Institutions + Innovation + Detroit

Society is every company’s debtholder

I’m not convinced society should be companies’ customer and shareholder or whether it should be, but I strongly believe that society is and should be thought of as every company’s debtholder.

WHY SOCIETY IS A DEBTHOLDER
In short, a debtholder lends resources to a business (i.e. money) and expects the money to be repaid. In exchange for the risk that the company won’t be able to pay them back, they insist upon charging a fee (interest).

In addition to that, debtholders aren’t “residual claimants” if and when the company goes bankrupt. What that means is if a company goes bankrupt debtholders aren’t the last people paid when the company’s assets are liquidated (shareholders are).

Society is definitely a debtholder of sorts for a business because it does lend resources to companies that they risk not being “paid back” for, in effect. For example, society “lends” the following resources to companies:

-Enforced rules which create fairer markets
-Clean water and air and access to other natural resources
-An educated workforce
-Roads and infrastructure to transport goods
-Assurances for citizens which transfer the burden of social welfare (e.g., unemployment, healthcare) to the state
-I could go on

Moreover, companies are getting a a great deal on all these resources. If companies privately tried do these things it would be astronomically expensive, even if they were possible. My guess is, the value companies get from these resources far exceeds the amount they pay for these resources in taxes.

If companies don’t compensate government for the risk they are taking to invest in resources, we all run the risk of the government running out of money to keep lending these resources to companies. For example, if companies don’t reinvest (i.e., pay back their “interest”) in the workforce, eventually the workforce will be so devoid of skills to the point where government provision of these resources becomes unsustainably costly.

THE BOTTOM LINE

So here’s the takeaway. Companies uses resources that society lends. They ought to pay their “interest” on these resources or eventually there will be no resources left to lend.

Why non-profits and government are harder than business

In my time at the Ross School of Business, I’ve come to believe that it’s much harder to run a non-profit or government organization than it is to run a business. One of my professors even brought this up in class, explicitly, yesterday.

Here’s the basic reason why.

In any organization you have to do two basic things, create value and secure the resources you need to create value. This dynamic looks different across sectors.

In business, you end up creating value for and getting resources from the same people – customers. In non-profits and government the people who fund (or vote for) you and the people you serve are different. This makes non-profit and government management fundamentally more difficult because you have to manage the needs of two groups of people (who have different interests) at the same time.

To reconcile this dissonance in government, you could either get funders/voters to care about the needs of all. Or, you could just get everybody to vote.

What’s Missing From “Business For the Social Good”

When it comes to “business for the social good,” there are many examples to be proud of. Bill and Melinda Gates are fighting malaria. Warren Buffett advocates that billionaires give their money away. Many others have signed The Giving Pledge. In addition to all this, many businesses participate in corporate social responsibility activities or pro bono work. All this is great.

However, I’d like to point out that proponents of “business for the social good” are largely motionless when it comes to fixing political issues which cause social problems in the first place*.

There are underlying schisms in the political systems which exacerbate or increase the likelihood of market failure. Business interests overlook these issues. For example, when’s the last time you heard a corporation advocate for campaign finance reform or billionaires (with Warren Buffett as a sort-of exception) talk about fixing loopholes in the tax code?

With limited exception, business interests are silent on underlying political and institutional issues to the social problems they are trying to solve. They fix market failure ex post instead of working ex ante to create a more resilient political system which prevents market failure in the first place.

I appreciate all business interests do for society, I really do, and for that they should be lauded. But, I don’t think we should ignore the fact that corporate interests and billionaire philanthropists are ignoring the gorilla in the room: fixing political systems so their money isn’t as needed to fix social problems.

Most companies, I’d argue, actually do the opposite of fixing political and institutional problems. Instead, they actively try to exploit political systems to improve their chances of winning in the marketplace.

If companies are not actively trying to bend the rules in their favor, they are silent. I can’t think of one business interest (though I’m sure there are a few) that lobby for fairer markets that are aligned with the public interest.

