Making Trillions for Effective Charities through the Consumer Economy

By Brad West🔸 @ 2022-06-30T12:10 (+74)

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-Ă -vis competitors.

CONCLUSION

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.

My email: brad@consumerpowerinitiative.org

Consumer Power Initiative website: https://www.consumerpowerinitiative.org/

Longer paper: https://forum.effectivealtruism.org/posts/4j7CsFvG2ADsj33FD/guided-consumption-funding-charities-by-leveraging-consumer

BOAS:  https://boas.co/

Misercordia: https://misercordia.square.site/


 

Vincent van der Holst @ 2022-07-11T14:28 (+14)

A lot of the critique that we get is that we can't be sure this works because we haven't done enough research or can provide data to show that this works. That's great critique and this post addresses both.

Research

We commissioned research (a Master's Thesis that was just successfully defended) on the economic sustainability of philanthropic enterprises (i.e. guiding companies) that donate all profits. Please note the research was completely independent but we did pay the researcher for their time. 
 

Here is the main conclusion of the paper (I encourage people to read the abstract and discussion and conclusion if they want to understand more): 


"The thematic analysis demonstrates 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 endeavours and develop their business."

For those who want to dig deeper into all of the data and citations, you can find the thesis here. 

Data

I want to emphasize that there is already a lot of data in the paper, but this is additional data that we have. 

Please note that we will do purchase intent research tomorrow (what is currently our most risky business assumption) to see if consumers go for the donation option significantly more than a regular offering and we will test this with identical products and with a product people have a small disliking for, to see if people sometimes go for the lesser option if the proceeds go to charity. We will share here once we have the results of that research. 

Consolidating feedback

Brand and I have talked to a lot of people over the last couple of months about this concept and we get a lot of the same feedback, so we will start consolidating everything into one sheet together with us addressing the feedback. We will share that once it's done. 

Of course, more research and data is needed, but what we have found so far is very encouraging for the prospects of guiding companies. 

Mati_Roy @ 2022-12-24T18:25 (+9)

I just skimmed. I like the idea. That plausibly only works for sufficiently memetically fit charities (which varies based on the product/service), but that's probably still a significant number.

If this is thesis is true, then it means donors (of charity that have companies with a consumer based that is memetically fit for that charity) should buy companies and transform them into Profit for Good (at least assuming they're able to hire a good CEO, and maybe providing other incentive-based pay for the CEO if they don't have shares), because this would increase the valuation of the company, and so increase their donation impact.

Running the organization directly as a charity would also have other advantages, notably tax benefits and unlimited H1B visas.

I'll share on The Economics of Doing Good (Effective Altruists) and add on Cause Prioritization Wiki.

Brad West @ 2022-12-25T04:29 (+4)

Hi Mati.

Thanks for your thoughts.

I would push back a bit on your notion that it would only work with memetic matching. Especially if the PFG model were to take off, it may be pretty cheap and effective to signal that a company works for charities instead of shareholders. For instance, one of our thoughts with the Consumer Power Initiative is that PFGs could use a color-variant of our logo to signify a category of charity (maybe red for Global Health and Development, yellow for animal welfare, green for fighting environmental degradation). Essentially though, helping any of those causes, if you're not paying more, or otherwise sacrificing, should give you an edge regardless of whether there's a thematic match.

I also do not know about PFGs acting as charities themselves... I think charities in most places are limited in the degree to which they can participate in the economy this way... But in any case, a company with charities in the equity position can do most of what others can do. This is why I think this model will take off eventually. I just hope EA takes advantage of the model so that effective charities enjoy the fruits of our economies.

Thank you for adding this to those sources. I will take a look at the other entries!

Mati_Roy @ 2023-01-01T22:32 (+2)

yeah, could be a nonprofit but probably not a charity

Grayden @ 2022-07-04T09:28 (+9)

"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 would be my main concern about the idea. While I agree that bad behavior is not the most effective business strategy, there are a lot of behaviors that I would consider sensible (e.g. paying a CEO 6-figures, making redundancies, putting prices up when there's lot of inflation) but that many people would consider wrong (particularly in Europe). People can be very funny about capitalism. For example, many people prefer to buy from small, local companies rather than national companies, even when those national companies are cheaper and operated very morally. I suspect most consumers would choose a friendly privately-owned company over a ruthless charity-owned company. Bill Gates was an incredible philanthropist but people didn't flock to use Microsoft for that reason. Let's not even talk about Soros and his public image. I think at the end of the day you are overestimating how much difference it would make to consumers (most of whom would probably be unaware of the distinction without an expensive advertising campaign) and underestimating how easy it is to suddenly own a major corporation without paying a premium (either for a buyout or new entrant) to get there.

Vincent van der Holst @ 2022-07-05T10:40 (+7)

My background is in marketing and this is one of my major concerns as well. People don't behave and buy rationally, and don't accept perfectly rational actions from companies who are "good". We're not sure how people will react to a billion dollar guided company who has a CEO who earns 10 million or that pays workers an unfair wage. But I do believe that if that company is open about why they operate the way they do, and they market the impact from their giving, this will still be an advantage. The company might pay its CEO 10 million, but it donated 1 billion this year to effective charities and that saved 100.000 lives. If you focus on the incredible impact that company has I think the overall value of marketing your charitable giving is positive, even if it is small. We know from Newman's Own that 6 figure pay and increasing prices with inflation are accepted by the general public, so I don't actually think those are issues. FYI I am from Europe. 

The good thing is that even if this makes a small difference to consumers (we agree on that) there's no reason this won't work with effective marketing and infrastructure to fund these companies, although that's far from easy. If a guided company has even a 0.1% advantage to their competition this advantage will compound and the company is "winning" slightly more and the extra profit would be worth the investment from philanthropists. Brad explains this really clearly:

"So, if we define the value of a firm with a normal shareholder set as F(k), I would posit that the relationship between the value of F(c), a firm owned 100% by a popular charity, is that F(c) > F(k). It seems to me that F(c) = F(k) + P, where P is the monetary value of the advantages attaching to the popularity of charities with economic participants  vis a vis the popularity of normal investors with market participants."

Even if P is low, and we argue it might, this company would still outperform the competition. As was discussed before, P is not only from marketing, but also from tax benefits, discounts, free advice/consultancy and improved employee recruitment and retention. My guided company has seen free marketing, advice, consultancy as well as tax benefits and discounts, and our job openings have far more engagement than any I have ever posted for other companies. We have also run a marketing campaign using the ad of our competition and a new ad that focused on us giving away all of our profits and that was clicked on 50% more. We also have traction with brands currently because we donate our profits to charities instead of shareholders, so we're signing more brands and we're taking higher commission because we're an ethical company. We literally have brands tell us "your commission is too high, but we'll pay it anyway because it's going to charity and we love what you're doing". These results on the most important sides of our business; consumers and brands, is encouraging that the value of P is definitely more than zero and perhaps a lot higher. We do have to gain much more information from our marketing efforts to understand how this translates to purchase intent. 

Lastly, I want to say that our researcher just finished his master thesis on the economic feasibility of this business model, and we spoke to all stakeholders (investors, consumers, guided companies, traditional companies and brands). It's still in draft but I will release it here once it's ready to be shared (hopefully within a week). This thesis will have a lot more data and references than this paper so it might address some of the empirical concerns that people have voiced. 

Brad West @ 2022-07-04T18:14 (+4)

Bad behavior (or behavior irrationally perceived to be bad) from Guiding Companies:

This is why one of the functions of the Consumer Power Initiative will be to do broad-based marketing for Guided Consumption, so that consumers can be aware of their power to do good. 

Imagine a campaign that focused on how much profits the average person generates from their average consumer behavior- maybe $12,000. And we show how if someone was able to get $4,000 of that to some charities, they could  save a child's life. "Don't you want to buy in a way that lets you save people's lives rather than make rich people richer?"

As for consumer response to different activities by companies, the beauty is that charitable investors and other actors will be able to direct their activity in the ways that make sense in response to research and thought This is why one of the functions of the Consume Power Initiative is research.

The (lack of) Bill Gates or George Soros factor:

One thing is that consumers may not be aware of the intentions of an EA profit-beneficiary or they may not be able to trust them to act consistently to it. 

Another thing is that consumers may feel more of a direct impact from a purchase where the profits go directly to a charity they value instead of by buying from a company and hoping that the profit-recipients will act beneficently. You as a consumer get to take credit for the moral act in a way that you don't... It is more like the profit-recipient philanthropist gets all the moral credit.

"At the end of the day you are overestimating how much difference it would make to consumers who are not aware of the distinction without an expensive advertising campaign"

This is why, as mentioned above, one of the functions of the Consumer Power Initiative will be broad-based marketing, such that a mass social movement regarding charities as our economies' beneficiaries will take off.

This sounds ambitious and it is, but a few crucial factors make such marketing feasible and likely to succeed:

  1. Very simple ask of consumers: buy what you were going to anyway, but through GC.
  2. Scaling of marketing efforts: advertising for broad-based GC affects a much broader set of markets . For instance when Anheuser Busch buys a Superbowl commercial for over $6.5 million, this is in service of a company with annual net profits of $4.67 billion. On the other hand, the same budget for a Superbowl commercial could cover a huge set of companies that have collective annual net profits orders of magnitude higher than one global alcohol company. Furthermore, the commercial would have a simple and clear value proposition for consumers: buy through GCs and benefit worthy charities rather than rich shareholders.
  3. Earned media. Most of the world including the public, celebrities, thought leaders, etc. want a world that is more just and sympathize with a lot of the same charities goals that EA does.  A lot of the work will be done by people wanting to ride the wave and see how they can help.

Philanthropic Investors looking to create Guiding Companies will have to pay a significant premium

In the proper contexts, once GC is established, the opposite might hold in circumstances where there are multiple incumbents in a low-differentiation market space. The philanthropic investors could threaten to significantly diminish the value of competitors by purchasing one, thus starting a  reverse bidding war.  For a (admittedly rosy) picture of how this might play out see this response under the heading "So, for a simple example to illustrate what I would be thinking of doing- "

Madhav Malhotra @ 2022-06-30T22:29 (+7)

A few questions:

Brad West @ 2022-06-30T23:10 (+14)

Hi Madhav,

Thank you for your thoughts.

On the commodity issue: the reason that it is hard for firms to get an advantage in the commodity business is because no market actor can offer a better product at a better price than any other market actor. Now imagine, in a commodity space that one market actor was able to produce a more valuable product without incurring additional costs. This market actor would tend to monopolize that commodity market, provided that other market actors could not secure the same advantage. This is the situation that Guiding Companies are in because costs are no higher for them, yet they have an advantage with other market participants, including consumers. I am positing, and believe strongly that research will substantiate this, that consumers will value profit destination at a nonzero level. In the commodity space, this advantage should be decisive. In sectors with more differentiation, it is less likely to be decisive.

Your commodities of scale point definitely makes sense. It will be difficult to compete without hundreds of millions or billions of dollars. This is why research and working on educating the public is critical to satisfy charitable investors that the targeted creation/acquisition of companies that serve effective charities is best use of their resources.

Your point regarding alignment of practices with charitable shareholders is a good and interesting one that will require a lot of thought regarding how to best organize. One solution would be to pair industries with these issues with charities in different cause areas. Another would simply be to create Guiding Producers in other industries that lack those moral concerns.

The starting place for CPI is likely going to be entry into areas where we can compete without huge economies of scale. We are super interested in input from sharp economic minds like yours to map out this path.

