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CAPITALISM 3.0E X P L O R I N G T H E F U T U R E O F C A P I T A LI N V E S T I N G A N D VA L U E C R E A T I O N

B Y J E D E M E R S O N + S H E I L A B O N I N I | I L L U S T R A T I O N S B Y R O S S M A C D O N A L DFOR FOOTNOTES SEE PAGE 70

Its time for capitalism to mutate again. Were due. Heres why:Release 1.0 the original model created not only wealth,but also a blizzard of economic, social, and environmental costs.

In succeeding in its mission, it also exploited the worldsresources and peoples as if there were no tomorrow.Release 2.0 evolving since the late 1960s has beenincreasingly regulated and civilized as it has attempted to keeppace with increasing awareness of its costly side effects. ButRelease 2.0 has hit a plateau in its efforts to build wealth and atthe same time make deposits in the bank of social value.Layering regulations over regulations, and social initiatives overmore social initiatives, just isnt going to result in the hoped-foreconomic, social, and environmental returns.

The problem is that even the most forward-thinking corpora-tions are still driven by a mindset that is obsolete. That mindset isdrawn in black and white and says that for-profit entities createeconomic value and nonprofit organizations create social value. Italso says that while it is (of course) a good thing for corporationsto engage in social programs (the terms CSR and SRI are increas-ingly mainstream familiar), they can and should do so as an ancil-lary activity, taken on separately from their existing businessmodel, which is centered on the creation of shareholder value.

Reality has long since left that mindset behind. Most peoplewould agree that for-profit entities create a great deal of socialvalue as well as economic value. By creating jobs, paying taxes,and providing products and services to consumers, they areinherently contributing to the social stratosphere. And mostpeople would also agree that nonprofits create economic valueas well as social value; in the U.S. alone, NGOs represent 7per-cent of the national GDP. Yet because we created two legal forms(the nonprofit 501(c)(3) and the for-profit LLC or other corporateform) to accommodate these entities way back when, we seem

stuck in an approach that seems increasingly skewed.

HOW SHOULD

CAPITALISM

EVOLVE TO

MEET THE

CHALLENGESOF THE NEW

CENTURY?

F E B R U A R Y / M A R C H 2 0 0 6 V A L U E 2 5

Jed Emerson is

senior fe l low at the

Generat ion Foundat ion

(www.generat ionim.com).

He is a lso a convening editor

of Valuemagazine and b logs

at www.blendedblog.org

Shei la Bonin i is now working

with McKinsey & Co.

and can be reached at

shei la_bonin [email protected]

4:43 pm, Jul 30, 2012


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It seems that the best we can do, within those parameters, isengage in a practice that is commonly called blurring, in whichnonprofits engage in certain activities that were formerly theprovince of the for-profit world, and vice versa. Blurring has

offered up some positive results on the social front, but ultimate-ly, the concept lives up to the definition of the word itself. Ablur has the connotation of something having gone astray, orsomething that has been distorted. It is fundamentally the wrongway to think about or approach what is happening in the world,which is, at its core, value creation by organizations and thosethat provide capital to them (in whatever form and with whateverexpectation of returns). Blurring, however well-intended, andhowever potentially positive the results, places a significant limiton the potential of value creation because it encourages peopleto continue to look at the world through their existing lens ratherthan rising above the present framework to understand theemerging, deeper shift in the nature of how all organizations oper-ate and need to operate.

Whats needed is the next iteration of capitalism a new

model that stems from an understanding that our common goalshould be to maximize our value potential. The model should bebased on a common understanding of what value is (to ourminds, it should be a blend of economic, environmental, andsocial factors). And, it should be implemented with the commonunderstanding that maximizing value, regardless of whether oneis the customer of or the investor in the entity, requires tak-ing all three elements into account.

