I by IMD magazine - Preview Issue XII

#12 December 2023

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IMPACT ECONOMY HOW TO MAKE A POSITIVE DIFFERENCE

BLENDED FINANCE DRIVES PROGRESS BIODIVERSITY AND eDNA

EMPOWERING NEURODIVERSE TALENT

LESSONS IN LAUGHTER REBUILDING COMMUNITIES THE RISE OF STEWARD-OWNERSHIP ibyimd.org

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[ Foreword ]

The impact economy offers a positively different approach

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e are inundated with signals indicating that our business practices are unsustainable.

Investor activists, as reported by Kristin Hull in this edition of I by IMD, are actively urging companies to address issues that are often ignored. How can we transition to a business model that aims to produce positive social and environmental outcomes alongside financial returns? As you will discover in our in-depth coverage, the impact economy could be the answer.

Several factors are converging to position impact investing as an appealing alternative to conventional business practices. These include a clearer understanding of impact business models, innovative financing schemes, supportive governance structures, enhanced impact assessment methodologies, and the emergence of successful case studies.

Participants in the impact economy are becoming more explicit about their intentionality, defined as their “Theory of Change,” as highlighted by Vanina Farber and Patrick Reichert. Frameworks like “civic wealth creation,” proposed by Sophie Bacq and Tom Lumpkin, are paving the way toward inclusive business models established through collaborative efforts between corporations and communities.

Illustration: Jörn Kaspuhl

Financing models for the impact economy are falling into place, as noted by Maximillian Martin, enabling private investors to make a positive impact without taking on undue risks. Maryanne Ochola advocates for increased inclusion of Africans in the impact ecosystem, emphasizing the significant value-creating opportunities that persist in doing business in Africa.

Innovative governance structures that challenge traditional concepts are being pioneered by companies such as Patagonia.

In an interview with Bryony Jansen-van Tuyll, Adrian Hensen illustrates how steward-ownership, a governance model that separates control and voting rights, can empower the impact imperative.

Impact measurement, as argued by Sonja Haut, enables companies to grasp opportunities for maximizing value, not only financially but also in market and talent management. Adrian Dellecker further explains that technology is playing an increasing role in facilitating access to novel forms of data, allowing us to measure aspects that were once considered unmeasurable such as biodiversity impact.

Impact investing acts as a catalyst for fostering a more inclusive, sustainable, and socially responsible global economy. Funds with a focus on impact are starting to demonstrate the viability of this new model. In his article, Adrian Ackeret, the Chief Investment Officer of elea, an early-stage philanthropic investor, shares success stories that suggest a potential shift in the ecosystem.

Another focal point in this issue addresses a dimension of diversity and inclusion often overlooked by many companies – harnessing the talents of people with disability and neurodiversity. Nancy Doyle and Heather Cairns-Lee illustrate that organizations can learn to accommodate and enable neurodiverse talent.

Additionally, Tania Lennon shares a framework for leveraging the contributions of people with disability, who arguably make up the world's largest minority group.

As in every issue, you'll discover compelling insights in our regular columns by Shelley Zalis (focusing on intentional investment in women), Jerry Davis (questioning the value of venture capital), George Kohlrieser (discussing authenticity), and Howard Yu (exploring future readiness). And don't miss Jessica Sibley's “CEO Dialogue” with IMD President Jean-François Manzoni as they discuss the reboot of TIME magazine. ■ Treat yourself to this high-impact issue!

Anand Narasimhan, Dean of Research December 2023 • I by IMD 1

[ CONTENTS ] 36

04 [ In good company ]

The venture capital model has failed far too many smaller firms seeking the funds to grow. A fresh approach is needed, argues Jerry Davis.

20 CHF

[ IMPACT ECONOMY ] What is the impact economy and why should it matter?

And how do you know if your actions are making a positive difference? Our 40-page report provides the answers.

