Expanding Warren Buffett's value investing approach to the socially responsible sector

Expanding Warren Buffett's value investing approach to the socially responsible sector

The Conscious Investor

  • "Social Value Investing: A Management Framework for Effective Partnerships" was written by Columbia University's Bill Eimicke and his colleague, Warren Buffett's grandson, Howard Buffett.
  • The framework for the book was inspired by Berkshire Hathaway and modeled after the company's application of value investing. Like value investing, social value investing employs a long-term strategy that the authors believe unlock hidden or intrinsic value. 
  • The book focuses on the partnerships between the public, private, and philanthropic sectors that are needed to tackle the world's greatest problems. 

Following is a transcript of the video.

Sara Silverstein: Why did you decide to write this book?

Bill Eimicke: We decided to write the book because we really believe that profit and purpose can go together, that you don't have to choose one or the other. And, in fact, I'll go even further than that. If we look at some of the bigger problems facing the world - inequality, climate change, opportunities, the disappearance of work, automation - those are problems that are not going to be solved by government alone. But they're not going to be solved by the private sector alone either. So we've been researching this area for 10 years, trying to find a way that you can be efficient and do good at the same time. And I think if people have a chance to take a look at the book, they'll see we found examples from all over the world. And we think there's much more to come. So it's not one or the other, it's both.

Silverstein: And your book goes a little bit further than some other socially responsible books where you're not just talking about that it can be done. You're talking about how it can be done.

Eimicke: Exactly. So there are examples in the book from India, from Brazil, from right here in New York City, even believe it or not, from Afghanistan, where the three sectors are working together to make a difference in the world for people who need a difference made, but also make the economies better and stronger. And right here in New York City, you look at Central Park and the High Line, they are two examples of things that are beloved by people from all over the world but they've been tremendously good for the New York economy.

Silverstein: And why is this cross-sector partnership such an important part of making things happen?

Eimicke: Because I believe one, government has gotten very, very big and bureaucratic. That's a problem. And number two, it's become very contentious as well, as we see everyday in the newspapers. "If I'm a Democrat and you're a Republican, whatever you say I'm against and vice versa." So it's very hard for government to get things done. So that's point number one. Point number two is the solutions to important problems like inequality, like the environment, require much more than government. It's just not pass a law, or pass an edict, or pass a regulation, you need to combine the resources that government has and the scope with the ingenuity that the private sector has, and then often the third sector as well, to work with community so they'll accept it. As you see in the changes in the book, without community support on top of the collaboration between government and the private sector, none of these things would have happened.

Silverstein: And do you have one favorite example of how this has really worked in the past?

Eimicke: Well, we love them all, and I love New York, and I'm from New York, so Central Park and the High Line are really close to my heart. But the one that's most amazing, to me and perhaps to most people, is India. You know, when most people think of India, they think of poverty, they think of streaming people, they think of Gandhi. And they don't recognize that India's the sixth largest economy in the world and growing faster than any other large economy. And in India, you see in the book, they have created a biometric ID system which has not only made all their citizens no matter where they are eligible for government benefits, but has become a bank card, bringing banking like Citibank to people in the most rural sectors of India. Through e-medicine with a private for-profit, Apollo Medicine, you can be diagnosed for brain problems by one of the best doctors in the world in Mumbai in your small village in Northern India. To me, it's almost like science fiction, it really is. But it's happening right now. There are over 1.2 billion people registered in the system using it. And they - you can carry that card. You don't have to carry your driver's license, you don't have to carry your proof of your mortgage, all your important documents are carried on the card. So you go to the bank, you give them your card, and they can approve you for a loan.

CASE STUDY: 21st Century Digital IndiaAn exploration of the world's largest digital inclusion program, built on cross-sector partnerships between government, private business, and community. 

Silverstein: And what did they do right that allowed them all to work together?

Eimicke: Well, I mean I hate the phrase, but that's a great question, it really is. The government had this idea in the '90s. And from the '90s all the way into the middles 2000s, it went nowhere because they didn't have the expertise. And when Modi, the current Prime Minister came in, he reached out to their Silicon Valley, to one of the strongest tech sectors in the world, and asked one of their leaders, "Would you come into the government, a dollar a year, and help us put this system together?" And that's exactly what happened. So the backbone of the system is the private sector which serves, now India, not just American Express. And the registration was done by 200,000 entrepreneurs that they licensed into the system to actually get people registered. So it was local, international, government, private, and community all working together. And it's, it's not done. There's miles to go. But the banking sector is probably going to triple in size. The wealth of people and communities and most importantly to me, corruption, which was a terrible problem with government benefits. I wouldn't say it's eliminated but it's reduced dramatically. So benefits all around.