Capitalism 3.0, as were calling it, represents an opportunityto break existing frameworks and create a model of accountabilitythat addresses the realities of the world were living in. It repre-sents an opportunity to step out of the limits weve created forourselves and find a common way to understand the nature ofvalue and organize to maximize value. (The authors encouragereaders to review the Blended Value Proposition to further explore

the concept of blended value 1. The authors also encourage read-ers to review the Blended Value Map, which seeks to locate thehundreds of resources that encompass the body of knowledgeupon which the model for Capitalism 3.0 might be refined.) 2

Weve all been guided by an approach that embraces the notionthat you can bifurcate value. We have been operating with theunderstanding that how you make your money can be differentfrom how youor the organizations of which you are a partarein the world. A host of factors not the least of which is the paceof technological change have made the dissonance of a bifur-cated-value proposition increasingly apparent, and untenable forthe organizations and individuals caught in the middle (and that isan ever-growing number of organizations, founded on for-profitand on nonprofit business models.)

Under Capitalism 3.0, the rules will shift to ease the disso-nance. In the realm of the new model, then, if you want to maxi-mize economic value by generating financial returns for investors,you should no longer be able to do it without taking into accounthow your execution of a business strategy is effected by socialand environmental factors. And if you want to achieve greatersocial and environmental justice in the world, you shouldnt beable to unless you understand the economics of modern busi-ness. Over coming decades we will have a window of opportunityto significantly decrease povertyand create more sustainable(in every sense of the term!) enterprises, companies driven tomaximize their full value potential. To do so, however, we mustadvance a new understanding of how we invest in value creationand manage corporations to capture their full value potential.

We do not know exactly what Capitalism 3.0 will look like. This

article doesnt propose to offer a blueprint. What we can do, how-

ever, is offer what we think are the building blocks of Capitalism3.0 and our thoughts on how those building blocks might be cre-ated and aligned.

TO BREAKEXISTING FRAMEWORKSIts easy to ask for-profits and nonprofits to disconnect fromtheir business models and find a common approach to value cre-ation. Its easy to call for a new way of assessing value as ablend of economic returns and performance mixed with socialand environmental impact. And, it is, of course, much more diffi-cult to do, in large part because the potential level of change isso enormous that the concept can quickly become overwhelming.

Our sense, then, is that the most useful first step towardCapitalism 3.0 is to identify and consider the areas of commoninterest and concern that exist among the current major areas ofsocially responsible activity. While those managing corporations(either for-profit CSR firms or nonprofit social-enterprise firms)

and capital investors (whether those pursuing market ratereturns, below market rate or philanthropic) share much in com-mon, they are largely aligned in silos along specific lines of activi-ty, each being relatively isolated from the others. Weve identifiedfive fundamental silos of related activity. They are:

1 C O R P O R A T E S O C I A L R ES P O N S I B I L I T Y2 S O C I A L E N T E R P R I S E3 S O C I A L I N V E S T I N G4 S T R A T EG I C P H I LA N T H R O P Y5 S U S T A I NA B L E D E V E L O P M E N T

Within each of those silos, there are particular issues under dis-cussion. These issues, while specific to the silo in question, arestrikingly similar across silos. What are the implications of this

shared ground? Are these commonalities worth building upon?And, most importantly, do they hold the potential elements ofCapitalism 3.0?

CROSSCUTTING THEMESFour major crosscutting challenges appear to be front and centerin the minds of those engaging in socially conscious business ororganizational activity.3 They are: the capital challenge; measure-ment and performance metrics; leadership and organizationaldevelopment; and government policy/regulation/tax codes. Takingeach in turn

The Capital Challenge_ Simply stated, capital is the fuel thatallows for the creation of organizations capable of creating valuewithin a given market. It is the resource that enables entrepre-neurs to build organizations, both nonprofit and for-profit, that canbring services to clients and customers, and it is the necessaryelement that permits businesses to grow and prosper.