Business schools are mostly silent on this issue, too. Not once in my MBA so far, for example, have we talked about whether business has the responsibility to advocate for fair and efficient markets. In class, we assume that markets are fair, businesses play by the rules, and that businesses don’t actively try to bend the rules in their favor.

The problem with that assumption is that it’s undoubtedly false.

* – Why? Because fair, competitive markets are bad for business.

Reimagining Healthcare, Education, and Government

I have been, and likely always will be interested and motivated to improve how institutions work. The three biggest institutions of our time that need to be reimagined are healthcare, education, and government.

I don’t think this is because healthcare, education, or government are inherently flawed or because the good folks working in those realms are foolish or stupid. Rather, I think those three areas are the last institutions to be reformed since the beginning of the information age because they’re the biggest, gnarliest, and most difficult to change.

If you claim to be interested in “systemic change” and you’re not working in healthcare, education, or government I’d seriously question your understanding of modern-day problems or your courage. These domains are where all the action is*.

* – It’s worth noting that all these domains are inextricably linked to cities.

The World Doesn’t (Exactly) Need More Leaders

Lots of institutions – like schools, companies, pundits, etc. – talk about leadership to the point of dogma. At best, this is misguided. At worst, this is dangerous.

What I find problematic is that these narratives imply that leadership is an end in itself. As in, you go to school to become a better leader. Companies, say they’re trying to recruit their next generation of leaders.

Besides, I don’t think “leaders” are what folks are really after. What they’re really after is value. They want people to make things beautiful or make beautiful things. They want people to make their companies, communities, and customers better than they were before. They care about the value, not the means to create it (assuming it’s ethical).

Leadership is merely a means to the end of value creation, but it’s not treated that way. Leadership is heralded as an end in itself. With all the books, courses, degrees, and gurus you think, “I’ve gotta be a leader!”

I take this issue (I acknowledge that it’s a subtlety) seriously because leadership without value creation is dangerous.

To be a leader, a leader needs followers. Ideally, people follow a leader because they are doing something valuable. That’s fine.

However, when you place leadership above value creation (making things beautiful or making beautiful things) it incentivizes people to attract followers even when they aren’t doing something of value.

When they aren’t doing something of value, leaders trying to attract followers tend to do ugly things – coercion, deceit, exploitation – because at the end of the day, if someone who aspires to be a leader isn’t doing something of value they have to make it appear as if they’re doing something of value or force people to follow them.

Of course, it’s helpful to have good leaders when trying to do something of value with a group of people. However, the point is not to be a leader, the point is to do something of value.

That’s why I stand behind the statement “The World Doesn’t Need More Leaders,” because what we need more of is people who create value, regardless of whether they are “leaders”. Leaders just happen to help create it sometimes. By making leadership a destination in itself, not only are we distracting from the true goal of value creation, we’re incentivizing dangerous behavior.

The Risk-Averse Career Choices of MBAs

If I wanted to link-bait this post, I would’ve titled it “Are MBA’s Risk-Averse Scardey-Cats?” I didn’t do that, though, because this topic is actually serious if you think about it.

I’m an MBA at Michigan Ross and many friends of mine are currently studying at Business Schools around the country. Almost invariably, the most highly-desired career paths after graduating from our “elite” MBA programs are Banking and Consulting.

Notice, that these two paths are professional services, more or less (especially consulting). In these careers, you don’t have to deal with the masses. You’re not on the hook for business results creating value for consumers. In other words, when you’re at a Bank or a Consulting firm you don’t have to take the risk of winning in the consumer marketplace, you just help your clients do that.

Oh, and you get paid a lot.

So what it comes down to is getting a big reward (gobs of money and “prestige”) while minimizing risk (because you don’t have to create value on the front lines in consumer markets). And that’s exactly what business schools generally teach their MBAs to do, increase rewards while minimizing risk.

This isn’t to say that consulting and banking aren’t good career choices. I’m merely pointing out that our supposed brightest business students are largely funneling into careers that don’t create value in consumer markets and that Business Schools are huge supports in getting them there.

