Towards a social stock exchange – barking up the wrong tree?

Peter Wheeler

The week of the Skoll World Forum on Social Entrepreneurship in late March, NASDAQ, a leading American stock exchange, withdrew their three-week-old bid for control of the common shares of the London Stock Exchange (LSE), valued at £2.43 billion.

The LSE started as a social enterprise (well, a mutual organization) in the coffee houses of 17th century London. It de-mutualized only in 1986 and it eventually issued shares to the public in 2001. Since 2001, its Chief Executive has been a woman, Clara Furse (it first admitted women members in 1971), and it is probably the most important stock exchange in the world – though the NYSE might challenge that assertion.

A lot of different things happen on the LSE: shares are bought and sold in the secondary market between counterparties who don’t know (and probably don’t care) who the other side of the bargain is; new shares are sold to raise capital for companies (or their sponsors) listed publicly for the first time, or more capital for those that have been listed for generations. Data on trading prices, volumes and other factors is collected real time and packaged and sold to members of the exchange and non-members at different pricing depending on whether it is five seconds, five minutes or five days old. You can have this information delivered on a direct data feed that can interface with your own software applications in nano-seconds. Trades can be executed electronically on one of several different trading systems and there is an automated interface with the clearing and settlement system that registers your ownership in 100 or 10 million shares without hesitation or error. There are sets of rules and regulations that companies listed on the exchange must abide by, mostly to do with sharing information on their performance fairly, if they wish to obtain and retain the privilege of listed status. We can call these rules ‘standards’ of disclosure, or transparency. They are minimum standards. Investors in the market demand much more, and if they don’t get it, can vote – literally at the AGM, or figuratively with their wallets by selling the shares with almost no transaction costs. It all works very well indeed – and so it should after 350 years of practice, the last 25 in a highly competitive environment populated by some of the hardest-to-please people in the world.

So what, exactly, are we ‘social entrepreneurs’ seeking when we march hopefully ‘towards a social stock exchange’? We explored this in some depth in one of the final plenary sessions of the Skoll Forum.

Just as the definition of social entrepreneur is confusing (one that encompasses Robert Redford, Ronald Cohen, Al Gore, Karen Tse, Stephen Sears and Muhammad Yunus makes the mind boggle), so too is the meaning of ‘social stock exchange’. I think two distinct broad approaches are emerging, and I predict (and welcome) a schism at Skoll 2007.

A marketplace for raising money

The first is the marketplace in which ‘non-profits’ (darn, call them charities) and non-profit-distributing (but possibly profitable) organizations (social enterprises) raise money. Muhammed Yunus circulated a paper that was a clarion call for such an exchange, defining clearly the concept of a ‘social business enterprise’ (SBE) that would raise money on it. Celso Grecco, one of the other panellists, has enterprisingly persuaded BOVESPA, the Brazilian stock exchange, and its member brokers to sponsor just such a market, and last year £500,000 was raised for deserving causes in Brazil. GlobalGiving does much the same thing for American donors on an internet platform. Note that the emphasis is on raising money – bringing investors/donors together with those doing the good work so they can ‘transact’.

A focus on value and price

The second approach is subtly but importantly different. It doesn’t necessarily envisage a new form of organization or even a new ‘exchange’ platform. The focus is on value and price, getting a social return on an ‘investment’. What if I own an interest (‘share’) in a social enterprise but need to raise some cash to pay my daughter’s school fees? Will you buy this interest from me? At what price? How will we establish that? What ‘social value’ measures should we apply to determine how much good the invested-in organization is doing for each £1 of capital raised? When can I be confident enough about those returns to be prepared to allocate more of my capital to these purposes?

Incidentally, one could ask very similar questions about one’s appetite for making a grant to Organization A rather than Organization B or C. After all, as a grantmaker among other things you should be looking for the lowest ‘price’ at which you can support a successful intervention to meet the need you are seeking to address – and not all interventions are equally efficacious.

Stock markets need prices to function. Prices need theories of value as well as willing buyers and willing sellers. Some venture philanthropy funds and social investing funds, the blended value movement and even the ‘sustainability’ commercial stock market fund managers are focused on this – quite rightly. But these theories of value are in their infancy. Even those on Jed Emerson’s ‘Bleeding Edge’[1] in addressing these questions are struggling to make progress and to widen the field of participants in the debate, six years after his seminal paper. Try as I might, reviewing the list of attendees at Skoll, I could not spot a single spreadsheet-bashing, Blackberry-terrorized, presentation-generating, 6am-flight-catching, holiday-cancelling investment banker or stockbroker. What was she up to? Not worrying about this question, evidently.

Can one size fit all?

Which brings me back to the definition of social entrepreneur and social enterprise: some social enterprises are almost indistinguishable from for-profit companies. Some commentators would go so far as to argue that some for-profit companies are equally well (or better?) equipped to deliver some types of social good. ECT, a social enterprise, delivers bus services and waste management services in West London under contracts to local councils. They are a tremendous organization, and a poster-child of the sector (if it is one). SITA, a for-profit business, delivers many of the same services, competing for the same local council contracts. Can the customer tell the difference? Do they care? Can the investor? Other social entrepreneurs run charities – they could not and should not even hope to generate revenue from their core activities. Karen Tse of International Bridges to Justice, who spoke eloquently at the conference of her work for human rights through the judicial system in China, comes to mind.

Is it even conceivable that ECT and International Bridges to Justice should be listed on the same ‘social stock exchange’? How would that help each of them?

Conclusion

I believe we need to disaggregate the question, get away from our preoccupation with what Matthew Bishop of The Economist, speaking at the closing plenary of this year’s Skoll World Forum, called a ‘mad’ capitalist metaphor based on a misunderstanding of what capitalism is about, and focus instead on the following constituent issues:

  • How do we develop standards of transparency and reporting for organizations that focus on social returns?
  • How should we address in our analysis the clear distinctions that exist between the different types of social enterprise?
  • Who is debating what represents social value and how it can be used for investment purposes? Is this a debate that leading players from the commercial capital markets will join us in?
  • How do we make investors (and institutional donors) accountable for their performance, and what does that mean?
  • Why, after so many years of talking about it, have we made so little progress in reducing transaction costs for those looking to raise capital? Are we missing a trick?
  • Why is so much of the capital in the hands of institutional donors and so little in the hands of the management teams looking to do the work at the coal-face?
  • What role should competition play among providers of services on the one hand, and among investors on the other?

 

If we can make some real progress on addressing these questions, we may decide we don’t even need a social stock exchange – that we have been barking up the wrong tree all along. But if we still want one, we will be a lot closer to having the initial conditions for success in place.

If she is not too busy fending off another hostile takeover approach, let’s invite Clara Furse of the LSE and some of her member stockbrokers to Skoll 2007. And let’s make sure we have done our homework first.

1 Jed Emerson and Jay Wachowicz (1999) Riding on the Bleeding Edge: A framework for tracking equity in the social sector and the creation of a nonprofit stock market REDF.

Peter Wheeler is Chair of Futurebuilders and a trustee of New Philanthropy Capital, UK. He is a former partner and managing director of Goldman Sachs. Email peter.wheeler@futurebuilders-england.org.uk


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