Thursday, December 11, 2008

The Stock Market Goes Social

Note: This is a shortened version of my recent blog post for Wokai. Wokai is an organization that I volunteer with and a cause that I am rooting for: it raises loan capital for micro-entrepreneurs in rural China, connecting people like you and me to borrowers via a peer-to-peer Internet platform. The following post is a general discussion of a hypothetical stock market that is based on social returns. To see how it relates to Wokai, refer to my original post.

In just ten minutes, I lost $400,000 dollars, and it hurt. No, I wasn’t on the NASDAQ – I was trading on the Social Stock Exchange, bidding and asking prices for the stocks of social businesses. This one guy managed to walk away with $4 million dollars. I was impressed! But to his dismay and my delight, we were not real social investors yet, and a social stock market was only a figment of our imaginations, thanks to the simulation game we were both players in. I know…phew, right?

The Wharton Social Stock Exchange is a simulation game that was designed for this year’s Net Impact Conference, which took place in November at the Wharton School of the University of Pennsylvania. (The three-day conference drew a diverse group of participants – business school students and professionals from both the private and public sectors – to discuss how to leverage business for good.) The 20 or so players in my session were all placed in front of computers and given stock profiles (including company description and stock ticker), dividend charts, and an initial allocation of stocks and cash. Using an interactive real-time trading platform, investments were valued and trades were made based on a company’s social (not just financial) performance. As popup windows brought social news updates (e.g., ethical sourcing, environmental practices) to us players, the room filled with pauses and then clicks, interrupted with the occasional sighs of frustration and relief. People were getting competitive.

Yunus book cover The goal of the simulation exercise is to allow players to test out for themselves Muhammad Yunus’s proposed social stock market theory. In his book Creating a World Without Poverty, Yunus talks about how, as social businesses become more prevalent, financial institutions will open up and adapt to meet their financing needs. We will see more social venture capital funds, social mutual funds…all culminating in the rise of a separate stock market for social businesses only. Definitely hard to believe, given the current state of international markets, but going on a slight tangent now…

(start of tangent)

…What is a social business anyway? A social business is like a profit-maximizing business (PMB) in the sense that it is financially sustainable through the products and/or services that it offers. However, unlike PMBs, a social business’s ultimate goal is to achieve social impact – measured for instance by the lives it touches. Any profits turned are reinvested into the business, as opposed to being passed along to investors (no dividends). Thus, a social business operates on a non-loss and non-dividend basis. Why should social businesses exist? I like Yunus’s explanation and the logic that it represents: free markets are good --> then why have they failed the poor? --> because they are based on a single-track concept of capitalism that assumes that the pursuit of profit maximization leads to happiness --> but this is wrong, humans are multi-dimensional --> not all businesses need to serve profit alone…

(end of tangent)

Back to social stock markets, and why they are so important to the growth and development of social businesses. I’m a firm believer in incentives. As with PMBs, the budding entrepreneurs and CEOs of social businesses will catch onto bigger problems and come up with better solutions only when the financial and investor communities are ready to become more involved. Other benefits Yunus highlights include:

1. Increased liquidity for shareholders to choose their social investments

2. Heightened public scrutiny to avoid potential deception and fraud

3. Greater exposure to social businesses to attract more capital into the new market

So, as Yunus predicts, heads up that you might start seeing The Social Wall Street Journal reporting that so and so social business did such and such, increasing its share price from 10.00 to 12.50. Or that two complementary social businesses merged, increasing their share values in the eyes of social investors. And don’t be surprised if you see the Social Dow Jones Index alongside the other indexes. I’m telling you, it may seem like a far-fetched vision, but it’s only a matter of time. I think I’ll change my Facebook status to, Jessica is waiting for the stock market to go social.

2 comments:

Michael said...

http://www.nytimes.com/2008/12/25/opinion/25kristof.html

how funny! i haven't checked ur blog in months, but i read that article just today and really liked it--your post really reminded me of that. i just have one question--in the stock market, the value of a stock is (theoretically) tied to its profitability, right? so the higher dividends it pays, the higher its value. do you really think some numerical value of how much social good a company produces is enough to create enough demand for a company to raise its share prices? i mean, yes, i feel good if i invest in a company that is doing social good, but in the end my personal support isn't doing THAT much to benefit the company.

Jelly said...

Thanks for the article, Michael. Regarding your question, keep in mind that in a theoretical social stock market, the price of a stock would be based not only on the social business's social returns, but also its financial returns -- which, going back to your article, further supports the idea that there is nothing wrong with profit-incentivized social organizations.