Silverstein: And you co-wrote the book with your former student and current colleague, Howard Buffett. So why did you guys call it "Social Value Investing"?

Howard and Warren Buffett

Columbia University

Howard Buffett is the co-author or "Social Value Investing" and the grandson of legendary investor Warren Buffett.

Eimicke: So it's a long story. I'll try to make it really short. But Howard's grandfather is Warren Buffett, Berkshire Hathaway, value investing. Value investing was actually, the theory behind it comes from Columbia Business School, from professors Graham and Dodd who wrote two books in the 1920s and '30s that influenced Warren, who was a student at Columbia Business School, and put the principles to work in Berkshire Hathaway. And as Howard and I are both committed to making the world a better place, as we thought about how do you do that, the first place we stopped was Berkshire Hathaway, because they've been so enormously successful in taking an idea of let's take a long-term approach. And we looked at their principles, we looked at Dodd and Graham, and then we looked at our own experience and we put together what we think is both a management and measurement strategy that can achieve not just profit but also purpose, positive impact. So it's not, again, it's not the choice, let's have impact investing or let's have for-profit investing. Let's have both.

Silverstein: So if you are looking at a company, how do you evaluate whether it's a good value investment or it's also a good social value investment?

Howard Buffett and William Eimicke

Columbia University

"Social Value Investing" co-authors Howard Buffett and William Eimicke.

Eimicke: Well, we have pretty good indicators, as everyone knows, for measuring the financial impact of an investment. Nothing's a hundred percent but there's a lot of information that you can use to analyze the financial prospects. Not so much on the other side, not on the impact side. So you'll see in the book an actual measure that Howard originally developed, called the impact rate of return. And the intention of that is to give you, as an individual, as a policymaker, as a manager, or as an investor, if in fact I'm committed to renewable energies. Among the companies that are providing renewable energy, which one is the most efficient? For each dollar spent, which one has the biggest impact on the environment? And the formula allows you to decide what that impact is, how you might measure that. So it's a customizable formula, but it gives you a quantitative measure to compare different investments in the same space. So it's not quite there to compare renewable energy with affordable housing. But I think the structure is there and what we hope, over the next five or 10 years, that people will start using this formula, perfecting it, making it better, and making it like the internal rate of return, just a common measure that everybody uses and everybody can use to compare investment.

Silverstein: And how much overlap is there, if value investing looks at long-term results also, is there a lot of one and the same?

Eimicke: There's a lot of overlap. And as a management professor, I personally believe that management is one of the key things you need to look over. You can look at statistics, you can look at - but if a company is, or a government, or a non-profit, if their management is not strong - as you saw in the book, we have really five areas or elements. Process, India's the best example. People, Central Park and the High Line. Place, Afghanistan which shows that they altered their process to fit the place. Portfolio, you see from Brazil, the philanthropic sector which is now around which has totally risk-free or risk appetite capital. That is, they put their money in and they don't expect to get it back. That kind of tiered finance approach can make things possible that never would be possible within the sector. And then finally, to me the most important one, which is performance, measuring performance. And we give good examples of how you can do that. So the five Ps, you put them together. We also have a checklist that you can look at to see if your partnership is well-structured. And you're good to go.

Silverstein: And last question, in the US, where would you most like to see companies working with other sectors?

Eimicke: Well, my own personal passion, my own belief, if you really want to change the world, you start with housing. And in some of the most vibrant economies in the world, New York City, San Francisco, London, Hong Kong, Beijing, affordable housing is literally a crisis everywhere. And I personally believe, based on the research that we've done, there are ways to do it. And, in fact, the High Line is a good example whereby that community has prospered but there are still 2,000 units of public housing right across the street from the High Line. And a number of the new buildings have a mix of incomes. So I believe the methodology that we have developed will help people create affordable opportunities in major cities around the world and that will help everyone.