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Why Confidentiality Will Unlock the Impact Economy

Words by 3p Contributor
Investment & Markets
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Editor's Note: This post originally appeared on Unreasonable.is

By Sara Olsen

As an impact accountant I have a unique vantage point into the inner-workings and health of the fledgling impact industry. Here’s one of its dirty secrets: At times, social enterprises aren’t doing any better for their intended beneficiaries than conventional businesses, and sometimes they even do harm.

When this happens, what should we do? Post a shaming video on Youtube? Call 20/20? Or work together to solve a problem that’s never been solved before, in an impact economy that’s admittedly still on training wheels?

My firm works closely with clients to measure social and environmental impact, with the goal of ensuring that results over time are what entrepreneurs and investors intend. Like a doctor or a lawyer, an impact accountant gets an inside look into social-impact ventures, which reveals valuable client data that should have confidentiality protection — like attorney-client privilege. Why? Because the fear social entrepreneurs and their funders face of negative PR or worse seems to tip the balance away from channeling their energy into fixing problems that inevitably arise, and toward minimizing or ignoring problems.

Here’s a theoretical example, based on a composite of our actual experiences over the past 19 years in the field:

Houston, we have a problem


Let’s call the startup Company X. On the surface, it is an online marketplace that connects consumer products made in emerging markets to buyers in the U.S. The company also aims to reduce economic exploitation of producers in emerging markets by sourcing materials from local agricultural producers and cutting out middlemen. By cutting them out, Company X increases its own visibility into the supply chain, decreases costs, pays local producers higher wages and supports the local community. The brand is savvy about consumer trends and sexy because of the impact story. All good, if the business can get momentum.

The founder of Company X spent time in a developing country wracked with economic deprivation and corruption, so he started Company X partly as a result of his personal experiences. His brilliance, creativity and hard work earned him a fantastic education and amazing contacts in the design, tech and venture capital worlds. And, like many social entrepreneurs, he has a terrific ability to put his own needs aside and to sniff out sources of support.

Even though Company X is barely a couple of years old, the entrepreneur finds a funder to sponsor the hiring of my impact accounting firm, SVT Group, to help develop impact metrics and reporting practices for Company X. Let’s call this funder the Foundation for Good Intentions (FGI).

Everything sounds pretty good so far, right? As part of our work, SVT Group goes into the field for stakeholder interviews, a classic step in the development of social impact metrics. We discover that, although most of the producer groups Company X is sourcing from are well run, there is one where the producers say they are paid much less than Company X thinks they are being paid. We aren’t sure, but we suspect a local manager (who could not be reached for an interview despite having known well in advance that we would be there) may be siphoning part of the compensation intended for the producers, leaving them in an unfair and vulnerable position.

This poses a direct threat to both Company X’s mission and brand, so we include this finding in our confidential report to Company X, along with corrective action in our recommendations.

Although the entrepreneur is interested in our findings and shares them with FGI, he is deeply dismayed and somewhat incredulous because he's had a longtime relationship with the manager who could potentially be pocketing the missing money.

He promises us he will attend to the matter, but we are candidly concerned that action will not be taken for several months since the U.S.-based entrepreneur feels as though he needs to go in person to handle it and won’t be on-site for over six months. While we understand his sentiment, months seems like a long time — especially for the producers.

We know that if FGI talks promptly with Company X’s founder about his action plan, that alone could make it a higher priority for him to address the issue. Likewise, if any of Company X’s board members were to ask to see the report and inquire how the entrepreneur is taking action, this could also spur him to debug the issue more quickly. But without that oversight, it is likely that the entrepreneur — striving to achieve enough momentum to break even and working with very limited resources — may let it slide … potentially indefinitely.

What do you think happens?

Strikingly, FGI never says anything about these recommendations to Company X’s founder. We are not sure that they even read the report. Six months later, to our knowledge, the entrepreneur has changed none of his practices.

Foundations of a healthy social impact ecosystem


For a social impact venture to avoid the risk of creating the very harm it strives to correct — taking its brand and investors’ capital down with it — the information ecosystem it sits within needs these six building blocks:

  1. Impact Purpose: The entrepreneur is sensitized to a social issue, and committed to addressing it through the enterprise.

  2. Impact Design: The enterprise’s business model and mission is designed to address that issue.

  3. Measurement Methods: Practical measurement methods exist that gauge the venture’s material social and environmental outcomes, including unintended ones.

  4. Measurement Investment: The finance community both asks for, and provides funding for, an “impact accounting system” to ensure that the social mission will be monitored and managed.

