Socially responsible investing

As a follow-up to last week’s rant, when I was in Israel we met with a company that produces healthcare IT solutions with the goal of making it easier for doctors and hospitals to transfer patient information quickly and accurately. A venture capital partner whose company provided much of the funding for the startup also attended the meeting and answered questions. One of my colleagues asked her the following: “since this company is making a product that can potentially save lives, would you accept a lower rate of return on your investment than you would otherwise?” Her answer was a terse, “No.” She went on to explain that the large technology companies that owned much of the equity in her company, the venture capital firm, would not allow such a thing because of their need to return market-competitive profits to their shareholders.

You can see where this is going, right? By requiring a return from the IT company comparable to other companies in which it could invest, the VC basically forces it to extract as much profit as possible from its customers. And who are those customers? Why, hospitals, of course. And who pays the budget for hospitals? That’s right, you and me – either through government taxes or, as in our country, through payments to insurance companies. This is why healthcare costs are skyrocketing, and why poor people are being left out of the picture. It’s because there is no attempt, on the business side of the healthcare industry, to capitalize on the good will of people who find meaning in their life from helping those in need.

But even the VC’s hands are tied, because it doesn’t really own most of its money. Its money comes from other stakeholders who invest in it because they think that they will make a profit from doing so. And other people invest in those companies because they think they will make a profit from doing so. And so on and so on.

Which is all fine and great if your primary objective is making money. But if your primary objective is public in nature, you’re not in such great shape.

So taking a hint from Adam on working with markets, instead of against them, this got me thinking: what if there were a way to modify the capital market structure in such a way as to incentivize investors to support socially responsible companies? Or in plain English, what if we made it so that people can make money because they do good things for the world, instead of having to choose between the two all the time?

It would require some kind of government intervention in the way that capital markets (stock exchanges, etc.) operate, either directly or indirectly. My initial idea involved a rather radical proposal to adjust stock prices according to social responsibility scores established by an independent rating agency set up for that purpose. Some friends here at SOM suggested instead a scheme that would try to accomplish the same purpose through manipulation of the capital gains tax. Anyone have other ideas? This is something I’ll be thinking and hopefully writing about more as the semester progresses.