Making Trillions for Effective Charities through the Consumer Economy
I write this paper in response to some feedback I have gotten from others in the EA community regarding the length of my prior post. So here’s a shorter version.
Please note that we are now using the term “Profit for Good” (here described as Guided Consumption). For the companies that direct all or the vast majority of profits to charities we refer to them as “Profit for Good Companies” or just “Profit for Goods” (here described as Guiding Companies). EDIT: Finally got around to switching the text to “Profit for Good”.
TLDR: Businesses that are either owned 100% by or direct 100% of their profits to charities would have a competitive advantage over traditional companies that benefit shareholders. This is because charities are more popular than normal investors and there is no additional cost to being a charity as opposed to a normal investor. Thus, these businesses working for charities, which I call Profit for Good Businesses (PFGs), could offer goods and services at the same price and of the same quality as ordinary businesses. Consequently, the project of creating and making the public aware of these companies-working-for- charities is potentially very high-impact, because these companies could tap into the profits in the broader economy and generate billions of dollars for effective charities.
Charities as Profit Recipients of Businesses
In most contexts today, consumers, or buyers of goods and services, are mostly unaware, and/or given little care to, who is on the other side of the transactions they engage. If you buy some laundry detergent or cables for your phone, usually some company’s set of shareholders is gaining profit from your purchase. In any case, companies seldom advertise who is profiting on the seller side. Consequently, there is a dimension of difference in the global consumer economy on which almost no sellers compete:: the identity of the entities that benefit from your purchase, often, owners in some form. An attempt to compete on shareholder/owner identity could be very effective, given that there is no strong public sentiment in favor of company shareholders or the other existing stakeholders. This use of seller-identity to compete could be seen where a consumer has a friend that owns a business, such as a barbershop, and the consumer chooses her friend’s barbershop out of a desire to help her friend. In that case, the consumer would be choosing on the basis of where the profit would go, without necessarily sacrificing quality of haircut or paying more.
One set of entities that could potentially occupy that shareholder position would be various kinds of charities. This makes sense because people donate millions of dollars to Oxfam, for instance, but they do not donate any money to Amazon. Consequently, if a charity or charitable trust acquired a company (through a set of wealthy philanthropists funding the acquisition- perhaps through a leveraged buyout) and advertised this fact to the public- that they could advance popular causes by buying through the firm owned by a charity instead of its competitors- it should enjoy an advantage. This effect could also be achieved by a company that explicitly directs all of its profit to charities. I call this Profit for Good because this situation would enable consumers to further their values by buying through specific firms that specifically communicate the identity of their owners. I call the companies that are either owned by charities or explicitly direct 100% of profit to charities Profit for Good businesses (PFGs).
A few conditions would be needed in addition to Profit for Good businesses, such as systems that ensure that Profit for Good businesses are doing what they say that they are doing. Another condition is effective marketing to tell the public about Profit for Good, where they can channel their purchases to advance a charitable cause. If you are interested in reading my descriptions of these conditions, feel free to check out Section II of my longer paper. But the main concern, in my view, would be whether or not the networks boosting Profit for Good would be able to penetrate the public understanding such that consumers would adjust their behavior to favor Profit for Good businesses over normal producers. This level of public awareness, to be the most powerful, would likely require a social movement, although Profit for Good business would likely enjoy a degree of advantage correspondent with a Profit for Good business being able to communicate this feature with its customer base.
I am optimistic about the prospects for a movement developing because of what it allows for consumers: they get the same product, at the same price, but profits benefit charities rather than shareholders. Essentially, it is a no-brainer from the consumer perspective. Unlike asking someone to sacrifice 10% of his/her income or radically change his/her diet, the consumer can do good without losing money or changing habits. I think that Profit for Good, helping worthy causes through consumer awareness, is likely to have traction with thought leaders, celebrities, and others who can see that this could be a powerful tool to direct resources toward important causes. A movement that enables everyday people to help charities without sacrificing anything personally should be much easier than one that demands people give significant things up or even mildly inconveniences people.