Madhav Malhotra @ 2022-07-01T20:23 (+6)

I appreciate your detailed followup!

"I am positing, and believe strongly that research will substantiate this, that consumers will value profit destination at a nonzero level."

  • I intuitively can see why you say this.

"In the commodity space, this advantage should be decisive. In sectors with more differentiation, it is less likely to be decisive."

  • That said, could it be possible that the higher margins in sectors with more differentiation are worth gaining only a fraction of customer purchases instead of (nearly) all of them? Ie. Do we want to maximise volume sold x profit per unit or volume sold only?
  • On an individual organisation level, I've seen plenty of case studies of nonprofits using cross-subsidisation to reduce reliance on donations/grants. One notable example that comes to mind is Me to We's model of selling Rafiki bracelets (bracelets being a product with lots of differentiation and very high margins)

"Your commodities of scale point definitely makes sense. It will be difficult to compete without hundreds of millions or billions of dollars. This is why research and working on educating the public is critical to satisfy charitable investors that the targeted creation/acquisition of companies that serve effective charities is best use of their resources."

  • Large companies tend to be very complex to manage and have their own disadvantages to scale. 
  • How would investing in large guiding companies compare to, say, charities investing in a VC fund of startups? Or investing in institutional options like a bond and getting steady returns? 
  • Ie. Some charities already invest in profitable companies via various means. What leads you to conclude that investing in guiding companies is a better alternative to these existing investments?
Brad West @ 2022-07-02T01:42 (+5)

(I just got my  501(c)(3) letter from the IRS so I am super excited!)

Thank you for the continuation of excellent points and questions!

 

You may be dead-on regarding the question of dimensions of product differentiation. Even though competitive advantage may be most powerful when there are the fewest dimensions, this may not correspond with the highest profit opportunity for Guiding Companies.  Perhaps entering a moderately variegated market sector would allow for sufficient market-share capture such that it would be more profitable to enter such a market sector than it would be to enjoy a (near) monopoly in a lower margin sector with fewer factors of differentiation. The key would be entry of Guiding Companies into sectors  where there exists enough product similarity that profit destination would have the potential to be a decisive factor for a significant portion of consumers who are aware of profit destination. I am imagining an area like laundry detergent, where there is substantial similarity  between rival brands, even though there are ingredient differences that make for marginal differences in product features. This is why I am interested in engaging very bright, driven, and aligned people to work with the Consumer Power Initiative. We can construct experiments and otherwise come to determinations  about what industries profit destination is likeliest to provide the greatest potential for charitable profit.

I think an analogy here would be sports where one participant has an advantage in one dimension, such as running faster. In terms of securing an advantage, such a participant would have a maximal advantage - a perfectly decisive one- in a hundred-meter-dash. In a contest like basketball, where one's running speed would confer an advantage, but could be overcome by other factors, the faster runner would have an edge, but perhaps only a probabilistic advantage. However, if the prizes for winning basketball games was sufficiently larger than the prizes for winning  running races, it might make sense to invest time in playing basketball despite your running advantage only offering  a probabilistic, rather than decisive advantage.  Winning the low-margin commodities market with a Guiding Producer here would like be consistently winning the running races with small purses; you might be better off playing basketball games with  higher prizes, even though you will lose some games.

The tendency of large companies to have complexity and disadvantages  is one shared by traditional firms that work for the benefit of rich shareholders. It is unclear to me why  professionals working for charities could not maneuver these complexities just as professionals working for private shareholders do. Indeed, one can imagine a set of charitable investors buying out a firm "F" and maintaining all factors constant other than some shifting of the advertising budget such that consumers are aware that their purchases 100% benefit worthy charities. In this case,  the Guiding Company would have identical  tools to managing the problems  you reference and any other to traditional company. So, if we define the value of a firm with a normal shareholder set as F(k), I would posit that the relationship between the value of F(c), a firm owned 100% by a popular charity, is that F(c) > F(k). It seems to me that F(c) = F(k) + P, where P is the monetary value of the advantages attaching to the popularity of charities with economic participants  vis a vis the popularity of normal investors with market participants. My thought regarding the class of economic participants with whom this popularity would be most important would be consumers.  However, Vincent van der Holt, in the course of his dealings in BOAS, has observed  BOAS's obtaining of preferential treatment by other economic actors such as advisors, advertisers, and suppliers. One of the most important functions of the Consumer Power Initiative will be to maximize the value of P, in this formulation, by educating and exciting the public, such that they realize their potential to save the world without personal sacrifice . This is why the creation of a social movement , facilitating the success of Guiding Companies is an extraordinarily high-value goal.

The reason that charities (or charitable investors working to benefit charities) should invest in the creation of Guiding Companies over other forms of investment is because this is a form of investment in which they can enjoy a structural advantage, perhaps an almost unimaginable structural advantage. If a charity acquires a marginal portion of a stock in a company or bonds , it occupies the same position as any other investor. If somehow the charitable investor is one of the most skilled investors in the world, it can (in expectation) achieve a percentage or two better than the market, but even being able to identify  the Michael Jordans and Lebron Jamesons of investing is extraordinarily difficult even among professional investors  and why index funds are often the best bet.

Regarding VC funds for Guiding Companies: I think this idea has a lot of potential! If we had a skilled set of EA  venture capitalists and angel investors. Perhaps P in this context would increase the likelihood of the incidence of unicorns, increase the profitability of unicorns even more , increase the profitability of non-unicorns, and decrease the incidence of total duds.

I am very impressed with your engagement with my  paper and would very much like to talk via zoom/continue with email (I'm planning on making a working google doc on Guided Consumption soon as well). I will look at your website and try to learn more about your projects and interests to see room for collaboration with myself and CPI. As stated at the end of my paper, I can be reached at brad@consumerpowerinitiative.org

But please continue with this comment thread, as well, if you have any such inclination!

Madhav Malhotra @ 2022-07-03T11:43 (+4)

I'll continue adding on here, just in case the public discussion helps anyone else too :-)

Glad to see the milestone on the 501(c)(3)! I could imagine that it's easy to just stick to academia, so good on you for bringing the ideas to more practical/uncertain grounds. 

RE: "We can construct experiments and otherwise come to determinations  about what industries profit destination is likeliest to provide the greatest potential for charitable profit."

  • Agreed on your points here. Which metrics do you think are useful to decide which industries guiding companies make sense for? 
  • One idea is that we could research willingness-to-pay-premium on organic or fairtrade products. As a proxy for how much consumers are willing to switch their buying choices based on non-price determinants. Though there are differences (ex: a guiding company's product may/may not have a premium relative to competitors).
  • Another idea is price elasticity of demand. My hypothesis is that inelastic products could be seen as a proxy of staples that people won't go without. Ex: "If I'm going to buy baby formula anyways, I might as well buy it from the option that does more good?"
  • Curious to hear your ideas :-)

RE:  "The tendency of large companies to have complexity and disadvantages  is one shared by traditional firms that work for the benefit of rich shareholders."

  • Agreed. I was more so comparing guiding companies' complexity to nonprofits investing in smaller companies (like with the VC fund). 

RE: "One of the most important functions of the Consumer Power Initiative will be to maximize the value of P, in [value(charity_funded) = value(investor_funded) + P]"

  • What are your ideas on how to maximise the value of P?
  • So far, we've already seen lots of 'certifications' for various products (ex: fairtrade, non-GMO, organic, etc.). They've had various challenges in 'doing good.' Though if we focus on just their ability to increase the value of their product compared to traditional profit-making products, what do you think are some lessons to learn from how well fairtrade/organic certifications increase the brand value of their products?
  • In real life, I've heard a lot of entrepreneurs talk about how 'mixed value propositions' actually lead to fewer customers deciding to buy a product than a single, clear value proposition. How have you thought so far about ensuring that product marketing leads to one deciding factor separating a guiding company from competitors, not unclear value propositions that repel customers.

RE: "The reason that charities (or charitable investors working to benefit charities) should invest in the creation of Guiding Companies over other forms of investment is because this is a form of investment in which they can enjoy a structural advantage"

  • If I were managing money at a charity that's tight on donations, my priority would be ensuring reliable returns starting in a year or less. Ie. Index funds would seem like a pretty good option :D
    • How are you thinking about meeting these needs for nonprofits investing in guiding companies?
  • From my interpretation of what you mean by "structural advantage" - it's what comes about in a guiding company funded by charities after all else is equal with competitors. Given what we talked  about unlocking economies of scale while balancing diseconomies of scale, it would seem reasonable to me that a guiding company wouldn't achieve significant market share for at least 2-3 years. 
  • That said, I can see that some charities (especially in EA) are willing to place funds with longer time horizons on social/investment returns. Maybe choosing which nonprofits invest in guiding companies is very key in the short run? And once the guiding companies' market share (and thus returns) are established, it would be a nice move for these larger nonprofits to sell some stakes to smaller nonprofits so they can also get returns. 
  •  Curious to hear your thoughts on getting around the initial high investments / low returns :-)

RE: "If we had a skilled set of EA  venture capitalists and angel investors. Perhaps P in this context would increase the likelihood of the incidence of unicorns, increase the profitability of unicorns even more , increase the profitability of non-unicorns, and decrease the incidence of total duds."

I don't have any evidence to suggest this is/isn't possible. 

Maybe @--alex-- or someone else at EA Angels might have more relevant comments?

Brad West @ 2022-07-04T00:49 (+4)

One thing that I hope will be a bit clarifying is an outline from a previous call with Vin in which I outlined some of the functions of the Consumer Power Initiative. I have posted it in another comment.

What metrics do you think are useful to decide which industries guiding companies make (most) sense for?

  1. I think research on the willingness-to-pay-premium in contexts in which there is data, such as organic or fairtrade products would be a good place to start. Another way to test willingness-to-pay-premium is by launching low-cost Guiding Producers in a variety of sectors. One idea I have had was to launch a Dropshipping store that sells gaming peripherals, such as headphones that works in conjunction with streamers/online influencers. An advantage of this sector is that positive discrimination by another market participant, streamers/influencers, could be extremely powerful in addition to positive discrimination by consumers. Because I have very little ecommerce/website development experience, I am very eager to find partners that could help launch low-cost Guiding Producers (forgive me if I sometimes refer to them as Producers rather than Companies, the broader category would be Producers), not only to generate money for worthy charities and boost Guided Consumption generally, but also to test what sectors are most responsive to charitable profit destination.
  2. Price inelastic products may be a good sector for GC because of their side benefit of broadly exposing the public to the idea of GC. This is part of what I am going to try to achieve when I launch the Giving Store, offer a wider degree of offerings to the general public so that a wider degree of people can become part of the project: buying stuff they were going to anyway.
  3. Another area to research is one that you referenced earlier, the relationship between market-share and profitability. Determining where expanded market share would translate to high profitability is a big question.

Large companies vs. smaller companies

Yes, considering whether large companies or small ones is best is an open question. One thing that I would note is that the costs of marketing GC (both in its general form and of specific Guiding Producers) decline in cost with scale and being able to exploit huge markets offers a lot of opportunities.

Maximizing P (profitability attributable to the popularity of charitable profit destination)

  1. Firstly, finding sectors that offer the greatest opportunities for GC is a way to maximize P. This is discussed by us already. It is also discussed in subsection 3(A)(i) of my longer paper.
  2. Another critical way to maximize P is not specific to a given Guiding Producer, but will benefit all Guiding Producers, and that is marketing of Guided Consumption generally. That is why one of the functions of the Consumer Power Initiative is to create a mass social movement questioning why the wealthy enjoy the vast majority of producer surplus and not charities and trying to direct the producer surplus from their purchases to worthy charities, when possible. This is an ambitious mission, to be sure, but because of the reasonable ask of consumers (don’t be inconvenienced or sacrifice anything, just buy what you would have anyway through Guiding Producers), I believe it will succeed.

