase event where selected innovators give presentations. They pitch their organizations’ missions and summarize the resources they need from individual donors, foundations, corporations, and in-kind service providers. This allows the potential donors at the event to make more informed decisions.

For the 1,000 resource providers and more than 40 nonprofits that have participated in the Social Innovation Forum since 2003, the dialogue between these groups has become honest and transparent. In addition, a shared understanding of the targeted social issues and performance data has become a primary basis for decision making.

What we have created is a social impact market: a mechanism that provides the infrastructure, information, and incentives to enable individuals or institutions to provide financial, volunteer, or in-kind resources with the expectation of those resources resulting in social impact. This marks a change in mindset from charity to philanthropic investment and is a sign that now more than ever society needs the rigor provided by social impact markets.

Markets provide an efficient way to allocate limited resources. And in today’s tough economic times, there is no doubt that making the most of our limited public and private resources is more relevant than ever. It is critical that the United States do more with less as it seeks to find its next economic growth curve. In the meantime, it will take years before governments at all levels will have budget surpluses. Philanthropy, for its part, is just beginning to recover from the losses of the recession. We need to make the most of the nearly $1 trillion of annual government and philanthropy funding going to the millions of nonprofit and government programs that address social issues today.

A model for accomplishing this, I believe, resides in the private sector. Today, we have a variety of mechanisms that allow for robust financial markets, so that innovation and entrepreneurship can flourish. If an individual develops an innovation, potential investors use data about that innovation’s performance to decide whether or not to allocate resources. If the innovation performs well, it attracts more resources with the expectation of a financial return. If it performs poorly, resources move elsewhere. This basic principle of investment following results drives the financial markets—whether investment takes the form of a small loan to a startup or an angel equity investment in a more proven company.

With few exceptions, mechanisms and this mindset have not guided the allocation of the majority of our resources to support and grow social innovation. Too often, competing factors—such as political agenda, lack of information or agreement on program performance, and relationships taking precedence over data—hinder the decision-making process that drives investment and growth in the private sector. Developing social impact markets is a way to better allocate our limited resources.

LESSONS LEARNED

Over the course of the last eight years, I have come to recognize some important lessons that can help us to become more deliberate about how we develop social impact markets.

Nonfinancial Resources | In the early years of the Social Innovation Forum, it became clear that the ability to leverage volunteer time and use in-kind resources is often essential to building a sustainable nonprofit business model. Yet these resources are rarely organized. As I began to explore this more, I was amazed that in the United States today, volunteer time adds up to $169 billion—supplementing the $309 billion of philanthropic giving in 2009. I was unable to find any national data quantifying the value of in-kind donations, but the dollar value is likely to be equally substantial. If we are going to succeed in doing more with less, we need to consider how best to allocate not just financial resources but also volunteer and in-kind resources.

Sound Data | We began organizing each Social Innovation Forum around social issues like dropout prevention, school readiness, and workforce development. We learned that the more we gathered data about the issue and information about the best approaches, the better it helped the investor community work together. It provided common ground for them to have conversations with organizations and to set expectations about performance. This ultimately became the impetus for Root Cause to start our own research department, Social Impact Research. Information about social issues and recommended approaches is a critical component of the transparency and common ground required to develop social impact markets.

Community Focus | All social change has a significant local component. We can consider ways to address the dropout rate nationally and at the state level, but people usually will rally around the communities they know and care about and the local programs that serve them. This is why our Social Innovation Forum has been successful in matching local innovators with local investors. The more social impact markets are linked to local issues and are embedded in communities where nonprofits, philanthropy, government, and business are working together, the more likely they are to take root and prosper. Any effort to have state or national impact must start with the actions and investments of members of a local community.

Government Involvement | Probably the greatest lesson I have learned is the importance of considering government for the development of social impact markets. This has the potential to be confusing, because private sector market proponents often criticize the involvement of government. Yet the vast majority of nonprofit funding comes from government. And in many cases, the delivery of nonprofit services occurs through government systems, such as schools and prisons. Government policies often determine the ways in which these organizations operate and are measured. Any development of social impact markets must include government; otherwise, efforts will have a marginal impact.

EARLY SIGNS OF SOCIAL IMPACT MARKETS

It took centuries for the financial markets to reach their current level of maturity. Today, we are beginning to see early signs of the same process unfolding for social impact markets. Below are examples.

Social Innovation Funds | Funds that have been created both within and outside government to incentivize innovative, resultsoriented approaches are serving as excellent mechanisms to develop social impact markets. Within government, we have seen the introduction of the Social Innovation Fund at the Corporation for National & Community Service and the US Department of Education’s i3 Fund. Outside government, similar funds are being supported by the Edna McConnell Clark Foundation, New Profit Inc., the Roberts Enterprise Development Fund, and Venture Philanthropy Partners. In addition, impact investing, funds that invest in for-profit ventures, are growing rapidly. They include Acumen Fund, Good Capital, Investors’ Circle, and the NewSchools Venture Fund.

Social Issue-Focused Allocation of Volunteers | There are several examples of initiatives focused on better coordination of volunteer resources. The OneStar Foundation of Texas has committed to devoting all of its AmeriCorps volunteers to work in education. City Year, which has 20 US locations, also has shifted from a general service program to allocating its volunteers to schools with the sole purpose of helping to reduce the dropout rate and expand college access.

Access to Information | In addition to the social issue reports produced by Root Cause’s Social Impact Research unit, a number of initiatives and organizations focused on information and transparency have emerged in recent years. In Boston, the Youth Violence Prevention Funder Learning Collaborative has commissioned community-based research studies and issued reports to ensure that members can make data-driven decisions in their grantmaking. In New York City, the Management Innovation unit for the Deputy Mayor for Health and Human Services is coordinating the development of shared performance and financial indicators to increase peer learning for nonprofits.

These early signs of social impact markets are promising. And we will need many experiments that enable them to mature in a way that rewards performance without stifling early-stage innovations. One example is the new social impact bonds, which recently were introduced in the United Kingdom and are a proposed pilot in President Obama’s 2012 budget. Developing more robust social impact markets will require changes in how nonprofits, business, government, and philanthropy operate. Each of these players will need to build new leadership skills, work across social issues and sectors, and rely more on information to make decisions. Ultimately, an environment in which more resources are allocated on the basis of performance will help us accelerate progress on the critical issues we face when we must do more with less.

Andrew Wolk is the founder and CEO of Root Cause, a nonprofit research and consulting firm that partners with nonprofits, philanthropy, government, and businesses to advance solutions to today’s toughest social issues. He holds appointments in social entrepreneurship and innovation at the MIT Sloan School of Management and Harvard University’s Center for Public Leadership.

That personal experience arrived for me (Kevin Kramer) while driving through Cleveland’s dilapidated inner-city neighborhoods for a meeting with the Boys & Girls Club. We talked about recruiting more kids to the club, and I asked the director whether the children in a building just across the street would be interested in joining. “Oh no!” said the director. “The kids in that building belong to a rival gang. If they walk across the street, there will be severe repercussions.” I asked myself: How can such a fractured community create a sustainable environment? And, correspondingly, how do we in the corporate world create mindsets that promote a sustainable relationship among our business, society, and the environment?

Another “aha” moment about sustainability came when I was president of Alcoa’s wheel business. A customer said, “Kevin, Alcoa has a great story—you just need to tell it.” I realized that the story was about sustainable growth, since we had been emphasizing the environmental benefits of using Alcoa’s aluminum for making automotive and commercial truck wheels. Soon after I took on my new role, I began reading widely about the connection between sustainability and innovation. The research gave me the framework for working with other senior executives to develop a steering committee, create a product focus, and develop a communications strategy to widen the sustainability effort across the company.

In my case (Jochen Zeitz), I was focused for years on restructuring and reengineering a business that was close to bankruptcy. After I managed to turn around PUMA’s brand and financials, I realized that I had to shift my thinking and consider business and its impacts on society and the environment in a more comprehensive and holistic way. I realized that the traditional paradigm of business delivering employment and growth was no longer enough, nor was it enough for me as a personal aspiration. I came to understand that the world cannot be compartmentalized and that the status quo—business creating profit and jobs, government setting the rules and infrastructure, civil society defining ethics, and religion presiding over spiritual matters—was not leading to the positive change we need in today’s world.

After having spent nearly 20 years traveling and living in Africa, in 2008 I established the Zeitz Foundation with headquarters in Kenya to support innovative sustainable projects and to promote the holistic balance of conservation, community, culture, and commerce. My private life and business life were merging. I realized that although business is part of the problem, it is potentially the best suited to solve it. I also was inspired to do something because I was in a position of influence to help change the old paradigm, where business works against nature, to one where it works with nature. This mission took further root when I met Anselm Grün, a prominent Benedictine monk and author on spirituality. We spent long hours over the course of many months exchanging ideas and belief systems, which we documented in the book Prayer, Profit and Principles: The Monk and the Manager. I also spent time in Grün’s monastery, which was the last step in my own transformation. These conversations were a turning point for me: I realized that I, too, had a responsibility. Jean-Paul Sartre once said: “Once we know and are aware, we are responsible for our action and our inaction. We can do something about it or ignore it. Either way, we are still responsible.” This quote resonated profoundly with me, and I have never looked back.