Other Advantages for Profit for Good businesses
Vincent van der Holst, who is the founder of BOAS (basically a sustainable Amazon donating all profits to charities), opened my eyes to other advantages Profit for Good businesses would likely enjoy from other market participants. In his experience, he has been able to secure advisors to his company who work for free, despite charging hundreds of dollars an hour to other companies. He has also seen brands that he sells on his site offer higher commissions than they offer other companies, because BOAS benefits charities, not shareholders. Vincent has been able to secure higher discounts for advertising through influencers, and even some that would work for free. In short, market participants other than consumers are often willing to provide favorable treatment for worthy causes, either because they want to do good themselves, or because they want to be associated with Profit for Good businesses doing great work, like BOAS.
Which Market Sectors?
So, where would some sectors be that would be ideal for Profit for Good businesses? One way of approaching this that I think is helpful is thinking of creating the “no-brainer” for the consumer. This could make it sensible to introduce Profit for Good businesses to sectors where there is not much difference between products. Although there’s some degree of brand loyalty in most consumer sectors, people just may not see much of a difference between varying brands of toilet paper, ketchup, paper towels, etc. In low-differentiation sectors, it may be easier to construct a “no-brainer” where a consumer is genuinely ambivalent as to two products. Given this ambivalence, they can go with the brand that, for instance, helps prevent kids from contracting malaria. Conversely, in sectors where there are a lot of different ways that products are differentiated, other factors are likely to overwhelm the consideration of who gets the profit. For instance, if you are going to a restaurant, you’re likely going to be considering how much you like a restaurant’s offerings, the convenience of the location, the ambience, the quality of service, etc. It is hard, in such cases, to think that anything close to the “no brainer” could be constructed.
Another approach is to capitalize on virtue-signaling, perhaps through products that could enable a consumer to conspicuously show that they bought through a Profit for Good business. Perhaps many people would be willing to pay a premium to show that they purchase in a way that benefits charitable causes. I think both approaches could be fruitful avenues for Profit for Good and likely an exploration of both is warranted.
Which Benefiting Charities?
For this question, I think an EA should be looking for where there is alignment between causes that are very effective at doing good and causes that are popular with the general public. I think that charities dealing with Global Health and Development, such as those endorsed by GiveWell, would be a natural fit. I think that causes looking to improve animal welfare, even farmed animal welfare, may also be a good fit. It is worth considering some causes that may not be as effective as the EA community typically endorses, for the purpose of resonating with a broader section of the public, perhaps in addition to Global Health and Development and Animal Welfare. Of course, it would be incumbent on those advancing Profit for Good to endeavor to advance the most effective charities in a given cause area.
Why Prioritize Profit for Good businesses?
IMPACT: As a group, the companies on the 2022 Global 2000 account for $47.6 trillion in revenues, $5.0 trillion in profits. EAs urge people to donate money to programs, for instance, endorsed by GiveWell, stating that the expected utility from donation to an effective charity is 100-1000x greater than that money’s use by most people in wealthy countries. I suspect the utility difference resulting from the diversion of money from the average shareholder in a company to an effective charity is likely even greater, as the distribution effect of investment tends to be regressive, enabling further accumulation to the wealthy. But even if you (for some reason) believed that shareholder wealth accumulation had 10x utility related to that of the average person to whom the argument to give 10% of income is directed, there is still a 10-100x greater utility from the diversion from normal stakeholders to effective charities.
If Profit for Good directs 1% of Global Economy Profits (through dividends or asset value accumulation) to charities, in a world of $10 trillion in global profits, this is $100 billion dollars. If 15%, $1.5 trillion dollars. Furthermore, if EA is involved in ensuring that significant portions are going to effective charities, significant headway may be possible in cause areas where effectiveness and popularity overlap, especially given that much of the general public support for charities tends to not flow to the most cost-effective, impactful charities. Particularly noteworthy is that, in the United States, only 5% is donated internationally, though charities in the developing world usually are far more cost-effective. Even if the competitive effect of Profit for Good is less potent than hoped, it still may be a powerful fundraising tool in some contexts.