Fairtrade/organic certifications

I have yet to learn and am interested in learning these lessons. One thing that I would note is that the advantage Guided Consumption has as a species of Conscious Consumption is that popular ownership identity confers an advantage without a corresponding cost. Conversely, most other examples of conscious consumption have a cost corresponding to their advantage of consumer preference in their favor. Commit to ensuring that the coffee farmers involved in supplying your coffee are paid fairly? It will probably cost you a bit more than competitors. Commit to treating the animals that will become the meat product you are selling more humanely? There will likely be a corresponding cost as well. This is not to say the use of conscious consumption in other ways is not noble, important, and may offer competitive advantage in excess of its costs. I simply note that Guided Consumption seems to be unique in that popular shareholder identity does not have an attendant cost (vis a vis other investors).

Single vs. Mixed Value Propositions

The value proposition that CPI and Guiding Producers offer consumers and other economic participants is pretty singular and clear: significantly further worthy causes by going through me. This value proposition, though singular, can be directed at many actors in the economic field, though my focus has been on consumers. To consumers: do good by buying from me. To employees: do good by working for me. To consultants: do good by providing me free or discounted consultation. To advertisers: do good by providing me free or discounted advertising.

One way that a value proposition could get mixed would be through the complexity of charitable profit destination. It is an open question as to whether consumers would be more inclined to discriminate in favor of a charitable trust that directed funds to a variety of charities, or if they would prefer fewer charities. I am inclined to think that few, or even one, charitable profit destination would be appealing to consumers.

Who is investing in Guiding Companies?

I was not contemplating charities themselves investing in the capitalization of Guiding Firms themselves (although perhaps it would make sense for them in some contexts). I was more contemplating charitable investors who wanted to use charities as a means to do good. 

So, for a simple example to illustrate what I would be thinking of doing- 

Let’s say that there are 4 global ketchup producers that each occupy 25% of the market: Heinz (H), America’s Choice (A), Del Monte (D), and 365 (T). Let’s say consumers do not differentiate between them very much. The value of all outstanding shares are $300 million.

In come a number of charitable investors who are interested in reducing global poverty and believe GiveDirectly is a great way to fight global poverty. So, they pool together $50 million to do a leveraged buyout of one of the ketchup producers. They go to H, and given that H realizes that he has a buyer interested in buying out the company, H demands a premium valuing the company at $350 million. However, the set of investors leak this information to A, D, and T, who are each worried that a Guiding Producer in their sector, given the lower differentiation in their sector, could dramatically reduce their value, thus starting a reverse bidding war, ending in the investors being able to acquire D for $200 mil.

Thus, the investors do a leveraged buyout supplying 25% of the funds for the acquisition, with a debt of $150 million. Post-acquisition, they advertise heavily that when you buy ketchup from D instead of H, A, or T, you help lift the extreme poor out of poverty. Given that the other competitors cannot favorably differentiated themselves, D comes to occupy 90% of the ketchup sector within 1.5 years, and the outstanding shares are valued at $1.2 billion. The investors borrow $480 million (40%) to pay off the $150 million from the leveraged buyout and direct $330 million to GiveDirectly. Over the next decade, they direct a portion of D’s profits to paying off the $480 million debt. So, within 1.5 years, from $50 mil in charitable investment, they were able to get $330 million to GiveDirectly (over 6x investment). Furthermore, they have continuing income to support GiveDirectly, and an enormous asset they can use to support GiveDirectly. Furthermore, given the Efficient Market Hypothesis, once this has happened a few times, the market will be able to more quickly identify the value of the company, allowing for even faster valuation increase, shortening the time that charity funding would have to wait. Ideally, what we need to establish is that G(d) > d, where d is a quantity of direct donation to a charity and G(d) is funding which proceeds from the capitalization of a Guiding Producer with the quantity of investment d. Once we show that, in a given context, G(d) > d, billions should be available from the philanthropic sector.

Structural advantage

Structural advantage isn’t contingent on the construction of the “no-brainer”; the “no-brainer” is simply a context in which structural advantage is most likely to translate into a decisive advantage, as discussed above. In a super low-differentiation context, charitable profit destination is more like running faster in a 100-meter dash. However, even with a many dimensioned product area, charitable profit destination would still offer some advantage. One of the functions of the Consumer Power Initiatives is identifying where the structural advantage is most powerful. However, I would imagine as Guided Consumption becomes a more prevalent feature of our world, Guiding Producers will tend to occupy a wider variety of sectors, because they will still have some advantage.

Time Horizon

As illustrated above, as Guided Consumption becomes more prevalent, I do not think that the time horizon issue will be as big. The Efficient Market Hypothesis should allow for asset value to be identifiable at sooner points, allowing for acceleration of charitable funding through mechanisms like securitized debt and fractional sale.

Getting around high initial investments and (not?) low returns

As you can see from above, I do not think that Guided Consumption would necessarily imply low returns. As for high initial investments, this is where we find a quite vexing catch-22: funding is needed (or at least helpful) in creating the proof of concepts and the broad marketing that would increase P, yet philanthropists often require demonstrated proof of effectiveness to fund projects.  

One way that I am looking to get around this is, as mentioned above, looking for low-cost opportunities for the creation and/or partnership with existing Guiding Producers, such as Misercordia, BOAS, the Giving Store I’m working on, and possibly Newman’s Own and Humanitix.

Also, given the degree to which EA values cause area exploration, it would be eminently sensible to fund the exploration costs associated with Guided Consumption, so I will be applying for grants and otherwise trying to obtain funding for the Consumer Power Initiative.

Would Charitable Profit Destination Advantage Startups?

I don’t see why being a GC would not advantage a startup in some ways. If other economic actors privilege charities over normal investors, this could be potentially powerful. The issue is that having equity stakes often incentivizes and aligns early actors in the early stages of a startup. One potential solution would be to have buyout options by charities available at amounts that would still allow for extreme enrichment of founders and other actors in unicorns, but would facilitate transition to becoming a Guiding Producer.

 

EA Angels

I will reach out to them. Although they typically do not deal with nonprofits, the Consumer Power Initiative is obviously intimately involved in a certain kind of for-profit entity, Guiding Producers/Companies. I think their insight could be great.

Vincent van der Holst @ 2022-07-04T08:35 (+5)

I really enjoyed reading your dialogue and wanted to jump in with some more thoughts. 

If you look at companies ranked by market cap (an easy way to estimate the overall profitability potential of companies). You'll find commodities/monopolies (oil, Google) and more differentiated companies (apple), so it seems that for overall profit potential both avenues could work. 

"What leads you to conclude that investing in guiding companies is a better alternative to these existing investments?"

I agree that the main factor is what Brad has already mentioned: it's a structural advantage and it cannot be replicated by competitors who are for-profit (investors love companies that have something that can't be replicated!). In addition, I think that funding guiding companies are a more direct and impactful path to impact. If you invest in guiding companies, you're investing in a company that donates directly, and you can influence the path of that company to more impact (rather than profit) and the founders and employees might be persuaded to become EA's and sign the founders pledge. Additionally, showing that guiding companies can work might slowly start to shift the broader economy to guided consumption, and with the economy having trillions and trillions of dollars in profit each year this could make more than just a dent in some very important problems. 

"Agreed on your points here. Which metrics do you think are useful to decide which industries guiding companies make sense for? "

In addition to your metrics I would look at the competitiveness of markets. It's very hard to enter monopolized markets such as search engines. Is it a market where we can build a competitive offering? 

If we believe that it will be continue to be hard to get funding for guiding companies, it might make sense to start with businesses that are easy and cheap to start, thus requiring less capital. Dropshipping is a good example. 

I believe that price is a more important factor for consumers than donating profits to charities, so I would start with a business that can offer similar prices to the competition. I run an online marketplace that has the same prices as competition. That also makes it easier to test the extent to which people value guided consumption. We actually ran 2 ads on Google where one was the add of the competition, and the other was the same ad including the profit destination. The profit destination ad was clicked on 50% more often, a very encouraging stat. 

Another category of products would be one where people don't care much about the price (or buy even more if the prices are higher): luxury. Thomas, Brad and I were brainstorming if we could not create the world's most expensive products and sell those to the rich (e.g. a 10 million USD T-Shirt where all profits go to charities). Just a thought. 

"In real life, I've heard a lot of entrepreneurs talk about how 'mixed value propositions' actually lead to fewer customers deciding to buy a product than a single, clear value proposition. How have you thought so far about ensuring that product marketing leads to one deciding factor separating a guiding company from competitors, not unclear value propositions that repel customers."

Great point, and one that I've seen in my work as a marketeer a lot. We run a sustainable marketplace that donates all profits to charities, so we have 2 important USP's: we're sustainable and we donate all profits. We have already found that people care more about the second USP (encouraging) and we're now thinking if we need to only focus on the non-profit part. It's something that we need to test though, but that's very simple. Profit destination should murk the offering. 

"Curious to hear your thoughts on getting around the initial high investments / low returns :-)"

I think we would tackle this exactly how the for-profit sector has done it: VC's who are okay waiting 2-10 year for an ROI. I don't think this will be an issue, because many HNWI already work with these time horizons for their for-profit investements, billionaires grant money across their lifetime in smaller tranches and EA is already being patient with their funding. 

Brad: "I am inclined to think that few, or even one, charitable profit destination would be appealing to consumers."

I think the opposite. The most important factors considering where people donate are proximity (favoring local donations) and how close it is to their heart (e.g. I lost a nephew to cancer so I donate to children's cancer charities). I think choice is really important for consumers and based proximity that will be many charities. That's a problem because local and close to heart charities are usually not that effective, so if we want to provide choice and try to give as much as possible to EA charities, we might want to try and nudge people to the best options. 

Glen Edward @ 2022-07-08T16:21 (+3)

"The most important factors considering where people donate are proximity (favoring local donations) and how close it is to their heart"

I agree these are important factors in how people like me often chose a charity but an equal or greater factor is having a sense of confidence that the Guiding Company and the charities it's owned by are not only legit but also effective. In these days where so many people have reduced trust in just about everything, I think it's critical for some trusted means for "certification" of effectiveness and integrity to be in place, much as Brad describes in his full length post  (i.e. “NCCOs”).  It's sad but there is a lot of skepticism out there today which keeps some people on the sidelines especially with lesser known charities.

Brad West @ 2022-07-08T17:16 (+2)

Yeah. People in EA are confident in the effectiveness of charities such as those endorsed by Givewell, but the general public is likely to be more skeptical. Especially with declining public confidence in institutions that has been prevalent...

This is why I think negative advertising could be effective... Maybe the public doesn't know whether The Malaria Consortium spends their money well, but they probably don't want to make rich elites even richer.

Vincent van der Holst @ 2022-07-11T14:42 (+1)

Although that would be great, from all of the research I read about donations, it doesn't seem that effectiveness is a big factor for consumers. I do think a certification for effectiveness could help, but based on the data I'm pessimistic how much it would add compared to marketing your charity effectively. 