Is that really what we want? Is that really good for society or even for “the market”?

Also, another question – does this mean that us MBAs are risk-averse scaredy-cats?

Where are you, my dreamers?

Where are you my dreaming friends? The ones with the errant scribbles in your pockets and hopeful, irreverent, conviction. I want to support you, be your friend, and share my dreams with you too.

But first, let me tell you about the types of dreams I don’t mean.

THE WHEN YOU GROW UP DREAM – I think of this as the dream you have for your own life and how you fit into the world. Maybe you want a spouse and kids. Maybe you want to be a PTA president when you grow up. Maybe you want to be a business leader or a sculptor. This type of dream is the answer to the “What do you want to do with your life?” question. These dreams are important, but this is not the dream I mean.

THE LEGACY DREAM – This is the dream of how you wish to be remembered. What will people say about you during your eulogy? In 100 years how will people talk about you? How will you ensure your contribution to the world? These dreams are important, but this is not the dream I mean.

The sort of dream I mean is what I call the DESTINATION dream. These dreams are the visions you have for the world around you, even if you’re not there. The dreams you have about the human condition and the potential of what the world could be. This is the dream of a better destination, regardless of who leads the journey. This is the dream that you can commit to even if it comes true without you or you never get credit for your contribution. The reward of having the dream come true is reward enough.

I came across a story of a Destination Dreamer today, reading this article about Elon Musk (h/t to my friend Dominik).

I’ve never met the Elon, so he may be an ego maniac. But to be honest, it doesn’t sound like it. It sincerely sounds like he wants to colonize mars and rid the world of fossil-fuel cars because that’s his point of view on how to preserve the future of the human race.

Such a Destination Dreamer – especially one with such grand visions – is rare. I have my theories on why.

I honestly feel the world we live in (in particular MY corner of the world, at least) discourages the sort of destination-focused dreams I mean. My world has taught me to set goals, achieve them, and reap the rewards and credit. My world talks about quantifying the results on your resume. My world talks about being a leader and running organizations efficiently. My world scoffs at the liberal arts because they are not “marketable” (which they are, by the way).

Surely results, efficiency, and practicality are important. But let’s not forget about the real, important dreaming.

Where would we be after all if there were no dream about a world rid of slavery, or a country that actively protected life, liberty, and the pursuit of happiness. Where would we be without the dream of eradicating smallpox or malaria. Thinking even smaller, where would we be if no neighbors anywhere imagined a safe street and a park with a small field for the neighborhood kids to play?

These dreams give us the path to carve out a better world and shape it to honor the dignity of the gift of our lives.

Which is why I ask, where are you my dreamers?

To be honest, I’m still working arduously to articulate my dreams – they’ve certainly vacillated throughout my life. Right now I have two interpretations:

I dream about a time when everyone living in Detroit and Southeast Michigan feel like they have agency to live a life of their choosing.

I dream about a world in which communities have systems and infrastructure to prevent human suffering (whether at the neighborhood, corporate, or national level) from ever occurring.

This is why I always think about campaign finance reform and civic engagement. These dreams are why I write constantly about innovation and how to ensure that companies don’t create economic value by destroying social, civic, or spiritual value.

Again I repeat: to all the dreamers out there, I’d like to be friends so that we can share our dreams.

***This is an open offer to anyone reading this post. I’d be happy as can be to let you make a cameo post on this blog to talk about your dreams. I will not edit your content, I only insist that you attach your name to your remarks.

To improve non-profits, mandate disclosure of their results

All non-profits should be required to disclose the results of their efforts to impact social systems. Let me explain why.

CONTEXT

I firmly believe that social impact business models (whether or not they are for profit) will only take off once the sector knows how to measure impact. Moreover, I firmly believe that we won’t really make headway on solving social problems until we start measuring social impact.

Why? Because we can’t work smarter or efficiently without measurement. Measurement provides two critical benefits to any organization in any sector, whether it’s for social impact or in a traditional for-profit company.