Cover picture: Created using Microsoft Image Creator

IMPACT ECONOMY HOW TO MAKE A POSITIVE DIFFERENCE

BLENDED FINANCE DRIVES PROGRESS BIODIVERSITY AND eDNA

EMPOWERING NEURODIVERSE TALENT

LESSONS IN LAUGHTER REBUILDING COMMUNITIES THE RISE OF STEWARD-OWNERSHIP ibyimd.org 11_IMD_2023_Edition_12_Dezember_2023_COVER_Final.indd 29

05.12.23 11:20

07 Vanina Farber and Patrick Reichert

propose using the ‘Theory of Change’ as a model to measure if your actions are achieving the results you seek.

10 Economies across Africa are being

transformed by targeted investment, but more needs to be done. Maryanne Ochola offers six ways to accelerate the pace of change.

12 ‘Civic wealth creation’ is strengthening local communities through commerce and collaboration. Sophie Bacq and Tom Lumpkin explain how such initiatives can help to solve complex local problems.

17 By taking a lead in the impact

economy, women can transform the way business operates and change lives, writes Shelley Zalis.

18 Impact metrics are about more than just

keeping regulators and investors happy, argues Sonja Haut, they can also help to unearth new pockets of value for companies.

2 I by IMD • December 2023

22 Blended finance has the power to unleash the capital needed to drive progress toward the UN Sustainable Development Goals. Maximilian Martin explores the options.

26 The responsibility to maximize

profits guides how institutional investors invest on behalf of others. But that does not mean investing in climate change is off the table, explain Emil Moldovan, Todd Cort, Matthew Goldberg, Jennifer Marlon, and Anthony Leiserowitz.

18 39 Be inspired by some wise words on making an impact from a book of quotations compiled by IMD’s Dominique Turpin.

40 Ventures that change ecosystems will help to develop the impact economy, writes Adrian Ackeret. He offers three ‘levers’ to add value and support innovation.

30 Adrian Hensen, Co-founder of the Purpose Foundation, explains to

Bryony Jansen-van Tuyll how the model

of steward-ownership equips businesses to deliver positive change.

34 Activist investors have the power

to direct the corporate world to embrace positive change. Kristin Hull offers a four-step guide to effective engagement.

36 With over two-thirds of species lost in the past 60 years, regulators want businesses to be accountable for their biodiversity impact. Adrian Dellecker explores the rise of biodiversity data startups seeking to help companies to adjust.

22 43 Impact venture capital in Europe is generating lower financial returns than its traditional counterpart. Valentina Masseretti, Anita Quas, Stefano Romito, and Clodia Vurro offer possible reasons why.

Photos: UNICEF/Mojtba Moawia Mahmoud, David Clode via Unsplash, © Volvo Bus Corporation

#12 December 2023

46 [ The human factor ]

Learning how to effectively accommodate and enable neurodiverse talent unlocks benefits for business and the wider workforce, explain Nancy Doyle and Heather Cairns-Lee.

51 Executives are often oblivious to the seven

psychological factors that shape human behavior.

Understanding and recognizing these needs opens the door to better leadership, writes Michael Yaziji.

55 A multi-step approach can help to attract and

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develop the largely untapped talents of people with disability, suggests Tania Lennon.

58 [ In the mind’s eye ]

Striking a balance between being approachable and authoritative can be difficult. George Kohlrieser explains in seven steps how to become an authentic and effective leader.

60 [ Leadership skills ]

Humor makes for better leadership, but not everyone is a natural comedian. However, through training and practice, executives can acquire the essential skills they need, writes Emilia Bunea.

63 [ I reader ]

Photos: Michael Steele/Getty Images, BBC, Purpose, Courtesy of TIME, Beyond Good

IMD professors recommend books that will make ideal gifts for the festive season.

64 [ Technology ]

From drug development to finance, the potential of AI for business is huge, but effective safeguards are needed, write Sarah Toms and Amit Joshi.

55 70 [ Sustainability ]

The telecoms group Telenor worked with UNICEF to increase digital birth registrations in Pakistan. It’s a powerful example of how firms can experiment with sustainable business models to empower societies, writes Zainab Hussain Siddiqui.

74 [ Finance ]

Companies responding to the shock of higher borrowing costs must beware of three common misconceptions, argue Salvatore Cantale and Marc Woodfield.