Madhav Malhotra @ 2022-07-04T23:22 (+3)

Useful perspectives! If you were inclined to write a followup post with some of the data you've seen thus far at BOAS, I think it'd help with establishing credibility for CPI :-)

RE: "I am inclined to think that few, or even one, charitable profit destination would be appealing to consumers."
I can see how both of you reached your conclusions. Empirical data would be the best solution :-)

Vincent van der Holst @ 2022-07-06T16:41 (+4)

Yeah we can definitely do that. We have a research paper coming out on Monday with loads of references and data and the research is independent (but sponsored by BOAS). Will post it here once it comes out. 

You can already look at our pitch for investors/philanthropists which has some data points from ads and talking to more than 100 user and 50 brands. We always encourage feedback so feel free to reply.  

Vincent van der Holst @ 2022-07-11T14:30 (+3)

Please note that my latest comment includes the research paper with additional data. Looking forward to receiving more feedback. 

Brad West @ 2022-07-04T23:40 (+1)

The Giving Store allows for a natural experiment contra BOAS. Of course, there will be a lot of potentially confounding factors, but still good information.

Madhav Malhotra @ 2022-07-04T23:16 (+3)

RE: Making  a Dropshipping site
I have web development experience. If you have clear goals/a 'why' behind making the site, I can get it done for you for free. Feel free to message when you get to that stage :-)

RE: Inelastic Products + general customer exposure
Good point, I hadn't thought of this :-)

RE: "One of the functions of the Consumer Power Initiative is to create a mass social movement questioning why..."
I'd be eager to hear your marketing plans when you have more specific information.

Maybe Development Media International would know EA-aligned marketers who'd be willing to help out? 

RE: "Guided Consumption seems to be unique in that popular shareholder identity does not have an attendant cost (vis a vis other investors)."
Lots of social justice charities have tried to market black owned businesses / businesses started by former felons. Ex: Inmates to Entrepreneurs. 

Have you looked into how scalable / effective their 'P-value' is? Do you think it'd help to talk to them to learn what has/hasn't worked well for them? 

RE: "The value proposition that CPI and Guiding Producers offer consumers and other economic participants is pretty singular and clear: significantly further worthy causes by going through me. "
This may be true when customers choose you from a directory with exactly the right information. It's less true on a Google Search page. Less true still on an industrial product datasheet. Less true still on a supermarket aisle. 

What I'm saying is that the context (channel) by which consumers buy the products of guiding companies will influence the value proposition(s) they see for those products vs. competitors' products. And given how much information is sometimes thrown at consumers, the decisions they make on average might be surpising to you or me. 

Brad West @ 2022-07-05T02:36 (+2)

Dropshipping Site: 

That's awesome! I will get back to you shortly, probably in a week or so, with a more fully-fledged value proposal and details regarding The Giving Store. But The Giving Store will serve many purposes:

 (1) it will be a concrete example of Guided Consumption in the United States, with a wider variety of products that will enable a broad range of people to be able to do good by buying cool and helpful items, this I think will help market the idea of Guided Consumption to the general public more accessibly than an essay for many.

(2)  It will provide data regarding Guided Consumption for the Consumer Power Initiative- and potentially a proof-of-concept for others

(3)  It will generate funds for an effective charity- I have one  in mind now, but I am still thinking it over.

Marketing Plans:

 I am still developing marketing plans, and  the resources that you mentioned of Development Media International and Inmates to Entrepreneurs are definitely two groups that may have some very valuable input. Some ideas that I have had on marketing: 

(1) Developing the Consumer Power Initiative website as a hub where people can be directed to a variety of affiliated Guiding Producers and learn more about Guided Consumption.

(2) Coming up with a simple, fun video for YouTube that goes into the microeconomics of consumer/producer surplus and presents the possibility of using consumer power through Guided Consumption to benefit charities instead of rich people. I had thought of a video similar in style and humor to this .

(3)  Trying to engage influencers/streamers to potentially become ambassadors for Guided Consumption and let their audiences know about it, as well as some cool Guiding Producers that they can buy from.

(4) Potentially engaging a variety of musician Guiding Producers who can release musical albums online where 100% of the money generated will go to an effective charity.

(5) Vin and EA Forum user Tomer_Goloboy, who founded Misercordia had thought of a kind of publicity stunt like a million-dollar t-shirt where all the profits would go to a charity.

Clear Value Proposition/ Channels and Contexts of Buying through Guiding Producers

In Section III(B)(ii) of my longer paper discusses the need to eliminate the frictions in transactions and make the path of least resistance for the consumer lead to a Guiding Producer.

The Consumer Power Initiative, by having a marketing GC function and a function of supporting Guiding Producers will solve some key problems that individual Guiding Producers would have by themselves.  An individual GC may have difficulty justifying a degree of marketing sufficient to broadly inform consumers of charitable profit destination. However, CPI, advancing many GCs, is cost-justified in broadly marketing Guided Consumption and allowing Guiding Producers to easily signal that they are a part of the project. The Consumer Power Initiative can also assist Guiding Producers in functions such as search-engine optimization, providing transparency mechanisms, and otherwise endeavoring to make Guiding Producers the most easy and attractive choice if a consumer is looking to buy in a sector where a Guiding Producer is available.

 

Please note that there are many steps to take before such a robust role could be played by the CPI and I am merely noting the possibilities opened up by economies of scale and a robust organization with the mission of promoting Guided Consumption.

Vincent van der Holst @ 2022-07-01T13:18 (+5)

Traditional companies are also scrutinized for their strategies, investments and donations by their shareholders, which I believe to be a good thing because it improves business and holds people and companies accountable. 

Personally I wouldn't start a guiding company that isn't ethical (e.g. bad for the environment, known for underpaying, prohibiting unions, sweatshops, etc.) because I believe the profit has to be made in a good way, but that's my personal view. Rationally, it would be better for oil companies to be guiding companies, where the profits would offset some of the harm they cause. 

I believe that guiding companies need a similar investment infrastructure as traditional companies and I agree that more than one philanthropist would invest. These guiding VC's would invest in the guiding companies who have the best shot at generating a large return on donation (ROD). In principle it's exactly the same as traditional VC, who also invest in whatever they believe to have the highest ROI. 

Jasper Driessens @ 2022-06-30T13:31 (+7)

Another example of this is Humanitix [website / wikipedia], a ticketing service like EventBrite.

I've been thinking about the Guided Consumption model as Choice Charity. Do good simply by choosing a different provider—no donations required. 

With Global Income Coin we are following this model as well, except with a currency rather than a product or service.

Vincent van der Holst @ 2022-06-30T13:54 (+3)

Humanitix is a great example, turning something super annoying into good! I will try and reach out to the founders to learn from their lessons. 

And don't get me started on GIC, what a concept! I have subscribed to your newsletter and will follow it closely. Great to see more people interested in this model. I might reach out to you as well to learn from what you've learned!

Brad West @ 2022-07-02T23:35 (+1)

Just got a chance to read the Global Income Coin and the project of generating a global UBI through seignorage sounds promising and interesting. I'm looking forward to the Zoom call next week and looking for opportunities to potentially work together.

Jasper Meyer @ 2022-12-15T00:16 (+6)

Hey Brad! I love the idea. I’m late to this comment section and many of my initial reactions were discussed at length. That being said here are a few ideas/questions which haven’t gotten much attention:

  1. You say that very few companies explicitly mention who benefits from their profits, but I think this is changing. More and more products state that their parent companies are woman-owned or Black-owned, etc.. I wonder if there is research about whether this sort of marketing actually drives sales. Regardless, the ubiquity of this sort of marketing is further evidence that this matters to consumers. Moreover, the very fact that CSR/ESG markets (for consulting, marketing, research, etc) are both well over $1B is good evidence for your cause...
  2. Interestingly, I feel like a lot of these products (those that state the identity of their ownership/leadership) are in luxury good markets. Makeup and fashion immediately come to mind. I agree that the "no-brainer" is a viable opportunity to change consumer habits, but you might also consider looking into more price inelastic markets. These markets may be easier to enter (I feel like new fashion brands crop up every day) but your presence might also be more ephemeral compared to CPGs. Taking this further, imagine a new car company like Rivian decided to donate all profits. I’d hypothesize that for a lot of folks that would be the deciding feature to influence a large purchasing decision (like a car).
  3. In the price elastic market I would guess it doesn’t matter much what causes you choose to benefit. As you state, people make these decisions quickly and if they see "all profits to charity", that will likely be enough. This is probably different in the luxury market because consumers are deliberating longer and it would be nice if the product somehow correlated with the cause.
Jo Zichterman @ 2022-07-01T22:32 (+6)

Hi Brad!

A friend of mine sent this to me and I'm interested in hearing how you see this playing out in practice. I want to start by saying I think this is a great idea, but I don't think it would work much better than current structures. I'm interested to know how you came to some of the statements you did, as my experience working for a for-profit company would suggest you're incorrect in some of your assumptions.

Premise: While I agree that a business focused on providing its profit to non-profit work is admirable, good, and perhaps the best we can do in an otherwise bad situation, I don't believe that this factor alone is a deciding business advantage over another business with similar products. It would be one factor of many at best.

 

I would argue that the idea of Guiding Producers is perhaps a good stepping stone to a post-profit world, but it is not on its own the solution to the problem of exploitation to the benefit of profit. To defend my premise, I want to point to a few statements you've made to the writings above, and I'd love to hear your thoughts in counter.

 

"Structurally, there is no reason that a Guiding Producer would produce goods and services at a higher cost."

I'd be interested in hearing where you're coming up with this statement and what justification you've got; in my experience, this is demonstrably false. Even if we don't account for the "economy of scale" argument (which you dealt with by arguing that consumers would deal with higher cost for a short period of time), there are hundreds of reasons why two businesses producing the exact same product would have very different business expenses. Things like:

These factors alone are enough to represent a major difference in the cost of producing one good, even if it is virtually identical to another. It is not safe to assume that because a business purchases, manufactures, and distributes the same or similar goods, their up-front cost is the same and therefore the cost to the consumer is virtually the same.

 

"In low-differentiation sectors, it may be easier to construct a 'no-brainer' where a consumer is genuinely ambivalent as to two products."

I would challenge this statement by asking where you see pure ambivalence in virtually any product purchase. It's true that commodity goods like ketchup, toilet paper, and paper towels are usually competing in a race-to-the-bottom on cost, but what you're talking about specifically here is a unique kind of product differentiator that functions as part of a much larger structure of consumer purchase behavior. We can come up with lots of theoretical ways that people end up buying things, and the entire field of economics is determined to codify these systems of supply-and-demand to a science. But unless you are able to take the business model of one business and replicate it exactly, all you've done is create one additional factor that might motivate a consumer to purchase your product. It's not a guarantee, because people don't fundamentally function in predictable, codified, rule-based ways. 

I don't buy Newman's Own because (1) it costs more and (2) it doesn't taste as good as the other kinds of ranch dressing on the shelf. It is not, in and of itself, an equal product to its competitors, and so it loses to Hidden Valley or DIY ranch seasoning packets when I go to the grocery store. 

 

"People all over the world choose the 'lesser of two evils' in the political contexts routinely."

Herein lies the core of my disagreement, which is that this advantage alone is enough to level the playing field and produce the Guiding Producer as the winner. I fundamentally disagree that we are able to practically operate on an equal playing field between two businesses and see demonstrable business advantage from just one product differentiator.

In order to sell one's products, one must be willing to create the absolutely perfect scenario to motivate a consumer to buy their product. The competitive edge relies on coercion, exploitation, subjugation, and dishonesty to accomplish its purpose, and the business can justify those actions by arguing that profit, above all else, is the sole measure of success. Governments exist to regulate this behavior by telling companies what they are and are not allowed to do to the end of profit.

