Derivatives in the Social Sector
Abhishek Thakore is a co-founder of the
Blue Ribbon Movement, that works with the youth to create leadership that
facilitates social transformation. An
MBA from IIM, Bangalore, in his previous avatar as a finance professional he
has worked with Deutsche Bank, Boston Consulting Group and the Hay group. He
combines his extensive knowledge of two diverse worlds to compile a ready
reckoner of ‘social sector derivatives’, highlighting their purported uses and
inevitable negative impact.
Derivatives were famously dubbed ‘weapons
of mass destruction’ by the legendary investor Warren Buffet. My own internship
at an investment bank exposed me to highly complex financial instruments that
were very useful but had the potential for harm.
of mass destruction’ by the legendary investor Warren Buffet. My own internship
at an investment bank exposed me to highly complex financial instruments that
were very useful but had the potential for harm.
One of the areas I was working on was
credit derivatives; very profitable instruments that protected companies from
default. About six years later, one of their variants led to a bubble on Wall
Street.
credit derivatives; very profitable instruments that protected companies from
default. About six years later, one of their variants led to a bubble on Wall
Street.
I am no longer a finance professional, but
in the social sector too there are some equally potent ‘instruments’ that have
derivative-like tendencies. And while we share these, we are all equally prone
to their misuse.
in the social sector too there are some equally potent ‘instruments’ that have
derivative-like tendencies. And while we share these, we are all equally prone
to their misuse.
The intent is to be mindful about how these
might misrepresent our impact, and while
this is not directly covered under legal compliance it surely is honoring the spirit of things.
might misrepresent our impact, and while
this is not directly covered under legal compliance it surely is honoring the spirit of things.
So, here are some social
sector derivatives.
|
Financial Sector
|
Social Sector Equivalent
|
Impact
|
|
Setting up ‘shell’ companies in tax
havens – creating multiple entities for the same activity. |
Registering NGOs – many of them merely as
legal entities – to legitimize certain activities or money. |
The staggering number of NGOs registered
in India (13 million!), with a very small percentage doing substantial work. |
|
Limited liability: The shareholder’s loss is limited to the contribution.
Call / Put options : Option to buy or
sell in the future depending on price. |
Almost no highlighting of ‘unsuccessful’
projects and learning from there – instead capturing the ‘upside’ of success and highlighting only that aspect. |
Creates a perception that no NGO is doing
anything wrong – there are only successful, high impact projects. Also, limits how much we learn. |
|
Futures Contracts: An agreement in the
future, that lets you buy with just paying the margin (the possible fluctuation in costs). |
Claiming credit for the same action at
multiple levels i.e local, national and international, by different partners.
Similarly, actions by one individual are attributed to
the incubator, fellowship, associates, some programs they may have attended – EVERYONE! |
Creates a perception that a lot of change
is happening because the ‘credit taken’ is exponentially more than the work done.
This is offset, perhaps, by many NGOs who
don’t communicate their work at all! |
|
Collateralized Debt Obligations:
Combining debt from various sources and then creating ‘tranches’ based on their quality. |
Combining all projects / activities from
a program and then using the highlights to imply that this represents the ‘average’, rather than the top. |
Light – touch models that claim impact
for deep changes.
Intensive programs that add up dropouts
and partial completions. |
As social catalysts, it pays to be
responsible for what we communicate and to resist the temptation to overstate
our results and impact. Otherwise, we risk doing what the financial services
industry did to itself .
responsible for what we communicate and to resist the temptation to overstate
our results and impact. Otherwise, we risk doing what the financial services
industry did to itself .
Instead, let us be more mindful of our
communication and the spirit of our impact.
communication and the spirit of our impact.