Archive for the ‘Corporate Social Responsibilty’ Category

Seeking Money and Meaning in the NGO World

February 12, 2007

People who work for non-profits often have a strong social conscience and a desire to “do good.” Good intentions, though, are rarely enough to ensure effective outcomes; they must be combined with business skills before these organizations can achieve their goals. In this inaugural edition, India Knowledge@Wharton presents a special report devoted to non-profits that are trying to learn how to function like, well, for-profit businesses. The first article surveys a number of organizations that are grappling with this challenge, while the second takes an in-depth look at Aseema, a Mumbai-based non-profit that has been struggling to build a products division — with some support from Wharton students. The third story, an essay by the founder of a non-profit organization, challenges conventional ideas on how poverty can be fought.


Indian NGOs: Learning to Walk the Line between Social Responsibility and Commercial Success
India’s social sector has in recent years seen a surge in funding and other support from global nonprofits, venture funds and individuals; it has also proliferated, rapidly expanding in depth and reach. The upshot has been a dramatic increase in the induction of professional management practices, creative networking between donors, other intermediaries and beneficiaries, and a greater rigor in the viability and performance appraisal of funded projects. These efforts are paying off and getting NGOs (non-governmental organizations) away from their traditional model of sustaining themselves solely through charitable contributions.
Case Study: How Aseema Seeks Business Success without Selling Its Soul
Ten years ago, when Aseema began its journey to educate underprivileged children, the road was not clear, nor was a destination in sight. But today, this not-for-profit organization has achieved reach and scale. Over the years, the sustained efforts at managing and streamlining its work professionally have enabled Aseema to change its operational and structural imperatives without losing sight of its goal. The Aseema story focuses the spotlight on the successes, problems and strategies that guide not-for-profit efforts in India.
Why the Fight against Poverty Is Failing: A Contrarian View

Abraham George is the founder of The George Foundation, an NGO engaged in humanitarian work in India, and the author of India Untouched: The Forgotten Face of Rural Poverty. In this contrarian essay, he explores why the current strategies that governments and development agencies are employing to reduce poverty are not working the way they should. Among his arguments: Microcredit programs, as they are now practiced in India, do little to help the poor.

Source : India Knowledge@warton

Link: http://knowledge.wharton.upenn.edu/india/special_section.cfm?specialID=1

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Corporate Philanthropy Inspires Trust: Does It Also Prompt Higher Profits?

February 6, 2007

Your mother probably told you that it pays to be nice, but that may not necessarily be true when it comes to corporate philanthropy.

Wharton finance professor Vinay B. Nair and two other researchers looked at whether being charitable — such as donating money to medical research or to organizations that promote economic self-sufficiency — helps a company’s financial picture. They concluded that it all depends on the type of industry.

“Corporate philanthropy and profits are positively related only in industries with high advertising intensity and high competition,” the researchers say, citing as examples the beverage and retail industries.  In low-advertising industries, such as computer chips and business-to-business services — “there is actually a negative association between philanthropy and profits.”

The mixed-bag findings come at a time when more and more companies are putting on a generous, good-citizen face. “In the business community, corporate social responsibility (CSR) has emerged as a significant theme,” Nair writes in a paper titled, “A Model for Corporate Philanthropy,” co-authored with Columbia Business School professors Raymond Fisman and Geoffrey Heal.

They cite a survey last year by the Economist on corporate giving. Of the 135 executives and 65 investors who responded, 85% said corporate social responsibility was a “central” or “important” consideration in investment decisions. That figure was almost double the 44% who responded similarly five years before.

“Doing well by doing good” has become a familiar motto in the business community, which acknowledges that the motivation to “do good” is at least partly self-serving. It is thought that consumers may prefer to “purchase products from companies with high ethical standards,” Nair and his team write. If that is true, then “companies may increase profits by acting as upstanding corporate citizens.”

In some cases, companies may be able to deliver a “warm glow” to customers, making them feel good about giving business to a company that seems to act responsibly in producing its products. Buying fair trade coffee, for instance, might give caffeine lovers a sense of global connectedness as they fuel their daily habit. Likewise, “Made in the USA” labels may alert customers that a garment company used no Third World sweatshop labor in turning out the latest fashion trends.