They get to say that losing money is the same as failure. How does a business whose sole purpose is to do good in the world operate by the same standard? Can a business reasonably justify underpaying its staff in order to further the profits of the non-profit it supports? If it were true that simply having a good cause was the deciding factor, why do non-profit businesses not already succeed against for-profit enterprise?

Unless a Guiding Producer is willing to exploit its workforce to an identical degree as its for-profit counterparts, it can't corner the market on virtue alone. 

 

Thank you for your time.

Jo

Brad West @ 2022-07-02T07:25 (+6)

Hi Jo! 

I am very grateful and delighted with your serious and thoughtful engagement with my thoughts.

Firstly, I would note that Guided Consumption is not a panacea.  A world of Guiding Producers/Companies could still be one in which structural relations between labor and capital result in workers not getting their due. It is unlikely that all corporate behavior of Guiding Producers would be totally unimpeachable. However, although Guided Consumption does not solve every problem, it tends to direct the fruits of economies from the least needy (wealthy shareholders who have the capability to own components of the means of production) to the most needy (beneficiaries of charities such as the global poor or potentially the billions of animals that are tortured through the factory farming process). In my view, allowing the perfect to be the enemy of the good, thus choosing not to explore the possibilities that Guided Consumption may allow, is dreadfully mistaken. That being said, even in a world where Guiding Producers/Companies that serve excellent and effective charities, there are likely going to be other political and social projects  to engage in to work for an even more just and happy world! 

You appear to have two premises, one unbolded, another bolded. Your unbolded premise, that Guided Consumption does not solve every injustice in our economy, is one I agree with, as noted above. As for your bolded premise, I would disagree because your claim is too strong. You contend that â€œI don’t believe that this factor alone is a deciding business advantage over another business with similar products. It would be one factor of many at best.” A business advantage, like advantage in other competitive contexts, has the potential to be decisive depending on the other factors involved. Certainly, there are contexts in which profit destination is less likely to effectuate a large market advantage; I used a restaurant as an example where profit destination will often be lost in a crowd of other factors. However, even in that context, charitable profit destination (“Designated Funding Destination”, or “DFD” as I define it in the longer paper) would provide some advantage. But the strength of that advantage would depend on that context, some of which would be imply greater advantages that would imply greater profit opportunity.

"Structurally, there is no reason that a Guiding Producer would produce goods and services at a higher cost."

This statement is true, albeit more modest than you appear to be suggesting. You correctly note that actors in our economies have different competitive advantages based on the factors such as vendor relationships, payment history, location, distribution mechanisms, and many more. Consequently, the results of competition between the actors that compose firms, including investors, depends on a wide variety of factors. What I mean when I say there is no reason a Guiding Producer would produce goods and services at a higher cost, I simply mean that having a popular charity as recipient of producer surplus instead of wealthy shareholders confers an advantage. This advantage is not balanced by any other structural disadvantage. A firm with a popular profit destination is strictly superior, competitively speaking, to the same firm with a neutral or unpopular profit destination. Of course, a Guiding Producer does not get to compete with its pre-acquisition self, and it may not outcompete the other competitors with a less popular DFD. So, status as a Guiding Producer is not a magical aura that will automatically optimize for all the factors, and thus success is not guaranteed, but it does create an unalloyed competitive advantage along one dimension that is broadly applicable across market sectors.

I believe that a metaphor may be helpful in conveying the power of charitable profit destination. Consider the economy of metal goods in the fictional medieval world of Profitos, where, on the island of Popularis, the metal Charitium is discovered. Charitium is as strong, durable, and otherwise useful as the other available metal, iron, but is significantly lighter, making it more useful as a component in the vast majority of applications. Now perhaps, in some contexts, this advantage is hardly important, such as regarding horseshoes. So, incumbent talented blacksmiths can produce better iron horseshoes because their superior skill and/or other available resources can make for the best offerings, even though, theoretically a Charitium horseshoe would be better. However, in the context of a sword, the significant weight difference implies a battle advantage that allows the swordsmiths with access to Charitium to monopolize the sector such that iron swordsmiths can only produce swords that are useful for resistance-training.

Very high amounts of Charitable Equity in firms in our world will be like Charitium in Profitos. Although in many sectors the advantage conferred will not necessarily imply dominance given other firms’ short-term advantages which proceed from their incumbencies and economies of scale. However, in some contexts, Charitable Equity in firms would allow for decisive advantages. For instance, maybe you could fund the salary of realtors or life insurance salespeople in exchange for their commissions with resultant Guiding Producers that are no less competitive (I know there are a variety of adverse selection or other arguments here, which I could address at another time- my point simply is that in some contexts Charitable Equity could be more potent or lack issues that may affect other economic contexts). As the public becomes more aware of Guided Consumption, the advantage of Charitable Equity will become more potent, and I anticipate that Guiding Producers will proliferate even to sectors where its advantage is not as important. One of the functions of the Consumer Power Initiative will be researching and reasoning so that we can identify the contexts in which Guiding Producers can thrive in the early stages of Guided Consumption so that an even more fulsome presence in the economy can soon be achieved.

So, to summarize on that quote, I think you took my statement as being stronger than it actually was, and Charitable Equity does not magically eliminate all other competitive factors. It does, however, add a dimension on which a firm can be almost always“strictly superior”, which I believe will allow for general economic proliferation.

"In low-differentiation sectors, it may be easier to construct a 'no-brainer' where a consumer is genuinely ambivalent as to two products."

This issue is one that I address more fully in my longer post, particularly in Section III. So, you are correct that it is unlikely that we can create the perfect no-brainer situation, however, this does not mean that we can’t get close enough to obtain large market-share capture or even monopolies in some contexts. This is even more evident when one considers the advantages from positive discrimination from other economic participants (see BOAS’s free consultants, lower advertising fees, higher commission from suppliers) and essentially tons of free advertising from a social movement for companies that serve charities.  I believe what this critique fails to appreciate is that Guiding Companies will have the benefit of professionals managing and directing their affairs just as normal companies would. Why would not these structurally advantaged entities not tend to outcompete normal firms?

“People all over the world choose the ‘lesser of two evils’ in the political contexts routinely”

I think that your formulation of my thesis is a strawman consisting of a stronger thesis than I am making (no attribution of bad faith or any ill will here, I most appreciate your comment!). Like you say, Charitable Equity is only one factor in the competition among firms. Thus, it is not, by itself, a guarantee of success, but rather a broadly applicable structural advantage. However, this broadly applicable structural advantage, in conjunction with tactical and strategic participation in the economy by charitable investors working in conjunction with the Consumer Power Initiative, can still be transformative and revolutionary.

Is a given sector, such as the cost-competitive production of chicken products, fraught with moral obscenity? Then enter the vegan and cultivated meat space, using profits to promote systemic changes that can create a more just relationship between humans and animals. There is one question as to whether significant moral impurity would be ruinous for Guiding Producers’ competitive advantages (I am inclined to think that they are not), but this question is besides the point. Charitable investors can choose the sectors in which Guiding Producers/Companies operate!

The positive or negative competitive advantage of acting badly is also contextual. In some, such as factory farming, evil is profitable. But in other contexts, consumers pay premiums for companies that behave scrupulously. This phenomenon is known as conscious consumerism. More generally, the tendency of economic actors to do good or ill is largely a function of the features of the systems in which they operate. The utilization of charitable equity to create structural competitive advantages to do good is a way to construct sustainably virtuous systems.

As for why Newman’s Own and Bosch are the exceptions that prove the rule? I just think there’s something very counterintuitive about the notion that the best way to solve global poverty would be to buy out a ketchup company for rich countries. There have been long-running mores requiring modesty and forbidding flaunting etc. regarding charitable activity. The merging of the philanthropic and business, so flagrantly using charities for marketing merges clashing worlds in a way that is almost forbidden magic. There have been isolated cases of Guiding Producers, but not a concerted effort to weaponize identity in the manner I propose.

Thank you for your time as well.

-Brad

Vincent van der Holst @ 2022-07-04T07:40 (+4)

Hi Jo,

We agree that profit has contributed to many of the problems that we face. We also agree that profit for non-profits is one factor among many, but I disagree that this is always a small factor. I believe it's a small factor in some businesses (e.g. the restaurant example, where you're going to go with the best marketed, top-reviewed and most tasty option) and a bigger factor in other business (e.g. buying from an insurance broker, where two dozen brokers are all selling an identical product and one donated all profits to charities). 

But let's assume it is a really small factor and suppose two identical companies (an online marketplace), where one is purely for-profit, and the other donates profit to charities, start. These companies need one billion in funding to generate 10 billion in future profits. The for-profit company gets the billion from VC because the expected value is 10 times the investment. In the current state of the world, the company directing profits to charities doesn't get the one billion because there is no VC like EA infrastructure to fund it. But if such a structure existed (e.g. SBF donating/investing the billion), the company directing profits to charities would be able to take off and donate 10 billion to charities over its lifetime. Again, both of these companies are identical, and let's assume they have a 1000 differentiating factors, only one of them being the profit destination. With all things being equal, the company who has 1001 differentiating factors would win. You're right that the reality is much more complex, and you're right in saying: "It is not safe to assume that because a business purchases, manufactures, and distributes the same or similar goods, their up-front cost is the same and therefore the cost to the consumer is virtually the same." But these are factors that are relevant to both for-profit companies and guiding companies. Statistically, if you start the above company a 1000 times you would have 1000 different outcomes, but even with an additional differentiating factor (assuming it's positive), the odds of the guiding company to win are higher, even if that's just a very small percentage. And that should warrant investment in them.  

In reality I think companies have less differentiating factors and a company that donates all profits to charities has more than 1 extra. A couple are named in the article and a recent blog on this forum also hinted to another advantage which is going to be really important for success, employee recruitment/retention. I have found this to be true for my own EA startup, which directs all profits to charities. 

So the crucial part that seems to be missing at this moment, is an infrastructure to fund guiding companies. If I start a for-profit, I can go to investors, and if they like the team, the numbers and the idea they will invest in it. This doesn't exist for guiding companies, but if it did, I don't see why guiding companies couldn't do at least as well as for-profit companies (if people don't at all care about the profits going to charities) or better (if people do care). 

You raise a very interesting point about for-profit companies being dependent on coercion, exploitation, etc. I think that's true for many of the biggest companies, but not true for smaller companies and I don't agree that it's always necessary to be successful, but it is in most cases. I genuinely think that some of the biggest companies in the world can be ones that are mostly good (e.g. Patagonia or FTX). I say mostly, because any billion dollar company will make mistakes. I don't think businesses whose sole purpose it is to do good always have to use coercion or exploitation, but I agree that they sometimes have to. Personally, I don't start businesses who rely on these methods, but I do think creating companies that have to use coercion to compete and that donate their money to charities are still a (much) better option than we have now. Government has to work together with guiding companies to create a playing field where these methods can't be used anymore, but we can't wait for that to happen. 

Grayden @ 2022-07-04T09:30 (+5)

Many large companies are owned by non-profit foundations. There's also evidence that they do outperform, but I suspect that is because they have better governance and a longer-term perspective, rather than because consumers choose them for their credentials.

See https://blogs.lse.ac.uk/netuf/2018/09/06/the-performance-of-foundation-owned-firms/

Brad West @ 2022-07-04T18:22 (+4)

There also has not been a particularly concerted effort to massively market this ownership.  For instance, I have never heard of negative advertising against competitors, which I imagine could be really powerful. "Buy from our competitors and you make some rich person a bit richer; buy from us and you help save lives."