Although executives we know recognize that sustainable growthis important, it is not clear to many of them how to implement a new approach effectively. We define sustainable growth as the use of sustainability-driven innovation to generate new business revenues from sustainable products and services, new business models, and business platforms. We believe sustainable growth is critical as growth from traditional sources becomes constrained in developed countries and economic growth accelerates in emerging countries, along with concerns about its impact on the environment and society.

This article describes a strategic framework that ties together the principles for implementing sustainable growth—principles that involve both the emotions of the heart and the reasoning powers of the head. It is based on our experience over the past decade as senior executives at Alcoa and PUMA. Together, our two companies have funded hundreds of sustainability-based business initiatives, engaged thousands of employees in delivering sustainable products and services to millions of customers, and faced many successes and failures in implementing sustainable growth. We hope this experience in implementing sustainable growth across diverse industries, markets, and regions will be of use to leaders and employees of companies pursuing a similar quest.

A SUSTAINABLE GROWTH FRAMEWORK

What are the preconditions for initiating sustainable growth efforts in a company? First, external market conditions need to be conducive to initiating sustainable growth. They include growing customer expectations, increasing resource constraints for energy, water, raw materials, and other inputs needed by the company, heightening stakeholder expectations (especially among shareholders), and increasing environmental regulations.

In addition, market conditions need to be such that sustainability presents business opportunities for growth. This issue has been explored in greater detail in recent business literature; for example, Ram Nidumolu, C. K. Prahalad, and M. R. Rangaswami’s article “Why Sustainability Is Now the Key Driver of Innovation” in the September 2009 issue of the Harvard Business Review. At both Alcoa and PUMA, many of these external drivers were sufficiently in place by 2007 to create an environment for initiating sustainable growth efforts.

Although favorable external conditions are necessary for initiating sustainable growth, they are not sufficient. Internal organizational conditions are important, and there must be senior management involvement. Moreover, the organization’s culture needs to be amenable to adopting the difficult changes associated with sustainable growth. Even when these conditions are in place, success may not occur. The key to success is a strategic approach, a framework, that we describe below.

Executives need to grasp three overarching lessons to achieve sustainable growth. First, they need to understand that a new paradigm for doing business will require fundamental changes to mindsets, behaviors, and business models. In our experience, many senior executives, and even sustainability consortia and indexes, fail to recognize the scale and scope of the shifts needed. Second, sustainable growth takes place when core business units that generate most of the revenue adopt and make it central to their business. Third, middle management represents both the central challenge and the core opportunity for enabling sustainable growth.

In this article, we identify five phases that organizations will need to go through to implement sustainable growth.

PHASE I: FORM A COHERENT VIEWPOINT ON SUSTAINABLE GROWTH

Sustainable growth means different things to different companies. Companies need to begin their implementation by forming viewpoints on sustainable growth that are a good fit with their values and strengths. Some of these viewpoints emphasize reducing damage or making a positive contribution to the environment or resource sustainability. Others emphasize first targeting the societal and relational conditions underlying environmental and resource impacts. Each company must take an industry-specific approach.

Alcoa’s starting viewpoint in 2009 was eco-friendly growth. It directly sought to mitigate the environmental impacts of producing its products while emphasizing the fuel efficiency and recycling benefits of using aluminum and other products to pursue business growth. The aluminum industry is one of the most energy intensive operations in the world. It produces about 500 million tons of CO2 emissions annually (nearly 1 percent of global emissions). Energy costs are the primary drivers of production costs, which determine the energy source and location of operations. This is especially true of aluminum smelters, which consume the most energy and generate 80 percent of the carbon emissions from all value chain activities. As energy costs from fossil-based sources increase and the effects of CO2 emissions on climate change become clear, growth that explicitly incorporates environmental impacts has become a strategic imperative for Alcoa.

The organizational challenge Alcoa faced was to get senior management to recognize that although previous sustainability efforts continued to be necessary, they were no longer sufficient to address the needs of Alcoa’s customers. For example, Alcoa had long been recognized as a leader in environmental, health, and safety matters. Along with other leading aluminum companies globally, it had supported long-term goals for greenhouse gas reductions, safety improvements, water treatment and reuse, and mine reclamation. The main challenge now was to convince executive management and business unit leaders to go beyond these traditional goals and recognize that further sustainability was imperative and could lead to greater revenues.

For PUMA, the starting point and resulting PUMAVision initiative was ethical growth, which emphasizes a moral foundation for stakeholder relationships to create mutual trust and high performance in the organization. PUMA believes that sustainable growth takes place when employees and other partners embed ethical thinking and integrity into their interactions with one another and with the natural world. PUMA arrived at this point in 2008 after setting up intense planning sessions among the CEO, senior executives, and an outside team with expertise in the environment, biodiversity, human relationships, peace, the arts, ethics, and philosophy. PUMA defined ethical growth as being fundamentally fair, honest, positive, and creative, a combination of traits it calls the 4Keys. It then established three major programs—PUMA.Safe, PUMA.Peace, and PUMA. Creative—to oversee behavioral change within the company and enable measurable contributions for stakeholders, the environment, and society. PUMA.Safe’s aim is to reduce the company’s carbon footprint, facilitate the development of sustainable products, and raise work and production standards worldwide. The goal of PUMA. Peace is to create programs that foster a more peaceful world. The PUMA.Creative program aims to bring together individual artists and organizations and to provide them with a platform for creative exchange and international exposure.

The organizational challenge for PUMA in this phase was that understanding and implementing an ethical framework required a great deal of effort from PUMA employees. The company faced huge educational, behavior, and management challenges and set out on a path to commit the time and resources to create deep and long-lasting organizational change.

PHASE II: INITIATE CHANGE THROUGH EMOTIVE MEANS

The second phase of the process focuses on targeted changes to mindsets through affective means that address emotions and feelings, providing a crucial link to initiating behavior changes. Below are a few approaches that Alcoa and PUMA used.

Provide peer inspiration. Credible organizations or peers can be pivotal in changing mindsets and inspiring new norms of behavior. Alcoa organized several meetings on sustainability and innovation based on the best corporate practices of eco-friendly growth. During these workshops, Alcoa compared its efforts and identified new business opportunities that core businesses could explore. These conversations enabled the business units within Alcoa that were further along the path to sustainable growth to serve as reference points for units just getting started. This peer inspiration resulted in new thinking and action, specifically around opportunities that Alcoa was overlooking. The meetings were enhanced by the mix of people involved: group presidents of the midstream and downstream divisions, the chief financial officer of the primary products group, the chief technology officer, and several core business unit presidents and directors.

The main challenge for Alcoa was to convince the broader management team that behavior changes would provide competitive advantages—not just against aluminum manufacturing competitors, but also against companies that produced competing materials such as steel, glass, copper, and plastics. To strengthen these arguments, Alcoa’s growth initiatives group used recent consumer research and personal anecdotes about the changing priorities of key customers.

PUMA also used peer inspiration to unleash the emotive drivers of behavioral change. All employees, including the CEO, are expected to embody the 4Keys in their daily interactions. Employees are urged to guide each other through lapses in behavior or judgment, especially at meetings. Such peer inspiration and pressure have shaped norms of behavior among employees. For example, PUMA created a partnership with Yves Béhar, a leading industrial designer, to design a new packaging system for PUMA footwear, called the Clever Little Bag, that would substantially reduce consumption of fuel, water, and materials because of improved transport logistics and package content. This partnership proved catalytic, as the designs developed in collaboration with the in-house team led to critical recognition and awards. PUMA’s designers aspired to emulate Béhar’s contributions, recognizing that designs could be cool and sustainable at the same time. The experience tapped into the designers’ desire to create a better world and to emulate admirable peers.

Choose credible change agents. Role models are also an important means for enabling the new behaviors needed to implement sustainable growth. At Alcoa, the chief sustainability officer is the former chief financial officer for the primary products group, and he has strong credibility with the core business groups. PUMA hired a museum curator with expertise in cultural change to drive the implementation of PUMAVision, who has become central to the initiative.

Because reputation is a driver of emotive behaviors, it needs to be explicitly considered during the implementation phase. Choosing the specific reputation to influence is important. Many companies aim to achieve a high rank in sustainability indexes as an end in itself. But core business managers are more likely to be influenced by the business unit’s reputation among prospective employees, key customers, and the managers’ professional community. These reputations will drive sustainable growth behaviors more than scores on sustainability indexes. This focus also prevents greenwashing and can enable stronger partnerships with NGOs developing sustainable capacity.

For example, product designers at PUMA care deeply about their reputation among design publications. As part of PUMAVision, PUMA developed the Creative Africa Network, the world’s largest online network of African artists across different disciplines, and turned the network over to the artist community to own, operate, and expand. The sustainable designs and discussions generated in the community’s forum were then picked up and publicized by leading design magazines. The value of this publicity far exceeded what PUMA could have purchased through advertisements. Most important, it validated the appeal of sustainable and local designs for PUMA designers.

