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The Restless Growth of 'Patient Capital'
Joel Makower, 30 Apr 06

The dissonance of two societal trends -- the resurgence of venture investing and the rise in environmentally and socially responsible enterprises -- has given birth to the notion of "patient capital."

Much like its gastronomical brethren movement, slow food, patient capital is a backlash against institutionalization -- in this case, of money as a means of earning, well, a fast buck. Rather, say its adherents, money should be a means of creating wealth -- the kind that enriches society, the environment, and our collective soul just as much as investors' financial standing.

This conversation is nothing new. For years, entrepreneurs and business folks interested in socially and environmentally responsible business have questioned the wisdom and appropriateness of our modern engines of capital formation and wealth creation. The past few decades have seen the emergence of new methodologies and metrics for integrating social and financial returns: screened portfolios, shareholder advocacy, double bottom line, triple bottom line (and even a quadruple bottom line), stakeholder capitalism, natural capitalism, restorative economics, social return on investment, blended value, sustainable development, and on and on. All of these question the notion, as Milton Friedman wrote in his famously titled 1970 New York Times article, "The Social Responsibility of Business Is to Increase Its Profits," that the sole purpose of business is to make money.

(My favorite rebuttal to Friedman, by the way, came in 1979 from Kenneth Mason, then president of Quaker Oats, who said: "Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life's purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit.")

Over the years, Friedman's assertion has been burnished by the corps of capitalists seeking ever-higher, ever-faster financial yields for their investments. The boom cycles of venture capitalism -- in which twentysomethings armed with a screwdriver and a vague idea could raise a few million dollars based on a sketchy business plan and few proven management skills -- have only underscored that fast bucks were there for the taking. The short-term mindset of Wall Street, in which "long-term thinking" involves anything beyond six months (or, for some, six weeks), is what happens when "get rich quick" is taken to an institutional level.

Enter "patient capital." The term describes an amorphous but emerging set of business models. It is rooted in the notion that pursuing maximum growth and maximum shareholder value often dilute a company's social and environmental mission, and that achieving financial, social, and environmental benefits can take time. At its forefront are companies like Patagonia and Newman's Own -- for-profit businesses with strong social and philanthropic missions not likely to meet The Street's purely financial expectations. Right behind them are countless companies whose founders and investors support the values of sustainable business, clean technology, and "local living economies." Some of these are "traditional" businesses in that their structures and financial models are much like conventional businesses. Others harness innovative new models, such as "B corps" -- private companies that donate all of their profits to charity -- the Newman's Own model, since replicated by others.

Does "Patient capital" represent the future of business -- a world in which "sustainable businesses" yield "sustainable returns" -- or yet another "alternative" model destined to be fringe? It's too early to tell, but I'll look forward to the discussion at the upcoming Investors Circle annual conference. Though the notion of "for-benefit" social enterprises may be a tough concept for hardbitten Wall Street types to swallow, the time is ripe for a new style of business, one that expands the reach of both venture investing and philanthropy, bringing value to all parties without the social and ecological carnage that emanates all too frequently from our capitalistic world.

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Comments

reminds me of the Tobin Tax - slowing down the volatility of currency speculation

http://en.wikipedia.org/wiki/Tobin_tax


Posted by: Murray on 1 May 06

We used to have an idea of "patient capital" as taxpayers funding policies of democratic governments. Quaint?


Posted by: David Foley on 1 May 06

Wow - good timing. I was just mulling on the idea of using investment capital to further a bright green future this morning... so this post is welcome reading!


Posted by: Christopher on 3 May 06

I remain skeptical about the value of discouraging businesses from making a profit, but changing the focus from quarter-by-quarter profits to say five or ten-year performance seems quite sane. Ultimately it should promote better wealth creation; five year performance isn't a flash in the pan, and gives plenty of time for critics (eg of the environmental performance of a company) to catch up with them. Some of the companies praised in the past for this longer term view may surprise or alarm you though - eg Nestle is one.

Companies should be able to use financial instruments to promote this view among their investors. The Google float is an example of this - by using a Dutch (reverse) auction, they were able to take the speculative heat out of their IPO and bypass big cuts for the brokers. Perhaps companies could issue 5-year futures/options instead of or together with dividends, therefore encouraging investors to stick with them for the long term.


Posted by: Adam Burke on 3 May 06

The triple bottom line is poorly understood and ill-defined. Even if it has clear profit implications, particularly when it comes to human resources strategy and customer relations, it's hard to measure with the same sort of rigor that's applied to numbers. Various attempts are being made to solve this problem. Read more at:
http://www.soxfirst.com/50226711/the_bottom_line_of_the_triple_bottom_line.php


Posted by: Sox First on 16 May 06



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