66 [ Coaching corner ]

Understanding what motivates you can help to build habits to sustain yourself when faced with uncertainty, explains Francesca Giulia Mereu.

68 [ CEO dialogue ]

Jessica Sibley, CEO of TIME, tells Jean-François Manzoni how she is transforming the 100-year-

old media brand.

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78 [ The forecaster ]

68

60

In the tech, pharma, and fashion sectors, Microsoft, Pfizer, and Nike have the knowhow and agility to make the most of the fast-shifting business landscape. Howard Yu has the details.

80 [ Preview ]

Join us in March when I by IMD will cast light on the opportunities and dangers for business in a world increasingly dominated by artificial intelligence.

December 2023 • I by IMD 3

[ In good company ]

A fresh start is needed after the misadventures of venture capital The venture capital model has failed far too many smaller firms seeking the funds to grow but, argues Jerry Davis, there is a better way

It’s not just WeWork that has disappointed retail investors. The American stock market is home to hundreds of tiny money-losing companies whose valuations drop after they go public. What gives?

Now is a good time to re-evaluate the role of venture capital in the economy. VCs have fundamentally distorted our capital markets and our system of business creation, sanctifying “going public” as the crowning achievement for young companies. But a public listing is only suited to a tiny minority of businesses. If our goal is to create sustainable companies, generate jobs, and provide investment opportunities for families outside the top 1%, perhaps we should re-think how we fund our enterprises, and what role the stock market plays in this system.

Taking stock of the market

American capital markets are vast and deep. A recent report notes that “with a combined market value of nearly $50tn, the US stock market is nearly five times larger than the second biggest“ in China. And yet almost all the real action is concentrated in a small number of companies.

Stock markets in the US list roughly 4,000 domestic companies, but 80% of the market’s value resides in firms that make up the S&P 500 index.

4 I by IMD • December 2023

And one-quarter to one-third of the value of the S&P 500 at any given time is made up of just seven tech companies: Google, Apple, Facebook, Amazon, Microsoft, Tesla, and Nvidia – “The Magnificent Seven”.

Moreover, 10 stocks accounted for 89% of the index’s gain in 2023.

It has always been true that a small number of companies account for most of the market’s gains, but this level of concentration is something new. A tiny group of tech conglomerates is uniquely responsible for how the world’s largest stock market performs (See table).

Like other S&P 500 companies, the tech conglomerates are devoted to shareholder value. Among the S&P 500, there is a rigorously enforced set of rules around corporate governance: no “poison pills”, no classified boards, and no dual-class voting shares for new admissions. Activists enforcing conformity to their codes of conduct almost inevitably target members of the S&P 500 and not the smaller companies outside the index. Thus, with few exceptions, companies in this index follow a rigid set of standards aimed at ensuring their commitment to creating shareholder value.

The ownership of companies in this index is also highly concentrated: nearly 25% of the average S&P 500 company’s share is held by just three giant fund families, invested on behalf of the 58% of American families who own shares.

Outside the S&P 500, things are very different. Far more companies have poison pills (a defensive strategy whereby directors buy up large chunks of shares) and classified boards, aimed at thwarting activist shareholders. They may also have dual-class shares that give the founders absolute voting control. And index funds mostly ignore them.

In short, the US stock market today consists of a handful of giant tech conglomerates with vast valuations, the rest of the S&P 500, which are

Illustration: Jörn Kaspuhl

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eWork’s declaration of bankruptcy in November closed a revealing chapter in Wall Street history. The company’s failed IPO in 2019 became a cautionary tale of the wild excesses enabled by the venture capital (VC) funding model – in particular, VC’s ability to fund audacious bets, turn visionary founders into overnight billionaires, and burn investor cash by the barrel-load. A chastened WeWork ended up listed through a different, less demanding route, but its sketchy business model – taking out long-term leases on acres of office space and retailing access by the month – ran headlong into the COVID-19 pandemic, leading to a disastrous collapse in its share price.

largely owned by three index funds, and 3,500 or so firms that are often small, loss-prone, and invisible to most activist investors. This last territory is where most IPOs dwell.