Like any other market, the social capital market requiresefficiency, transparency and measurable outcomes for sus-tained growth. Various authors have addressed the inefficien-cies of this market; the key concerns focus on the followingset of considerations:

1 H I G H T R A N S A C T I O N C O S T S2 LA C K O F A D EQ U A T E I N F O R M A T I O N F LO W3 L A C K O F M A R K E T R E S P O N S I V E N E S S4 LA C K O F C O N N EC T I O N B ET W EEN O R G A N I Z A T I O N A L

P ER F O R M A N C E A N D C A P I T A L A LLO C A T I O N

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5 L A C K O F C O M M O N S T A N D A R D S A N D D E F I N I T I O N S6 LA C K O F I N T ER M ED I A T I O N7 LA C K O F C O M M O N U N D ER S T A N D I N G O F R ELA T I O N B ET W EEN R I S K

A N D V A R I O U S R ET U R N S

Another key component of capital-market inefficiency is the lackof appropriate financial instruments. In general, capital marketscan support any variety of for-profit enterprises, but when itcomes to investing in social value we have only grants or loanswith few options for creatingreal capital investment toexpand ventures that arentclearly creating either social oreconomic value. This lack ofinstruments inhibits the effortsof managers pursuing blendedvalue, whether in mainstreamcorporations, emerging for-profitsocial ventures or social pur-

pose enterprises attempting toscale their ventures. 4

What might be doneto forward the concept ofCapitalism 3.0? The buildingblocks might include:

1_ Mapping the total social cap-ital market in terms of types ofreturns, terms of investment,and risks associated with them.2_ Defining the market for anew asset class focused onblended returns. This researchshould explore investor motiva-

tion and risk profiles.3_ Exploring the policy environ-ment that shapes both domesticand international capital marketsto better advance policy frame-works supportive of practitionerneeds and investor interests.4_ Encouraging viable strate-gies for capital diversification(e.g., investors may not knowthat they can receive a full mar-ket return on securities offeredby nonprofit organizations suchas Habitat for Humanity).5_ Expanding the role of fund-ing intermediaries. By takinggreater part in funding, capacitybuilding, and field developmentroles, such entities can help connect work at the local, regional,and international levels.6_ Calling for foundations to take the lead, in working withgrantees,to create and introduce investment instruments structured to gener-ate multiple returns for both the investor and practitioner.7_ Creating new forms of collaboration capable of creating greaterefficiencies, balancing risk profiles, mobilizing significant amountsof new investment capital, and sharing emerging practices.8_ Diversifying corporate capital (a move that might bespurred by increasing the financial sophistication of managersand finance officers).

9_ Creating an international fund to provide secondary financing

to funds that provide micro-financing, community loans, and othersuch services. Foundations could take the lead in working withthe World Bank, the Inter-American Development Bank, and otherproviders of capital to create such a fund of funds.

10_ Expanding the definition of fiduciary responsibility toencompass not only financial stewardship, but also economic,social, and environmental performance.

Measurement and Performance Metrics_ In the research that

led us to create the original Blended Value Proposition, and insubsequent research, we have been surprised to find little con-sensus across the five silos concerning how best to approach thecreation of a single, commonly endorsed set of metrics by whichto assess the performance of nonfinancial aspects of both organ-izations and funds.

Key issues that arose as we explored the world of meas-urement and per formance metrics include the lack of consis-tently effective approaches and common tools for measuringand repor ting social value, and the lack of confidence in whatis measured.

What might be done to improve metrics in general and bridge



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the silos here? This is far from a definitive list, but just to name afew of the more innovative examples weve encountered:

Several organizations, such as the Roberts EnterpriseDevelopment Fund (REDF), the Urban Institute, and SustainAbility

have advanced and documented their various social outcomemeasurement processes. Working together with these parties todetermine a common understanding with regard to language,terms, and standards of practice could be a first step in develop-ing a commonly endorsed set of metrics.

The CDFI5 Data Project, a data-collection and management sys-tem for community-development financial institutions launched in2000, and the Annie E. Casey Foundations work to evaluate itscommunity initiatives over long periods of time could both beteaching examples in exploring how best to create a practicaldata-gathering methodology that does not place undue burdenupon those attempting to gather and track that data.

