Thursday, 5 May 2016

Derivatives in the Social Sector

Abhishek Thakore is a co-founder of the Blue Ribbon Movement, that works with the youth to create leadership that facilitates social transformation.  An MBA from IIM, Bangalore, in his previous avatar as a finance professional he has worked with Deutsche Bank, Boston Consulting Group and the Hay group. He combines his extensive knowledge of two diverse worlds to compile a ready reckoner of ‘social sector derivatives’, highlighting their purported uses and inevitable negative impact.   


Derivatives were famously dubbed ‘weapons of mass destruction’ by the legendary investor Warren Buffet. My own internship at an investment bank exposed me to highly complex financial instruments that were very useful but had the potential for harm.

One of the areas I was working on was credit derivatives; very profitable instruments that protected companies from default. About six years later, one of their variants led to a bubble on Wall Street.

I am no longer a finance professional, but in the social sector too there are some equally potent ‘instruments’ that have derivative-like tendencies. And while we share these, we are all equally prone to their misuse.

The intent is to be mindful about how these might misrepresent our impact,  and while this is not directly covered under legal compliance  it surely is honoring the spirit of things.

So, here are some social sector derivatives.

Financial Sector
Social Sector Equivalent
Setting up ‘shell’ companies in tax havens – creating multiple entities for the same activity.
Registering NGOs – many of them merely as legal entities – to legitimize certain activities or money.
The staggering number of NGOs registered in India (13 million!), with a very small percentage doing substantial work.
Limited liability: The  shareholder’s  loss is limited to the contribution.

Call / Put options : Option to buy or sell in the future depending on price.
Almost no highlighting of ‘unsuccessful’ projects and learning from there – instead capturing the ‘upside’ of success and highlighting only that aspect.
Creates a perception that no NGO is doing anything wrong – there are only successful, high impact projects. Also, limits how much we learn.

Futures Contracts: An agreement in the future, that lets you buy with just paying the margin (the possible fluctuation in costs).

Claiming credit for the same action at multiple levels i.e local, national and international, by different partners.

Similarly,  actions by one individual are attributed to the incubator, fellowship,  associates, some programs they may have attended – EVERYONE!

Creates a perception that a lot of change is happening because the ‘credit taken’ is exponentially more than the work done.

This is offset, perhaps, by many NGOs who don’t communicate their work at all!
Collateralized Debt Obligations: Combining debt from various sources and then creating ‘tranches’ based on their quality.

Combining all projects / activities from a program and then using the highlights to imply that this represents the ‘average’, rather than the top.
Light – touch models that claim impact for deep changes.

Intensive programs that add up dropouts and partial completions.

As social catalysts, it pays to be responsible for what we communicate and to resist the temptation to overstate our results and impact. Otherwise, we risk doing what the financial services industry did to itself .
Instead, let us be more mindful of our communication and the spirit of our impact.

Views expressed are those of the author. CAP does not necessarily subscribe to the views, either  in whole or in part. Readers are welcome to send us their thoughts and counterpoints –

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