TRACTABILITY: Significant research is needed to determine the degree to which consumers would switch to Profit for Good businesses over normal producers. This research and other empirical validation is cost-effective because it relies on modest assumptions. Essentially, the value of Profit for Good holds if consumers have some preference for the funding of charities over traditional shareholders, we are capable of informing consumers of how to engage in Profit for Good, and we are capable of creating the “no-brainer” situation, or otherwise obtain advantage through Profit for Good, for consumers, in some contexts, which constitute a significant portion of our economies. The ask being made of consumers is extremely modest: buy the same stuff you would otherwise buy at the same price, but through a specified company. Essentially, we are asking consumers to favor helping the neediest in the world over the most wealthy. The rejection of this is confusion or psychopathy. This message, I believe, would not only resonate with the end consumers, but also with influencers, thought leaders, and others who are influential with consumers, because it is intuitively reasonable. One variable could be the amount of time that such a process might take, but even discounting for a long time period for consumer activation, the utility derived would be tremendous.
NEGLECTEDNESS: Although there are a few examples such as Newman’s Own and Girl Scout Cookies, where charities benefit from consumer activity, there is virtually no effort to deliberately weaponize the identity of the owner of businesses’ profit in a focused manner, let alone create a movement that could divert significant portions of our world economies to effective charities. Worth noting is that Newman’s Own has donated more than $570 million for charitable causes since 1982, indicating interest in the concept, even though this feature of 100% of profits going to charities has not been aggressively advertised and many customers are not aware of this feature. One notable exception is that of Vincent Van der Holst, who created BOAS, an online store in the EU that directs 100% of its profits to charities. Another awesome example is Misericordias, which was created by a young man who read my longer essay and was inspired to create an online store selling clothing and other items, where 100% of profits are split between The Against Malaria Foundation and The Clean Air Task Force. Given the potential for good that could be done by having a significant portion of our economies going toward the most effective charities, it seems totally bizarre to me that more effort and resources are not being devoted to attempting to leverage consumer sentiment in our economies. Even with very high degrees of skepticism, the exploration of this cause area/potential tool is cost-justified.
FAQ’s and Answers
Won’t Profit for Good businesses Increase Costs for Consumers? Structurally, there is no reason that a Profit for Good business would produce goods and services at a higher cost. A charitable investor or set of investors buying out a firm would not necessarily have to pay more than a private investor or set of investors. There may be some cost to advertising a firm’s status as a Profit for Good business for a charity, but firms in general have costs of advertising. The inference of a cost increase may be under an assumption of a firm with normal stakeholders/shareholders that elects to give a percent of proceeds to charity. Such a firm would likely have to increase costs to cover this donation. Indeed, Vincent van der Holst, founder of BOAS, has indicated that Employees/Influencers/PR/Consultancy are willing to work for less for Profit for Good businesses. Vincent has also noted negotiating advantage when dealing with brands, given that they often benefit from being associated with a Profit for Good businesses. Given the advantages Profit for Good businesses could enjoy, one might even expect a Profit for Good business operating with the advantages of economies of scale to offer lower prices than competitors.
One caveat is that, in many contexts, the firms that can compete best on price enjoy economies of scale. Consequently, given that initial forays into Profit for Good may not have the millions or billions of dollars to create companies that can exploit economies of scale, a consumer may have to pay a slight premium for goods from early Profit for Good businesses. Fortunately, the success of such firms should indicate with even greater strength that Profit for Good businesses would compete if able to compete at economies of scale, thus warranting further philanthropic investment.
What if selfish motivations make for the best founders/investors/etc.? The efforts of philanthropic investors are capable of being strategically deployed, meaning that they can enter sectors with stable competitive equilibria and capitalize on consumer sentiment. Founders, venture capitalists, and angel investors can create value by disrupting various industries out of a desire to enrich themselves, and this is wholly compatible with philanthropic investors entering at different points of the business cycle. If circumstances were correct, it may make sense to start a new firm. But the lack of a monopoly on brilliant talent would not prevent the tactical entry of different sectors by philanthropic investors.
