I to Q: Innovation in Finance to Quarterback Models

I’m wary of “innovation” in the financial sector. My unease is motivated by the 2007 mortgage crisis. There were many activities by many parties that led to the crisis, but one aspect of the collapse of the financial system that I think particularly drove the financial market into the ground was great distance between the investor and the impact or hedge fund and homeowner.

The Economist article, “A place in society” highlights that social finance is not new but does point to the new interest of mainstream financial institutions and investors.[1] The article goes on to describe a microfinance market that was once a charitable activity in the past as now a highly profitable business in some cases. “More and more microfinance institutions are tapping conventional capital markets through securitization, arranged by banks such as Citigroup, and even share offerings.” I hope that a thirst by investors for highly profitable businesses combined with creative financing tools does not create such a multifarious financing system that the simplicity of trying to “do well while doing good” is not lost.[1]

Innovation is not a bad thing though. The concept of community-level fundraising or “locavesting” is an example of an innovative direct financing model with a narrower distance between investor and impact. In the booming crowdfunding market, according to “The $5.1 Billion Future of Crowdfunding Is More Than Kickstarter” article, one can anticipate a future with more specific fundraising sites.[2] This is a good thing. More specific fundraising sites may allow investors to compare investments qualitatively (as industry sectors in traditional financial markets) in addition quantitatively, such as a rate of return. The ability to invest in one’s area of expertise and interest—which may be one’s neighborhood or a topic in which one is particularly knowledgeable—is a benefit for the investor, the invested, the market, and the target population which is being served.

            Social Impact Bonds (SIB) are interesting tools in providing capital to social enterprises. I appreciate that SIBs are multistakeholder partnerships.[3] As an advocate for a holistic approach to problem solving and integrative leadership, I think one key intangible benefit of the financial relationship is many stakeholders being focused on the same goal. I am interested to learn how these partnerships have formed, whom they consist of and—beyond the structure of the SIB—what framework are these stakeholders using to work together.

The intermediaries appear to play a critical role. “The intermediary links all the other stakeholders together in the service of the constituents.”[3] I am reminded of the role of convener. I have heard many organizations in the social space speak the value of the convener in accomplishing complex, cross-sector goals. Unfortunately, these organizations also note that the role of convener is often not funded; funders prefer to fund organization delivering direct services to the target population. Since ‘what gets funded, get’s done’ the role of convener is often unsustained.

As we discuss intermediaries, I would like to compare and contrast SIB to the “quarterback model.” As summarized in the article, “Community Development Needs a Quarterback” the community quarterback concept was first introduced in the book, “Investing in What Works for America’s Communities.”[4] The model prescribes that a single organization serves as a “systems integrator” and bridges stakeholders across sectors working towards a shared goal:

Under the quarterback organization’s leadership, these stakeholders work as a team toward agreed-upon goals, such as improving public safety or academic performance among children. The quarterback marshals the funding sources to support the work, tracks progress in achieving goals over time, adjusts strategy based on performance, and holds everyone accountable.

Sounds like an intermediary to me!

            When has innovation gone too far? What responsibility does the innovator have to insuring his or her innovation is used properly? How dependent is the innovation of SIB on the performance of the intermediary? Quarterbacks in the NFL, on average, are the highest paid positions on the team.[5] Interestingly, defensive ends are the next highest paid position. Continuing the football analogy—who are the defensive ends in SIBs?

[1] A Place in Society (The Economist, September 26, 2009); www.economist.com/node/14493098

[2] The $5.1 Billion Future of Crowdfunding Is More Than Kickstarter (Fast Company, April 19, 2013); www.fastcoexist.com/1681808/the-51-billion-future-of-crowdfunding-is- more-than-kickstarter

[3] From Potential to Action: Bringing Social Impact Bonds to the US (Callanan, et. al., May 2012) at: http://mckinseyonsociety.com/downloads/reports/Social- Innovation/McKinsey_Social_Impact_Bonds_Report.pdf

[4] Community Development Needs a Quarterback (Stanford Social Innovation Review, July 22, 2014); http://ssir.org/articles/entry/community_development_needs_a_quarterback

[5] CHART: The NFL's Highest-Paid Positions (Business Insider, October, 8, 2013. http://www.businessinsider.com/chart-nfls-highest-paid-positions-2013-10