Guest Lecture to Prof. Suzette Viviers Finance Honours Class of 2014, Stellenbosch University, on 4 February 2013

1. Finance Honours Class: Guest Lecture
Stellenbosch University
4 February 2014

2. Introduction
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Vodacom
Samsung
Medscheme Group
Alexander Forbes
Hewlett Packard
Edgars
Diners Club International
FirstRand
Old Mutual Group
LoveLife
Guide Dogs Association
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SANParks
Peace Parks Foundation
GivenGain
City of Cape Town
University of Stellenbosch
Medicins sans Frontiers
WWF SA
UNICEF
Greenpeace
Nelson Mandela Foundation
PayProp Capital

3. Introduction
Connecting Capital:
Investigating the factors influencing the
decision-making processes of
institutional investors towards
responsible investing

4. Expectations

5. Principles of Corporate Finance
Shareholders
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Investment
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Real
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Assets
Profit
Maximisation
Metrics
Instruments
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Value
Governance
Honesty
Ethics
Responsibility
Relationships
Timing

6. Definitions
Finance:
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.

7. 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?)

8. 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?

9. Left Turn…
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Social Enterprise - Why 'Social'?
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The Missing Middle - The Gap in Capital Markets
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Investing for Impact - The Rise of Investor Activism
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Relational Economics - The Power in People
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The Source of Innovation - The Periodic Table of Elements

10. Wicked Problem: Poverty
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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…

11. Solution: Aid?
Aid and Income Growth in Africa
20
2.5
18
2.0
16
14
1.5
12
1.0
10
8
0.5
6
0.0
4
-0.5
2
0
-1.0
Aid/GNI
Growth GDP/Capita
Growth GDP/Capita (%)
(10-year moving average)
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
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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/GNI (%)
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12. Solution: ‘Social’ Enterprise?
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Economic growth is the fastest way to reduce poverty – China, Asian Tigers
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FDI is critical to economic growth but requires political and economic
stability, good governance – factors missing in poor countries
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‘Social’ entrepreneurs needed to fill this gap
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Triple Bottom line – financial, social & environmental
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Sustainable profitable businesses
Maximising financial and social returns
Employment
Empowerment
Entrepreneurship training
ESG (Environmental, Social, Governance)

13. Topic # 1: Social Enterprise
What
is a social enterprise?
How do these differ from conventional enterprises?
Case Studies

14. 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?

15. The Missing Middle
Public Capital
$ Trillions
Global
Enterprises
Low Cost Capital
Listed
Companies
Medium Cost Capital
Private
Capital*
$10 B
SMEs
“The M
issing M
iddle”
Microfinance
$25 B**
Grant Aid
$325 B***
*Cumulative investment in frontier market SMEs.
**Estimated loans outstanding.
***Foreign development assistance, private
philanthropy & remittances, per annum.
MicroEntrepreneurs
Limited Access to Capital
Poverty
No Access to Capital
Abject Poverty
Prosperity Drivers
High Cost Capital
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Rule of law
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Property rights
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Physical security
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Economic freedom
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Health & education
Prosperity Ladder Concept: Legatum Global Development

16. Funding Sources
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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
16

17. Funding Requirements
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Business Plan
Financial Forecasts
Track Record
Management & Board
Good Governance
Current Financials
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Creativity
Communication
Marketing
Perseverance
Sense of Humour
Prayer

18. Topic # 3: Impact Finance
Impact
Investing Continuum
Case Study: Silulo Ulutho Technologies
Concept: Social Impact Bonds

19. Topic # 3: Investing for Impact
Impact
Investing Continuum
Case Study: Silulo Ulutho Technologies
Concept: Social Impact Bonds

20. Impact Investing Continuum (Oostlander)

21. Impact Investing Analysis (Markets for Good)

22. Silulo Ulutho Technologies
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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

23. Financial Innovation: Social Impact Bonds
Source: From potential to action: Bringing social impact bonds to the US, McKinsey Company 2012

24. Topic # 4: Relational Economics
Why
‘Relational’?

25. Relational Economics
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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
Seven steps to loyalty
7. Advocacy
6. Commitment
5. Emotional loyalty
4. Relationship forms
Find values in the brand and willing to
take action on behalf of it
“Loyalty
Hurdle”
Mutual problem solving
Bond becomes stable.
Positive interaction on both sides
“Loyalty Hurdle”
3. Behavioural loyalty
No emotional tie
2. Satisfaction after first purchase
1. Expectation
Customer is satisfied unless
something better comes along

26. Loyalty Economics
The Loyalty-based Cycle of Growth
Source: Reichheld, 1996, 2001

27. The Purpose of Loyalty
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The ‘Right’ Contributions from the ‘Right’ Relationships
How do you find the ‘Right’ Stakeholders and keep them?
Source: Reichheld, 1996, 2001

28. Relational Economics:
A Virtuous Value Chain
Investor
returns/reinvestment
Business
&
Co
st
E
In ffic
n o ie
va nc
tio ie
n s
Co
m
Op p e
po ns
rtu ati
ni on
t ie &
s
Superior
Products
Market & Industry
Conditions
Value Added
Benefits
er
m nce
to e
u s l lig
C e
t
In
Fu
lfil
me
nt
Tu
Environmental
Concerns
rno
Spend &
Profile
Partner
Quality
Assurance
Loyalty &
Referral
Training
& Incentives
ver
Legal & Ethical
Regulations
Pr Sup
od er
uc ior
tiv
it y
Employee
or
eri
up ice
S
v
Ser
k
bac
eed
F
Customer
Community
Responsibilities
marketing/mindshare
Competitor
Source: Habberton, 2005

29. Relational Economics:
Creating Shared Value
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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:
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“…how a company has, both positively or negatively, impacted
on the economic life of the community in which it operated …”
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Principles for Responsible Investing & CRISA

30. Topic # 5: The Source of Innovation
The
Periodic Table of Elements (as per Prof. J. Kinghorn…)

31. The Periodic Table of Elements