Competitive firms often need to reinvest rather than make cash profit distributions to shareholders; would this be acceptable for a Profit for Good business? Firstly, some firms would be conducive to a dividend-structure. Secondly, when firms reinvest, this tends to increase the value of the ownership stakes of the business. This value appreciation (and, indeed, principal amount of the asset) can be converted to cash in various ways, such as debt to be serviced by later infusions from the Profit for Good business. There further could be a small percentage of the Profit for Good business, say 5-10% that could be privately held, which could later be absorbed in stock buybacks. Essentially, this question is a question of corporate finance that should ultimately be resolvable.
Won’t there be moral objections to activities that normal businesses use to compete, such as extreme executive compensation, environmental effect, low worker pay? This is a tricky question, but for one, it is not clear to me that bad behavior is necessarily the most effective business strategy, and firms may enjoy a premium for avoiding acting poorly. But even if Profit for Good businesses engage in activities that consumers take issue with regarding traditional firms, such as competitive (i.e., princely) compensation for CEOs, it is not clear why this would cause a consumer to choose a company that enriches shareholder over a company that helps fight global poverty. People all over the world choose the “lesser of two evils” in the political contexts routinely.
Why hasn’t such a movement for something like Profit for Good happened already? Because Profit for Good businesses, by definition, generate profit for charities instead of traditional investors, a major issue they face is that Profit for Good businesses cannot access the same investment pool of private equity and angel investors for seed money. One solution to this would be to seek financing from philanthropists, particularly those who are looking to spend their money to advance the same cause area as the Profit for Good businesses. However, the question remains: if Profit for Good is a more effective means of funding charities than direct donation, why has this not been more fully explored already? I suspect that the reason stems from a deep-seated psychological separation between the way that people think about the business world, essentially a rather competitive, dog-eat-dog mindset and the kinder, more magnanimous mindset involved in charity work. The notion also seems to violate intuitions about sacrifice involved in charitable contributions, although these intuitions do not hold with the deliberate substitution of traditional stakeholders for charities. I would also note that some further red-teaming can be found in the comments of the longer paper.
Are there other possible advantages Profit for Good businesses might enjoy? Why thank you- nice not to be raked over the coals for a minute! Yes! Employees may be attracted to work for Profit for Good businesses because many employees find it important to work for companies that do good, This allows for competitive advantages in hiring and morale. Profit for Good businesses may get discounts due to their worthy mission enabling lower prices than competitors. There may be some tax advantages. Potentially, Profit for Good businesses could enable greater consumer choice in charities. Advertising from organizations such as the Consumer Power Initiative which promote Profit for Good businesses could help Profit for Good businesses spend less on advertising individually, lowering costs vis-à-vis competitors.
Profit for Good businesses should enjoy an advantage over normal companies because they serve a more popular master—charities- than normal companies—rich shareholders, thus enabling consumers to benefit popular and worthy causes through normal purchases. This advantage is not balanced by other factors, and thus Profit for Good businesses, once created and known by consumers, should expand throughout market sectors and deliver profits to charities many multiples of costs incurred in their creation. Critical to note in considering attention/funding Profit for Good is not just the initial funds generated for effective charities, but also the move towards an economy where profits are enjoyed not just by the already wealthy, but by effective charities.
I’m Convinced: How Can I Help?
First things first, if you think this idea has potential, please share it with 3 people. If you don’t think it has potential, please share why you think so in the comments so we can improve or learn and address your concerns. I have started a nonprofit called the Consumer Power Initiative, with the purpose of promoting Profit for Good . I could use insights from all kinds of people wanting to share thoughts about directions the Consumer Power Initiative could go. I could use advice and guidance from those who have worked in the profit or nonprofit spaces. I could use technical assistance, such as people who have worked on websites, especially Shopify or other ecommerce experience. I could not begin to think of all the different categories of insight which might be useful to this project. Finally, I could use funding, although I will defer this request until 501(c)(3) status has been finalized.
Consumer Power Initiative website: https://www.consumerpowerinitiative.org/