Mark Kramer on the future of philanthropy and social entrepreneurship.

Question: What’s next?

Mark Kramer: There’s a new type of entity that was just adopted in Vermont and North Carolina called an L3C which is a low-profit corporation, which is a way of incorporating in the United Sates with a combined social mission in a for-profit entity. It’s brand new, it’s just in the last month or so that it was passed. I don’t know that there are any of them out there yet. It’ll be interesting to see what develops. It’s really hard, I have to say, to balance a profit motive and a social objective but we do see that it’s possible and that it can be aligned. Actually, I’m beginning to believe that the difference between the for-profit sector and nonprofit sector may begin to blur over time.

We grew up as a generation thinking that business makes money, doesn’t worry about social issues; nonprofits solve social issues, don’t try and make money. But in fact, we see companies like GE saying our growth with eco-imagination is going to be in solving social problems. We see companies like Whole Foods saying we can differentiate ourselves from grocery stores by offering healthier products. Then we see nonprofit or social enterprises like Waste Concern building a significant scale international business, solving huge humanitarian buildings. So this line between the two I really believe is beginning to blur.

Topic: Social entrepreneurs

Mark Kramer: I think there is a core of people really in the social entrepreneurship movement and in some ways it grows out of the venture philanthropy movement in the United States. They’re folks like Mario Marino and Paul Schumacher who I think of as leaders in the venture philanthropy movement in the US. Certainly Muhammad Unis, you mentioned, leader in micro finance and Accion and other major micro finance companies, which incidentally is an interesting story in itself of a successful business enterprise. I’ll digress for a moment but it’s a really interesting story.

Accion helped start a nonprofit bank in Mexico called Compartmentos and it was doing micro finance loans, very poor people, very small amounts. About six years ago, they decided to convert to a for-profit bank in order to be able to offer a wider range of services and they raised about $6 million of capital to do it. They grew very rapidly and they went public about a year ago and they went public with a $3 billion capitalization. Accion, the nonprofit, made about $300 million on its investment and a lot of the employees of this bank made a lot of money.

The reason they were so profitable is they had a 50% return on equity and the reason they had a 50% return equity is the interest rate they were charging on their micro finance loans was somewhere around 80% a year. It’s a really interesting ethical question. They say this is lower than what people could borrow at elsewhere and by showing how profitable it is to make money available to the poor, we’re going to create a huge industry here. Lots of other players will come in.

The profit margins will go down with competition but will build a huge industry. Others and really Muhammad Unis take a very different point of view and says we should be charging the least amount we need to charge to cover our costs. But it’s hard to tell which is the right answer here. Again, I think that gets to some of the dilemmas of trying to balance a social mission with a for-profit enterprise.

Topic: The GE case study

Mark Kramer: One great example, I mentioned GE earlier. They have a terrific project which I think really exemplifies what can be done when a company takes the lead. There is an association of black employees of GE and they got together this is now about four or five years ago and went to the CEO and said what is GE doing about the AIDS pandemic in Africa. It’s not a market you sell in. It’s not a big market for you but it’s something we care about and we think the company should be something about. GE could easily have written a check to any of a dozen different charities that deal with AIDS in Africa but instead they said “We’re pretty good at solving problems. Let’s see what we can do as a company.”

They sent teams of executives to two different countries in Africa. They interviewed hundreds of people who are experts in the area and they said “We want to actually develop clinics, healthcare clinics that can help people. We make medical equipment. We make water purification. We make electrical generators.

We make a lot of the stuff you need for a successful clinic but we need to find a country where there’s a need but there’s also enough of a stable infrastructure that whatever we put in place will continue to be operated by the government going forward. So they really triaged different countries and they picked Ghana and they decided to start with a specific district in Ghana, l00,000 people.

The only healthcare was a single midwife. They said let’s build a clinic there and we need the government to guarantee that they will provide a doctor and nurses if we provide the clinic. We need the local townspeople to help, to dig trenches for the water pipes and to help construct the actual physical facility. And we need the nonprofits in the area to help teach people how to use the clinic and to help spread awareness of it. We can’t do it alone but we can come in and we really know to get these things done.” In nine months from the time those black employees came to the CEO, there was a completely equipped and functioning clinic open there in Ghana and GE said this is pretty cool, and you know what, “We can do more of this.”

So they began to expand to other districts in Ghana. They began to expand to other countries in Africa. They’re now opening clinics at the rate of one a month. We asked them when is this program going to end, and they said it’s not going to end. “This is how we do philanthropy now. We’re not just writing checks. We’re really using our executives, our equipment, our capabilities to directly try and bring about solutions to social issues.” There’s no nonprofit in the world that could’ve opened clinics as quickly, as cost effectively and on as large a scale as GE is able to do by working directly on the issue.

Recorded June 4, 2008.