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Applying business principles to philanthropy

Westminster Matters

Applying Business Principles to Philanthropy

A Message From President Michael Bassis 
Fall 2005

I suspect that few of you will be surprised to learn that, as the president of a private and independent college, I take a keen interest in philanthropy. I am, after all, constantly asking donors for money. To be successful, I need to understand the factors which influence their giving. What continues to surprise me, however, is the fact that many of the donors I talk with are just as interested as I am in gaining a deeper understanding of the practice of philanthropy. Many of them told me that while they might not share Bill Gate’s wealth, they do share his belief that it is a lot easier to make money than it is to give it away intelligently.

The more I studied the issue, the more I learned that there is a body of knowledge and experience one can use to address the challenges associated with philanthropy. I was particularly interested in the effort to adapt the practices that produce success in the private sector to the challenges of operating effectively in what John Gardner called “the independent sector.” But determining what policies and procedures can and should be exported from the private sector to a philanthropic effort is, at best, challenging.

My educational philosophy is rooted in the belief that learning is richer, deeper, more nuanced and more valuable if individuals, under the guidance of an experienced and knowledgeable expert, learn with and from each other. So it occurred to me that there would be value in bringing together people involved in philanthropy and encouraging them to talk with each other about what they do and why and how they do it.

There was an enthusiastic response to that proposal. Both Zions Bank and Wells Fargo Bank provided funding to support three symposia on philanthropy. The Westminster College community—recognizing that such a series would provide our students with a unique opportunity to learn more about why and how philanthropists act—provided support as well. And individuals involved in philanthropic activities signed up to participate.

We held the first of our three scheduled events earlier this year, and while I believe much of what transpired was valuable, I was particularly struck by the insights contained in the keynote address delivered by Patrick Byrne, the founder and CEO of Overstock.com. His discussion of how he modified his business model to support a philanthropic initiative illustrates both the inherent differences between, and the essential compatibility of, these two vital forms of activity. While he would be the first to recognize that his approach is not appropriate for every philanthropic initiative, I would emphasis its power to illustrate the level of creativity needed to transform profit making models into an effective philanthropic program. With his permission, we have modified his presentation and are delighted to make it available to a broader audience.

We have two additional symposia scheduled to take place in the next few months. If you are interested in getting more information about them or attending those programs, feel free to call 832-2734 or e-mail sparker@westminstercollege.edu and we will provide you with additional information.

Michael S. Bassis
President, Westminster College

Excerpts from

Social Entrepreneurship

Patrick Byrne
CEO, Overstock.com

As an undergraduate at Dartmouth, I majored in Asian Studies and Philosophy. When I did my graduate work at Cambridge University and Stanford, I continued to explore that area of the world and the philosophies to which it gave birth. So, when my Internet company, Overstock.com, was in good enough shape, I decided to take some time off, get on a motorcycle, and travel through India and Southeast Asia.

Patrick Byrne,  CEO, Overstock.comI spent my time avoiding cities and traveling from one small village to another. In almost every village, I met interesting people, ate great food, and had fascinating detours. I also saw some absolutely first rate, top notch hand-made craft work—jewelry, woodwork, table settings, silks, and home décor products. I suspect that I was thinking about the quality of the workmanship and not about the road conditions when I lost control of my bike and crashed in a relatively isolated area of Cambodia. That explanation wasn’t much comfort, however, as I lay sprawled across a dirt path and wondered what I had gotten myself into this time.

After a while, some local kids came down the path and, after getting over the shock of seeing a Western white guy lying on the ground, they helped me get to their village. There, some kind people took me in, tended to my wounds, and offered me food and hospitality.

As I healed, I started wondering how I might repay the kindness these people had shown me. I knew that offering them cash would be seen as an insult, but I didn’t know how else to express my thanks…until I really started to think about their lives, and what I had seen on my travels through their country.

