Trading Social Credits

The Economic Times in an article today informs that the government is planning to ask corporate houses to be more transparent about their social spending under the head corporate social responsibility (CSR). In a post in this blog some days ago, I had posted a question – Can we have a specialized exchange to trade "social credits" in order to develop capital markets for non-profits? Large corporations have corporate social responsibility (CSR) budgets that are spent on a variety of development projects. If NGOs (and even Government agencies that are responsible for implementing developmental programmes) could quantify the social returns they generate and bundle them through instruments which I call “social credits”, these could be sold to corporate houses, donors, socially motivated investors, government agencies which can utilize their CSR/developmental budgets for purchasing such social credits. Such trades can be facilitated through social credit exchanges, which would allow NGOs to raise resources for their developmental projects. NGOs that have high social credits would be able to generate more resources. Social credits themselves would be a function of the social impacts that are generated by these organizations. The quantification of such impacts is a challenge; however, the step that the government is planning is in line with the argument presented above.

Is a DCF Valuation Pre-money or Post-money?

This question arises because of the different vocabularies of mainstream corporate finance literature and venture capital/private equity practicioners. I have seen many people believe that this is a point of negotiation between the investor and the investee. In my opinion, there is a very clear theoretical case, that the DCF approach to equity valuations yield a pre-money equity value as negative free cash flows are also discounted which reflect the impact of future dilutions in equity. Therefore no further adjustments are required.
Intuitively, though, consider what a negative free cash flow to equity implies. It indicates that the firm does not generate enough cash flows from current operations to meet its reinvestment needs. Since the free cash flow to equity is after net debt issues, the firm will have to issue new equity in years where the cash flow is negative. This expected dilution in future years will reduce the value of equity per share today. In the FCFE model, the negative free cash flows to equity in the earlier years will reduce the estimated value of equity today. Thus, the dilution effect is captured in the present value and no additional consideration is needed of new stock issues in future years and the effect on value per share today.
(Italics quoted from Aswath Damodaran - Professor of Finance at NYU-Stern, page 34-35 of the document - chapter 14, Investment Valuation, box on Negative FCFE, Equity Dilution and Value Per Share - available on www.damodaran.com).

Dispensability makes it sustainable

Experience has convinced me about my own dispensability. I have a sense of pride in the fact that I have contributed to it significantly. It also means that I can take things lightly. If you are dispensable in the social setting, it allows you to sit back, enjoy the drama, take a few liberties and have fun, as you are free from the burden of having to live up to expectations.

In an institutional setting, it is organizational competence and not concentrated skill-sets that can ensure scale and sustainability. This is especially difficult to achieve in industries that are driven by people and not by machines such as the services industry. No matter how well defined and articulated processes are, it is almost impossible to achieve perfect standardization - the “production” and “distribution” of a "service" has a considerable human interface.

BPOs in India have successfully addressed this issue by designing well crafted trainings (for example in voice and accent, or in standard operating processes) that make it possible for them to deliver services that are uniform in quality. MFIs have much to learn from BPOs.

If a service involves intellectual processing of problems, the complexity increases manifolds. To take an extreme example, the service that a good CEO provides to her/his firm would virtually be impossible to standardize. No wonder, there is a lot of discussion on how CEOs’ actions, role, compensations etc. impact a host of organizational variables and ultimately firm-value. Successful companies are very effective in delegation of responsibilities. Also, functional boards with independent directors as well as a sound system of independent internal audits help build strong organizations. In effect these measures reduce the discretion a CEO has in taking arbitrary decisions and help reduce the risk that an “indispensable” CEO could expose her/his firm to. This is another imperative for MFIs in India.

It is essential to create dispensability in order to have sustainable outcomes that live beyond an individual. Isn’t it ironical that obituaries are written for an audience!

http://www.youtube.com/watch?v=jpf5MoxWuxQ&feature=related

Restless thoughts of a sleepless night

Can we have a specialized exchange to trade "social credits" in order to develop capital markets for non-profits?
Can private sector monitoring (such as independent ratings, certified audits, transparent accounting) enhance market efficiency?
Can we think of a macroeconomic model that factors in the effects of the unaccounted economy (black economy) on national income, inflation and interest rates?