Although successes have been achieved through the Clever Little Bag and the Creative Africa Network, PUMA designers continued to view sustainable growth as a significant challenge because progress is complex and takes time. PUMA has needed to nurture and encourage the efforts of product designers continually to keep them on track.

PHASE III: EMBED SUSTAINABLE GROWTH INTO ORGANIZATIONAL IDENTITY

Once changes in mindsets and behaviors begin to jell, enterprises need to identify the most effective way to embed sustainable growth initiatives within core business activities. Fundamental questions such as “Who do we want to become as a company?” and the related question “Who are we now?” become a natural preoccupation for managers and employees.

Recent research, such as Mary Jo Hatch and Majken Schultz’s collection Organizational Identity, suggests an important difference between organizational identity and culture. Organizational identity focuses on the central, distinctive, and enduring aspects that describe what the organization stands for. It is more focused, explicit, instrumental, and textual than organizational culture, which is more unfocused, tacit, emergent, and contextual. Organizational identity is the tangible “we” that arises from the intangible processes of culture. An important aspect of organizational identity is organizational mission or purpose, but organizational identity is much more than mission or purpose. It is what the organization represents to its employees.

Because organizational identity informs the enterprise’s core business activities, efforts to embed sustainable growth within it must be supported and led by the CEO and senior executives. Sustainable growth becomes an effective part of organizational identity if it provides a clear justification for the future existence of the company and guides the experience of its customers.

Justification for future existence. At Alcoa, organizational identity was redefined through two related questions customers would ask in the future: “Why aluminum?” and “Why Alcoa?” Aluminum’s chief competitors are steel in the automotive industry, carbon fiberreinforced polymers (CFRP) in the aircraft industry, and polyethylene terephthalate (PET) in the packaging industry. Although primary aluminum is highly energy intensive in its production, it has advantages in reusability when compared to CFRP and PET and in fuel efficiency when compared to steel. Moreover, Alcoa has positioned itself as the market leader in developing new technologies for producing and using aluminum and other metals. By incorporating the viewpoint of eco-friendly growth, Alcoa’s organizational identity is slowly shifting from being a producer of primary aluminum to one that produces sustainable products and positions aluminum as the preferred environmental choice.

A challenge that Alcoa’s change agents faced was to prove why aluminum and Alcoa’s sustainable innovations made financial sense to customers. To do this, Alcoa developed a quantitative tool that showed a financial return on investment for the change. Another challenge was ensuring that a consistent message was sent to all stakeholders around sustainable growth. Alcoa leveraged the broader coalition of global aluminum associations in the United States, Canada, Europe, Australia, and elsewhere as well as the International Aluminium Institute in London. Getting all stakeholders, internal and external to Alcoa, to move toward sustainable growth was an important and difficult element, but it has justified the company's future existence.

Guide desired customer experience. Once managers at PUMA became fluent in the 4Keys, the focus shifted to making sustainable growth a core part of PUMA’s organizational identity. PUMA changed its corporate mission to reflect the viewpoint of the customer. Before PUMAVision, the company’s mission was “to be the most desirable Sportlifestyle brand in the world.” Now PUMA sought “to be the most desirable and sustainable Sportlifestyle company in the world.” In addition, PUMA’s brand identity was changed to “We are the DJ: the brand that joyfully mixes the influences from sport and lifestyle with the desire to contribute to a better world.” This emphasis on sustainability, contribution to a better world, and a joyful experience in using PUMA’s products has been the driver of PUMA’s business strategy and products since 2008.

The main challenge for PUMA at this stage was the complexity of sustainability as it applied to a sports lifestyle company. The change agents at PUMA had to develop clear definitions of sustainable design, sourcing, and production, so that employees could better implement PUMA’s mission and brand identity.

PHASE IV: INSTITUTIONALIZE SUSTAINABLE GROWTH

Sustainable growth gathers momentum and is institutionalized in core businesses through formal mechanisms, such as business models, business systems and processes, and performance targets. These mechanisms need to go beyond the traditional sustainability steering committees; they need to focus on how sustainable growth opportunities will be systematically identified, justified, implemented, and evaluated in furthering strategy. In their absence, decisions on sustainable growth get made ad hoc and are informed primarily by enthusiasm and high ideals rather than by strategic thinking that focuses on business value, scale, and institutionalization.

Informal mechanisms, such as emotive means and organizational identity, and formal mechanisms, such as models, systems, processes, and performance targets, have an iterative and escalating relationship. Although informal mechanisms seed the ground through supportive mindsets and identities that initiate change to behaviors, formal mechanisms capture and communicate these changes in the familiar language of business. In turn, these changes build motivation and help change behaviors even more, leading to transformative changes.

At Alcoa, formal mechanisms for evaluating conventional market opportunities were modified to include sustainable growth. Several new opportunities have been identified in building and construction, transportation, and reuse of production waste, which could be worth billions of dollars, while significantly improving the environment. Alcoa also instituted an employee compensation system that incorporates performance incentives related to sustainability. Moreover, each business is required to report on sustainable growth progress at its quarterly business review with the company’s executive council.

An important implementation challenge for Alcoa has been clear corporate communication regarding how each employee can promote sustainability. This is especially important because 20 percent of an employee’s incentive compensation is tied to reaching internal targets. As more employees inquire about how they can help hit the sustainable growth targets, the incentives system appears to be gaining traction.

Environment-related product performance targets are also important of waste by 2015, much of which will take place through changes to its product distribution and packaging system. Last, PUMA has developed one of the world’s first formal environmental profit and loss (EP&L) systems, which will include targets for environment-related costs and benefits to measure business performance.

Currently, the principal challenge at PUMA is to create and implement a staged approach to introducing EP&L. PUMA is an early innovator; virtually no other company in the world has attempted to implement such a system. PUMA has to proceed carefully with EP&L to ensure it does not overwhelm the other considerable changes within the company.

PHASE V: EVOLVE BUSINESS FOUNDATION FOR SUSTAINABLE GROWTH

The first four phases create a basic foundation for sustainable growth. Yet the business foundation will continue to evolve because sustainable growth is an ongoing transformation whose long-term features are unclear. New and radically different business opportunities may arise that require implementation. Given the unfamiliarity of this growth paradigm, it is important to create a culture of learning, experimentation, evaluation, and persistence.

In our experience, it often takes four to five years of sustained commitment before core units begin to recognize sustainable growth as a new paradigm for business. Setbacks are bound to happen and should be viewed as occasions for learning. The best approach is to view resources spent on sustainable growth as an investment in building a business foundation that is critical for future success. Even when the basic elements of the business foundation are in place, profound questions about the nature of sustainable growth will continue to arise.

At Alcoa, sustainable growth is becoming especially important in the midstream and downstream businesses. The company is witnessing increasing demand for sustainable products in the automotive industry as US automakers recover and higher mileage standards are implemented. Emerging markets in China, India, and other countries are providing new and large markets for fuel-efficient transportation and green construction. Moreover, as the clean energy industry grows, new markets in renewable energy equipment are emerging. Globally, demand for aluminum in midstream and downstream markets is expected to grow from 53 million metric tons to 93 million metric tons between 2010 and 2020 for the industry as a whole. At Alcoa, sustainable growth initiatives are expected to add several billion dollars in incremental revenue by 2013. At the same time, Alcoa has also made significant progress in reducing its carbon emissions. For example, the upstream primary products group had set a goal of 20 percent reduction in carbon emissions by 2020 over 2005 levels; by 2010, it had already achieved a 22 percent reduction. In recognition of its sustainability efforts, Bloomberg-Maplecroft ranked Alcoa third among 350 US companies in climate-related innovation and carbon management.

Despite these opportunities, Alcoa continues to face profound questions that challenge the company and the industry. Aluminum is reusable and almost three-fourths of the aluminum that has been produced is still in use. Because of that, Alcoa is trying to ensure that CO2 emissions from the production of new aluminum are reduced, either through new operations technologies or by finding cleaner sources of energy. For the aluminum industry, upstream activities such as bauxite mining, alumina refining, and aluminum smelting are highly energy intensive and have high profit margins (ranging from 30 to 40 percent), whereas midstream and downstream activities such as extrusion, rolling, and finished products are less energy intensive but have lower profit margins (ranging from 10 to 25 percent). How can Alcoa continue to expand into more mid- and downstream products and increase its profit margins through new technologies and other innovations, while meeting the performance and cost expectations of its customers? How can Alcoa improve the business model for recycled aluminum to successfully enter markets beyond packaging? Moreover, how can Alcoa use the lessons learned in aluminum and apply them to the other materials it works with?

At PUMA, the success of PUMAVision is leading to new opportunities. By 2015, 50 percent of PUMA’s product portfolio is expected to be from sustainable products, representing €2 billion. PUMA has received numerous awards as a sustainability leader, including the German Sustainability Award for Most Sustainable Strategy 2010. Initial results of PUMA’s EP&L analysis show that the direct annual ecological impact of PUMA’s own operations is €7.2 million, and an additional €87.2 million is from the supply chain.