In the economic terms in which I was now trained to think, the most obvious thing was the crushing poverty. But there was also the pride: pride in the quality of the work they did even if that work didn’t bring them much money. After all, how could it? They were individuals, working in isolated environments, and producing goods in quantities too small to be efficiently moved to potential buyers who might be located a world away.

Then, on that cot in a small village, I realized that the problem these people faced was precisely the problem that my company had been established to solve. I had created Overstock.com to work within the fractured supply channels of numerous, scattered vendors, scooping up products in lots too small to be moved efficiently through mass retail. Overstock.com proved that you could match small lots of liquidated goods to mass demand through the Internet. I could, I thought, just expand that concept to include artisan production. That way I could bring economic growth and individual profit to countries and craftspeople while giving customers an opportunity to help people by buying wonderful products that would otherwise be unavailable.

However, what seemed so simple on a cot in a Cambodian village got a little harder when I returned to the States.

The problems weren’t operational. Expanding Overstock to include Worldstock (the name I gave to the venture) wasn’t simple, but there were experts I could turn to in systems design and logistics management who could give me clear answers to the problems I faced. I could not, however, find experts to give me definitive answers to the ethical problems such a venture involved.

For example, I didn’t want to trade in products produced by child labor, but I also knew that many children helped their parents in informal, cottage-industry settings. I needed to find a way to draw a line that would respect local customs while still expressing my moral belief that child labor was wrong. And, there was the question of whether I should buy products from countries which had abysmal human rights records.

Different theorists argued that the economic boost that trade provided would end up supporting abusive governments, while others claimed that increased trade would promote reform. Should I buy through organizations—NGOs, micro-enterprise ventures like those supported by the Grameen Bank—or directly from individual craftspeople? Again, experts drew different conclusions about the impact of different purchasing patterns in promoting self-sufficiency or encouraging and rewarding organizations working on the ground.

Realizing that there were no easy answers to these problems, I decided I needed to think through the problems myself. I do not claim that the answers I developed are either comprehensive or correct, but they have guided Worldstock’s behavior and they seem to be working fairly well.

I began by trying to define what kind of market I wanted to serve. My conclusion was that I wanted to sell products whose purchase would support women, disabled people, traditional artisans (such as Native Americans), or other disadvantaged groups. I wanted to focus on goods produced through micro-credit rather than traditional commercial ventures. And, I wanted to trade in goods whose production and consumption was environmentally sound.

With those goals in mind, it soon became apparent that the basic principle which ought to govern Worldstock was sustainability: we should support enterprises that sustain rather than use up people, cultures, and natural resources. With that basic principle in mind, four criteria emerged:

     1. Economic Sustainability. Worldstock offers “employment” to disadvantaged people: we seek to purchase products made by people who don’t have many options—casualties of war such as land-mine victims and widows; aboriginals and traditional peoples who have been bypassed by over-centralized development; and women with no viable job opportunities. By giving such people a market in which to sell their work, we provide stable employment that does not “use up” workers in the short term, and through which people can build a life for themselves over the long term. By purchasing products through Worldstock, our customers circumvent a top-heavy, hand-out approach to poverty and, instead, obtain objects they value while supporting an approach which nurtures local cultures and practices and rewards individual initiative.

    2. Cultural Sustainability. Development often causes massive cultural dislocations. For example, efforts to stimulate job creation in cities can lead to increasing urban unemployment as stimulatory effects get washed out by waves of workers forsaking traditional crafts for urban jobs. By buying the products of artisans working in traditional settings, we aim to support traditional practices while ameliorating the cultural disruptions which often accompany development.

    3. Environmental Sustainability. Goods can contribute to environmental sustainability. For example, organizations such as Worldwatch Institute and One World Projects, Inc. aim to save the Brazilian rain forest by researching and selling replenishable products from it rather than burning it for pasture. Moreover, some goods are surrogates for commercial goods but are produced in non-industrial, eco-friendly ways.

    4. Worldstock Adoptive Principles. I wanted my fourth criteria to fit within the “sustainability” format in order to complete the symmetry of the first three, but I just couldn’t. Indeed, I confess that, in addition to lacking “sustainability” language, the fourth criteria was really a catch-all for a number of concerns designed to ensure that our behavior matched our rhetoric. 

