Catalytic Capital | October 29, 2020

How a portfolio of inclusive businesses prioritized the poor through COVID

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The spread of COVID-19 and the economic devastation in its wake have shown just how necessary for-profit approaches are to serving the poor and vulnerable. In 1970, economist Milton Friedman’s landmark essay asserted that creating shareholder value is the sole purpose of a business—rejecting the idea that a business should promote “desirable ‘social’ ends.” Last year, the Business Roundtable rejected this position and declared that capitalism should serve all stakeholders. While Milton Friedman is an American economist and the Business Roundtable an American organization, this debate over the role of business is a global one. And it threatens to remain an ideological one.

The idea that a business’s sole responsibility is to maximize shareholder value is both practically unsustainable and morally irresponsible. Over the past 20 years, Acumen has invested patient capital in 136 companies and seen how business can play a critical role in solving the toughest problems of poverty. Companies in this portfolio have tangibly shown what it looks like to serve stakeholders—particularly the poor—in addition to shareholders. 

The potential of business to address social problems has been no more apparent than during the COVID-19 pandemic. COVID-19 has laid bare throughout the world how health and economic crises disproportionately impact the poor, putting every business’s values and principles in high relief. 

Acumen investee Kentaste, for one, is making sacrifices to support its stakeholders most vulnerable to the COVID-19 crisis.

Redefining success

In 2014, Kyle Denning set out to change Kenya’s coconut industry.

Kyle saw that less than 5 percent of Kenya’s estimated 100 million coastal coconuts were being processed into products. Instead, over 50,000 Kenyan farmers were selling their coconuts raw at local markets or to small-scale brokers. With little negotiating power, most of these farmers had to sell their coconuts at fluctuating market prices, or, worse, at whatever price buyers might offer. That same coast was home to one of Kenya’s poorest communities, where 57 percent of people were living on less than $3.20 per day. Kyle realized this was backwards. And he saw an opportunity to turn it around.

Alongside large companies, small social enterprises like Kentaste are joining a movement to redefine success in business. Companies from Chobani to small producers are increasingly reimagining business to measure success not just by shareholder returns but by how their stakeholders fare: customers, employees, suppliers, shareholders, and the earth itself.

These models are emerging as we come to realize how harmful “business as usual” can be when it tells us to chase shareholder returns at all costs. Ironically, this too often leads to the poorest among us bearing the highest burdens and risks.

In the $100-billion global chocolate industry, smallholder cocoa farmers receive only 6 percent of a chocolate bar’s sales—amounting to an average income of less than $1 per day. In the United States, the poorest tenth of Americans spend 35 percent of their incomes on healthcare—as compared to 3.5 percent for the richest tenth. Around the world, low-income families spend twice as much of their incomes on lighting and phone-charging costs than high-income families—even though they consume five times less energy. 

There’s a more creative way to do business, and it is up to companies themselves to reimagine the norm.

Stress tests

Facing the extreme stressors of COVID-19, it would be easy for a company to compromise on its founding principles to get by. Yet these principles exist not for the easy moments, but for the hardest. 

By 2019, Kentaste had become the largest buyer of coconuts on the Kenyan coast. The company, part of a growing movement of African farmer-allied intermediaries, buys nearly 2,000 smallholder Kenyan farmers’ coconuts at fixed prices—50 to 100 percent higher than brokers—and at consistently high volumes to ensure that, no matter how much global coconut prices may rise or fall, its farmers will always make the same steady income for what they produce. In those same coastal communities, the company’s 150 factory employees process the coconuts into coconut oil, milk, cream and flakes for sale in hundreds of grocery stores, hotels and restaurants across East Africa.

And then came the pandemic. 

As borders, stores, hotels and restaurants closed indefinitely, Kentaste’s meetings quickly turned into conversations on working capital gaps and emergency measures to stay afloat through the economic downturn.

The company’s focus remained on their founding intent: to spark Kenya’s domestic coconut industry and reduce poverty. Kyle and his team identified every possible cost that they could reduce if conditions persisted or even worsened, from renegotiating loan repayment terms to reducing senior staff salaries. Their priority was to maintain the incomes of their farmers and factory employees through the pandemic at all costs. But they were still facing a capital gap. Without emergency stopgap funding, Kentaste would have to reduce the pay of their farmers and workers—their stakeholders with the thinnest safety nets.

Prioritizing stakeholders

In response to COVID-19, Acumen launched two emergency facilities to provide our portfolio companies and Fellows with the funding they need to support the low-income communities most affected by the pandemic. In some cases, this means supporting a company in its pivot to serve its stakeholders most vulnerable to crisis: a clothing company like The Assembly Hub producing face masks for frontline workers in Nigeria, for example, or a job training company like LabourNet turning to serving food and protective equipment to displaced workers in India.

In other cases, it’s more simple. Sometimes, supporting low-income communities means enabling a company to prioritize its most vulnerable stakeholders by shouldering the biggest stresses. Acumen’s emergency funding is enabling Kyle and his team to keep Kentaste afloat while also absorbing the economic shocks of the pandemic, rather than transferring them to their farmers and workers. 

And they’re not alone. Acumen’s emergency funding is enabling textile enterprise Islamapur Cottage Industries Association to maintain its weavers’ incomes through Pakistan’s lockdown by overhauling its product line. It’s enabling fintech startup Numida Technologies, founded by two Acumen Fellows, to defer loan payments for over 1,000 small business owners in Uganda. It’s supporting Acumen investee Esusu in launching an emergency rent relief fund for low-income American families.

This is the role of a business in a crisis. We need to rally our resources around the small, early-stage stakeholder business models. The role of investors like Acumen is to accompany them. Our responsibility in a crisis like COVID-19 is to both support and enable companies to do what’s right, not what’s easy. It is up to us to help them make these decisions through thick and thin—not just with our voices in the boardroom but with the emergency funding to make them a reality. 

Otho Kerr is Acumen’s chief investment officer.