The pink-ribbon phenomenon that is all the rage these days is one of the latest twists in corporate philanthropy. Customers can indirectly donate money to breast cancer research or breast cancer awareness campaigns by buying “pink products,” such as Yoplait yogurt with pink lids or Campbell’s soup with pink labels. There’s even the “Crunch for the Cure” campaign, which raises the tantalizing possibility that eating junk food can be a kindly thing to do. Shoppers who buy a bag of specially-marked, pink-ribbon SunChips, for example, can go online and enter the bar code number to direct a 25-cent donation to the Susan G. Komen Breast Cancer Foundation. The Wall Street Journal reported recently that last year, “pink products accounted for $35 million of the Komen Foundation’s $200 million in annual revenues.”

But while corporate philanthropy sounds laudable, not everyone agrees that it’s always a good idea. Economist Milton Friedman made the case that firms should simply lower their prices and let customers make their own charitable donations. Likewise, some people believe that “corporate giving is a waste of shareholders’ money,” Nair says. Shareholders may not agree with how company officials decide to direct the firm’s charitable giving, and they may, like the individual consumer, simply prefer to get a bigger dividend check and spend it on charities or products of their own choosing.

The Trust Factor

But Nair and his colleagues theorize in the paper that charitable giving may be good for the bottom line because it helps to convince consumers that a company and its products are trustworthy. Trust factors into many purchases, particularly when it is not obvious why one product is better than another. Nair uses the example of “natural food” products, which typically are priced higher than standard items even though they may not taste any better. Natural foods are a rapidly growing business.

 “Consider, for example, the task faced by a consumer in deciding whether to buy ‘natural’ beef from Whole Foods Market,” the researchers suggest in their paper. “Given that it is difficult, even after consuming the product, to verify the absence of bovine growth hormones, it is essential that Whole Foods establish its trustworthiness in the eyes of its customers…. While there are consumer watchdogs and legal obligations that ameliorate such concerns to some degree, the purchase ultimately involves a leap of faith that the company is not passing off cheap, factory-farmed beef as a premium product.”

Applying the same argument to the broader marketplace, the researchers make a case for why corporate philanthropy is more likely in industries characterized by high advertising — “where a firm’s image is important to consumers” — and in industries where “firms are closer together in [their] products.” Visible corporate philanthropy provides a “source of product differentiation in an otherwise uniform market space,” the researchers say.

But what about making money?

To gauge the relationship between corporate giving and profits, the researchers collected financial data from 1991 to 2003 on 3,000 companies from the Compustat database. They also turned to a corporate database maintained by KLD Research & Analytics that focuses on “social actions.”  Companies were assigned a philanthropy rating score based on certain levels and patterns of giving, such as support for housing or education initiatives. The researchers excluded from consideration good deeds that could also have the effect of boosting a company’s productivity and, in turn, its profits. For instance, a company’s decision to operate an environmentally friendly plant could increase efficiency. Likewise, a company that offers flex time and good maternity leave benefits may reap the benefits of a more loyal and productive workforce.

The researchers found, as they suspected, that there was much more philanthropy going on in advertising-intensive industries. “The advertising-intensive industries (the top 25%) have average KLD philanthropy ratings that are more than double those in the bottom 25% of advertising intensiveness.”

But when it came to profitability, being generous paid off — or at least didn’t cause a financial drag — only under certain circumstances. “In advertising-intensive industries, there is a more positive relationship between philanthropy and profit,” the researchers concluded. “In an industry with very low advertising expenditures,” such as the steel industry, “there is actually a negative association between philanthropy and profits.”

From the perspective of competition, “for competitive industries, the direct cost of giving is offset by the benefits of differentiation” that flow from corporate philanthropy, the researchers write. Corporate philanthropy isn’t necessarily making those companies rich, but it isn’t hurting their bottom line, either. “Corporate philanthropy may act as a signaling device, indicating that a firm’s products are reliable and that it can be trusted to provide high quality in those dimensions where the consumer cannot readily check quality before buying,” the paper concludes.

Companies may also “use philanthropy as a signal of the quality of their products and their concern for the consumer.” Finally, “corporate philanthropy should be more common in industries where products are less differentiated,” such as the oil industry, the researchers say.