  5. Measurement Capability: The enterprise sets up and maintains its “impact books,” that is, ensures metrics and data management practices are in place that can meaningfully gauge the venture’s material social/environmental outcomes over time.

  6. Impact Accountability: Investors, donors, their fiduciaries, and senior management require reporting on appropriate metrics, and actively ensure that social performance, including any problems, is being managed.

If any one of these is absent, it can unravel the venture’s impact, despite plenty of good intentions all around. In Company’s X’s case, the sixth element — accountability, perhaps the very most essential one — is missing.

To be clear, the issue is not that a company is potentially harming its beneficiary; it’s that management needs the support and involvement of boards and funders to address impact problems. The entire burden can not be left to fall on the entrepreneur’s shoulders alone.

In Company X’s case, a lack of accountability for impact can cause a chain reaction where insensitivity to vulnerable producers becomes ingrained in the habits of the company from the ground up, leading to pockets of economic exploitation that eat away at the mission, the promise of social entrepreneurship and impact investing itself. And, tragically, the only factor differentiating Company X from mainstream multibillion-dollar corporations — its social impact — is lost.

Embrace the pain


So, how can professional privilege solve this problem? I’m not just talking about confidentiality agreements, which are de rigueur. I’m talking about a privilege afforded to the impact accounting profession and enshrined as a right in law, the way the legal and medical professions have. Social enterprises and their funders don’t know that they can get help identifying and tracking what is really going on with their impact without running the risk that the mere act of discovering a negative impact would bring all sorts of liability and negative PR. If they had protection to discover and disclose the facts with a professional, they would develop a more mature capacity to account for, manage and improve impact.

The lack of protected space for discovering and addressing negative impact issues has created a developmental delay in impact management. In far too many cases, instead of objective identification of issues and solution-based interactions, there is (often willfully) ignorant perpetuation of situations that are potentially the same or worse than the (non-“impact”) status quo. This is punctuated by periodic scandalous exposés in which the entrepreneur is accused of moral turpitude, funders and customers are implicitly made suckers for hollow marketing ploys, and would-be beneficiaries are left to their tragic fates.

Developmental delay is often the product of trauma. In this case, it may stem from a deep-seated fear of criticism of good works and those who fund them —and that has prevented what isn’t working from being surfaced and addressed.

A dozen years ago, I collaborated with a foundation executive director and long-time Council on Foundations member, who championed the council's creation of an ombudsperson role for nonprofits to anonymously voice problems they experienced in their interactions with foundations. The overwhelming sentiment his idea had met with was fear, and it went nowhere. He said foundations weren’t afraid they’d lose their tax-exempt status, or that Congress would step in to provide unwanted oversight of philanthropic activity. They were simply too afraid of unleashing a floodgate of negative feedback from their nonprofit counterparts. “They just didn’t want to open that door,” he said.

This is gradually changing thanks to the brave efforts of many philanthropic leaders. But the sentiment still runs deep and has set a precedent for impact investors, who may view regular impact reporting and management as optional. For impact investing to scale, this sentiment must change radically faster.

My hunch is that things aren’t as bad as the philanthropic community worries they might be. All these years in the dark have bred a kind of neurosis about criticism that I think is highly exaggerated. Confidentiality protection as a practice standard would help free us to discover the true nature of things.

Privilege should be a right


Just as there is professional privilege in law and psychology, we need clear guidelines for how negative information can be shared, discussed and addressed confidentially by enterprises with their impact measurement advisors.

The nature of the risk involved in both impact investing and philanthropy, and what it takes to improve our impact, will both be illuminated by creating a safe space in which to find out what isn’t working.

In the case of Company X, the easy thing to do is to lay the problem at the feet of the entrepreneur, or to say that the Foundation for Good Intentions should have taken more of an interest. But the problem is bigger than either of them, and the fate of the impact economy cannot rest on the perfection of each and every social entrepreneur.

Professional privilege rules urgently need to be defined for the social impact industry so that executive teams and their boards and investors can be encouraged to discover and address problems—and get better at solving them. The growth of the impact economy, and all its promised benefits, demands it.

Image credit: Flickr/Hilary Dotson

Sara is the founder of SVT Group, a social and environmental accounting and management firm, and the co-founder of the GSVC. She has led the design of customized systems that today reveal the impact of over $4.7Bn in 70+ countries and numerous industries including reforestation, green technology, sustainable agriculture, maternal and child health, education and community economic development.

3p Contributor

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