1) Measurement provides Managers objective feedback about their performance. Without measurement, Managers can’t tell (with much clarity or precision) whether the plans they enact are actually improving how their organization operates or whether they are achieving results.

2) Measurement provides investors data about whether their capital is being used efficiently. Can you imagine capital markets working without public companies releasing reliable, accurate financial statements? We’re surely not allocating capital efficiently in the social impact sector if we can’t objectively compare one organization against another.

I’ve been zeroing in on this idea of social impact measurement (and that it’s crucial for moving the needle on social issues) for some time and I’ve come to a stark conclusion. We should mandate that non-profits disclose their results rigorously and uniformly.

THE ARGUMENT

Put yourself in the shoes of a non-profit CEO. Fundraising is your organization’s lifeblood. You’re constantly stressed about staying solvent and carrying out your mission. Say you’re evaluating whether or not to rigorously disclose your organization’s impact through a uniform set of audited social impact measures.

As a non-profit CEO I would never voluntarily disclose my organization’s impact results in a rigorous way because the downsides (the costs of data collection /reporting, the risk of looking bad compared to someone else) far outweigh the upsides (the potential for increased funding because my results are good). In other words, as a non-profit CEO I would never voluntarily disclose results because it’s not in my organization’s individual interest.

Moreover, even though it’s the right thing to do, I think it’s unlikely that a movement from within the non-profit community will compel non-profits to rigorously and uniformly report their results. Even though uniformly reported metrics are good for the sector and for the public, it’s not in the interest of individual organizations. Moreover, the sector is incredibly decentralized, making it operationally difficult for a movement within the sector for impact reporting to actually come to fruition.

This leaves us with one simple option: create a uniform set of impact metrics and mandate that all non-profits disclose their results on a regular basis. (I do see one unlikely way of creating a movement inside the non-profit community, which I’ll discuss a bit further down).

Here’s the summary of the argument:

1) Rigorous, uniformly reported disclosures of impact metrics would help solve social problems faster
2) It’s not in the interest of individual non-profits to rigorously disclose their own results, so they will not
3) It’s unlikely that a movement within the non-profit community will compel rigorous disclosure of a uniform set of impact metrics

Therefore, we should create a standard set of impact metrics and mandate rigorous disclosure on a regular basis

I don’t think the mandate I’m suggesting is unreasonable. Non-profits are allowed to operate without paying taxes or having their donations be taxed. This is an enormous operating benefit. Non-profits are given their tax status because it’s presumed they are operating to provide social welfare. We (whether as a regulator or as a funder of non-profits) currently have no way of screening whether they are actually providing social welfare. If they’re getting such a big benefit, why not ask non-profits to justify it so that funders can make good decisions about how they allocate capital?

Moreover, business have to disclose audited financial statements all the time which demonstrates that uniform disclosure is possible with the right set of reports.

Many people I know would argue that “it’s too hard and/or not fair to measure social impact” and I don’t think that’s a reasonable counter argument. Here’s why:

  •  Existing efforts to create social impact metrics are not impressive, nor do they seem like earnest attempts. We haven’t even really tried to do this yet (as a sector and society) so how can we say that it’s too hard?
  • A lot has changed in the world, with the proliferation of digital infrastructures and technologies. One of the biggest challenges to measuring social impact (data collection) becomes more and more feasible every day
  • If every non-profit starts at the same time and is held to the same standard, it’ll even the playing field between different non-profits. In other words, no organization gets punished for disclosing first

AN ALTERNATIVE

If not mandated by the federal government, I think funders and mayors can play a big role in pushing for a standard set of impact metrics. Foundations for example, are a narrower set of players in this ecosystem which means its easier to coordinate their actions. For example, if a group of the 25 largest foundation funders in the country came together, created a system, and required their grantees to publicly disclose reports, they’d be able to compel a substantial amount of non-profits to disclose results.