Many have emphasized the importance of understanding thecosts involved in measuring social outcomes. Involving investors

in discussions about the costs of data-tracking systems coulditself be a way to get capital providers to recognize these costsand ultimately to be willing to help pay for these systems.

Experiences such as those of the Greater Kansas CityCommunity Foundation suggest that any process by which stan-dards are set and reporting goals established should be one inwhich practitioners are intimately involved. Understanding and dis-seminating the lessons learned could help reinforce that metricsexist not only to assure investors, but also to provide practition-ers with information they need to be most effective and efficient.

Leadership and Organizational Development_ Few areas ofhuman inquiry have as long a history as the study of leadership.But often its not possible to simply click-and-drag on existingbest practice from areas like the military or Wall Street and applythem in the five silos discussed here. That said, questions ofdeveloping core leadership, improving management skills, andachieving financial sustainability are not limited to any particularsilo but are common to the whole. In general terms, achievingorganizational capacity involves a number of related areas, includ-ing leadership and management, financial sustainability, gover-nance, strategic planning, scale, and funding capacity building.

From our research, it appeared that many of the necessaryelements for the silos to achieve greater organizational capacityare already in place. (Do silo-dwellers see them, too?) The steps

that follow seem straightforward, but progress will require mean-

ingful investment and effort:Develop strategies and policies to attract and retain senior

management of the highest caliber in social ventures, socialenterprises and corporations working to build and capture full

value. While important for all levels of managementfrom CEOsto finance and marketing positionsresearch indicates that it isespecially crucial at the highest levels.

Encourage management-training programs to integrate socialand environmental issues directly into curriculum content.According to a 2001 survey of MBA programs reported in BeyondGrey Pinstripes 6, there remains a lack of integration of socialand environmental issues into the core MBA curriculum. Webelieve these issues should be viewed as integral to the corepractices of effective management.

Provide more money to build internal operating capacity ofboth nonprofit and for-profit organizations. At this point, both setsof investors working with both types of organizations commonlybelieve capacity is equivalent to overhead and that it is an excess

element that should not be supported.Support the infrastructure of these efforts. This, too, will take

money. It is not enough to build capacity at the organizationallevel if we are not also making investments in the field as awhole. Funding must be made available to create and implementimproved reporting and accountability systems capable of docu-menting the full value being created by an organization.

Government Policy/Regulatory/Tax Codes_ While there is signif-icant debate regarding the appropriate role of government in cre-ating a level playing field, the fact remains that governmentalregulations, policies, and tax code have a significant (perhaps pri-mary) effect upon the degree to which market forces are allowedto work to create blended value. However well the case is madeto companies and their investors, many among the mainstreamcorporate community might well predict that initially it will be thestick and not the carrot that will get them to act on these issues.

Challenges in this area include developing a common advoca-cy agenda, then lobbying for that agenda and against initiativesthat oppose it. If we are to be successful in moving an effectivepolicy agenda to support healthy corporations, communities, andecosystems, we first need to bring the larger set of playerstogether from across their silos. In these discussions, areas ofcommon interest and policy development could be explored, andspecific policy initiatives could be developed.

A discussion of policy initiatives would help better define those

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FROM OUR RESEARCH,IT APPEARED THAT MANY OFTHE NECESSARY ELEMENTS FORTHE SILOS TO ACHIEVE GREATERORGANIZATIONAL CAPACITYARE ALREADY IN PLACE.


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areas in which actors from various silos can support a commonpolicy agenda. Among the questions that could be asked:1_ Should policy development address issues related to privatecapital investment? Public funding initiatives? Tax frameworks to

support emerging areas of work?2_ Should the policy agenda be broadened to include such areasas community and economic development (including public-invest-ment practices, land use, and economic-development policies?3_ What mechanisms are needed to ensure par ticipation in thedevelopment of policy agendas by those within these various silos?4_ Who are the key actors, and where are the most effectiveleverage points in advancing core parts of this policy agenda?

