Draft 2.1 7KH%XVLQHVVRI5HDFKLQJWKH*OREDO3RRU&RQIHUHQFH +DUYDUG%XVLQHVV6FKRRO&DPEULGJH0$ 'HFHPEHU No of words: 8700 excl 500 word summary and references 35,9$7('(9(/230(17%$1.,1*0$1$*,1*7+(7(16,216 David Porteous (;(&87,9(6800$5< Businesses face growing pressures to combine profit maximizing behavior with concern for social impact in a so-called ‘double bottom line approach’. Private businesses which seek to integrate their profit making and social intentions are usually thought to be dynamically unstable: stunted in their growth and vulnerable to single-minded competitors on the one hand; and diluted in their social impact on the other. Development banks are financial entities which seek social impact while remaining solvent. State ownership is often required to provide a risk underpin because of the vulnerabilities of inhabiting this wasteland: to date, there have been few examples of privately owned development banks of any size or longevity. This paper focuses on three privately owned development banks on three continents—Plantersbank (Philippines), ShoreBank (US) and Triodos Bank (Netherlands). From the outset, these banks have explicitly intended to have a positive social impact in underserved banking niches in their respective markets, and yet also to produce at least positive real returns for shareholders. This will be called a ‘strong double bottom line’ approach. Using conventional measures of financial and social outcomes, this paper shows that these banks have achieved positive social impact while also surpassing their peers in financial performance. The paper argues that the paradigm of private development banking demonstrated by these three banks is highly relevant to reaching the global poor. Building sustainable and robust retail financial service markets in developing countries will in many cases require a deliberate double bottom line approach if it is to be successful and sustainable. Privately owned and run development banks such as these three are well placed to do this. 1 Draft 2.1 ,1752'8&7,21 There are growing pressures for businesses to combine profit maximizing with a concern for their social impact. This so-called ‘double bottom line approach’1 amounts at a minimum to making business more accountable for its impact on society. Since the time of Adam Smith, the two bottom lines have traditionally been seen as aligned—at least in theory, since special conditions are required for this result to hold. In practice, businesses are increasingly forced at least to consider the social and environmental impact of their activities. CK Prahalad’s recent work (2004) has highlighted cases of large profit maximizing firms which nonetheless have positive social impact on low income people. But is the converse possible? Can businesses which seek social impact first nonetheless survive, let alone thrive, as private businesses over time? Privately owned firms which seek to blend their social and financial motivations are usually thought to be dynamically unstable: stunted in their growth and vulnerable to single minded competitors on the one hand; and diluted in their social impact on the other. Development banks are financial institutions which seek social impact first while remaining solvent, and are perhaps an extreme example of this vulnerability. Most often, state ownership is required to provide an underpin to the risk; or else, the development banks which offer retail services, like postal savings banks, stay away from lending in favor of savings and payment services only. There are few examples of successful privately owned development banks of any scale globally.2 Contrary to this norm, this paper focuses on the example of three privately owned development banks on three continents—Plantersbank (Philippines), ShoreBank (US) and Triodos Bank (Netherlands). These banks have explicitly had the intention from the outset to have a positive social impact in underserved banking niches in their respective markets, and yet also to produce reasonable positive returns for shareholders. Using conventional measures of financial and social outcome, these banks have in fact achieved exceptional social impact while also surpassing their mainstream peers in financial performance. This paper introduces these three banks and assesses their long term performance in social and financial terms. The core argument of this paper is that 1 In fact, all three banks in this paper have a `triple bottom line' where effect on t he environment is also measured and assessed; but this paper focuses primarily on social impact , hence t he narrower reference to double bottom line. 2 For example, t he World Savings Bank Institute, which is an association for banks committed at some level to a double bottom line, has 101 members, almost all of which are state owned; and many focus only on taking retail savings without providing any credit . Co-operative banks in some count ries are notable exceptions, alt hough these are restricted to members only. Ot her notable exceptions which deserve further research are t he giant Bangladeshi microfinance NGOs such as BRAC or ASA which have been consistently profitable and yet have great impact on the wellbeing of their clients. 