Nair notes that his team’s findings are the “first evidence that corporate philanthropy can have both a positive and negative impact on profits depending on what industry you’re in. If you’re in the top 10 percentile for advertising-intensive industries, then corporate charity does not appear to be harmful to profits.”

According to Nair, building trust with customers is a big issue for companies these days because of high-profile corporate scandals such as Enron and others. “People in general don’t have too much faith in corporations; that is becoming clearer and clearer,” he says, adding that the results of the study don’t mean he’s making a case against corporate generosity. But he suggests that it’s important for companies to understand the motivations and implications of their charitable acts.

The paper’s conclusions, he suggests, could be used to help shape a company’s advertising message. “If what’s driving customers is trust, then advertising should take a different form,” he says. “Rather than just tying ribbons, you should advertise the fact that you are a good corporate citizen.”

Source:http://knowledge.wharton.upenn.edu

Indian NGOs: Learning to Walk the Line between Social Responsibility and Commercial Success

February 3, 2007

In rain-starved villages in the remote interiors of India where subsistence farming has long been the norm, farmers have been driven to debt and death by the vagaries of the weather. Uncertain monsoons have forced many farmers to choose between migration and abject poverty.

Muniyappa was one such farmer. Maintaining his 1.5 acre banana farm in the rural districts of Bangalore was becoming a struggle, one he was ready to give up for urban life. What changed his mind was a product called KB Drip, an irrigation system that ensured controlled and year-round access to water. The product was developed by IDEI, the New Delhi-based Indian arm of International Development Enterprises, a non-profit in Lakewood, Colorado, that aims to use “market principles” as it works to help rural farm families improve their agricultural productivity.

Sumita Ghose, founder and CEO of Rangsutra, a Gurgaon company that focuses on livelihood issues of rural artisans and farmers, started the company 15 years ago as a non-governmental organization (NGO). But over time, she decided the NGO model didn’t work best for Rangsutra and turned it into a business. Says Ghose: “Ownership is a very big motivating factor, and we decided to start a company with artisans and farmers as shareholders.”

IDEI and Rangsutra are part of a growing breed of nonprofits and other Indian entities working for the underprivileged that have become business-savvy and embraced modern management methods. 

India has always been a fertile ground for social issues of all hues. Its rampant poverty, unemployment, disease and illiteracy have drawn voluntary organizations and financial support from philanthropists, charities and religious trusts.

That old order is changing. Social commitment is no longer the preserve of voluntary workers. Conventional business and management metrics are being bundled into a package with unconventional means of finance to provide unique solutions for large social problems. Knowledge@Wharton spoke to NGOs and their financial sponsors who are making the transition from a “charity mode” to a professionally run model in an attempt to grasp the nature and extent of the changes underway. In the emerging NGO landscape, scale is important and so is sustainability. And both depend on an innovative and steady flow of funds.

IDEI produced a Bollywood-style film to promote the $30 KB Drip and convince farmers about the benefits of drip irrigation. It has so far sold innovative irrigation products to more than 85,000 farmers in India. It is one of the many companies backed by Acumen Fund, a global non-profit venture fund based in
New York City, and part of the Fund’s $1.4 million “water portfolio.” Varun Sahni, the Hyderabad-based country manager of Acumen Fund in India, says his fund chose to back IDEI because, “we look [to support] ventures that are going to have lasting social impact.”

Life as a corporate entity is proving to be more bountiful for Rangsutra. Its artisan shareholders invest an initial Rs. 1,000 each ($22) and have a say in the company’s operations. In its first year (2005-06), Rangsutra managed to break even with revenues of Rs. 26 lakh ($56,500). “We are planning to go over Rs. 1 crore this year ($218,000),” says Sumita.  Rangsutra is supported by Aavishkaar Venture Funds, which is described by its CEO Vineet Rai as a regular commercial fund that “wants to invest in businesses that make money with a social commitment.”

The lines between for-profit and non-profit ventures are beginning to blur. The focus everywhere, not just in
India, is on building sustainable development models. There is also an increasing realization that the traditional models have had a limited impact on the problems they sought to resolve.

A glaring example in India is the education sector. Over the years, there has been sustained government intervention through programs like the Sarva Shiksha Abhiyan (mass literacy movement) that aim to put every child in school. Lots of NGOs have been working in the sector for decades. And even though there are instances of remarkable achievements by individual NGOs, observers say these efforts have yet to translate into a significant nationwide impact.

