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Some conversations and reactions to my earlier post have made it clear to me that I need to clarify some points and my thoughts on Unitus and SKS. So here goes:

1) I have no objections whatsoever to for-profit microfinance. In fact, I’m a believer in the need to attract commercial capital to microfinance. I’m also an ardent supporter of market-based approaches to alleviating poverty (as will be clear to anyone who reads more than a few posts on Philanthropy Action).

2) I’m a big fan of microfinance in general, while being a skeptic about the claims many make for its social impact. I’m a fan because, more than most other anti-poverty programs, it allows the poor to make their own decisions and exert control over their own lives.

3) There are two issues related to Unitus that I’m concerned about: a) the fact that the same board which directed $6.6 million of charitable grants to SKS also stood to benefit personally from equity investments in SKS; b) how the non-profit Unitus’s share of income and equity in SKS was distributed when UEF I was spun-off.

4) In the former case, this is an issue much larger than Unitus. The folks at Unitus can probably be forgiven for not thinking through the full implications of crossing the boundaries between non-profits and for-profits. What Unitus did had never been done before. But now that it has, it’s legitimate to ask questions both about what happened at Unitus and what the proper governance, regulations and social norms are for social enterprises that take both non-profit and for-profit capital and for the boards that oversee them. This is a messy world we live in now, and if we don’t establish some rules and norms then our ability to innovate and attract capital to social enterprises will be unnecessarily constrained. The social enterprise sector needs to wrestle with these questions now in order to build the confidence and trust necessary to keep the sector growing.

5) In the latter case, there simply isn’t information available as yet. It is a legitimate question to ask (and it impacts on the former issue) and I hope we get some answers soon that prove that transaction was handled in an above-board and ethical way. The only reason to question that is the current lack of information and the potential conflicts of interest. That’s important for other social entrepreneurs to note: to maintain confidence and trust from the public they need to be fully transparent about transactions that shift assets from non-profits to for-profits.

6) The decision by Unitus that it had fulfilled its mission and it was time to redirect its efforts was, on its face, an admirable one. A disappointing result of the lack of transparency in this whole process is that it potentially undermines incentives for other non-profits to follow suit. Rather than being an example to follow, Unitus may end up being a cautionary tale and that’s unfortunate.

7) The question I raised in the New York Times about how Unitus will use the funds coming to it from the SKS IPO was not meant to suggest that Unitus redirecting its efforts was the wrong decision. But by the Unitus board’s own logic—to whit, the microfinance industry now has lots of capital flowing to it—it is even more important to make sure you have experts allocating those funds. Given that the Unitus board has said that it will use the funds it has in service to its original mission it is exceedingly odd that they would dismiss the staff before deciding how to distribute that money. Without those experts to guide it, in a market with lots of capital flowing around, it’s hard to imagine that Unitus will be able to spend that money well. Imagine for a moment a private equity fund that on the verge of selling its largest portfolio company lays off all of its analysts. Investors would legitimately question how the the fund was going to use the money coming in.

In closing, the key issue for me is not that something “wrong” was done; it’s certainly not that people are profiting by serving the poor. The key issue is how we as a society handle the cross-overs between the public interest and private interest. We debate these issues endlessly when it comes to economic stimulus, bailouts, and government contracts. It’s time for the social entrepreneurship sector to debate these issues too—and to come up with some very good answers that ensure the public maintains confidence in social enterprise as a way of solving our pressing problems.

Comments

The comments to date are more surface thoughts and do not go deep into the question of ethics.  As I see it, this microfinance effort was partially funded with charitable money to make the lives of the poor better, not the rich.  The poor were lent money at high rates, 70% annually and the cost of the lending had a zero capital cost since it was charitable leaving a huge margin that should have been past on to the poor to lift them out of poverty to even higher, sustainable levels.  Instead, return on investment has been high and an IPO enriches some while the poor at left behind.  We need to work towards the Common Good, and not leverage the poor to enrich a few.  Tom

[Editor’s Note: SKS never charged anything like 70% interest rates (see linked news articles that document rates around 20%) and a significant portion of their capital was received through equity and debt, not via charitable donation. Return on Investment at SKS has been high because, by all accounts, it has been a very well-run organization]

July 31, 2010

hey tim,
india’s economic times published this interview with joseph grenny yesterday. take a look. http://economictimes.indiatimes.com/Interviews/articleshow/6302294.cms
cheers

August 13, 2010

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