Financial Inclusion: The Most Important Question for Business Leaders

Editor's Note: This post was originally published on Unreasonable.is. By Ross Baird

The philosopher Tony Judt, while dying of ALS three years ago, wrote a final essay, "Ill Fares the Land." Below is its opening paragraph:

"Something is profoundly wrong with the way we live today. For thirty years we have made a virtue out of the pursuit of material self-interest: indeed, this very pursuit now constitutes whatever remains of our sense of collective purpose. We know what things cost but have no idea what they are worth. We no longer ask of a judicial ruling or a legislative act: is it good? Is it fair? Is it just? Is it right? Will it help bring about a better society or a better world? Those used to be the political questions, even if they invited no easy answers. We must learn once again to pose them."

Judt’s message: As a society, we focus nearly all of our time, attention and resources on maximizing wealth for shareholders in private companies. We know what things cost, but not what they are worth.

A close friend and collaborator once showed me a New Yorker cartoon that sums up the consequences of this scenario: a series of kids gathered in a post-apocalyptic landscape around a pyre of burning trash, with an older man in a dirty suit saying: “Yes, the planet got destroyed. But for a brief moment in time, we created wonderful value for shareholders.”

To “maximize shareholder value” is required by law in many states as a part of any investor or company manager’s fiduciary duty. The term “fiduciary” derives from the Latin “faith” — the faith an asset owner has in its stewards. In society, our fiduciaries have incredibly high standards for how the resources perform on a cost-benefit analysis — and they should. Investors managing pension fund assets are charged with the retirement accounts of firefighters and teachers, and public company CEOs recognize that the net worth of millions of people potentially depend on the stock price.

Yet, the New Yorker cartoon shows that if business leaders are not simultaneously fiduciaries for society at large, the world faces grave consequences. It’s easy to read a stock ticker; how do we begin to discuss what things are worth?

The fallacy of “two pocket” thinking

Many business leaders would suggest what we call “two pocket” thinking: Your business career ought to be dedicated to making as much money as possible, in one pocket, so that, as a philanthropist, you can give all your assets away. Philanthropy is a tremendous force for good: Millions of generous people support hundreds of thousands of wonderful philanthropic causes worldwide.

Yet “two pocket thinking” is a losing proposition for society if you care about its future. The sum of all the charitable giving in the world, added up, more than 4,000 times. For the future to have a chance, business leaders need to integrate shareholder value with the impact their business — their day job, where the vast majority of all our assets, time, and attention are focused — has on society.

The tale of the first consumer bank: Self-regulated business leadership

This past fall, our firm, Village Capital, launched an initiative called Edupreneurs, a partnership with the Pearson Affordable Learning Fund and the Omidyar Network to support startup businesses that increase learning outcomes for underserved students in Africa. Sir Michael Barber, the chief education advisor to Pearson, spoke to participating entrepreneurs about the role of balancing ethics and entrepreneurship: an important topic for anyone in for-profit education to address.

Sir Michael tells the story of the founding of one of the earliest banks in London as perhaps one of the first financial inclusion initiatives. This bank, which has become one of the most prominent names worldwide, was founded by Quakers several hundred years ago as an alternative to moneylenders of the time — who were extractive and took advantage of the poor (think Ebenezer Scrooge, pre-three Christmas spirits). No one told these founders that they had to set up a bank, available to the mass public, at reasonable interest rates — they did it because it was the right thing to do. And helped create a market revolution, to where most people can get bank accounts today.

Ethics in financial inclusion

At Village Capital, we regularly wrestle this tension through the eyes of entrepreneurs. This spring, we are launching three programs in Mexico, the U.S. and East Africa, each supporting entrepreneurs in that region providing access to financial services to underserved populations.

The need is clear: According to the Financial Diaries, a national study of U.S. households, nearly 100 million Americans rely on informal financial services. In practice: You’re a freelance accountant in Ohio, making $45,000 per year — the median income in the state — nearly all of it between January and April, but your baby daughter gets a big medical bill in November. Your credit score is too low for a formal loan, so you borrow $3,000 from a payday lender at 40 percent interest, knowing that you’ll have the cash to repay the amount in January. Over a lifetime, the average American who uses informal financial services pays $40,000 — nearly one year’s salary for the median Ohio household — in fees alone to informal financial institutions.

Entrepreneurs can solve this problem. eMoneyPool, a company we support at Village Capital, provides online management of “money pools,” informal lending circles that 30 million Americans use each year. If you’re a member of a money pool and your daughter gets sick, you can borrow money from your friends through a third-party managed system — and when you repay it, you can improve your credit score, so next time you can get a fair-interest rate loan from a bank.

Earlier this year one close colleague, asked a question: “What’s the difference, though, between entrepreneurs who create value for underserved customers and exploitative loan sharks?” This was a great question, and it isn’t asked nearly often enough. There’s no simple “cost” answer or interest rate, I replied — instead, we rely on the ethics of the management team to solve a problem in a way that creates value for customers that they can reasonably pay for. We invest in leaders and businesses who have net positive worth to society.

I had the privilege of spending time with another pioneer in microfinance earlier this spring who has invested in literally dozens of enterprises extending access to financial services to underserved customers. I asked him a version of this question, and he said, right away: “The management. We trust the values and motivations of the management team to come up with the right answer to this question.”

Everyone in business has a fiduciary duty — to respect both the capital invested in your business or fund, create financial value for your supporters, and take care of your and your coworkers’ families. Yet we also have a fiduciary duty to our customers, society and generations to come.

When making difficult decisions, we can’t build formulas or metrics that get us to the right answer. But having difficult and important conversations about what things are worth, and not just what they cost — what Tony Judt says used to be the important questions in society — ought to return top of mind again.
Ross Baird is the Executive Director of Village Capital and has worked with over 350 entrepreneurs in Village Capital cohorts using a pioneering peer investment model. Before launching Village Capital, he was at First Light Ventures and as an entrepreneur with four start-up ventures.