Philanthropy is in a ‘sorry state’ Ronnie Cohen tells charity leaders

Philanthropy is in a ‘sorry state’ Ronnie Cohen tells charity leaders
Civil Society Finance, By David Ainsworth
24.01.14     

The world of philanthropy is in a “sorry state” and charities are too small to solve the social problems they need to address, Sir Ronnie Cohen, founding chair of Big Society Capital, told an audience of charity and City leaders yesterday.

Speaking at the second City’s Giving lecture, organised by the Lord Mayor’s Charity Leadership Programme, Cohen said that William Shawcross, in the first lecture in November last year, had "put philanthropy in perspective".

“In the UK, as in most of the world, it’s in a sorry state," he said.
In a lecture entitled Revolutionising philanthropy – Impact Investment Cohen said that charitable organisations were “plagued by lack of scale”, but that impact investment might be a tool to implement a “sorely needed” revolution.

He said that he believed social investment could potentially offer “7 to 10 per cent returns” per annum, and could eventually be worth more worldwide than the $60bn microfinance movement.

He said that in the UK, charities should target winning half the £61bn a year of public services contracted out by the government, and should also aim for half of the £200bn which is currently delivered directly by government, although he said he was not sure this latter target was achievable.

Cohen, the multi-millionaire founder of private equity firm Apax Partners, proposed the idea for social wholesaler Big Society Capital to grow the social investment market more than ten years ago.
 
He said that to achieve the scale required to solve social problems, the sector needed “high-risk innovative social organisations” which were “able to access capital markets”.

He said traditional philanthropy faced problems because it was focused on giving, not outcomes, because its timescales were too short, and because it did not care enough on growth.

“What is the common characteristic of the charitable social service providers who are the backbone of the social sector?” he said. “They are small and have no money.

“I have come to realise why we face this predicament. The primary reason is that traditional philanthropy has focused on the act of charitable giving rather than on achieving social outcomes.

“It has given charitable organisations money for two or three years and told them as a sanity check to raise money elsewhere after that – oh and not to waste any of it on their overheads.

“If entrepreneurs had come to me at Apax with business plans that involved investing nothing on overheads I would have shown them the door.

“The combination of unpredictable funding and lack of investment capital has prevented almost all charitable organisations from realising their potential effectiveness and scale.”

Social impact bonds a “breakthrough in thinking”

He said that the idea of the social impact bond – created in 2007 by an organisation he set up, Social Finance – was “a breakthrough in thinking at several levels”. He said this was partly because “perhaps for the first time” the social performance of organisations was accurately measured, and that this was changing how charities thought about solving problems.

He said that it was also because social impact bonds were “equivalent to equity” for charities – they could be used in a way similar to the way companies issue shares. And he said because SIBs were “risk capital” – money which only has to be repaid if the charity is successful – they could be make it easier to raise other types of finance as well.

But he said it takes “far too long” to issue a SIB in the UK.

“It takes 18 months,” he said. “It needs to be three to six months.”

He said a major problem in the UK was that there were “very few social organisations large enough to be prime contractors” but he was confident that the social investment market could help them grow large enough to do so.

“I think government wants to see more services delivered by not-for-profits,” he said. “At Big Society Capital we’re very interested in speaking to social enterprises to talk about how we can help them grow.”

Not-for-profit the preferred model

Cohen said that he expected to see the growth of for-profit organisations with a defined social purpose, such as the benefit corporation used in the US.

“We think we might be able to achieve something similar to the benefit corp in the UK under existing law,” he said.

But he said he felt not-for-profit organisations had many advantages, because they did not have to pay shareholders, because there was “a suspicion of the profit motive” in government and among potential service users, and because many young people preferred the idea of working for a not-for-profit organisation.

“I have found it striking how many young people are attracted to non-profit rather than for-profit models,” he said. They prefer the culture of non-profit organisations, their single-minded focus on helping others, the inspiration that comes from striving to achieve lofty goals.

“At Harvard Business School, 40 per cent of students are taking the social enterprise course.”