Why Guided Consumption can Work

Vincent van der Holst28 Jul 2022 12:18 UTC
47 points
10 comments7 min readEA link

ELI5: Guiding Companies/​Producers are companies where charities own all or almost all of the rights to profits. Guiding Companies can work because they already exist at every scale ,are more profitable and live longer than their competition. We think there’s high impact in building and buying from guided companies, as well as lobbying existing GC’s to donate according to EA principles.

TL;DR: We spent the last month talking to more than 100 people (EA’s, investors, consumers and brands) about Guided Consumption. The majority of (negative) feedback we got falls under three categories:

  1. You won’t be able to fund this/​giving your profits away will slow down growth/​this can’t scale

  2. Your assumption that guiding companies have competitive advantages is wrong

  3. I want to see data and research that this works

It seems that Guiding Companies actually grow faster, are more profitable and live longer than their competition, so the rational option for a philanthropic investor looking to maximize their giving could be to fund Guiding Companies as opposed to investing traditionally owned companies (or even direct donation, provided that there are means of converting equity into cash for charities).

With Guiding Companies being more profitable, it also follows that these companies have competitive advantages. The main advantages that we found in research and from our own experience and research were higher employee productivity and retention, higher customer loyalty, lower costs, better alignment with values and mission, higher innovation, research and development and a long-term orientation. We anticipate that the competitive advantages will scale with greater public awareness of their ability to help charities through normal purchasing, the advancement of which is one of BOAS and CPI’s missions.

The research shows that, even in the current status quo, Guiding Producers can be competitive, or even have advantages over traditional companies. Of course, BOAS and CPI are interested in changing the status quo for the benefit of Guiding Producers. But establishing the baseline viability or advantaged status even as is provides a floor from which we believe we will be able to climb beyond.

We will explain in more detail below, and link to all of the data and research. We still welcome additional feedback or concerns (we still have many concerns, but these are for an upcoming post).

You won’t be able to fund or scale this

To scale a business you need money and a great team, and with money you can hire a great team (although money is not the primary driver for great people, just look at EA).

The most common feedback is that investors won’t invest in Guiding Companies because they don’t get a return, and they are correct. We’ve talked to big (impact) investors, and they won’t fund this.

But this world has more than 3.000 billionaires, many of which are philanthropists and investors. When they invest they want the highest possible return on investment (that they can later donate) and when they donate they want the highest possible return on donation (i.e. giving based on EA principles). If Guiding Producers can fund charities more effectively than direct donation (because of their competitive advantage), this could open up a large pool philanthropic investment.

Research shows that foundation owned companies are six times more likely to survive over a forty-year period than conventionally owned businesses and having higher economic performance of profitability and market value than private or disperedly owned companies (see page 14 for an overview). If this is true, philanthropists trying to maximize their donations should invest in Guiding Companies because these create better returns on investment than their competitors. And this scales: Bosch has donated more than 100 billion to charities so far and makes 4 billion in profit each year. There are many other examples, especially in Europe and more specifically Denmark, where 70% of the value (p.36) of the stock market is from companies that are at least partly owned by foundations.

Of course, there is the risk of sampling bias from this evidence, i.e., it may be that firms owned by charitable foundations tend to already be excellent firms, perhaps because they are a means for a founder to attempt to immortalize his/​her legacy. (Hansmann & Thompsen 180). However Hansmann & Thompsen’s paper on the Governance of Foundation-Owned-Firms reviews the existing literature on non-pecuniary incentives and advance several bases that that suggest a causal relationship between foundation ownership and performance: lack of distortion effects of incentive pay; lack of costs associated with influence activities and cognitive bias; the ability to prioritize long-term goals rather than short term earnings; a greater degree of autonomy by directors; increased performance for agents working for principals that advance charitable goals rather than that of their personal consumption or enrichment; confidence of agents that work and contributions will last rather than be undone by downsizing or spinoffs engineered by activist investors, and greater personal identification of company agents with the company they work for. (Hansmann & Thompson 186-90). This research accords with common sense notions that agents are interested in working most diligently and most faithfully (rather than just signaling effectivity through metrics that imperfectly capture value)

However, most current Guiding Companies do not donate according to EA principles, so an investor might maximize their monetary giving, but if this is donated ineffectively the better path would still be to give directly to EA charities. The optimal path could to be to fund Guiding Companies who donate according to EA principles, and possibly persuading those who don’t to start giving according to these principles. Both these opportunities seem like they could have very high impact, which is why BOAS is working on the first and CPI on the latter (among other things).

Your assumption that guiding companies have competitive advantages is wrong

The research that Guiding Producers are more likely to survive and are more profitable contradicts this. It naturally follows that these companies must have competitive advantages, otherwise they would die more and be less profitable.

There’s one example that we think shows the potential of Guided Consumption, Amazon and Amazon Smile (which is Amazon where 0.5% of your sale goes to charity). This is the fairest comparison we could find, because it’s basically the same service with one donating some (not all) of profits to charity. We checked the growth from both and found that Amazon Smile is growing twice as fast (likely faster, because the Amazon number includes worldwide purchases and Amazon Smile is only active in the US, Germany and Austria).

