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Finance Honours Class: Guest LectureStellenbosch University
4 February 2014
Introduction
Vodacom Samsung Medscheme Group Alexander Forbes Hewlett Packard Edgars Diners Club International FirstRand Old Mutual Group LoveLife Guide Dogs Association
SANParks Peace Parks Foundation GivenGain City of Cape Town University of Stellenbosch Medicins sans Frontiers WWF SA UNICEF Greenpeace Nelson Mandela Foundation PayProp Capital
Introduction
Connecting Capital:Investigating the factors influencing the
decision-making processes of institutional investors towards
responsible investing
Expectations
Principles of Corporate Finance
ShareholdersInvestmentReal AssetsProfit MaximisationMetricsInstruments
Value Governance Honesty Ethics Responsibility Relationships Timing
DefinitionsFinance:
1. The management of large amounts of money.
2. Monetary support for an enterprise.
3. The monetary resources of a state, organisation or person.
Money:
A medium/object/record that can be exchanged for goods and services and is used as a measure of
their value in a market.
Some Questions…
Can society and nature be seen as stakeholders? If so, what legitimate claims do they have?Are there business owners who are primarily concerned with stakeholder wealth maximisation? Does it have to be shareholder versus stakeholder wealth maximisation (i.e. are these goals mutually exclusive?)
Some Further, Uneasy Questions…
What role can finance play in the context of poverty and/or environmental sustainability? Do you think massive salaries are morally justifiable in the world of finance today? Why?In what way do you think relationships have a role to play in financial innovation? What role does governance play in a business and its stakeholder relationships?
Left Turn…
Social Enterprise - Why 'Social'?
The Missing Middle - The Gap in Capital Markets
Investing for Impact - The Rise of Investor Activism
Relational Economics - The Power in People
The Source of Innovation - The Periodic Table of Elements
Wicked Problem: Poverty Nearly 50% of world’s population live on less than US$ 2 a day 3 Billion people, 3 000 000 000, 3 thousand millions Less than R20 a day…R20! 10 million children die every year from preventable diseases AIDS kills 3 million per year 1 billion people lack access to sanitation 1 000 000 000 people are illiterate 25% of children in poor countries do not finish primary school 20% of the population own 80% of the world’s wealth That’s you and me Poorest 20% own 1.4% And these people are right outside, all around us…
Solution: Aid? US$2.3 trillion in global aid since 1950 (William Easterley, World Bank) US$1 trillion in Aid to Africa, 6 Marshall Plans equivalent to
US$5,000/person (Richard Dowden, Royal Africa Society)
Aid and Income Growth in Africa (10-year moving average)
0
2
4
6
8
10
12
14
16
18
20
19701973
19761979
19821985
19881991
19941997
2000
Aid
/GN
I (%
)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Gro
wth
GD
P/C
ap
ita
(%
)
Aid/GNI Growth GDP/Capita
Solution: ‘Social’ Enterprise? Economic growth is the fastest way to reduce poverty – China, Asian Tigers
FDI is critical to economic growth but requires political and economic stability, good governance – factors missing in poor countries
‘Social’ entrepreneurs needed to fill this gap
Triple Bottom line – financial, social & environmental Sustainable profitable businesses Maximising financial and social returns Employment Empowerment Entrepreneurship training ESG (Environmental, Social, Governance)
Topic # 1: Social Enterprise
What is a social enterprise?How do these differ from conventional enterprises?Case Studies
Topic # 2: The Missing Middle
How are social enterprises financed?Which sources of funding are available in South Africa?What are the challenges that social entrepreneurs face when seeking funding?
15
The Missing Middle
*Cumulative investment in frontier market SMEs.