Foundation or charitable ownership has always been incident. CPI is working to make profit destination a salient feature in consumer choice- perhaps other factors will warrant the choice of a normal company, but the possibility of doing good is at least in the mix. 

Also, the fact of outperformance by existing Guiding Companies at least suggests that it might serve as an advantage, even if this fact is not emphasized.

Vincent van der Holst @ 2022-07-06T10:47 (+3)

FYI Negative advertising against competition can be powerful but you have to tread lightly (at least in the EU) for legal issues. I have talked to laywers about this and you can be sued if you say the wrong things and even factual negative advertising (e.g. we're X% cheaper than our competitor Y) has strict rules for what you can and cannot say. 

Grayden @ 2022-07-04T09:28 (+5)

"If Guided Consumption directs 1% of Global Economy Profits" - I'm not quite sure I understand the mechanism to get to this state of the world. Would this essentially require the EA community to buy 1% of the global market? Or are you suggesting we build a whole load of new companies? That is almost impossible in most mature markets unless there is some sort of disruption.

Brad West @ 2022-07-04T18:45 (+3)

I am suggesting that strategic investment by EA or other philanthropic investors to create Guiding Companies/other Guiding Producers will allow for a huge profitable return.

For instance, in life insurance sales, there is little to differentiate salespeople  within an agency (they are all selling  the same products at the same costs), but they could make millions of dollars and capture a huge portion of the market for life insurance sales if they advertised that their commission would go 100% to charity. Paying 400 life insurance salespeople $120k/year, distributing them across states and agencies, would cost $75mil/year, but they could potentially  capture a significant portion of the market with a viral campaign (why not save the world while protecting your family?). And compensation of $200k/year is sufficient that we could capture talented salespeople and pay them more than what they had otherwise made. So if they generate $2 .5 billion in sales, that is 33x ROI. 

The reason that this could be so effective in sales commissions contexts is that there is almost nothing to differentiate salespeople (they are all selling the same stuff) and there are people that already want the product, so it makes sense for those consumers to buy the exact same stuff in a way that benefits a charity.

So, I am suggesting that strategically deployed charitable investment in conjunction with a broad-based marketing campaign could enable outsize market capture from a small investment.

Also see my response here under the heading "So, for a simple example to illustrate what I would be thinking of doing- "

Brad West @ 2022-07-04T00:40 (+5)

Thought it would be helpful to share an outline of the Consumer Power Initiative's functions.

Functions of Consumer Power Initiative

  1. Marketing Guided Consumption (creating a social movement) 
    1. To the broad public (consumers)
    2. To EA and other and other organizations
    3. To nonprofits
    4. To public intellectuals, influencers,  celebrities, academics (economists)
    5. To philanthropic sector
    6. To world governments
  2. Research critical to questions of Guided Consumption
    1. Public choice research (will consumers switch to Guiding Producers)
    2. Mechanism and degree of impact
      1. Degree to which market-share capture translates to profit
      2. Utility differential between funding to average shareholder/stakeholder (how much more utility from $ to effective charity vs. $ to average shareholder/stakeholder) 
      3. Factor of Guiding Producer investment translating to funding for charities (NEEDS TO BE AS EFFECTIVE AS DIRECT FUNDING TO ATTRACT INVESTORS, i.e. G(d) > d)
    3. Sectors in which Guided Consumption would have most cost-effective entry
      1. Low product differentiation sectors?
      2. Sectors with potential for virtue signaling like fashion/luxury?
      3. Sectors with natural product complementarity with cause area? (Vegan products with animal welfare DFD; sustainable products with environmental DFD)
      4. Sectors with commissions, particularly where rainmaking is a limiting factor and strong rainmaking could lead to immense profits (life insurance sales, real estate sales and brokerage)
  3. Supporting Guiding Producers
    1. Assisting Consumers in finding Guiding Producers that meet their needs
    2. Providing systems and structures that will allow Guiding Producers to serve charities transparently and effectively
    3. Assist with legal issues in starting the company
    4. Credentialing Guiding Producers- ones that are actually supporting charities, not engaging in shell games or otherwise acting sketchy
    5. Recruiting founders and talent for Guiding Producers
    6. Raising money for acquisition of firms to make them Guiding Producers
    7. Generally, marketing of Guided Consumption should also support Guiding Producers
  4. Other Possible Purposes?
    1. Eventually, looking to influence consumer preferences for charities so that Effective Charities retain consumer sentiment
    2. Promoting ability of consumers to otherwise affect the world positively
Gee @ 2022-06-30T19:35 (+5)

I keep going beck to this part, because this is what could make this so successful.

"... they get the same product, at the same price, but profits benefit charities rather than shareholders. Essentially, it is a no-brainer... the consumer can do good without losing money or changing habits... A movement that enables everyday people to help charities..."

Because at the end of the day, people can be pretty lazy (Including myself).

Newman's Own is an example of this. You're gonna buy pasta sauce anyway, might as well go with Newman's.

Even if it just gets the ball rolling, once you know companies who do good, it's easier to know what to look for and where to look.

Brad West @ 2022-07-01T01:55 (+3)

Hey Gee.

Yeah. I think that there are several sets of target customer bases.

One would be the super conscious set of consumers that would be seeking out the opportunity to do good through purchases and would be very excited to learn about Guided Consumption. This set of is analogous to "early adopters" in other contexts. They would value purchasing through Guiding Companies significantly, and would purchase such products even if they had to pay a slight premium. Given that some of the early forays into Guided Consumption will not necessarily be able to exploit economies of scale such "early adopters" would be especially helpful in the early stages.

However, the set of consumers who place a non-zero weight is the vast majority of all consumers: non-psychopaths. Consequently, once the Guiding Companies have the economies of scale to be price-competitive with multinational firms, they should have an advantage with every consumer (the "no-brainer"). Given that advantages with other participants in the economy could allow for costs even below competitors, it seems Guiding Producers in a developed Guiding Economy should tend to monopolize their sectors.

What's rather intriguing is to consider contexts in which Guiding Producers can be super competitive even without huge investments. For instance, you could pay a realtor or life insurance salesperson a salary in exchange for their commissions and then commit those commissions to effective charities and advertise this to prospective clients. I would think such Guiding commission-based employees could be a compelling example of early Guiding Producers.

Gee @ 2022-06-30T15:50 (+5)

I know so many millennials and zoomers that do want to do better for the world and its people, but are so overwhelmed they dont know how or where to start. One spot that breaks it down to "this product you will buy anyway is also good because it does x, y, z, which is better then just lining another millionares pockets" would be so helpful for them.

So often I hear "look at this amazing thing.... that I unfortunately got from amazon... but look! It will cut down on my plastic usage/good waste/ect. So it kinda evens out." So I'm rather excited to see this get off the ground.

Glen Edward @ 2022-07-03T17:25 (+5)

I think Guided Consumption works across multiple generations and for somewhat different reasons.  While I believe all generations would like to do better for the world (and this could provide an easy, natural and "low cost" way to do so) it's worth considering the very large population of retired and retiring boomers as a fertile pool of high value labor.  As evidenced by the recent drain of experience from corporate America due to the relatively affluent, aging population retiring, there is a very strong pool of knowledgeable people with a) more time on their hands than they know what to do with and b) a growing motivation to give back in some meaningful way as their personal priorities change.

Many retirees who have spent decades in the working world in which a significant portion of their self-worth and social interactions were formed are struggling as they move into the next phase of their lives especially after many of their bucket-list items have been either checked or reevaluated.   Even if there is no personal financial need there will likely be a real demand for opportunities for retirees to retain or regain some of this structure, especially if the fruits of their labor can more directly and reliably do good for others than was likely the case during their working years.   As Guided Consumption gains more traction and clear needs and opportunities are created, experienced individuals are available in unprecedented numbers to participate in the creation or staffing of either supporting organizations or even the Guided Companies themselves and very likely to do so at below market (or even no) cost.  Talk about an business advantage!

Brad West @ 2022-07-04T04:03 (+3)

This is another area in which Guiding Producers might be able to have competitive advantages with actors in our economies other than  consumers. 

One of the virtues of Guided Consumption is the potential to magnify  the capabilities of a very wide set of people to do good. I am sure that there are a lot of people that would be interested in doing a lot of good with their lives, for various reasons are not the most effective at working directly in a cause area, and are not well-suited or capable of earning extremely high incomes working in quant trading, neurosurgery, or high-level consulting. The areas where one can achieve the highest impact- either directly, or through Earning to Give- are not easy paths, and many smart, hard-working individuals may be better suited for other areas.

Guided Consumption potentially opens up the Earning to Give field dramatically. Perhaps someone is relatively talented in sales such that they would earn $70-100k/year selling life insurance. As a Guiding Producer advertising that their commissions would got to a popular and effective charity rather than an individual , they could potentially earn 10-20x that, in an environment of robust public awareness of Guided Consumption.

And like you say, a lot of individuals (talented retirees, for instance) may be willing to provide excellent work informed by decades of experience for below-market rates, provided that it is for a cause that they believe in.

Vincent van der Holst @ 2022-06-30T13:41 (+4)

Please note that I helped edit this piece and gave my feedback, and that I have left my red team points in the previous longer paper. Also note that I'm building a Guiding Company, so I'm biased.

"But even if Guiding Companies 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."

I think consumers would actually oppose high CEO pay and other activities they deem immoral from Guiding Companies. There's many examples from NGO's that got berated for activities that would be normal for traditional companies, like high CEO pay, and I'm not convinced it would be different for guiding companies.

Furthermore, we agree that consumers would  choose a company that donates profits to charities over a traditional company when all things are equal, but I suspect that situation is hard to create and will take a long time. Consumers, investors and philanthropists are still wary of this idea, so (for now) it's harder to attract the capital needed to acquire or build guiding companies that can compete with investor backed companies. And if you get to the no-brainer level, you still need to be able to market it to the public effectively. There seems to me to be no obvious reason why this wouldn't work, but creating this movement, persuading stakeholders and building these companies will require a lot of time, money and talent and should not be underestimated. But the size of the opportunity is potentially all the profits in the world, so it's definitely worth exploring. 

Brad West @ 2022-06-30T15:01 (+6)

The question isn't whether consumers would oppose high CEO pay of a Guiding Company/Producer, but rather whether they would choose that company over a normal company that serves normal shareholders and also has high executive pay. If you're a consumer and you're choosing a normal company's product over a Guiding Company's product due to high executive pay, you're cutting off your nose to spite your face, because you are enriching shareholders instead of charities.

It may even be they Guiding Companies can compete better for executive talent because of the social cache of leading an organization that generates $100 million/year for effective charities. Sure, normal fortune 500 companies can offer 10 figure yearly compensation, but a major Guiding Company could not only pay well (perhaps not quite as exorbitantly) but also grant one tremendous social status and the psychological benefits of being able to do lots of good through your job.

The benefits from actors across the economic arena - consumers, employees, consultants, advertisers, vendors- will allow for enormous advantages for Guiding Companies over regular companies. It just takes enough people to realize that the power of Guided Consumption.

Guided Consumption just needs (as was noted in the previous post by Tomer_Goloboy) to hit a social tipping point. Because right now, there's a strong status quo bias that is not fully appreciating the structural advantages that Guiding Companies will have.

Vincent van der Holst @ 2022-07-01T13:10 (+5)

I completely agree that it makes no rational sense for people to choose traditional companies over guided companies with all things being equal. But I've been in marketing long enough to know that people are highly irrational and emotional, and charities evoke a whole host of strong emotions. It will be really interesting to see how the public responds to guiding companies, but I know it won't be rational. The CEO of Newman's Own apparently made 270K USD each year, this question on quora about the CEO's pay is also interesting. Most people tend to think that 270K USD isn't too much. 