The competitive advantages we found in several studies found that Guiding Producers live longer, are more profitable, have higher employee productivity and retention and higher customer loyalty. Both in our research and talking to many people, we found time and time again that people do care.

We also wanted to research our own industry and business directly so we conducted our own research (independent, but commissioned by BOAS). It concludes that “philanthropic enterprises should be able to meet the economic needs of their current and future stakeholders without compromising the objective to donate all of their profits to non-profit organisations and charitable causes. However, the research findings do not suggest that their corporate philanthropy alone is enough to drive economic sustainability. Instead, philanthropic enterprises should preserve some flexibility in the yearly donation percentage and reinvest a part of their profits to market their philanthropic endeavors and develop their business.” This model of business, in which profit is used for reinvestment and financial health as well as “dividends” (i.e., donations), is, in fact, the approach the CPI and BOAS endorse. Indeed, such use of profits increases business value, which is why no or low dividend companies like Amazon have pleased their shareholders despite not directly giving them money. As long as charities effectively hold equity, value appreciation inures to their benefit. Corporate finance allows mechanisms by appreciation in equity can be translated into cash that charities can use for their purposes.

But even if people don’t care, it seems that Guiding Producers compete or outperform and outlive their peers anyway. Many of the companies that are foundation owned do not advertise that fact. They also outperform their peers because foundation owned businesses are aligned with their mission and values, and they can orient on the long term, reinvesting more of their profits into their business (as opposed to paying dividends to shareholders) to become more resilient and innovative and outperform their competition.

Furthermore, my experience with BOAS, has revealed that economic actors other than consumers provides advantages for companies that make explicit that they work for charities. Consultants that normally charge over 200 euros/​hr are willing to provide BOAS free consultation. Brands offer higher commissions for sales made through BOAS than they offer other platforms. Essentially, these economic actors want to help BOAS because they are aware of who BOAS serves. We think that once consumers have this degree of awareness, they will similarly act favorably for BOAS and other Guiding Companies vis a vis normal companies.

This is why we think that if Guiding Companies advertise the good they do, taking advantage of consumer sentiment in favor of charities over the set of wealthy shareholders that tend to own private firms, they would see even stronger outperformance translating into greater market-share (or even monopolies). This effect is likely to be amplified by a movement to make consumers and other actors aware of their ability to help charities through economic activities, which is one of the functions of the Consumer Power Initiative. Research about social movement campaigns show that they may work, examples are littering and drunk driving campaigns and #MeToo. Campaigns regarding littering or drunk driving are likely successful because they ask their targets to do good in a manner that is low-cost, no (net) cost or negative (net) cost (for instance, refraining from littering is a minor convenience; securing a ride home when inebriated is inconvenient, but incorporating self-benefit is likely net negative cost). Asking the public to buy in a way that benefits effective charities rather than wealthy shareholders, because of its modest ask, is also likely to be effective.

To see if companies would benefit from advertising this fact we ran the exact ad from a competitor (one of our most successful competitors) and swapped one headline of three headlines from “100% sustainable baby products” to “100% of profits go to charity”. We changed the sustainable message in the description (one of two) to a donation message also. The non-profit ad was clicked on 50% more than our competitor’s ad (5.99% interaction rate vs 9.24% interaction rate).

Next to this quantitative analysis we also ran a qualitative analysis asking people how they would rate a company that donates 10% of profits to charities and how they would rate a company that donates all profits. 10% of profits was rated 7.1 and all profits was rated 8.7. Please note that donating 10% of profits is already exceptional.

The reply rate to our cold emails to sustainable brands is more than 20%. This is, by far, the best cold email I’ve ever sent. The average reply rate of cold emails is 1-5%. The conversion from reply to signed brands is almost 50%, meaning that for every 10 cold emails we sign up 1 sustainable brand (10% conversion rate). Most cold email campaigns are well under 1%.

We have been highly encouraged by the results from our surveys, tests and research, as well as the existing research and real world examples. We continue to think Guided Consumption is one of the largest opportunities to increase philanthropic giving (the world generates around 10 trillion in yearly profits), and potentially create awareness of EA giving among the general public, entrepreneurs and philanthropists. In a few weeks, we look forward to presenting a more theoretical paper that evaluates the costs and motivations of different agents within Guided Consumption, clarifying why we believe in the potential for Guided Consumption to transform the world economy.

Thoughts, feedback, concerns?

We encourage open feedback in the comments, but if you want to share anonymously you can send us a DM on the forum or email at vin@boas.co or brad@consumerpowerinitiative.org

Want to help?

BOAS is hiring interns and looking for a CTO. We’re also still looking for funding. If you are a parent in Europe, you may consider ordering from BOAS instead of Amazon. If you can help please email me on vin at boas.co

To learn about the Consumer Power Initiative’s mission, current projects, team, and opportunities to help, check out CPI’s first newsletter.

Vincent van der Holst28 Jul 2022 12:18 UTC
47 points
10 comments7 min readEA link