Finance Honours Class: Guest LectureStellenbosch University

4 February 2014

Introduction

Vodacom Samsung Medscheme Group Alexander Forbes Hewlett Packard Edgars Diners Club International FirstRand Old Mutual Group LoveLife Guide Dogs Association

SANParks Peace Parks Foundation GivenGain City of Cape Town University of Stellenbosch Medicins sans Frontiers WWF SA UNICEF Greenpeace Nelson Mandela Foundation PayProp Capital

Introduction

Connecting Capital:Investigating the factors influencing the

decision-making processes of institutional investors towards

responsible investing

Expectations

Principles of Corporate Finance

ShareholdersInvestmentReal AssetsProfit MaximisationMetricsInstruments

Value Governance Honesty Ethics Responsibility Relationships Timing

DefinitionsFinance:

1. The management of large amounts of money.

2. Monetary support for an enterprise.

3. The monetary resources of a state, organisation or person.

Money:

A medium/object/record that can be exchanged for goods and services and is used as a measure of

their value in a market.

Some Questions…

Can society and nature be seen as stakeholders? If so, what legitimate claims do they have?Are there business owners who are primarily concerned with stakeholder wealth maximisation? Does it have to be shareholder versus stakeholder wealth maximisation (i.e. are these goals mutually exclusive?)

Some Further, Uneasy Questions…

What role can finance play in the context of poverty and/or environmental sustainability? Do you think massive salaries are morally justifiable in the world of finance today? Why?In what way do you think relationships have a role to play in financial innovation? What role does governance play in a business and its stakeholder relationships?

Left Turn…

Social Enterprise - Why 'Social'?

The Missing Middle - The Gap in Capital Markets

Investing for Impact - The Rise of Investor Activism

Relational Economics - The Power in People

The Source of Innovation - The Periodic Table of Elements

Wicked Problem: Poverty Nearly 50% of world’s population live on less than US$ 2 a day 3 Billion people, 3 000 000 000, 3 thousand millions Less than R20 a day…R20! 10 million children die every year from preventable diseases AIDS kills 3 million per year 1 billion people lack access to sanitation 1 000 000 000 people are illiterate 25% of children in poor countries do not finish primary school 20% of the population own 80% of the world’s wealth That’s you and me Poorest 20% own 1.4% And these people are right outside, all around us…

Solution: Aid? US$2.3 trillion in global aid since 1950 (William Easterley, World Bank) US$1 trillion in Aid to Africa, 6 Marshall Plans equivalent to

US$5,000/person (Richard Dowden, Royal Africa Society)

Aid and Income Growth in Africa (10-year moving average)

0

2

4

6

8

10

12

14

16

18

20

19701973

19761979

19821985

19881991

19941997

2000

Aid

/GN

I (%

)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Gro

wth

GD

P/C

ap

ita

(%

)

Aid/GNI Growth GDP/Capita

Solution: ‘Social’ Enterprise? Economic growth is the fastest way to reduce poverty – China, Asian Tigers

FDI is critical to economic growth but requires political and economic stability, good governance – factors missing in poor countries

‘Social’ entrepreneurs needed to fill this gap

Triple Bottom line – financial, social & environmental Sustainable profitable businesses Maximising financial and social returns Employment Empowerment Entrepreneurship training ESG (Environmental, Social, Governance)

Topic # 1: Social Enterprise

What is a social enterprise?How do these differ from conventional enterprises?Case Studies

Topic # 2: The Missing Middle

How are social enterprises financed?Which sources of funding are available in South Africa?What are the challenges that social entrepreneurs face when seeking funding?

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The Missing Middle

*Cumulative investment in frontier market SMEs.