2 Draft 2.1 these banks demonstrate by their example that it is possible, though not easy, to manage successfully the tensions between achieving social impact and making profit over time. Through their example, a paradigm emerges of private development banking as an example of what will be termed a ‘strong’ double bottom line approach to business. None of the banks presently serves the global poor directly as a core business, although their indirect interests in microfinance in poor countries are already substantial and still growing. The paper argues, however, that their paradigm is particularly relevant to providing financial services to poor people globally. The paper is structured as follows. Section 2 creates the theoretical framework for the double bottom line concept and describes how it can be measured. Section 3 then introduces the three banks; and Section 4 assesses their performance, both social and financial. Section 5 explores the tensions inherent in their approach, and how they have been managed over time. The conclusion returns to the question of the relevance of this approach to the business of serving the global poor. '28%/(%27720/,1(,17+(25< This section builds a simple apparatus to depict double bottom line business in the context of the traditional roles of business and charity3. The emerging hybrid organizations, of which the banks in this paper are an example, are then located in this framework. A key distinction is drawn between H[DQWH intentions and H[SRVW outcomes. Each is considered in turn. ,QWHQWLRQ Businesses are traditionally characterized as entities which seek first to maximize return to shareholders. Representing the mainstream view, Dobbs (2005) says in a recent 0F.LQVH\4XDUWHUO\6SHFLDO(GLWLRQ, “..the tumultuous recent past has reinforced two fundamental beliefs. The first is that the business of business is to maximize it shareholder value by increasing its intrinsic value.” Businesses may nonetheless achieve positive social outcomes as a by-product while they pursue profit. This does not change their prime intention, however. Conversely, charities seek first to maximize their positive social impact. They may, however, be constrained to earn revenue sufficient at least to break even and sustain themselves. In theory, there exists a continuum of weighted intentions between the polar cases of 100% profit seeking, and 100% impact seeking. The dashed line in 3 Whether delivered by the state or non-government organizations. 3 Draft 2.1 Figure 1 below indicates all the possible mixes: for example, at the centre point as shown, an entity may choose to weight its objectives equally in terms of financial performance and social impact. With the precedent of strong and weak economic hypotheses, we may distinguish a `strong double bottom line zone' (`strong DBL') around the midpoint, in which both intents are heavily and deliberately weighted; and two `weak double bottom line zones' above and below the strong DBL zone. In the weak DBL zones, one intent is either heavily subordinated to the other; or else is to be achieved as a by-product of the other. Hence, a business which combines profit maximization with (i) a `do no harm' approach to social impact and (ii) which produces positive social impact as a by-product only, would fall into the weak double bottom line zone at the bottom. )LJXUHWUDGLQJRIIJRRGLQWHQWLRQV Social impact Charity (NGO/ state) 100% `Weak' DBL zone `Stro`Sntgr'o nDgB'L d zboln zeone Business `Weak' DBL zone 100% Financial performance In theory, a business could choose to locate at the midpoint shown, equally balancing both intents. In practice, however, there are a number of forces which create a slippery slope around the mid-point, so that the only stable options appear to be within the `weak' zones. Competitive forces alone should ensure that firms which are not burdened by the added cost or diluted focus of two bottom lines can take business from those which are. Fear of this effect will limit access to capital for non-profit maximizing firms. As a result, they will be stunted in growth and probably unsustainable over time. That there is ongoing debate over whether social responsibility investment is necessary or even desirable illustrates this point: if this investment (which averages close to 1% of profit 4 Draft 2.1 among Fortune 500) is questionable, how much more questionable is say, a blend of intention which includes less than 99% weighting on profit maximization? Equally, non-profit entities with social missions have faced increasing pressure to generate revenue.4 Foster & Bradach (2005) account for these pressures in a recent HBR article entitled “Should nonprofits seek profits?” From their observations of non-profits which also seek to produce revenue, the authors conclude: “…executives of nonprofit organizations should not be encouraged to search for a holy grail of earned income in the marketplace.