Sustainable growth is being implemented throughout the French multinational holding company PPR, which in addition to PUMA includes fashion, luxury, and high-end retail brands such as Gucci, Stella McCartney, Yves Saint Laurent, the Redcats Group, and Fnac. Ethical growth through fairness, honesty, creativity, and a positive outlook to work and relationships will be a key component of the group’s approach to sustainable growth. Although this expansion holds great possibilities, it also poses profound challenges. Highend fashion and luxury items are often perceived to be indifferent to, or even at cross-purposes with, sustainable growth. How can PPR implement a credible way to produce sustainable products for high-end items and still maintain its identity? How can PPR maintain a coherent approach across the disparate brands in its portfolio? And can PPR develop and implement an approach that leverages its global infrastructure to achieve a tipping point for sustainable growth within the holding company and industrywide?

Thomas Kuhn observed toward the end of his book The Structure of Scientific Revolutions, “If a paradigm is ever to triumph it must gain some first supporters, men who will develop it to the point where hardheaded arguments can be produced and multiplied.” The core message in implementing a sustainable growth paradigm is that it is a persistent, iterative, and constantly evolving effort, linking “soft” means to formal mechanisms that provide “hard” arguments. And, as Kuhn argued, it requires activist leadership.

We believe a sustainable growth framework is like a DNA double helix, comprising two interconnected strands that run in opposite directions but are mutually dependent. The strands in this case are not two polymers of nucleotides, but the heart and the head, with the heart governing the moral and ethical imperatives of sustainable growth and the head figuring out how to make them a practical reality. In the end, regardless of how the process of sustainable growth unfolds, one thing remains clear to us: Its successful implementation will make or break the credibility of business as a worldwide institution for meeting society’s economic needs.

Ram Nidumolu is CEO of InnovaStrat, an advisory and consulting company for sustainability strategy and innovation at global corporations.

Kevin Kramer is president of growth initiatives at Alcoa, and was previously president of the Alcoa wheels and structures business.

Jochen Zeitz is CEO of Sport & Lifestyle Group and chief sustainability officer of PPR, and chairman of the board of directors of PUMA.

Even before the disaster, there had been only 108,000 landbased telephone lines in the country, compared with 3.5 million mobile phones. After the earthquake, mobile communications, particularly text messages, were one of the few means by which people could report their needs and location. Around those calls for help coalesced a community of techno-humanitarian volunteers using computer software that helped turn text messages into a real-time online disaster map, usable by rescue workers and aid organizations.

Foremost among the volunteer groups was Ushahidi, an organization founded two years earlier by four tech-savvy activists frustrated by a lack of mainstream Kenyan media coverage of the country’s postelection violence. But while Ushahidi (Swahili for “testimony” or “witness”) and its mapping platform had been used elsewhere, Haiti marked their big-stage debut. Within days of the Haiti earthquake, the platform was customized and a text message hotline set up. Hundreds of volunteers from around the world processed texted reports of trapped people, medical emergencies, and requests for aid, feeding the reports into a map that rescue workers could use. A total of 1,500 reports were gathered and mapped in the first two weeks, and more than 3,500 created altogether.

Since that time, some 17,000 maps have been made, some with the help of Ushahidi’s personnel and volunteer community, but most by people unconnected with the organization. The maps have chronicled everything from political violence in Africa to calamitous weather in New York and neighborhood news in Sydney. In principle, the potential uses are almost infinite.

“When we originally drew up our first mind maps of the different stakeholders, we figured that some organizations and journalists and NGOs might use it. We couldn’t have envisioned what would happen today,” says Ushahidi co-founder Juliana Rotich.

The platform has by no means become mainstream. And back in January 2010, only some Haitians and a few on-the-ground workers knew about it. But hundreds of people were adding to the maps and at least some government personnel were paying attention. Patrick Meier, Ushahidi’s director of crisis mapping, recounted, “On the third day [after the earthquake], FEMA (the US government’s Federal Emergency Management Agency) called us to say keep mapping no matter what people say—it’s saving lives.” This social activism approach revealed the essence of Ushahidi’s model. Though the nonprofit is nominally tech focused, its activism is less about building technology than building community. “One thing we’ve realized,” says Rotich, “is that the platform is just 10 to 15 percent of the solution.”

CLOSING THE LOOP

Of course, technology isn’t unimportant. Without that 10 to 15 percent, as represented by the code that ultimately turns instruction and information into maps, the organization wouldn’t exist. So when Rotich and three co-founders started Ushahidi, they didn’t build a tool from scratch, but decided to combine the abilities of simple, widespread tools: mobile phones, databases, and online maps.

In those early days, before anyone else would help them, they relied on a programming technique called agile development. “You just jumped in,” says Rotich. “If something needed to be done, you did it. If e-mails needed to be answered, you answered. Until you could set up the system, you just did it.” Having a dedicated core group was a necessary precursor to building their first volunteer community: software programmers.

Inspired by WordPress, Firefox, and Redhat Linux, software packages built on open-source—publicly available—code and developed by far-flung communities of volunteer programmers, Ushahidi asked the programming community for help. As Ushahidi developed its platform, a coder named rabble was especially important. He posted scathing critiques of Ushahidi’s methods in its online forums. “Some of us were very new at the time. We didn’t know best practices; rabble called us out,” says Rotich. “We responded and said, ‘Sorry, we’ll do what we can to fix that.’” Without that responsiveness, Ushahidi would never have been able to engage the 125 programmers who have maintained and refined its software package, which has been translated into no fewer than 16 languages.

Another community of volunteers helps during Ushahidi mapping deployments. In Haiti, those volunteers were responsible for customizing the software to local needs and manually processing each texted report. Many were also Haitian emigrants in Boston, where Meier was a student at Tufts University’s Fletcher School of Law and Diplomacy. Recruited largely through social media tools, the Haitian diaspora community was essential, translating both the Creole language and locale-specific references unfamiliar to foreigners.

“You need to have in your partnership someone who understands the context,” says Rotich. It was a lesson they’d learned in 2009 in the Democratic Republic of the Congo, where—unlike Kenya, the country where Rotich was raised—Ushahidi had little knowledge of local circumstances, and mapping faltered for lack of on-the-ground support and participation.

“That galvanization of such huge communities in such a short period of time is really impressive, and really inspiring,” says Catherine Dempsey, a research consultant at PAX, a nonprofit organization developing an Ushahidi map for spotting early warning signs of social unrest in southern Africa.

In Haiti, Ushahidi also contacted Haitian telecommunications companies that provided technical assistance in setting up a hotline and media outlets that announced it. But they didn’t fully engage with one essential community: humanitarian workers. People in a position to use their maps didn’t always know about them, and those who knew didn’t necessarily find them useful. “We had extremely limited engagement with crisis mappers and volunteer efforts,” says Andrej Verity, an information manager with the U.N. Office for the Coordination of Humanitarian Affairs who saw Ushahidi’s map but found it impracticable. “I was sent a link to the crisis map based on Ushahidi. I open it up, and it’s got a bunch of red circles on it. With the amount of information that was being thrown at me, working 18 to 20 hours a day, it didn’t do anything for me.”

Verity’s experience was far from universal, but it underscored Haiti’s chief lesson for the organization: the importance of building relationships with the people who ultimately could use the volunteers’ maps and of hearing their criticism as well. In Haiti’s aftermath, Ushahidi and other members of the crowdsourced mapping community worked closely with Verity and established aid groups, setting up protocols and working groups that could better provide the type of data they needed. To help ensure that the volunteer effort catalyzed by Haiti’s earthquake could be replicated elsewhere in the future, Ushahidi also helped set up the Standby Task Force, an Ushahidi-independent mapping community of trained volunteers who can participate immediately after a crisis, before a larger community assembles.

The tangible impact of these improvements remains to be seen, but the potential was enough for Verity to invite Ushahidi’s collaboration as the Libyan civil war intensified in March 2011. “The mappers really wanted to learn from the humanitarian community. They were willing to listen,” said Verity, who went on to echo Rotich’s assessment about its utility. “Ushahidi itself is the technical component, which is 10 to 20 percent of the larger solution,” said Verity. “You need to figure out how you are going to build your community.”

USHAHIDI 2.0

Ushahidi’s work with the United Nations is, for the moment, unpaid, and about 80 percent of the organization’s budget comes from foundation support, which started with a crucial $200,000 grant from Humanity United in 2008. Since then, the staff has expanded from Rotich and her three co-founders to a total of 14 employees. Other supporters include the John D. and Catherine T. MacArthur Foundation, the Knight Foundation, and the Omidyar Network, which in 2009 gave the nonprofit $1.4 million. The other 20 percent of Ushahidi’s budget comes from fee-based consulting projects, with customers currently including the ICT4Peace Foundation and the World Bank.

Rotich characterizes these consultancies as early stage. As with its U.N. work, Ushahidi must establish its maps’ real power and utility. Rotich also acknowledges that Ushahidi has had a great start in part due to media coverage. Nick Martin, president of activist technology training provider TechChange, has described Ushahidi as “the darling child of the tech crisis space.” Indeed, after Haiti, the organization received glowing press coverage, with some journalists hailing their work as revolutionary. Such praise made Ushahidi a household word, but only for about 15 minutes.