**Estimated loans outstanding.

***Foreign development assistance, private philanthropy & remittances, per annum. Prosperity Ladder Concept: Legatum Global

Development

Low Cost Capital

No Access to Capital

Abject Poverty

Poverty

Micro-Entreprene

urs

Listed Companies

Global Enterprises

Rule of law Property rights Physical security Economic freedom Health & education

Pro

speri

ty D

rivers

Pro

speri

ty D

rivers

Grant Aid $325 B*** Grant Aid

$325 B***

Public Capital $ Trillions

Public Capital $ Trillions

Microfinance $25 B**

Microfinance $25 B** Limited Access to Capital

High Cost Capital

Medium Cost Capital

SMEs $10 B $10 BPrivate Capital* “The Missing Middle”

Funding Sources

Commercial Banks Development Banks Small Business

Development Organisations

Angel Investors Private Investors Corporate Investors

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Institutional Investors

Public Investors International

Investors Network Friends Family

Funding Requirements

Business Plan Financial Forecasts Track Record Management & Board Good Governance Current Financials

Creativity Communication Marketing Perseverance Sense of Humour Prayer

Topic # 3: Impact Finance

Impact Investing ContinuumCase Study: Silulo Ulutho TechnologiesConcept: Social Impact Bonds

Topic # 3: Investing for Impact

Impact Investing ContinuumCase Study: Silulo Ulutho TechnologiesConcept: Social Impact Bonds

Impact Investing Continuum (Oostlander)

Impact Investing Analysis (Markets for Good)

Founded in Khayelitsha, Cape Town in 2004 by 4 local partners

Computer training, internet access and business support services

1000’s of people introduced to ICT and trained per year

Affordable, accessible services meeting critical needs at a local level

18 Employees by 2009, 100+ in 2014 R1,8 million in turnover in 2009 up to

over R 10 million to date From a car boot to over 20 training

and internet centres in W & E Cape

Silulo Ulutho Technologies

Financial Innovation: Social Impact Bonds

Source: From potential to action: Bringing social impact bonds to the US, McKinsey Company 2012

Topic # 4: Relational Economics

Why ‘Relational’?

Relational Economics Commitment is the basis of lasting, loyal relationships The bond that is formed through building a relationship with your stakeholders Should ultimately lead to advocacy

1. Expectation

2. Satisfaction after first purchase

3. Behavioural loyalty

4. Relationship forms

5. Emotional loyalty

6. Commitment

7. Advocacy

No emotional tie

Customer is satisfied unless something better comes along

Positive interaction on both sides

Bond becomes stable.

Mutual problem solving

Find values in the brand and willing to take action on behalf of it

Seven steps to loyalty

“Loyalty Hurdle”

“Loyalty Hurdle”

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Loyalty Economics

Source: Reichheld, 1996, 2001

The Loyalty-based Cycle of Growth

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The Purpose of Loyalty

The ‘Right’ Contributions from the ‘Right’ Relationships How do you find the ‘Right’ Stakeholders and keep them?

Source: Reichheld, 1996, 2001

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Relational Economics:A Virtuous Value Chain

Employee

Business

Partner

Customer

Cost E

ffici

enci

es &

Innova

tion

Custom

er

Inte

lligen

ce

Superior

Service

Feedback

Fulfilment

Turnover

Training & Incentives

Compensation &

Opportunities

Superior

Productivity

Sp

end

&

Pro

file

Su

perio

r P

rod

ucts

Lo

yalt

y &

Ref

erra

l

Valu

e Ad

ded

Ben

efits

Quality Assurance

Investor

Competitor

returns/reinvestment

marketing/mindshare

CommunityResponsibilities

EnvironmentalConcerns

Market & IndustryConditions

Legal & EthicalRegulations

Source: Habberton, 2005

Relational Economics: Creating Shared Value CSR to CSV (Porter, 2011) Value Creation not just Value Add Intrapreneurship Economic & social returns Stakeholder relationship management

Linked to normative structures in SA including: King III Report on company reporting: “…how a company has, both positively or negatively, impacted

on the economic life of the community in which it operated …” Principles for Responsible Investing & CRISA

Topic # 5: The Source of Innovation

The Periodic Table of Elements (as per Prof. J. Kinghorn…)

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The Periodic Table of Elements