**Estimated loans outstanding.
***Foreign development assistance, private philanthropy & remittances, per annum. Prosperity Ladder Concept: Legatum Global
Development
Low Cost Capital
No Access to Capital
Abject Poverty
Poverty
Micro-Entreprene
urs
Listed Companies
Global Enterprises
Rule of law Property rights Physical security Economic freedom Health & education
Pro
speri
ty D
rivers
Pro
speri
ty D
rivers
Grant Aid $325 B*** Grant Aid
$325 B***
Public Capital $ Trillions
Public Capital $ Trillions
Microfinance $25 B**
Microfinance $25 B** Limited Access to Capital
High Cost Capital
Medium Cost Capital
SMEs $10 B $10 BPrivate Capital* “The Missing Middle”
Funding Sources
Commercial Banks Development Banks Small Business
Development Organisations
Angel Investors Private Investors Corporate Investors
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Institutional Investors
Public Investors International
Investors Network Friends Family
Funding Requirements
Business Plan Financial Forecasts Track Record Management & Board Good Governance Current Financials
Creativity Communication Marketing Perseverance Sense of Humour Prayer
Topic # 3: Impact Finance
Impact Investing ContinuumCase Study: Silulo Ulutho TechnologiesConcept: Social Impact Bonds
Topic # 3: Investing for Impact
Impact Investing ContinuumCase Study: Silulo Ulutho TechnologiesConcept: Social Impact Bonds
Impact Investing Continuum (Oostlander)
Impact Investing Analysis (Markets for Good)
Founded in Khayelitsha, Cape Town in 2004 by 4 local partners
Computer training, internet access and business support services
1000’s of people introduced to ICT and trained per year
Affordable, accessible services meeting critical needs at a local level
18 Employees by 2009, 100+ in 2014 R1,8 million in turnover in 2009 up to
over R 10 million to date From a car boot to over 20 training
and internet centres in W & E Cape
Silulo Ulutho Technologies
Financial Innovation: Social Impact Bonds
Source: From potential to action: Bringing social impact bonds to the US, McKinsey Company 2012
Topic # 4: Relational Economics
Why ‘Relational’?
Relational Economics Commitment is the basis of lasting, loyal relationships The bond that is formed through building a relationship with your stakeholders Should ultimately lead to advocacy
1. Expectation
2. Satisfaction after first purchase
3. Behavioural loyalty
4. Relationship forms
5. Emotional loyalty
6. Commitment
7. Advocacy
No emotional tie
Customer is satisfied unless something better comes along
Positive interaction on both sides
Bond becomes stable.
Mutual problem solving
Find values in the brand and willing to take action on behalf of it
Seven steps to loyalty
“Loyalty Hurdle”
“Loyalty Hurdle”
26
Loyalty Economics
Source: Reichheld, 1996, 2001
The Loyalty-based Cycle of Growth
27
The Purpose of Loyalty
The ‘Right’ Contributions from the ‘Right’ Relationships How do you find the ‘Right’ Stakeholders and keep them?
Source: Reichheld, 1996, 2001
28
Relational Economics:A Virtuous Value Chain
Employee
Business
Partner
Customer
Cost E
ffici
enci
es &
Innova
tion
Custom
er
Inte
lligen
ce
Superior
Service
Feedback
Fulfilment
Turnover
Training & Incentives
Compensation &
Opportunities
Superior
Productivity
Sp
end
&
Pro
file
Su
perio
r P
rod
ucts
Lo
yalt
y &
Ref
erra
l
Valu
e Ad
ded
Ben
efits
Quality Assurance
Investor
Competitor
returns/reinvestment
marketing/mindshare
CommunityResponsibilities
EnvironmentalConcerns
Market & IndustryConditions
Legal & EthicalRegulations
Source: Habberton, 2005
Relational Economics: Creating Shared Value CSR to CSV (Porter, 2011) Value Creation not just Value Add Intrapreneurship Economic & social returns Stakeholder relationship management
Linked to normative structures in SA including: King III Report on company reporting: “…how a company has, both positively or negatively, impacted
on the economic life of the community in which it operated …” Principles for Responsible Investing & CRISA
Topic # 5: The Source of Innovation
The Periodic Table of Elements (as per Prof. J. Kinghorn…)
31
The Periodic Table of Elements