With new talent (millennials) caring much more about the sustainability and ethicality of their jobs, guiding companies might have better teams, and better teams, provided there is enough money, built the best companies. I'm very excited about this aspect and from anecdotal evidence from my company, this is true. We have a lot of applications on our jobs and the main reason they apply is because of our guiding company business model. 

david_reinstein @ 2022-09-22T23:15 (+3)

#Which Benefitting charities

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.

I think this already exists enough with Newman's Own etc. I think we should try to focus on GH&D here and maybe some Global Catastrophic Risk prevention public goods. Animal causes: maybe, but only to some demos/products (like vegetarian stuff).

david_reinstein @ 2022-09-22T23:12 (+3)

Which Market Sectors

Another approach is to capitalize on virtue-signaling, perhaps through products that could enable a consumer to conspicuously show that they bought through a Guiding Company. More

I strongly agree with this. Focus on conspicuous consumption things.

low-differentiation sectors, it may be easier to construct a “no-brainer” where a consumer is genuinely ambivalent as to two product

But are there substantial profits to be had by newcomers in such sectors? The profit margins may be low for such commonplace undifferentiated sectors.

Repugnant transactions:

I also suggest market sectors where there is some reluctance/repugnance to buying the product or service. The charity aspect will allow some moral licensing. E.g., Child.org (Thomas Muirhead) allowed people to donate in exchange for cutting-in-line at some festival.

david_reinstein @ 2022-09-22T23:11 (+3)

Somewhat minor, but perhaps an important example

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.

A lot of companies (e.g., Big Y) advertise themselves as 'American owned. '

david_reinstein @ 2022-09-22T23:08 (+3)

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.

But can we really quantify the benefit?

And, perhaps more importantly, will people (over)compensate for this by reducing donations elsewhere?

david_reinstein @ 2022-09-22T23:08 (+3)

By the way, I'm adding comments and suggestions inline using the hypothes.is tool. Get an account and install to see and interact with these.

Some key things in threads below...

david_reinstein @ 2022-09-22T19:40 (+3)

You say:

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.

But is it possible that the company that donates its profits/revenue could indeed provide an equal product at the same price? And if not, is the price differential less or more than the donation being made? (And if it's more, why not just pay less and donate the difference? However, either is theoretically possible.)

I think the basic microeconomic issues are

  1. Are the firms in question earning 'supernormal profits' or rents as a function of their market power? If so, what enables this and why don't more firms already enter and compete this down to zero? Would the firm that 'leverages consumer altruism' have an advantage here?

  2. If the firms are simply earning 'normal profits' (return on capital in line with the level of market risk) then how can the firm be giving any money to good causes without taking a loss? Or is there some synergy between the donations and production that yields a certain type of greater efficiency?

I believe the work of Paul Pecorino on 'byproduct firm', e.g., Monopolistic Competition and Public Good Provision with By‐Product Firms makes an (formal microeconomic theory) case for #1, at least indirectly.

My paper with Joon Song 'Efficient Consumer Altruism and Fair Trade' made an (formal microeconomic theory) case for #2. Below, a "layman's explanation" of our work: from my old web page

In recent years[1] there has been a surge in popularity of Fair Trade products as conscientious consumers have become more willing to pay higher prices to retailers who treat their producers and suppliers well. This has lead to a variety of research into Fair Trade products with arguments both supporting and disagreeing with Fair Trade. In this paper I consider the purchase of Fair Trade products to include both the product and a charitable donation. We make a case that “bundling” these can be efficient, implying that it may be less expensive to buy a Fair Trade products then to purchase an equivalent a non-Fair Trade product and make a separate donation. This occurs because when the farmer is given a higher income, he can be induced to put more effort into producing the product. Our preliminary work using data from Amazon.com supports this view, finding that fair trade coffees are no more expensive.[2]

Note that our argument in that paper basically could only work if the 'donation' in question is going to someone asked to put in effort on the part of the production process under incomplete information. So it may not apply to most of your 'guided consumption' cases. (But our case is only one of several.)

  1. note this was 2012 ↩︎

  2. Note: I never published the empirical part of this work, and I'm not sure if others have followed up on the question of 'relative price differentials' paid by consumer vs intermediary. ↩︎

david_reinstein @ 2022-09-22T19:50 (+3)

And in case it's interesting, here is a slide presentation of a talk on this paper I gave (a long time ago), which includes some of the empirical analysis at the bottom (which was dropped from the published paper).

Brad West @ 2022-09-22T20:53 (+1)

You're making the same mistake in understanding my proposition that a lot of my economics professors made that I am discussing charitable "bundling" (although after discussing with my professor from U of C, he understood better than what I was proposing). I must not be writing clearly.

Just instead of thinking of "donations" think dividends. Charities are simply occupying the same place that shareholders normally occupy. Thus, there is no reason it would be "taking a loss" any more than any other firm that has owners. The identity of an owner does not necessarily imply higher costs. Just as individuals trade ownership positions every day on the stock market, ownership could go to charities without jeopardizing performance.

david_reinstein @ 2022-09-22T23:05 (+3)

I didn't really misunderstand your proposal, but I am sort of thinking "at the margin, why would a rational altruistic consumer buy from these firms."

So basically you are saying

  1. Charities/philanthropists should invest in companies and tell people they are doing this, and tell people what share of profits is going to the charity.

OK they already do invest in companies, but they should tend to invest in those companies that are altruistic-consumer-facing, perhaps.

  1. People will be motivated to shop at these companies rather than at other companies

This seems kind of obviously true and reasonable, and to some extent it already happens (Bill Gates and Microsoft etc.) But maybe it should happen more and be publicized more. So maybe I mainly agree with you on this, and it seems like a good initiative.

But I think the 'at the margin' questions still should be considered.

From the POV of the rational altruistic consumer, it must be the case that by buying a product specifically from the GC firm, this leads more money to go to the charity in net[1].

Going back to the idealized models of microeconomics With 'perfect competition' or 'monopolistic competition', firms are meant to enter (and introduce new products) until no 'super-normal' profits are left. In such worlds I am not sure if a consumer preferring to buy from a GC company actually leads that company to make more profit. At least in perfect competition, firms set their price at marginal cost, and entry occurs until all firms are pricing at their average cost, and thus making no profits. Nor, with average cost pricing, are they making any incremental profits from additional purchases.

Our "Fair Trade paper" basically makes the point that even if firms are pricing at cost, a firm that pays its workers/suppliers more could, under some conditions, charge less than this markup to consumers, making it rational for altruistic consumers to buy from it. That's the 'synergy' we talk about.

Of course the real world does not involve perfect competition ... and the condition above is basically 'only once we reach equilibrium'. But I think these issues still need to be considered. Suppose we are in a world where firms sequentially rival for monopoly. Or maybe there is only room for 1 firm in a particular industry. How is it that a firm that donates from its profits to charity could dominate such an environment. (I think you make some good points in this direction, as does Paul Pecorino. I just think these points should be addressed, it's not a complete "no-brainer".

  1. I say 'in net' because, in case the equivalent product is more expensive at the GC firm, the amount going to the charity must exceed such a difference ↩︎

Erusian @ 2023-11-06T06:30 (+2)

My suggestion is legitimately to go take a few intro courses for business. I think your heart's in the right place but you clearly need some further training.

> This is because charities are more popular than normal investors

It's a basic truism that what people say they care about and how they actually make decisions are widely different. There are numerous, numerous case studies where strong survey sentiments didn't translate into actions. And preference for charity is one of the basic cases you'll get in an undergrad business course. I also know several companies who tried to advertise with philanthropy all of whom found people cared less about that than the packaging.

> and there is no additional cost to being a charity as opposed to a normal investor.

Of course there is. The additional cost is the foregone return on investment to the people who put up the money. With a for-profit investment I can raise money through promising to return the money with additional amounts. With a charity I can't.

> Thus, these businesses working for charities, which I call Guiding Companies, could offer goods and services at the same price and of the same quality as ordinary businesses.

No, they couldn't, because they lack the same mechanisms to raise capital. And the cost of capital affects prices.

> 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.

Aligning corporate incentives and founding companies that serve a social purpose is potentially high impact. But your mistake is how you're going about it.

> 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.

This is simply untrue. Corporations frequently advertise who their owners are and are so organized around this there are explicit government laws privileging companies based on who owns the business.

I'd suggest you look at the Social Enterprise movement or the B-Corp trend which have been thinking about this much longer than you have and has actually managed to have some major successes including multiple billion dollar plus companies. Of course, they don't give to EA but to other charities because they're not EAs. But they do generate plenty of money for non-profit causes. It also empirically works. If you want I can answer questions about that.

Brad West @ 2023-11-06T18:01 (+2)

I'm sorry you find my thoughts so misguided.

Re People's stated preferences contradicting actions:

Perhaps people indicate their willingness to make sacrifices to a much lower degree than what they would actually act upon. However, there is not a structural reason that  equity ownership by a charitable foundation, as opposed to other passive investors, would increase price. Thus, given adequate capitalization for the context in which they operate, there is no reason Profit for Good businesses would be less able to compete on price and quality than normal for-profit businesses. It amazes me that you and other critics seem to think that there is zero preference by consumers and other economic actors for charitable causes vs random investors. You mention that other factors may overwhelm this consideration, but provide no reason for thinking that Profit for Good businesses would perform worse on these other factors (other than access to capital, which I will address). In fact, if there are contexts in which PFGs can match the other factors, leaving little differentiation but profit destination, this small advantage could prove decisive (similarly to having a small speed advantage in a race is the difference between gold and naught). To summarize on this point, I think that it's quite plausible that people would act consistently with their statements where they don't have to give something up contra a kidney donation where they do. 

Re Cost to being a PFG rather than normal company:

I'm saying that having one particular kind of entity in the shareholder position, as opposed to other passive investors, does not tend to increase costs to the business. Ownership composition changes every day in normal businesses on the stock market. If a philanthropist were to buy out a company, putting its stock in a charitable trust, and kept management the same, then there is no reason to think the company would perform worse along other metrics. So, if there is any value (consumer tiebreaker effect, talent acquisition, business partnerships) to other economic actors, ownership by a charitable foundation would confer an advantage.

Re Capital Acquisition disadvantage:

You're right: currently there is access by for-profit investors that enables scaling and its attendant advantages that is much less available to Profit for Good businesses. But just as there are entities who are interested in making money for themselves, there are also entities interested in making money for charities: philanthropists and/or patient philanthropists (people interested in investing to be able to donate at a later date). The key to unlocking philanthropic dollars as a source of capital would be establishing evidence that Profit for Good businesses outperform normal businesses. If this theory is correct, capital should become available through philanthropists who are motivated to get more money to the causes that they care about. As the evidence becomes even stronger, access to traditional investors should become available through debt enabling leveraged buyouts. The disadvantage on capital acquisition will dissolve if evidence is established to prove my theory.

Re Companies seldom advertise ownership:

When I'm going to the grocery store or convenience store, for most products, there is not conspicuous advertisement of who owns the business.

Social Enterprise/B Corp:

It is great that businesses are doing this, but there are a few reasons that I think focusing on profit to charities is particularly powerful:

  1. Money to effective charities is extremely efficient at doing good. 
  2. Focusing on doing good through business activity rather than business profits tends to increase costs, or else this would be the industry standard. On the other hand, if you keep business activities the same, having a different owner (a charitable foundation) will not tend to increase costs for the business.

