An Integrated Approach to an Integrated Bottom Line

[david...@presidiomba.org]

An Integrated Approach to an Integrated Bottom Line
Draft 7 by David Bruce, Jennifer Boynton, Tina Butler, and Brian
Bishop of the Presidio School of Management 1/5/09

This is a discussion on an approach on how to integrate an
entrepreneurial party, a governmental entity, and the community in an
investment with an integrated bottom line that has social,
environmental and financial benefits.

One of the biggest barriers to adopting an integrated bottom line into
financial considerations is agreement on how to quantify the value of
environmental and social benefits. Another significant challenge is
the ability of investors to capture a return on those benefits. The
consequence of these barriers is that projects that can have major
gains for a community may not be considered feasible by investors.
Developing a community center, for example, with a café, bookstore,
farmer’s market, light industrial, and residential housing could have
great benefit to a struggling neighborhood by providing jobs and
services and drawing other businesses to the neighborhood. But the
high cost of capital means a net negative return to investors over a
typical payback period. As a consequence, such a project is not
considered viable even though the net return for all stakeholders is
positive. Our current system only measures benefits of such a project
based on the financial returns to the investor. The external benefits
like more jobs and services for a community are not captured unless
the local government is brought in as a player.

Indeed, social investments are the domain of the government. But even
when a government is willing to invest in entrepreneurial projects,
the conventional wisdom of the separation of government and business
prevails and the involvement is limited primarily to subsidies. This
allows the private investor to undertake projects with smaller
returns, but the value to the community is questionable as
stakeholders are left out of the process. What we need today is a
greater involvement by the government to effectively employ resources
for the benefit of the community while taking advantage of the
dynamism and flexibility of the free market.

The private sector is very efficient at producing economic activity
but with a limited view of returns and risks. By partnering with a
government entity, an enterprise can responsibly also consider social
and environmental returns that are not normally the domain of the free
market. The government is the partner that reaps the social,
environmental and external financial returns of the investment and the
private party reaps the direct financial returns. The government body
would be the capital investor controlling the long-term assets and
overseeing their sustained use, and the private body would control the
operations and oversee the short-term economic activity.

This unconventional model has several benefits. First, projects that
in the past did not return sufficient returns to investors to pay for
large capital investments, but have good returns to the community at
large suddenly become viable. Next, problems with accounting for hard-
to-measure external benefits now become the exclusive domain of the
government with its responsibility to stakeholders, and not a private
party whose concerns are primarily to stockholders and managers. Other
problems like legal activities such as paying absurdly high bonuses to
management, for example, which reduce the social benefit the
government investment was intended to bring, can be addressed in the
structure of the partnership. Some control over the practices of the
enterprise is necessary to ensure the effective allocation of
resources. If the government owned the capital and dictated the terms
of its use, guiding principles could be enforced.

Creating a model for government and private enterprise for social
returns is a task that must be undertaken now. The problems we all
face from economic, to social, to environmental are at or perhaps
beyond a critical tipping point. Our leaders appear to be unable to
use the tools at their disposal to turn our fate around. An integrated
approach is a potent tool that combines the power of the Government
with the dynamic insight of the entrepreneur in a synergistic model
for the future. The New Deal of the 21st century, it is an opportune
time to experiment with this idea. As students of the Presidio School
of Sustainable Management, we are acutely aware of the failures of the
current system and are particularly suited to address the concerns and
develop solutions for projects with integrated bottom lines. We invite
you to engage in further discussion to advance or refine this idea.