Better isn't good enough: why we must optimise social value
Why does the way in which we think of, manage and create social value lack the same drive and unapologetic hunger that exists in the creation of financial value? Jeremy Nicholls, CEO of the Social Return on Investment (SROI) Network, argues that it's down to accountability.
It’s difficult to guess the amounts of money that are being moved around the world on a daily basis in the relentless search for financial returns.
It is even harder to understand the total rate at which it moves. For example, the International Financial Futures Exchange, just one exchange, trades around US$1.8tn per day.
For any of us that think the existing financial system is contributing to the increase in inequality and the degradation of our ecosystems, the implications are depressing.
The urgency with which finance seeks financial return and drives inequality is far faster and far more relentless than the systems we are building to create social return. This means that despite innovations, in impact and social investing, in social enterprise and in social impact, the gap is continuing to get wider.
Why is it that the way in which we think of, manage and create social value lacks the drive that lives within creating financial value?
Unhappy customers go somewhere else. Investors that don’t receive the returns they hope for sell their shares and move on.
In social value, social investing and social enterprise, the people getting the social return cannot generally hold the financial investors or the social enterprises to account for the social value they create. Where there are mechanisms, they tend to be much slower.
I was at a recent social investor event, which was talking about how strong the social investment ecosystem is in the UK. And in many ways it is. But compared to the ecosystem that surrounds mainstream investment, there is still a long way to go.
In mainstream investment there are agreed accounting principles and standards to ensure that businesses can account for what they have done with investors’ money. Not so for social impact, where businesses are not held to account for the social returns they create.
In mainstream investment there are auditors, employed by the investors, to make sure the accounts that businesses prepare are reasonable and that investors can act upon the information in the accounts. Not so for social impact where reports on social impact are rarely audited (as those who are expected to benefit from any social return cannot hold the organisation to account).
In mainstream markets there are analysts and an active press as part of an ecosystem of accountability and so on…
This is not to argue that accountability in financial markets is by any means perfect. Recent events in, for example, HSBC and Tesco show that the checks and balances that society puts in place cannot be perfect and need constant review and updating. Whilst we need to do more to improve accountability in financial markets – as we have argued here – we can still learn from what is currently in place.
What accountability does is encourage organisations to create as much financial value as they can with the resources they have. Of course, it is not possible to know how much profit will be made but this tension between board and management is designed to result in achievable but ambitious targets against which performance will be measured, promotions gained and jobs lost. This is the pressure that underpins the rate at which money changes hands in the search of profit.
Few organisations are geared up to know if they are creating as much social value as they can with the resources they have. They don’t have a consistent framework within which the board can argue about which options will create the most social value. As long as some social value is created, and no one is accountable for any social value being destroyed, the organisation can claim success.
If we are going to create social value at the rate we need, we need more organisations to start thinking about social impact measurement frameworks.
Historically, the focus has been on proving your social impact rather than choosing between different options; and this has resulted in approaches to measuring social impact designed to prove.
Ironically, financial accounting isn’t designed to prove. It is designed to hold organisations to account, to make sure they are making decisions to create as much financial value as possible, knowing full well that we will never know whether the decisions a business made were the ‘right’ ones.
There is currently a lot of talk about social returns, especially in social investment circles. But there is still not enough commitment to knowing what this is.
Once a business starts thinking about whether it could have created more return, more value, it inevitably has to involve its stakeholders in order to understand the different returns they get, or outcomes they may experience, and the relative value of these outcomes.
The suggestion that we should get a group of stakeholders together and then let them decide may sound strange, but pause to think about our judicial process – a jury of individuals as members of society decide on a verdict, and all the experts have to accept this decision.
Arguments about the many ways of measuring social impact are often about a lack of clarity about the different needs of different audiences and purposes rather than being about theoretically different approaches.
Nonetheless, it is the lack of accountability that allows these arguments to persist, putting off the day when organisations can be encouraged to optimise the social value they create. And many of the uncomfortable questions that some wish to avoid – how much value are you creating for your stakeholders, what would have happened without your intervention, were there any negative outcomes and how do I know I can use the information you have provided?
Too much of the time the bar we set for the rigour for information on social impact is higher than the bar we set for information on financial impact, and conversely we spend more money managing the financial budgets than we do on managing the impact.
If we are going to create social value at the rate we need, we need more organisations to start thinking about social impact measurement frameworks. Then we can make the case for legislative changes to make boards, in organisations with a social purpose, responsible for optimising social value.
To read about Liverpool-based social enterprise the FRC Group's recent work on measuring its social value through a structured framework, click here.
Header image: São Paulo Stock Exchange
Photo credit: Rafael Matsunaga