At present, there are only a modest number of silo-wideopportunities to come togetherand virtually none that arefocused on convening the commons as a whole. We understandthat, even as we offer our thoughts for next steps. Its relativelyeasy for us to bring our questions and suggestions to the table,however rigorous our research. It is much more difficult to take

the next steps. Initiating this dialogue and enabling its partici-pants to advance a shared policy agenda may take a significantinvestment of both time and moneybut as we have witnessedin other sectors of interest, the payoffs may be quite significant.It is critical that regulatory and policy development efforts befirmly connected to actual experience and interests. In the sameway that research is irrelevant if not embedded in practical appli-cation, the interests and priorities of practitioners should set theagenda for policy development and advocacy. Organizations suchas PolicyLink and others are key in advancing this strategy ofbuilding policy from practice. Consideration should be given tosupporting such effor ts.

ADVANCING CAPITALISM 3.0

Ultimately, the implications of our research for the broader field,we believe, are threefold: collaborating across sectors, value net-working, and building an international infrastructure.Cross-Sector Collaboration. Collaboration is difficult to engage infor a number of reasons. First, conflicting incentives and motiva-tions can inhibit collaboration. Second, while foundationresources will be important to funding efforts to bring variousactors together and to achieving cooperation, a preference towardfunding unique programs may unintentionally encouragegrantees to focus on individual priorities versus common chal-lenges. Third, the silos are fragmented to a point that consolida-tion and collaboration may be very difficult to achieve even withinan area of work. Fourth, cross-silo engagement requires differentskills, orientations, and leadership styles than may suffice withina single silo of activity.

The challenges of effective collaboration are great. Yet thesuccesses of initiatives at the corporate, nonprofit, and founda-tion levels show that the benefits are even greater. A new collabo-rative could unite and coordinate efforts across silos to addresscommonly defined challenges. Take capital markets: Actors inter-ested in increasing market efficiency could together support proj-ects that tailor mainstream financing instruments to investorsseeking a blend of social, environmental, and economic returns.Or consider performance metrics. Already, many managers areworking to advance more useful ways to assess performanceespecially extra-financial performance. Many for-profit corpora-tions are exploring how to track their own and others social per-formance. Funding those working together to address this com-mon challenge could well benefit both managers and investors.

Such collaborations could bring together key public and private

investors in a better understanding about the specific fundingareas that others are supporting. This would also help fundersestablish a unified strategy to support the creation of an interna-tional infrastructure needed for these investments to be brought

into a more effective whole.Value Networking. Success in this new phase of collaborationacross silos to advance Capitalism 3.0 will require the develop-ment of new skills. It will require more than simply cultivating adesire to work togetherit will require a fundamental change inthe understanding of how organizations link to each other and toinvestors in the field as a whole.

Nonprofits tend to approach collaboration as a tactic toachieve a given project goal, not as part of an overall strategy toattain their broader goals. While of obvious limited benefit, thisapproach is stunted in its potential to create long-term value onthe terms sought by actors across silos.

Treating collaboration as a process of value creation requireslooking forward and out instead of looking inward and back.Unfortunately, much collaboration in the nonprofit sector takes

the latter approach. By contrast, consider the most successfulfor-profit firms of the current age. Among others, Cisco Systemsand eBay recognize opportunity, organize resources to respond tothat opportunity, and then reconfigure relationships to capitalizeupon the next wave of opportunity.

Understanding the need to build value networks also has impli-cations for how we build capacity of firms and nongovernmentalorganizations. Enhancing the capacity of individual organizationsmust be a key part of any effort to build common activity, but it isnot the only way to create meaningful change across silos. Wecertainly need to build strong, well-functioning firms and institu-tions capable of acting upon their value propositions. For collabo-ration and networking to be successful, an infrastructure mustexist for individual groups to network and convene. Adequateresources for practitioners to participate in these supported dia-

logues and shared work projects will be required.Building an Infrastructure for Capitalism 3.0. How do we moreeffectively leverage these separate parts in support of pursuingour common whole? We must recognize that our ultimate goal isnot to build any individual silo or organization, but rather to createa world in which all organizations are best positioned to maximizethe total value possiblevalue that is the outcome of a blend ofeconomic, social, and environmental performance.