A survey conducted in 2003 by Pratham, a Mumbai NGO active in the city’s slums and backed by Indian private bank ICICI Bank, is revealing. The survey says the percentage of children in the country who can read nothing and those who can read only the alphabet is about 52%; 40% drop out before completing primary school; and 11% of the children do not enter school. “We realize that a single experiment is not going to make a difference,” says Usha Rane, director-curriculum at Pratham Resource Centre. “At Pratham, we think like the government. We think mass.”

Scale Matters

The majority opinion within the social development sector is that it is not enough to create isolated models of excellence. As Rane explains, “It is necessary to create a mass movement.” Pratham operates out of 14 states. In the 10 years of its existence, it has developed reading and mathematics kits that are being used to teach the basic concepts to unlettered children. Nearly 1.6 lakh children have benefited from the program in the last three years.

Like Pratham, many NGOs are working scale into their operations. Muthu Velayuthan who has been involved with migration and livelihood issues in the villages of Tamil Nadu, Karnataka and Andhra Pradesh, has set up a rural production and retail network under the brand “Aaharam.” He says that his work in the villages showed him the tremendous potential that is locked up in the Indian rural framework.

He developed Aaharam as a supply network that organizes small self help groups into a federation and links that to a producers’ cooperative. That cooperative in turn processes the agricultural produce into a range of agro products such as spices, pulp and juice. It also retails these in the rural market.

In its first year, Aaharam reached out to 1,000 families and created an inter-state platform of 160 federations. Its current monthly turnover is over Rs. 3 lakh ($6,500), and it is expanding its network of states and federations at great speed. “Our mandate,” says Velayuthan is “to promote traditional markets.”

Aaharam, like several such organizations, walks the line between social responsibility and commercial success. It applies corporate marketing and business strategies to further the interest of a marginalized population. And in the process, it builds economies of scale into its operations.

Devashri Mukherjee, the Mumbai-based director of venture programs at Ashoka: Innovators for the Public, a global association of social entrepreneurs based in Arlington, Virginia, points to another example: Nidaan, a company run by Arbind Singh in Bihar. Singh focuses on the very poor and marginalized sections of society in one of India‘s most backward states. He organizes them into co-operatives and links them into a marketing group that not only protects their rights but also guides them to making financially sound decisions with respect to sales and production.

What emerges from these experiences is an innovative chain of scale, professional management and funding support that links these organizations in a web of sustainable growth. Scale increases the bargaining power of groups. A professional management team sharpens focus and enhances efficiency. And finance works in two ways: as a catalyst that helps build the other links in the chain and as a growth pill that creates sustainable models out of small beginnings.

Clicking on the Right Links

Traditionally, fund support has been a key imponderable for NGOs. Since most NGOs were — and many still are — primarily dependent on grants and donations, they faced the constant threat of their money resources drying up.

There are two ways in which the sector is getting around this problem. One is through the well documented rise of micro finance institutions (MFIs). Micro credit has had its successes and failures, but MFIs have helped significantly increase awareness and interest in the rural sector. The other development is the emergence of social venture funds such as Aavishkaar and Acumen and the development of organizations that link donors to NGOs such as Give Foundation of San Jose and Kiva of San Francisco — both are active in
India.

Exploring New Organizational Models

On the one hand, these developments have deepened the financial market for the social sector. On the other, they have forced NGOs to break out of the traditional charity models that they were built upon. Says Vinay Somani who has set up Karmayog, a Mumbai-based B2B for NGOs, “Outside funding agencies bring in best practices, force NGOs to become more transparent and lead the entire sector to a system where self sustainability becomes a specified goal.”

Finance, along with scale and professional management practices, is creating a network of sustainable organizations. The Aaharam network is illustrative. Velayuthan experimented with other forms of social intervention before he decided on a group-based income generation model that according to him “seemed to be the answer to rural poverty and migration issues.”

Velayuthan was not the first to try out this model, but he designed it with commercial and contemporary management practices. He used money from microfinance institutions to set up a company, set specific production and sales targets (for example: the amount of mango pulp to be sold in a month) and ensured that the company scaled up within a given period of time. He also worked to build strong managerial skills among his team by organizing monthly meetings and routine interactions with private industry.

