Why You Can’t Talk About Impact Investment Without Corporate Governance
Mention the term “impact investing” at a social enterprise gathering and eyes widen and enthusiastic words flow. Mention “corporate governance” and it’s likely that those same eyes will glaze over and someone will share a frustrating experience from a board meeting.
A group of 17 social entrepreneurs from the Schwab Foundation community created a taskforce on Social Investment (now more commonly referred to as impact investment). Last year, the taskforce, with the support of the Technical University of Munich Centre for Entrepreneurial Finance, launched the Social Investment Manual to provide strategic guidance and actionable tools for social entrepreneurs on attracting the right investors and maintaining mutually beneficial investment terms and relationships. The manual from social entrepreneurs for social entrepreneurs was considered a hit; it was downloaded several thousand times, adapted by several universities in their MBA and MPA curriculums, and used by social enterprise incubators around the world.
We soon learned the Social Investment Manual only scratched the surface for social entrepreneurs who want to maximize their impact through working with external partners. The leading social entrepreneurs of the world told us what they learned the hard way: You can’t form productive impact investment relationships in the long run without creating robust corporate governance structures for your enterprise.
Impact investing, by definition, aims for two returns on invested capital: financial return and social impact. Few social enterprises deliver these returns with ease. Most social enterprises serving the poorest of the poor face a trade-off between widening profit margins (and increased financial return) and improving the quality, accessibility and affordability of their offering (and increasing social return).
Governance is the structure with which the vision, values and mission of the social enterprise becomes institutionalized into strategic decision-making. Governance is also the mechanism with which the social enterprise can manage the diverse priorities of stakeholders (investors, management team, beneficiaries/community members etc) as well as compliance with public policies and regulations. The members of the taskforce were particularly concerned about cases where, in the absence of effective governance structures, social enterprises become vulnerable to mission drift, possibly leading to the founder’s ouster.
It is for these reasons that the Schwab Foundation for Social Entrepreneurship, the Technical University of Munich and the European Business School created The Governance of Social Enterprises: Managing Your Organization for Success, a guidebook for leaders of social enterprises on how to set up a robust corporate governance board. Given that there is no “one size fits all” for social enterprises, the guidebook helps social enterprises to custom design and manage their corporate governance board. The guidebook accounts for factors specific to the enterprise, including the lifecycle stage, geographic reach, organization size, and regulatory climate or industry in which it operates.
Well-managed governance boards are important not only for the social enterprises to protect their organizations once they attract investors; they also serve as strong signals to investors that the organization is on track for success in the future. During a meeting focused on impact investing at the World Economic Forum Summit on Latin America in April 2012, an impact investor explained that while he may open a conversation with a social entrepreneur given the enterprise`s social impact and financial sustainability, he rarely invests in an enterprise without a solid governance structure. For him, the absence of a corporate governance board is a deal-breaker.
Good governance matters. It may not be as sexy as the field of impact investing, but governance is what enables impact investments to work.
The authors would like to thank Ann-Kristin Achleitner and Judith Mayer of the Technical University of Munich, and Andreas Heinecke of Dialogue Social Enterprise for their contributions to the guidebook.