Thus, I think that focus on profits to charities is warranted.

I urge you to think more carefully about the fact that business performance is affected by the choices of economic actors: consumers, prospective employees, other businesses. Small advantages among these members could compound and make it difficult for firms without access to these advantages to compete.

Ricardo Pimentel @ 2023-10-05T18:29 (+2)

Hey, just skimmed the post but I feel the basic premise looks a lot like the work the Purpose Foundation  is pushing for steward-ownership.

Martin (Huge) Vlach @ 2023-10-30T15:16 (+3)

The link is to be https://purpose-economy.org/en/purpose-foundation/ ,
very interesting document,
if anyone wishes to discuss, please meet me via http://linktr.ee/uhuge

Brad West @ 2023-10-07T05:48 (+1)

Yeah, if it is the case that the "Purpose Orientation" aspect of "Responsible Ownership" means that profit goes to donation, reinvestment, or covering capital costs, then such businesses would be Profit for Good businesses.

Moritz K. Hagemann @ 2022-07-01T02:28 (+2)

Not sure if you are aware of this or simply consider this to be fundamentally different from your approach, but there are some companies out there who are majority-owned by charitable foundations. An example is Robert Bosch GmbH (one of the largest industrial companies in Germany). Most (if not all) of the profits go to the Robert Bosch Foundation which spends them on charitable causes (not EA-aligned though). See: https://en.m.wikipedia.org/wiki/Robert_Bosch_Stiftung

Hope this helps to assess the viability of your approach & learn from existing solutions. There are more companies like this out there, let me know if you want me to point you to them.

Brad West @ 2022-07-01T02:47 (+3)

Yes. In Germany, I think people are aware of Bosch's charitable ownership, but this is seldom known by the broader world. I'm looking to look more into Bosch for insight.

I would be interested in learning of more companies like this.

EDIT: and that is an example of a Guiding Producer/Company. If you look at my larger essay, I note the conditions of Guided Consumption. You basically need networking and communication in addition to the existence of Guiding Producers/Companies. But Bosch and Newman's Own have definitely been able to do well... I suspect they would do even better if there was a social movement buttressing them further.

EDIT2: Keep in mind Bosch and Newman's Own took off prior to the age of the Internet. There may be more potent ways nowadays to further movements.

Seth Ariel Green @ 2022-06-30T15:27 (+2)

the question remains: if Guided Consumption 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.

I think you've got a great idea and I hope to see it work. The default answer -- the obvious answer -- to the question you raise is that a for-profit structure provides a fitness advantage in the Darwinian environment of business competition. The burden of proof sits with you to disprove that. That would mean coming up with a compelling theory why every sufficiently large successful corporation has, to date, pursued a for-profit structure; and because of the sheer lopsidedness of the numbers, that's a much higher burden of proof than you meet, I think, with the answer you provide here (an appeal to our intuitions about widespread beliefs without any grounding in, e.g., psychology or sociology research). 

A related question: what's the largest public benefit corporation? Why isn't it bigger?  Is there any evidence that any of the FAANG/Fortune 500 companies has considered shifting gears to giving away 100% of profits to charity? That would probably cause a shareholder revolt, but theoretically, someone could take a large company private (a la EM's bid for Twitter) and then totally change its governance and profit distribution structure. Perhaps we want to explain the fact that this hasn't been done as a collective action problem? Or has it been done?

Again, interesting idea, I'll be stoked to see it succeed!

MichaelStJules @ 2022-12-25T05:41 (+5)

I suspect the main reason is just that regular for-profits can attract far more investment, because they attract investment from investors who want the profits for themselves, not given away to charity. This allows them to scale faster and bigger, and for more of them to exist. EDIT: And then economies of scale or other benefits from size (recognition, network effects) may favour them further.

If something is a mostly or completely non-profit company but takes (or starts to take) private for-profit investment, two things could happen to cause the non-profit shares to remain low in total value:

  1. It could scare away for-profit investment, because investors may be skeptical that the company will prioritize profits over helping others or being ethical. Then the company struggles to scale.
  2. The company attracts significant for-profit investment and scales, but then becomes a primarily for-profit company.

Also, with easier access to financial capital, for-profits could potentially sell below cost of production for longer than non-profit companies to drive out competition and increase their market share.

 

You could also just compare the size of all philanthropy vs all investment. The funding available for non-profit companies would be relatively tiny, so we should expect few such large non-profit companies. These non-profit companies would be funded initially or acquired through philanthropy. There's just much less money for this, and this is just one competing use of philanthropic funds, with some alternatives being to donate directly to charitable work or invest more broadly in the market.

Brad West @ 2022-12-25T06:35 (+1)

The firms would not be looking for (much) investment on behalf of typical shareholders. So your numbered points are immaterial... PFGs are 90%+ charitable equity.

Your characterization is a bit off... These Profit for Good Companies are not "nonprofit. " They exist to make profit, but for a specific kind of shareholder.

You're right... Currently PFGs cannot get adequate investment because this isn't on the menu for philanthropists as means to multiply their donations. But if philanthropic money could be multiplied by leveraging consumer (and other economic actor's) discrimination in favor of charities, there would be ample incentive to invest... Philanthropists want to multiply the funds that are available and leveraging the good will of economic participants gives them that opportunity... If people can buy your laundry detergent for the same cost and help fight malaria, they will. The fact that we are not trying to give them this power is foolishness.

Anyone would rather buy in a way that benefits charities rather than traditional shareholders, and equity being held by a particular kind of entity does not necessarily increase costs or otherwise compromise a product.

You're right, capitalizing PFGs would compete with direct donations and "more broad investment." In these competing cases, you're leaving money on the table because you're failing to leverage the good will of consumers and other economic actors.

The bottom line is that PFGs, if capitalized, have all the advantages normal firms do, plus an extra advantage in that economic participants value their success more than competitors. The only thing keeping such firms from thriving and offering a huge multiplier opportunity is that we haven't created an environment of public awareness of the opportunity (which is what my nonprofit is trying to do).

MichaelStJules @ 2022-12-25T07:53 (+2)

The problem is "if capitalized". Even with widespread awareness, they could still be at a disadvantage for raising capital and scaling, because the pool they're targeting (philanthropic capital) is much much smaller.

Brad West @ 2022-12-25T16:29 (+1)

Yep. Acquiring capital without selfish profit motive is a key challenge.

However, if there is an environment in which PFGs enjoy a large advantage and this is clear to the relevant parties, there should be no problem raising funds through philanthropists and debt.

You can frame it as

F(C) = F(K) +P

F(C) is a firm capitalized mostly by charitable equity

F(K) is an identical firm capitalized by private equity

P is the monetary value of positive discrimination in favor of charities

If we have an environment in which P is high enough (I think this could be true in a lot of lower differentiation products), a PFG could probably be capitalized wholly by debt...

If PFGs offer a high enough value proposition (and this is clear to the relevant parties), the financing issues will work themselves out.

Thus, the question is, are the costs of creating the environment we're looking for worth it? I think with the amount of money on the table, it is definitely worth determining what P values are possible in different contexts because money in the hands of effective charities is such high impact.

Vincent van der Holst @ 2022-06-30T16:22 (+4)

Thanks for raising these points Seth. I agree that the burden of proof is higher than what we currently have. This paper and the companies that some of us are building are just the start of proving that this might someday happen. 

I think it's critical to note that guiding companies are basically for-profits. There's nothing distinguishing them  from for-profits except that the profits go to charities and that the investors are philanthropists buying out companies or funding new guiding company initiatives. 

The good news is that there's one large successful case with Newman's Own, who have donated about 570 million USD to charities and give away all of their profits. There's more smaller projects that are successful and donated millions, but nothing that I know of that's close to Newman's . I see one big difference between Newman's Own and the other initiatives that are less successful: money.

I hired a research intern to validate that and he's now drafting up his thesis on the economic sustainability of this business model (I can share it here once it's done), and the main conclusion is that the issue with this is money. If you have someone like Paul Newman funding your guiding company there's no reason it can't be big, and that turns out to be true, because Newman's Own is a multi-billion dollar company in a very competitive space. If the wealthiest philanthropists put their weight behind this and "invest" in the next best guiding companies, I don't see why these companies cannot be the biggest in the world. With the money you can hire the best team, and the best teams build the biggest companies. Currently, the infrastructure (venture capital, stock markets, etc.) are lacking for guiding companies, but these can be built. This will take a long time. 

To answer your other questions, I have no evidence that any Fortune 500 company tried this, but I don't think that kind of initiative would be public. You could argue that Warren Buffet, who intends to give away almost all of his wealth, is buying and investing into companies to generate more profits that he can give away to charities. But that's indirect. Why hasn't he bought a company and turned it into a guiding company? Twitter and EM are an interesting example as well. Maybe EM would use Twitter to fund his next EA endeavor (e.g. backing up humanity to another galaxy). Would Twitter be a guiding company in that case? 

Seth Ariel Green @ 2022-06-30T16:44 (+5)

Thanks for the thoughtful reply -- I think that I should have specified 'shareholder-corporate-governance-structure for-profit' rather than just 'for-profit' 😃 and once we get to that level of granularity, maybe it is plausible that alternatives haven't abounded simply because of a lack of imagination!

Newman's is indeed a nice counter-example. 

And FWIW, I am a coworker of Jasper's at Global Income Coin, and we're trying to do something exactly like what you propose but with currency...so I really hope it's viable!!

Brad West @ 2022-06-30T17:52 (+6)

Regarding the burden of proof... I would think that such a burden is a function of the purpose that it serves. In the criminal justice system, we require a very high burden of proof, "beyond a reasonable doubt", because of the enormous cost of a false positive: depriving an innocent person of life and/or liberty. In the civil context, a mere preponderance (greater than 50%) as if it is more likely than not that one has violated another's rights and harmed them, they should be compensated commensurately, even though there may still be a significant chance that we are wrong.

Regarding the burden of proof here, in considering whether and to what degree one should support a project, one should consider the probability associated with different outcomes and the utility associated with said outcomes. This is why even if you are very skeptical of Guided Consumption, supporting it, especially at early stages, is justified.

I am interested in learning more about GIC and will very soon be taking a look at the project. I love the idea of global UBI and very much want to work toward a world in which everyone has a chance toward living a life of dignity and having a chance at his or her dreams. Perhaps there are some opportunities for collaboration here!

Alastair Fraser-Urquhart @ 2022-07-01T03:13 (+1)

How does this differ from eg FTX?

Maybe (albeit in a slightly different way) SBF did this, in that he founded a company, made billions of dollars, and pledged it to EA causes - to me that looks like the same outcome, but with the advantage of not having to buy an established company at market value.

Brad West @ 2022-07-01T03:37 (+5)

SBF ran an excellent company and made billions by running a normal company. He did not use the fact that he would use the money he earned to donate to charities to gain an advantage with consumers. What would make FTX a Guiding Company is if he had donated his equity ownership to a charitable trust and advertised this to users of his product as a basis to choose FTX over competitors.

FTX and SBF do not resemble Guided Consumption because they do not use consumer sentiment to gain an advantage.

Vincent van der Holst @ 2022-07-01T13:26 (+3)

FTX does sometimes advertise their foundation but they are not a GC of course. I hold my crypto on FTX because I know it will end up in their foundation or on SBF's bank account and he'll do great things with it. I think more people would switch to FTX if they went GC or advertised their charitable work more broadly. 

It's great that people like SBF are humble, but his purpose is worth bragging about and it might accelerate the causes he cares about.