             Razor-thin margin pricing. Some retailers buy the same sort of products we do, from the same type of sources, using the same humanitarian justification. Then they turn around and mark up their prices by 300 percent or more. The net result is that only a small part of the proceeds get back to the producers. My model is different. While I need to price products high enough to cover costs of acquisition, importing, and shipping, my goal is to keep the price as low as possible. That will allow me to grow Worldstock rapidly, increase the numbers of producers we help, and spread the advantages of the system to as many areas as possible. Roughly 60–70% of the purchase price of our goods is returned to the producers with the rest covering our costs.
             Fair negotiations. Despite the fact that I didn’t set up Worldstock to make money, please believe me when I tell you I am a capitalist. I enjoy making money, and I do everything I can under the law to edge out the competition. At Overstock, I try to pay as little as I can for merchandise in order to make as much as I can when I sell it. However, that kind of model is inappropriate in a Worldstock context. When disparities in wealth, options, and information between two parties go beyond a certain point, negotiations can no longer be fair. We don’t want to chisel Peruvian widows in order to increase our profit margin. That just isn’t the point of this activity. We do, of course, negotiate with our suppliers, but it is a “gentle” negotiation designed to remind them that lower prices will increase volume and benefit everyone in the supply chain from producers to purchasers.

             Transparency. As I indicated earlier, there are a host of ethical problems associated with the kind of business I want Worldstock to be. As is often the case, well-intentioned people can reach different conclusions about those issues. Additionally, consumers know only too well that some firms which boast about their philanthropic motives can end up (knowingly or not) subsidizing sweatshops or other unacceptable practices. Our response to these issues is simple: we make our policies and practices as transparent as possible. We require all producers to sign a statement of principle regarding the manner in which they produce the goods we buy; we do our own investigation of our suppliers and their reputations. We make all that information available so that if anyone doubts my claim that buying a particular product from Worldstock will help a particular producer, they are free to review the information on which I base that claim. Worldstock customers want to be socially responsible. We help them achieve that goal by making products—and information about those products—available to them.

So, one may ask, how is it all working? Pretty well. In the three years since Worldstock was created, we have sold thousands of products and returned roughly $8 million to artisans throughout the world. Can we do more? I certainly hope so. I hope that Worldstock continues to grow, and I have pledged to do everything I can to support that goal. In fact, this year alone we are on track to sell another $25 million and return over $15 million in payments to the developing world.

I was able to extend my core business model, with minor adaptations, to create Worldstock. Other companies may not be in a position to do that. But virtually every company that really wants to can find a way to contribute to a cause. And every company should—both as a way of discharging a human obligation to help others and as an exercise in good business. I indicated earlier that I am a capitalist, and now I want to make it clear that I am proud of that label. While my primary motive for creating Worldstock was to improve conditions in a part of the world I care deeply about, I am happy to report that “doing good” also helps my core business. Worldstock attracts the kind of people I want to have working for me; it attracts customers to Overstock; it even makes some people think that I’m an OK guy and run a pretty good company.

But I recognize that Worldstock is not the only model that will help achieve the goals I have identified. For example, there is an organization called Rehab Craft Cambodia, a NGO, which is building a self-sufficient business channel for Cambodians with disabilities. In a capitalist environment, my goal would be to compete with them, but in this environment my goal is to share space with them. They may, after all, be able to do more for the group they have targeted than I can. Our interests are not in conflict; their success helps me achieve my goal.

And, of course, there are other ways to help and other areas that need help. Business people ought not shed their humanity when they enter their offices. There are ways to combine making a profit with serving people, and there are plenty of reasons to do so. I would hope that the philanthropic community might encourage the business community to think about those potential combinations: encourage rather than confront. Business can, after all, do more than give money to organizations trying to solve problems—it can solve problems itself. And, I believe Worldstock demonstrates that.