The world made by venture capital

Venture capital plays an exalted role in American capitalism. Most prominently, Silicon Valley was built on venture capital. Its high-growth model is widely emulated: during the 1990s and 2000s, economic developers around the world sought to launch some variant of the Silicon Valley model in “Silicon Prairie” or “Silicon Glen” or “Silicon Gulch,” in the hope of germinating world-beating businesses that bring jobs and prosperity to the local economy. The leading VC practitioners are regarded as intellectuals whose wealth certifies their genius. Sometimes they even pen lengthy manifestos to guide lesser mortals.

But there is a bug built into the venture capital model. VCs are oriented toward maximizing financial returns for their partners, who typically get their payday when portfolio companies exit, either through an IPO or acquisition. Their ideal outcome is going public at the highest valuation possible and cashing in for the next round. On the other hand, retail investors who buy shares in a public company aim to realize returns over time – and yet for many venture-backed enterprises, the IPO is the peak of the bubble in terms of valuation. (A skeptic might even compare this model to infamous pump-and-dump operations, as in The Wolf of Wall Street film based on the memoirs of a convicted trader.) As my analysis of recent data on IPO firms demonstrates, this may not be a situation conducive to jobs and prosperity.

Let’s start with jobs. Among the roughly 1,800 American companies that have gone public since the 2008 crisis, the median company created just 32 jobs per year – about the size of a typical McDonald’s outlet. That’s hardly a jobs boom. And 57% of these companies were concentrated in just four states: California, Massachusetts, Texas, and New York.

A glance at the industries of IPO companies helps to explain why they are not major job creators. About one-third are in biotech (broadly), where the median company employs just 39 people at IPO. These firms grew by 10 employees per year on average. And the biggest employers among IPO companies tend to be seasoned enterprises that had previously gone private, such as grocery giant Albertsons.

Evidently venture capital is not the most reliable pathway to creating jobs. But are VC-backed firms at least creating wealth for their shareholders? Here too the story is not encouraging. The Wall Street Journal reported that 87% of companies that went public in 2021 were trading below their IPO price by the fall of the following year, and Crunchbase found that the biggest IPOs of 2021 had lost 60% of their value by October 2023. Of the 26 companies that debuted with a $10bn or higher valuation, only one was not trading well below its IPO price. Retail investors who jumped on these new IPOs on the day they listed would have learned a hard lesson in American capitalism.

‘Among the roughly 1,800 American companies that have gone public since the 2008 crisis, the median company created just 32 jobs per year – about the size of a typical McDonald’s outlet’ This should not be too surprising. Four in five companies that have gone public since 2019 reported a loss last year. Even among seasoned firms, losses are common: half of all listed firms in the US had negative net income in 2022, continuing a trend that dates back two decades.

To be clear, there were some notable exceptions to this grim picture – two, to be precise. Tesla grew from roughly 250 employees in 2008 to 130,000 today, and Facebook grew from 2,000 to 86,000. Both have made their early investors rich. But should we premise our system of funding enterprises on a tiny handful of extreme cases? Judging by the numbers, WeWork is more representative of the market than Facebook or Tesla.

There is some evidence that retail investors are catching on. Professor Jay Ritter reports that there were only 38 IPOs in 2022. This is the smallest number since the financial crisis of 2008, and the second-smallest number in over four decades – at a time when, by many indicators, the economy is booming. Perhaps it’s now twilight for the VC model.

There is an alternative, maybe more than one

If the stock market is broken as a method of funding enterprise, then »

TOP S&P 500 COMPANIES BY MARKET CAP 1998

2003

2008

2013

2018

2023

COCA-COLA MICROSOFT EXXONMOBIL MERCK INTEL

MICROSOFT GENERAL ELECTRIC EXXONMOBIL WALMART CITIGROUP

EXXONMOBIL GENERAL ELECTRIC MICROSOFT AT&T PROCTER & GAMBLE

APPLE EXXONMOBIL ALPHABET WALMART MICROSOFT

APPLE ALPHABET MICROSOFT AMAZON FACEBOOK

APPLE MICROSOFT ALPHABET AMAZON BERKSHIRE HATHAWAY

December 2023 • I by IMD 5

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