Aaharam’s goal is to address food, nutrition and income security of producers from resource-poor areas. It largely works with rural women, taps into their expertise to make a wide range of agro products, and helps them market these through a company within a specific district or zone. “We wanted to stop migration [out of rural areas], and the only way to do that was to create reliable income sources during lean agricultural months,” says Velayuthan, whose initial funding came from MFIs. “We looked at five broad areas where this expertise could be used, and classified these as neem, tamarind, medicinal plants, traditional crafts and charcoal.”

Velayuthan says he faced his biggest hurdle in setting up the company; next came the first milestone of breaking even. Aaharam charges its members a fee. This serves as working capital for the company. It also seeks out marketing and retail tie-ups that would bring in funds for expansion and business development. It already has a tie-up with the Mumbai-based Parle group for the sale of mango pulp and has recently entered into a contract with Bharat Petroleum for producing fuel pellets from agro-waste.

Aaharam is only one of the instances of the work being done in the rural sector. Says Vineet Rai of Aavishkaar, “The entire rural space has come alive in the past few years. There is a huge pipeline and we can’t respond to all of them.” When he started out in 2002, things were very different. “There were not many projects that we could invest in at the time. We used to get about two applications a month then. We are now getting an application a day.”

Forming Networking Platforms and Communities

Rangsutra is a company that Aavishkaar supports. It has, within a year of being set up, established a small export market and a link with urban retailers such as FABIndia for the linen and hand embroidered clothes it makes. Says Sumita Ghose, “It is a difficult process, but we have learned to get out of the NGO mindset. Managing cash flows was a unique experience, but it has helped us focus and think our strategies through.”

Another example is LabourNet. Run by Solomon J. P., it started out as an organization that looked after the rights of construction workers. It has evolved into a complete database of construction workers in and around Bangalore that links industry and laborers and facilitates training programs targeted at the construction workers. “We charge a fee from the company and the workers. We also offer our services to companies that want to train the workers, and that becomes a steady revenue stream.” LabourNet helps the workers get medical and other workplace benefits and works with the companies to enhance productivity.

The network has tremendous community contact, which opens other doors. LabourNet has won contracts with Bosch to market the latter’s tools to construction workers; with microfinance companies; and with a waterproofing company that wants construction workers to use its products. Says Solomon, “Workers get these products cheap because they are buying in bulk; the water-proofing company benefits as it gets bulk orders, and we get the funds to run our network.”

The Individual Makes Way for the Organization

Most of these organizations are also developing professional management teams to run their daily operations. That is vastly different from the earlier NGO model of centralized decision making that was usually dependent on a charismatic founder or a committed charity organization. This is partly due to the nature of the projects being planned and the increased volume of funds flowing into the sector. Says Varun Sahni of Acumen, “We don’t invest in an individual. We look for an organization.” Acumen representatives are part of the beneficiary organization’s management board and participate in the decision-making.

Professional participation is welcomed by people from within and outside the social sector. Says Karmayog’s Somani, whose portal aims to connect NGOs with those who want to fund, help or seek their help, “We want to ensure that the NGO sector has access to trained and educated professionals.” For instance, Karmayog has been working on civic issues in the city of
Mumbai and has effectively used systematic networking between lawyers, academics and engineers to initiate dialogue between citizens and the local municipal corporation.

Several donor agencies are also driving NGOs to inject professional management approaches. Says Venkat Krishnan of GiveIndia, part of Give Foundation, “For us, the driving force is empowering both NGOs and donors. By allowing NGOs to state what they want support for, we are allowing them to focus on their missions and strategies the way they wish to. And by allowing donors to choose which projects they want to donate to, we are ensuring that there is an automatic ‘market pressure’ to encourage efficiency and effectiveness.”

The Flip Side of Getting Business-like

While these are sound and logical arguments, there is of course a flip side. Professional management, scale and sustainability may well be the way to go for the social sector, but not all socially relevant projects lend themselves to a market-oriented rigor.

India does not have a social security network like many developed countries. It often falls upon the voluntary sector to look after the marginalized sections of society such as abused children and women, the poor, the mentally challenged and other underprivileged sections of society. Funds are hard to come by for these projects as they do not fit the new mold. The challenge going forward is for this segment of the social sector to redefine the rules.

Source : http://knowledge.wharton.upenn.edu/