Rotich’s advice to nonprofits working at the intersection of technology, global aid, and social justice is to find staff with diverse expertise who can successfully work together and with volunteers. “People fall in love with a prototype, not an idea,” she says. “As much as possible, make sure your team has a good technologist who can prototype the idea you’re working on.” Equally important is storytelling: Keep a blog, use Twitter, and “share the journey of what you’re creating.” Ask for help, too: Encourage people to participate with whatever skills they have. That helps an organization immediately and helps create a community of people who spread the word about their work.

“We did not have an advertising budget,” Rotich says. “We still do not.”

Brandon Keim is a freelance journalist and associate editor of Wired Science based in Brooklyn, N.Y., and Bangor, Maine. In previous SSIR articles he’s written about green building, Indian environmentalism, the global coffee trade, and urban transportation development.

Dobbin and colleagues examined a national sample of 816 firms from 1980 to 2002, and found that corporate culture, women in management, and industry norms do more to drive the adoption of diversity programs than does actual need. Companies tend not to respond to regulatory scrutiny or to a lack of racial or ethnic diversity in the workforce. What does lead them to adopt programs, such as diversity training, mentoring, and task forces, is a history of having embraced new social norms in the past, as evidenced by by their progressive work-family practices. Those firms also tend to promote women into management, who then advocate for further diversity.

Peer pressure is an alternative force. “Every firm wants to make sure it remains competitive for the best talent, and seeing what other firms do is a huge motivator for change,” says Caroline Simard, vice president of research and executive programs at the Anita Borg Institute for Women and Technology. But surprisingly, Dobbin found that external and internal pressures don’t reinforce each other. Only one or the other matters; a firm that already resisted adopting a popular industry program won’t be swayed by higher numbers of female managers.

“I think we can now understand why the economy begins to look like it’s dividing into firms that are very pro-diversity and firms that just never seem to get out of a rut,” says Dobbin. “One of the reasons is that if you’ve made some progress, there’s support for further progress.”

Another problem is that although white women managers are promoting diversity programs, they often promote the wrong ones. Employers spend the most money on one program—diversity training—that has been shown by several studies not to work. Mentoring is more effective, but white women managers tend not to institute it. Minority managers might also champion diversity program adoption, but the researchers couldn’t tell, because there still aren’t enough minorities in management.

“I think we would probably be in a better place if all these firms were required to take some of the steps we know are effective at reducing inequality,” says Dobbin. “It would be useful if the federal government would take a clearer stand on what policies and programs firms need to put into place.”

Frank Dobbin, Soohan Kim, and Alexandra Kalev, “You Can’t Always Get What You Need: Organizational Determinants of Diversity Programs,” American Sociological Review, 76, 2011.

The solution to this problem, we wrote, was fourfold: cost-efficient processes with low transaction costs; robust information flows providing good data on value and risk; value-driven allocation of money, with investors rewarding better performers; and flexibility, where assets could be bought and sold easily and quickly. The good news is that over the last seven years a great deal of progress has been made toward realizing these goals.

The gains are largely attributable to the creation of a growing and diverse collection of intermediaries in the social capital market. Broadly speaking, these new intermediaries can be classified into two categories, information intermediaries and funding intermediaries. (See “Social Capital Market Intermediaries” below.)

Information intermediaries—which include philanthropic prizes, social networks, and new measurement and evaluation entities—have significantly enhanced efficiency in the social capital market. There has also been progress, though significantly less than the progress achieved by information intermediaries, in creating strong funding intermediaries. New funding intermediaries, such as Acumen Fund and Sea Change Capital Partners, coupled with long-standing funding intermediaries such as the Nonprofit Finance Fund (NFF), have had a notable impact on the changing contours of the emerging social capital market.

This article explores the advances these information and funding intermediaries have brought to the social sector, and the challenges—in concept and implementation—that remain for achieving true efficiency in the work of social change.

WHY INTERMEDIARIES ARE IMPORTANT

Economists have long held that the emergence of intermediaries can be a sign of a more efficient and effective market. This is particularly true when it comes to the flow of information. Economists believe information is valuable because it enables people to make better decisions, resulting in greater utility and higher payoffs. Despite the potential value of information, it is often imperfect (a buyer usually does not fully know what she is buying), asymmetric (a seller usually has better information than the buyer), or difficult to acquire. Consequently, people can be discouraged from making transactions that would be beneficial to the overall market. Intermediaries often arise to overcome the challenges arising from imperfect or asymmetric information, facilitating a more robust flow of information about things like value, impact, and risk.

Intermediaries also play an important role in lowering transaction costs, thereby making processes more cost-efficient. Transaction costs are the costs of participating in a market, adding to the ultimate price of a good or service. For example, if a person decides to buy a new stereo, the transaction costs would likely include the time and effort required to decide which stereo to buy and the best place to buy it, the energy to haggle about the price, and the hassle incurred in making sure the seller will take it back if it breaks soon after the purchase. Intermediaries often arise to perform these operations more efficiently, and in doing so lower overall transaction costs for all parties involved.

From the earliest days of the US economy, intermediaries have emerged to take on important roles. As James R. Beniger points out in his book, The Control Revolution: Technological and Economic Origins of the Information Society, intermediaries in the early American agricultural trade were prevalent for cotton, wool, sugar, spice, coffee, and tea because the quality of the product varied and buyers needed assistance in obtaining accurate information. By contrast, brokers did not appear in the wheat trade, which required little information processing because most grain was substitutable. Cotton brokers, like most other agricultural intermediaries, helped to classify and grade the agricultural output. By helping to provide accurate, up-to-date information about the value of the cotton for sale, the brokers minimized risk for both the buyer and the seller. Even though there was a commission, the cotton brokers also lowered transaction costs by minimizing time and costs associated with bargaining between buyer and seller.

Most markets, whether it is the early American agricultural trade or our contemporary equity exchanges, are not efficient in their infancy. Today the stock market is among the most efficient examples of a for-profit market, but this hasn’t always been the case. The capital markets did not have good information at the beginning, and developed robust information flow only over time. The social capital market is still relatively new, and it is not surprising that it is taking time for it to mature and become more efficient. The advent of information and funding intermediaries is an important advance in the maturation process.

INFORMATION INTERMEDIARIES

Progress in the social capital market is ultimately gated by the quality of the decisions that donors, grantmakers, and investors make, yet accurate and useful information is still not widely available, particularly for the mass of individual donors. “There is so little good information and analysis,” says Holden Karnofsky, founder of GiveWell. “It’s as though the sector is trying to mass-produce a cookie, figuring out the logistics and branding before perfecting the recipe.”

Although much remains to be done to improve the quality and availability of information about the social sector, substantial progress has been made in recent years because of the emergence of three types of information intermediaries: prizes, social networks, and evaluation.

Prizes | Philanthropic prizes have become a useful instrument to signal the strong performance of an organization to other donors. For instance, “exemplar prizes”—which identify excellence, focus attention, and influence perception of a particular field or issue ²—typically recognize past demonstrable accomplishment, in contrast to a traditional grant that is a bet on future potential. Prize selection committees are typically composed of some of the leading experts in the world, who select recipients after extensive and rigorous due diligence.

The Henry R. Kravis Prize in Leadership is a case in point. Established in 2006, the Kravis Prize selection committee conducts extensive and detailed research on potential candidates and rigorously evaluates the impact of each nonprofit organization. “In the nonprofit sector, evaluation methodologies are a work in progress and economists are striving to improve them, but it is imperative that donors focus more intently on impacts and results. The Kravis Prize seeks to identify organizations with extraordinary impacts and low costs per beneficiary that we believe would be ‘best-buys’ for other donors,” explains Marie-Josée Kravis, chair of the Kravis Prize selection committee. “When I was awarded the Kravis Prize in 2009, I knew that it would help financially,” says Sakena Yacoobi, founder and executive director of the Afghan Institute of Learning. “What I didn’t anticipate was how the reputation of the Kravis Prize would bring my organization increased credibility on the international stage.”

In addition to signaling the value of this selection to donors who may lack the time or experience to conduct their own research, prizes can also raise awareness among institutional funders or intermediaries who advise donors. Consider the Conrad N. Hilton Humanitarian Prize, which is awarded each year at the Global Philanthropy Forum, an annual gathering of more than 400 leading philanthropists and foundation executives. The 2011 Hilton Prize award ceremony and dinner celebrated award winner Handicap International. Most of the philanthropists, foundation executives, and philanthropy advisors in attendance were not familiar with Handicap International; the event provided an introduction to the organization and a chance to hear expert perspectives about the organization’s strengths and achievements.

“If a group has won a prize, it helps us find them,” says Karnofsky. “We of course still conduct our own due diligence, but the prize is a signal that the organization is more promising and helps us identify possible high-performing organizations.” Many other prizes are spawning across the sector, from the Schwab Foundation’s Social Entrepreneur of the Year Award to the Lipman Family Prize in Leadership and Innovation at the Wharton School of the University of Pennsylvania.