This will be achieved by making use of our best skills andtoolstaking what business has to offer and combining it withthe best public policy and community/social enterprise practice.We should combine the financing tools of the marketplace, themarket acumen of mainstream business leaders, the investingpotential of the foundation community, and the human assets ofsocial entrepreneurship to provide a new generation of leaders.

This will not happen of its own accord. While actors have poten-tial to self-organize to advance shared aspects of this agenda, anetwork orchestrator might well be a necessary catalyst, provid-ing support for what could easily be a complex global dialogue.

While the link among these various actors may primarily betheir interest in pursuing multiple returns and blended value,those invited to participate in this process should not be exclu-sively limited to the converted. For example, corporate socialresponsibility practitioners could learn a great deal from main-stream nonprofit managers who have labored to build informationsystems to track social performance (regardless of economicvalue), while tools developed in mainstream accounting (such asthe Balanced Scorecard) could directly inform those whose workattempts to go beyond traditional applications of such tools.

Let us simply conclude by stating:



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For leaders of corporations seeking to maximize their full valuepotential, the challenge is to consistently promote a broader visionof the value proposition for the firm. Companies move from mar-ginal profitability to sustainable economic performance as a func-tion of not focusing upon the parts, but rather the total value theyhave the potential to create. This value comes not only in financialterms but also in environmental and social terms. The intersect ofthese three constitutes the real value potential of companies.

For those structuring research into how blended value func-tions within companies, a multidisciplinary approach to develop-ing and executing research strategies becomes key. The tradition-al emphasis upon discrete areas of research that seldom inter-connect will not provide the breadth of perspective required tounderstand the full continuum of finance, organizational behavior,general management theory and so forth required. As increasingnumbers of firms attempt to apply concepts of blended value inpractice, opportunities for tracking real-time experiences of man-agers and investors will only grow, providing additional informa-tion and data based on real market experience.

Individual investors will need to recalibrate their calculations ofreturn and value creation in order to take these new considera-tions into full account. Indeed, those seeking sustainable, long-term returns will need to assess before making an investmentthe degree to which any given company attempts to manage itsnonfinancial value in order to generate financial returns.

Finally, a new, expanded set of commonly endorsed, extra-

financial metrics are required if we are to be able to not simply

evaluate nonfinancial performance of companies, but also con-duct accurate valuations of extra-economic value within compa-nies and investment firms. These metrics will marry quantitativeand qualitative datayet will help advance apple to apple com-parison of both firm performance and capital returns.

A WINDOW OF OPPORTUNITYThe concepts of blended value and an evolved form of capital-ismplus the number of those seeking to bring both into reali-tyare advancing faster than the eye can see or the mindabsorb. We have before usat this very momenta historicallyunique opportunity to both change markets and evolve organiza-tions (whether for-profit or nonprofit) capable of capturing fullblended value within those markets. But this is a window ofopportunitynot a fait accompli. We are realistic about the scaleof the challenges we face in the coming decades, but we are alsooptimistic that we can now find the commitment to create real,sustained change and the collaborative action required to achieveit. We will explore some of the paths to Capitalism 3.0 in futureissues of Value. .TH IS AR TI CL E DR AW S DI RE CT LY UP ON TH E EX EC UT IV E SU MM AR Y OF TH E BL EN DE D VA LU E MA P

PROJECT (PLEASE SEE WWW.BLENDEDVALUE.ORG), AS WELL AS A CHAPTER TITLED

THE BLENDED VALUE MAP: EXPLORING THE IMPLICATIONS OF VALUE CREATION BY CORPORATIONS

AND INVESTORS, BY JED EMERSON AND SHEILA BONINI INCLUDED IN THE NEW SERIES,

THE ACCOUNTABLE CORPORATION, PUBLISHED BY GREENWOOD PUBLISHING GROUP, WESTPORT, CT,

DECEMBER, 2005.


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