Similarly, a mayor of a major city wanting to improve the performance of local social sector organizations (whom governments often partner with) could be a convener to get this to happen. If a lot of the big players started after such an intervention, the littler non-profits would have to follow-suit to compete for dollars.

CONCLUSION

To conclude, I think rigorous, uniformly reported impact metrics are crucial for performance improvement in the social sector. I can’t even believe non-profit CEOs have gone so long without such data to manage operations.

I don’t think that will ever happen without a mandate, despite being good for the sector and good for citizens.

A Backdoor Antidote to Money In (Local) Politics

I’m currently reading Lessig’s “Republic, Lost” at the recommendation of my friend Dominik (thanks buddy).  Because the book is about the influence and implications of money in politics, I’ve been thinking lately about how to combat this pervasive force. 

Per usual, let’s start at the beginning – why do people want to give money to political campaigns? This is what I was able to come up with (Lessig does have discourse about this, but, I’ve taken my own liberties):

Candidate Support: They want to raise their “voice” to support the candidate and do not expect personal favors in return
Intrinsic Motivation: They value political engagement and want to participate in the process beyond voting
Reciprocity and Access: They want to curry favor with the candidate and want the candidate to prioritize their interests when elected

If a citizen is donating to a political campaign in the first two instances they probably aren’t donating a lot of money. Why? Because they don’t expect anything in return, and I suspect most people wouldn’t dogmatically support a political candidate enough to drain their savings without expecting something in return.

This assumption needs a bit of defense, but let’s continue and assume the corollary as well – that when people donate huge sums to political candidates it’s because they expect something in return. In return for donating money, they want access to power.

If that’s the case, and we want to mitigate the effects of money in politics, why don’t we just give people access to power for free? Isn’t that how it ought to be anyway? I’m envisioning a campaign where a candidate and his/her staff talk to thousands of constituents personally over the course of a campaign and when in office. My hypothesis is that if you actually listen to people’s problems on a personal level, and talk to them, you can get them to vote or even campaign for you. 

Sure, that still takes money, but potentially much less because people have a real connection to a candidate and their interests are presumably more likely to be addressed as a result.

Of course, this is much harder in non-local elections and I’d have to make many more assumptions about voter efficacy to extrapolate this idea beyond local elections. But why not adhere to this policy in a local election? Even in a city of a million or so people, you could meet with 10s of thousands of people in a few months.

It’s a lot of work for candidates, but isn’t political leaders working directly with the people exactly how we want our republic to function? Who actually wants to continue to have money ridiculously influence politics?

Detroiters, what do you make?

I make ideas, connections between communities, slam poems, and pancakes. Detroit, what do you make?

BERLIN, GERMANY - In the short time I’ve been here, I’ve come to realize that Berlin was Detroit before Detroit was Detroit. We have many lessons to learn from Berlin, but it comes down to this: Make Something.

Berlin has a distinct culture, for the same reason that any city has a culture, people have agency and create things – whether it’s art, food, businesses, or ideas. As people here have gone out and just created, it’s turned Berlin into a vibrant, international, hard-working, party-all-night, entrepreneurial city. It’s really an amazing place.

I’m not suggesting we try to make Detroit to look and feel like Berlin. What I am suggesting though is that we focus on making and creating, because that’s the only way cultures form – when passionate people go out, do what their heart desires, share their experiences, and learn from other people.

Right now, in my opinion, the culture of Detroit is more consuming than it is creating. There are a small group of people creating valuable products and experiences and many more people free-riding and consuming them. That’s fine for a time, but the city will never grow if we consume more awesome things than we create.

We have no other choice by to make things. Working a 9-5 job and calling it a day doesn’t count because those profits and value gets extracted by a private entity…there’s ever any spillover to the community.

So my fellow Detroiters, I think it’s time we stopped trying to do the next big thing and just started created something by following our hearts and sticking with it. Who cares if it’ll get press or get big accolades. Let’s just make something that represents who we are and what we care about.

So, I ask again, what do you make?

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