Social Networks | Since the rise of Facebook there has emerged a burgeoning group of web-based organizations trying to create a social network around some aspect of people’s desire to “give back” or “do good,” and leverage that desire directly or indirectly for social impact. Some of these organizations, which we call social networks for social good, unsurprisingly, have Facebook roots. CAUSES, a Facebook Connect website, was founded by Joe Green, a friend of Facebook co-founder and CEO Mark Zuckerberg when they both were students at Harvard University. CAUSES enables users to identify and connect around their favorite causes, be it broad topics, specific organizations, or a user’s own cause. A person can use CAUSES to plan events, share ideas, or donate. CAUSES claims 140 million users and $40 million in donations for 25,000 nonprofits.

Chris Hughes, a Facebook co-founder and also a friend of Zuckerberg’s from college, first applied his Facebook skills to creating President Obama’s hugely successful online campaign during the 2008 presidential election. Late last year he launched the nonprofit Jumo, which is trying to build a social and dynamic directory for the sector. With Jumo it will be possible for a Midwestern mom to find out what’s going on in agriculture in Kenya, as well as what is going on in her own neighborhood. As Hughes explains: “The basic problem in the space is that while the social sector is immense and a significant percentage of the global economy, there is nothing on the Web as a home base for people to participate in it. There is no organizing network and no protocol on the Web for organizations, funders, researchers, and everyday people. There have been significant advances in the movies, restaurants, etc., and Jumo is trying to achieve this for the social sector.” Jumo has signed up nearly 15,000 organizations. “Jumo ultimately aspires to facilitate accountability and transparency,” says Hughes. “We provide an opportunity for everyday people to weigh in on the quality of a program. When it comes to impact assessment, more people watching and weighing in is a healthy thing for the social capital market.” Jumo recently announced it was merging with GOOD, a more conventional (and successful) content platform with a magazine and a supporting website.

There are countless other social networks for social good. For example, Change.org is a compelling online advocacy platform that enables people to start and sign petitions as a means of social change. But as of now, no Web-based organization has broken through the threshold of true scale compared to conventional person-to-person social networks like the United Way, which still raises $4 billion annually, or the 700 or so community foundations that exist throughout the United States, the largest of which have assets of more than $1 billion. Even Kiva, the widely known online microlender, has facilitated less than $250 million in loans. Despite the slow progress, it’s hard not to imagine that some social network will transform the social capital market by bringing the same efficiencies that eBay, Amazon, and other for-profit online businesses have.

Evaluation | It is now generally accepted wisdom that few nonprofits have easily accessible evaluative information upon which donors and grantmakers can make well-informed decisions. The most astute decision makers have come to appreciate the insight said to have been written by Albert Einstein on his chalkboard in the Institute for Advanced Study at Princeton University: “Not everything that counts can be counted, and not everything that can be counted, counts.” That said, a quick perusal of GuideStar or Charity Navigator, or a nonprofit’s own website, will likely lead to the well-known conclusion: Few nonprofits provide the evaluative information that counts and can be counted. The first step in creating a more efficient social capital market won’t happen until such evaluations are widely available.

In recent years there has been an increasing emphasis on thirdparty evaluation to assist funders in identifying the most compelling interventions, programs, and projects. These third parties serve as information intermediaries, conducting rigorous analysis to evaluate the impact and effectiveness of a nonprofit’s programs. In addition to providing charitable investors with greater insight into the organization they are investing in, this information also allows the nonprofit’s board and staff to manage the organization’s programs better. Increasingly, nonprofits themselves are soliciting these evaluations.

The rise of consulting firms—such as the Bridgespan Group and the social sector consulting arms of McKinsey and Company, Monitor, and others—along with the creation of other intermediary institutions—such as the Center for Effective Philanthropy, this journal and its parent organization, the Stanford Center on Philanthropy and Civil Society, and similar organizations at Harvard University, Duke University, Indiana University, and New York University—all in some way support the creation of evaluative information for the sector.

There are many different types of social impact evaluation, but randomized controlled trials, such as those used in medicine, are emerging as the gold standard. Randomized controlled trials are considered most r igorous because they generate a statistically identical comparison group with which to compare outcomes of those who participated in a nonprofit program with those who did not participate. Because they produce the most accurate, unbiased results, randomized controlled trials are particularly useful to the social capital market. Although randomized controlled trials provide good data, they are expensive and sometimes difficult or impossible to apply to an organization’s activities.

Trailblazing progress in developing and promoting randomized controlled trials has been made by the Abdul Latif Jameel Poverty Action Lab (J-PAL) at the Massachusetts Institute of Technology, and its affiliate organizations such as Innovations for Poverty Action. J-PAL researchers have completed or are undertaking more than 267 evaluations, enabling them to develop clear perspectives on which programs really help the poor and which do not. Funders and nonprofits use J-PAL’s research to scale up the most costeffective programs.

On the other end of the evaluation spectrum are websites that offer a wide range of information, including sometimes misleadingly simple evaluations. The largest of these are GuideStar and Charity Navigator, each with more than 2.5 million users. GuideStar continues to provide the most information on the most nonprofits, but it does not yet provide comprehensive evaluative information that donors and grantmakers can rely on. Charity Navigator is trying hard to provide simplified ratings based on better information than the specious ratios it has relied on historically, but it still has a way to go.

There are also many smaller online evaluation organizations. In his November 2009 report, “The Current State of Online Philanthropy,”David Koken identified 55 websites that provide individuals with opportunities to learn about, or directly engage in, philanthropic giving over the Internet. As Jacob Harold, a program officer at the William and Flora Hewlett Foundation’s Philanthropy Program, the lead funder in the area, explains: “The result is that the available online giving capital is shared, leading to insufficient funding for many organizations. And no one gets the network effects.” There is also very little standardization of data, contributing to information fragmentation.

One of the most promising new evaluation websites is Philanthropedia. After identifying a group of experts in a particular field, such as homeless programs, Philanthropedia asks the experts to complete a survey and recommend those organizations that have the highest demonstrable impact. Philanthropedia’s staff then compiles a list of the most recommended nonprofits and reviews the list with the experts before offering the results online. Philanthropedia has grown rapidly. In June 2009, after operating for one year, Philanthropedia had 39 experts and had identified eight high-performing nonprofits in one cause. As of this writing, Philanthropedia has 1,734 experts and has identified 242 high-performing nonprofits across 19 causes. In March 2011, Philanthropedia was acquired by GuideStar, an important step toward creating a comprehensive evaluative information hub.

The irony of all of these efforts is that most of this evaluative information already exists within the walls and computer networks of foundations. The best foundations conduct robust evaluations of their grantees and have a rich trove of hard research-based data as well as softer judgment-based data. Unfortunately, they are generally reluctant to share what they know with other donors. Cracking open this treasure trove would be an important step forward.

FUNDING INTERMEDIARIES

Few people of our generation are more respected and famous for making complex and high-stakes financial decisions than Warren Buffett, the founder of Berkshire Hathaway. Yet how did Buffett decide to handle the lion’s share of his philanthropy? By essentially delegating the responsibility for giving away his money to an intermediary that he thought would be able to make better decisions than he could, the Bill & Melinda Gates Foundation. If an intermediary is good enough for Buffet, why don’t more people use funding intermediaries to make philanthropic decisions?

The principal reason funding intermediaries have not taken on a more important role and are not likely to do so in the near future is donations by small- and medium-sized donors, who compose the majority of the social capital market, are still more raised than given. People aren’t usually inspired to give on their own. Rather, they must be asked or cajoled by a nonprofit organization’s active fundraising effort, using a direct sales and marketing program that the sector calls development.

In spite of this obstacle, a large number of funding intermediaries have been formed in the last decade, many of which are based on the Internet, as a means for generating cost-efficient processes with low transaction costs. Network for Good (NFG) is one example of an online funding intermediary. NFG aspires to “make it as easy to donate and volunteer online as it is to shop online” and provides adequate underlying infrastructure to do so. The vision behind many of these ventures is that donors and investors will come to the Internet, leverage powerful tools to understand their philanthropic goals and how to best meet them, and then find organizations who are best able to achieve them.

That vision remains, at best, in its early days. The vast majority of people still make donations when they are asked by a friend or a development officer, receive a letter or e-mail, or attend an event. Yes, they might text “Haiti” into their smart phone to give $10, but even that fundraising campaign, with millions of dollars in free advertising and support, raised only $22 million for the American Red Cross following the Haiti earthquake. In contrast, a few good university development officers can raise that much money in one year. As long as money is mostly raised and not given, the philanthropic part of the social capital market will remain inefficient. The Internet has been a dramatic force for disintermediation in many other markets for goods and services, so it is possible but not a foregone conclusion that it will become such a force in the social capital market.

The notion that money is still raised and not given applies not only to nonprofits’ efforts to raise money from individual donors but also to nonprofits’ efforts to obtain grants from foundations. For example, a feasible funding intermediary has not yet emerged to provide one common grant application that could be submitted by nonprofits to multiple foundations, eliminating wasteful duplication. This concept is similar to the common application adopted by many undergraduate colleges and universities, allowing prospective students to apply to several institutions with only one application. Despite the merits in reducing transactions costs and fundraising work—and ultimately making the social capital market more efficient—foundations are still hesitant to back the idea, perhaps because it would reduce the need for program officers or change the way they work.

Although countless new funding intermediaries have emerged over the past decade, including 63 online platforms at last count, the proven, long-established financial intermediaries are still drawing insufficient attention and replication. NFF, for example, which provides debt-financing products to US nonprofits, has a proven model that helps build the capacity of nonprofit organizations and enhances how money is given and used in the social sector. During its 30 years of operation NFF has lent more than $235 million and leveraged $1.3 billion of capital investment on behalf of its clients. With the arrival of Antony Bugg-Levine, the former leader of impact investing at the Rockefeller Foundation, as NFF’s new CEO, look for the organization to expand beyond its longtime focus on debt financing.

Over the past 10 years several hundred students at the Stanford Graduate School of Business who have considered becoming social entrepreneurs upon graduation have sought the advice of faculty regarding the nonprofit or social enterprise that they envision. Tellingly, more than half of them have focused their attention on starting a new Internet-related funding intermediary, but only a few have considered replicating a proven, long-established model such as NFF.

Some of the leading re-grantors, such as the Acumen Fund, make very compelling cases and are on their way to validating their model as a mechanism for improving the efficiency and effectiveness of the social capital market. For example, the Acumen Fund consolidates the funds of a group of donors, enabling smaller donors to share costs, spread risks, and give in previously inaccessible areas and ways. Despite our enthusiasm for the aggregating and re-granting models, we cannot help but wonder about the intermediary costs hidden in the models, and whether donors will be attracted to use them.

THE FUTURE LOOKS PROMISING

The advances that the rise of information and funding intermediaries has brought to the social sector in recent years bode well for the future. And although significant challenges still remain, there are several trends that are likely to spur additional progress toward achieving the goal of true efficiency in the social capital market.

The Internet has been a driving force in stimulating the robust flow of information for decision making in the social capital market, and we expect this to intensify. One need only reflect for a moment on the fact that Facebook has more than 800 million users to appreciate the great potential of social media to become a force in the social capital market. Jumo is still nascent, but if Hughes is a fraction as successful as he was at Facebook, Jumo could be a driving force in the social capital market. The important question that remains unanswered is whether social networks for social good will grow to rival traditional social networks.

Probably the most important trend that has emerged since our 2004 article is how the social capital market has begun to tap into two sources of capital that dwarf philanthropy: government funding and private investment capital. The Obama administration has aggressively adopted the concept of social innovation, which has had the effect of marrying government funding with philanthropic and private capital to achieve social impact. Take, for example, the recently created Social Innovation Fund (SIF), a federal program that was established with an inaugural round of $50 million that was competitively allocated to public-private partnerships that address areas such as economic development, health, and education. Although SIF provides direct grants to awardees that hit income statements directly, it also allows the awardees to scale up by using the new money as collateral for additional financing. SIF has strengthened both the income statements and balance sheets of the organizations it supports.

At the same time, there are multiple efforts—called variously impact investing, social investing, or hybrid financing—to bring into the social sector private investment capital seeking both a financial and a social return. If these two trends take hold, the social capital markets could expand dramatically beyond the current scale of about $300 billion in philanthropic dollars to well over $2 trillion in philanthropic, government, and private investment capital.

Finally, there is the burgeoning pool of talent going into the social sector. Ashoka, Teach for America, and others have legitimized and proselytized social good as a worthy career for the young elite. Social entrepreneurship classes in business schools, nationwide social business competitions for students, and student-run social venture clubs show that the idea of business and social value creation are influencing those who will shape the culture and the social capital market in the future. And at the end of the day, it is talented and motivated people who will find ways to make the social capital market more efficient and effective.

Bill Meehan is a lecturer in strategic management and Raccoon Partners Lecturer in Management at Stanford Graduate School of Business, and director emeritus at McKinsey & Company. He is also a board member of GuideStar, the San Francisco Symphony, the Oregon Shakespeare Festival Endowment, and the Stanford Center on Philanthropy and Civil Society.

Kim Jonker is a consultant to nonprofits and foundations on topics related to strategy, board governance, evaluation, and organizational effectiveness. She is a visiting practitioner at the Stanford Center on Philanthropy and Civil Society, and director of the Henry R. Kravis Prize in Leadership.

”Looking at the public affairs listings in the Encyclopedia of Associations from 1965 to 1997, Walker and colleagues concluded that advocacy organizations without members—think tanks, foundations, and public law groups, for example—have not displaced those with members.

The Children’s Defense Fund, Earthjustice, and the Southern Poverty Law Center launched in the 1970s, but so did memberbased advocacy groups such as the Citizens Committee for the Right to Keep and Bear Arms and the National Coalition to Abolish the Death Penalty. “The proportion of nonmembership organizations relative to membership organizations has been relatively stable,” Walker says.

Walker says the two kinds of organizations support rather than compete with each other. The more membership organizations there are in a field, the more nonmembership ones are founded. Member-driven and professional advocacy groups serve the complementary functions of demonstrating popular support and providing expert knowledge. Some professional advocacy groups, like the Industrial Areas Foundation, exist to support broad-based organizing.

But even if membership associations are going strong, “membership” is not what it used to be. Groups like Common Cause, Amnesty International, and NARAL don’t necessarily involve their members in broad-based organizational life the way the classic fellowship associations once did. “Traditional American membership associations, such as the General Federation of Women’s Clubs, the American Legion, and the Fraternal Order of Eagles, had local chapters with face-to-face meetings, they collected dues, they checked off whether each person paid their dues monthly,” says Theda Skocpol, professor of government and sociology at Harvard University. “And that’s not the same as sending out a mailing list to several hundred thousand people shrieking that the environment is being endangered and asking you to send in a contribution.”

Civic engagement is more than writing a check. Without the structure of the fellowship associations, “we lose bridges between educated and well-to-do people and their fellow citizens, and we lose all kinds of ways for people to learn to be active citizens—what it means to pay dues, how to keep records, how to run meetings, what it means to send a delegate to a higher level,” says Skocpol. Walker acknowledges that the meaning of membership is changing. “The old federated groups clearly brought together people from lots of different social class backgrounds,” he says. “They aren’t the polarized, single-issue membership groups that are playing such a large role today.”

Edward T. Walker, John D. McCarthy, and Frank Baumgartner, “Replacing Members with Managers? Mutualism Among Membership and Nonmembership Advocacy Organizations in the United States,” American Journal of Sociology, 116, 2011.

Partners in Health (PIH) co-founder Paul Farmer says his organization’s partnership with Abbott Laboratories, the global health care and medical research company, to build a production facility is an opportunity to “help the people of Haiti build back better.” At the new plant in Corporant, local workers will produce a therapeutic food called Nourimanba, using peanuts grown by regional farmers.

PIH health workers began distributing Nourimanba several years ago, borrowing the idea from similar efforts to combat childhood malnutrition in Africa. The packaged paste, which PIH gives away free, allows children to recover from malnutrition at home rather than in the hospital. Dr. Joia Mukherjee, chief medical officer for PIH, says this “peanut butter with some stuff in it” has revolutionized the treatment of childhood malnutrition. The United Nations and UNICEF have offered similar endorsements for ready-to-use therapeutic foods, known as RUTF.

What’s new with this initiative, says Jonathan Lascher, PIH operations manager for Haiti, is both the expanded scale of local production and the emphasis on quality control. Before the partnership, Nourimanba production in Haiti relied heavily on hand labor. The new $3 million facility will dramatically increase efficiency and output. Ramping up production means PIH can treat more of Haiti’s malnourished children. That’s one-third of the country’s population under age 5. Abbott’s involvement in the project enables “the highest standards for quality and safety,” Lascher adds. Haitians hired for new factory jobs will undergo training to meet these exacting standards.

Developing the facility, which represents a $6.5 million commitment from Abbott and the philanthropic Abbott Fund, “is a true partnership,” Lascher says. Native Haitians and Abbott experts have worked side by side to design a plant that will withstand rugged conditions, meet local needs for economic development and sustainability, and yield a high-quality therapeutic product.

The project represents “a departure from traditional philanthropy,” says Kathy Pickus, vice president of global citizenship and policy for Abbott. “This is an investment rather than charity.” Abbott began looking for opportunities to help in Haiti before the earthquake. The disaster sharpened the corporate philanthropic focus on two goals: improving nutrition and encouraging economic sustainability.

Rather than donating products or shipping goods in from the outside, “we wanted to work in the country to spark the economy,” Pickus says. Partnering with the well-regarded PIH “gives us a chance to leverage what they are doing and make it more efficient.” A nutrition expert from Abbott, for instance, traveled to Haiti to analyze and improve the formula for Nourimanba. Abbott scientists made recommendations to improve testing for aflatoxin, a peanut fungus that can sicken vulnerable children. Abbott also has worked with PIH to develop income-generating strategies to make this effort sustainable in the long run. The same facility that produces Nourimanba for free distribution could eventually be used to make peanut butter for sale, generating new revenue to reinvest in the operation and growing the market for peanut farmers.

In a separate effort, PIH is preparing to open a 320-bed teaching hospital in the central plateau city of Mirebalais that will serve patients from across Haiti. Hospital staff will likely identify even more cases of childhood malnutrition. Once the new food production facility goes on line in 2012, there should be an ample supply of Nourimanba to meet this anticipated need. “We’re creating a product that saves lives and creates livelihoods,” Lascher adds. “That’s exciting.”

It’s noteworthy when a serious book about education reform makes it onto the bestseller list. Class Warfare weighs in at nearly 500 pages, almost a quarter of it devoted to sources and references. Chapters end on wonk-friendly cliff hangers: “It seemed that private foundation investments were actually going to bring change. Could investments by a government bureaucracy also produce results?” Class Warfare is selling because it’s a good read, presenting the struggle to reform American schooling as a heroic tale populated by real people. But it also poses some juicy innovation questions.

Brill got interested in education while writing a scathing New Yorker article about “rubber rooms”—holding tanks where New York City teachers suspected of wrongdoing whiled away years at full pay. In doing so, he waded into the hottest debate in education. On one side are “reformers,” who believe that the quality of teaching makes a huge difference in life outcomes for kids and that school systems need to be a lot better at getting good teachers into classrooms and bad ones out. On the other side are those, often associated with teachers unions, who see the role of schools as overshadowed by poverty and other social ills and who see the effort to measure teachers’ and schools’ performance as an excessive faith in testing.

Brill makes no secret of which side he’s on. In his two-year exploration of education, he found voluminous evidence that good teaching matters and argues we need to act urgently on that knowledge. He admires the leaders of the reform movement, from Jon Schnur, co-founder of New Leaders for New Schools, to former Washington, D.C., schools chancellor Michelle Rhee, whose stories he tells in humanizing detail. (Disclosures: my firm supports many of the pro-reform organizations named in the book.) The reformers stand against school districts—“the most lavishly funded and entrenched bureaucracies in America,” he writes—and against teachers unions with “money and playbooks every bit as effective in thwarting the public interest as Big Oil, the NRA, or Big Tobacco.”

Readers can sense Brill’s wonderment at education’s hall-of-mirrors politics. It is the teachers’ own unions that have fought to treat them as a mass differentiated only by years of experience and academic degrees. And it is the left that defends gradualism, arguing that there’s not much that schools can do about poverty. Meanwhile, the right pushes for radical institutional change and for judging school systems by how well they serve poor and minority children. The situation leaves Brill’s heroes, mostly youngish Democrats including candidate Barack Obama, asking, essentially, “Dude, where’s my party?”

Brill’s tale offers Bob Woodward-style close-ups as the nascent Obama administration grabs the reform baton and enacts Race to the Top, a competition that encourages state-based reforms. Yet the focus of reviewer fascination is Brill’s final chapter, where he concludes that reform can’t happen at meaningful scale without the teachers unions. Some have misunderstood Brill’s coda as a repudiation of the previous 400 pages.

So why the last chapter? Brill has said that he was touched, late in the reporting process, by a few incidents that dramatically demonstrated how hard it will be for successful reforms to reach wider scale. Most poignant is the story of Jessica Reid, a teacher in a high-performing Harlem charter school whom Brill follows throughout the book, who quits over fears that the pace of her work is threatening her health and her marriage. Meanwhile, KIPP’s Dave Levin worries about what it would take to give excellent training and leadership to the country’s 3 million teachers. And so Brill arrives at the fundamental social innovation quandary: What will it take to go from islands of excellence to systems of excellence?

Brill ticks off a handful of solutions: paying more in salary to early-career teachers and less for seniority and extra academic degrees; eliminating “last-in-first-out” policies that target recently hired teachers for layoff s; and spending new money to boost teacher salaries. All of these are right, but we’ll need to do much more. We need to do far better at connecting teacher preparation with what teachers actually do in the classroom. We need to ramp up the use of technology that helps teachers tailor instruction to students’ needs and makes better use of teachers’ time. We need broader measures of student learning than today’s standardized tests. We need to get better at recognizing, and reacting to, both strong and weak teacher performance. And we need to get beyond our hall-of-mirrors politics, so that recognizing the impact of teachers can no longer be framed as an attack on them.

Jonathan Schorr is a partner at NewSchools Venture Fund, a nonprofit venture philanthropy firm that supports innovation in education.

Only about one in five donors consults nonprofit watchdogs online. Cnaan found that being rich, computer savvy, highly educated, or engaged in volunteer work doesn’t make people any more likely to use them. “The vast majority of social investors and charitable givers really make their decisions predominantly on personal connections and emotional ties and things of that nature,” says Ken Berger, president and CEO of the watchdog Charity Navigator. “The whole movement toward using independent data is still in its infancy.” Also, for most of the more than 1 million US nonprofits, very little information is available.

Cnaan and colleagues analyzed data from the Donor Pulse, an online survey conducted by Harris Interactive. The poll asked respondents who had donated within the past year to check off the resources they used from a list consisting of GuideStar, Network for Good,Charity Navigator, the Better Business Bureau, the American Institute of Philanthropy, the organization’s own website, and “other.” The Better Business Bureau was the most frequently consulted of the group, at 40 percent, followed by Charity Navigator at 12 percent.

Two kinds of donors did seek out independent evaluations more often: people who were giving more money and people who were engaged in advocacy. “If you donate $50, you know you don’t have much impact on the organization,” says Cnaan. “But if you donate $10,000, you want to see that your money is not wasted.” Cnaan was more surprised by the scrutiny of the activists, who he supposes are more suspicious and less accepting of authority than the average donor.

One reason people may neglect watchdogs is an implicit trust of nonprofits. Another is that it’s too much trouble: To use a watchdog to choose a nonprofit, you first have to choose a watchdog. There are competing methods of assessment and “some nonprofits are considered a safe bet by one organization and not by another,” says Cnaan. Also, donors are often just motivated by the warm glow of giving, not by assessment.

Watchdog organizations have control over at least one aspect—no one will consult a service they don’t know exists. “All of us who are concerned about providing third-party information have an obligation to continue to educate and encourage people as to the importance of doing so,” says Berger. Cnaan agrees: “Donors should know that they have an option.”

Ram A. Cnaan, Kathleen Jones, Allison Dickin, and Michele Salomon, “Nonprofit Watchdogs: Do They Serve the Average Donor?” Nonprofit Management & Leadership, 21, 2011.

In a fresh twist on corporate citizenship, Toyota is bringing the automaker’s vaunted process improvement methods to at least 20 nonprofit organizations that are struggling to do more with limited resources. “We’re really talking about sharing a core piece of the Toyota business culture: our problem-solving method,” says Jim Wiseman, chief communications officer for Toyota Motor North America.

A nonprofit that is rebuilding houses in post-Katrina New Orleans has managed to cut rework orders by more than 50 percent since opening its operations for a look-see by Toyota engineers. Zack Rosenburg, co-founder of the St. Bernard Project, says reducing errors on plumbing, carpentry, and electrical work “allows us to optimally serve our clients. We have a limited amount of time and money. If we’re not using both efficiently, our clients are suffering.”

Although Toyota’s commitment to this initiative was announced by corporate executives at the Clinton Global Initiative in June 2011, it began in a grassroots way. Stories started circulating about individual employees who, in their off-hours, were sharing workplace expertise with good causes. For instance, a food bank cut wait time for hungry families from one hour to 15 minutes after a Toyota engineer helped improve the process for assembling food baskets. Similar stories led Toyota to realize that its culture of continuous improvement—called kaizen in Japanese—could have value for the nonprofit sector.

At the St. Bernard Project, introducing kaizen has meant analyzing inefficiencies “at a granular level,” explains Rosenburg. With Toyota’s help, he and his staff tracked rework orders during two-week periods. Categorizing mistakes helped them identify and then eliminate the most common sources of time-consuming errors. This has led to a cultural change in an organization that’s heavily dependent on volunteers, AmeriCorps staff, and goodwill. “Fear of not being efficient can lead to hiding problems,” he says. “Now we recognize these are good problems because we can fix them.” With new efficiencies in place, the time to build a house has been cut to six weeks, a 30 percent reduction.

Similar results are emerging in diverse projects. At a hospital in Pittsburgh, engineers helped design a better system to deliver pharmaceuticals to patients, freeing nurses to devote more of their time to patient care. In Kentucky, a cash-strapped county asked Toyota to suggest energy-saving measures for a 150-year-old government building. “Our folks were able to identify where heat was escaping from this beautiful historic building. By finding ways to conserve energy and use less water, they’re saving $50,000 a year. That’s a big deal in a small town,” Wiseman says.

“Every situation is unique,” he adds, “but it’s never us saying, do this or do that.” The 10 Toyota engineers assigned to this initiative are careful about taking a collaborative approach. “We don’t come in with a silver bullet,” Wiseman says. Nor is the sharing of expertise intended to replace more traditional philanthropic efforts. “We’ve always tried to do our part financially,” he adds, “and that will continue. But we think that lending our expertise is going to be a bigger and bigger piece of our collective efforts. Our employees—especially the younger generation—are community minded. If we can give them a way to add value, that’s a win-win.”

Toyota is also working with nonprofits to help them share what they are learning. “We want to come up with a model for affordably built housing that’s scalable in New Orleans and replicable in other parts of the country,” Rosenburg explains. Sharing good ideas is part of Toyota culture. “It’s called yokoten,” says Wiseman. “We’re eager to help nonprofits do more of that, too.”