To fund or not to fund – Mission drift, market failure, (dis)incentives

cooperatives
Cooperatives and other Social Sector organisations often have to tackle issues of strategic drift, market failure, the delicate apportionment of rightful concern

This afternoon, two juniors from USP posed the same question to me, a question of great concern, not only to them, but (I’m pretty sure) to members of the social and public sector – practitioners, observers and policy makers alike.

These juniors of mine run a snacks store back in my student hostel, which sells items at or below market price while donating profits back to the student population through a residence fund for needy students. This afternoon, they were considering the option of financing a tuition programme for lower-income children run by students from the same hostel.

As of this afternoon, the snacks store has approximately $800 of profits yet to be donated, while the tuition programme requires approximately $1,000 of financing as part of operating costs, as their sponsor has abruptly decided to rescind its financial support.

As I used to run the snacks store, these two juniors, who couldn’t decide on whether to finance the tuition programme, decided to seek a third-party opinion. (This sounds eerily like what happens out there in private and public sectors too…Or perhaps not, since some argue that executives hire consultants to support their existing stance while civil servants don’t usually take stances. I say these in jest. Just so we’re clear.)

As the snacks store is run like a cooperative and, from what I understand, the tuition programme is run like a voluntary welfare organisation, let’s refer to them as “Cooperative” and “VWO” respectively. Here we go.

“Hi Uncle, I think we need your advice regarding Cooperative stuff.”

“Weileongggggg. Can I ask for some wisdom?”

I proceeded to listen to them both. We exchanged views and here are some concerns we had along the way.

Mission Drift

Cooperative was set up with a specific mandate and double bottomlines. Cooperative is to buy snacks and drinks in bulk and sell them within the student hostel at  or lower than market prices. This would bring both convenience and cost savings to students. Thereafter, Cooperative is to donate all profits to the hostel’s fund for needy students so that lower-income students in this academic-residential programme might receive some support for their commendable endeavour in pursuing academic interests while managing financial constraints.

VWO was set up as a platform to match lower-income children from a nearby housing estate with student volunteers, who would share dinner and provide tuition and mentorship within the student hostel. After the initial success, VWO extended its services to an estate slightly further away. A Community Club (CC) in the area recognised the value of this programme and had been sponsoring transport arrangements for the children. The expenditure for the semester ahead was projected to be approximately $1,000. Recently, for some reason, the CC communicated that it had to stop funding this initiative.

The current team running Cooperative caught wind of it and started discussing if they could and should do something about it.

The first concern that came to mind was that of mission drift. In short, it refers to the phenomenon of moving away from one’s purpose or mandate. Mission drift might happen to corporates, especially if they seek “diversification” with inadequate thought. Intuitively, though, organisations in the Social Sector might just find themselves more susceptible to mission drifts, especially when they try to contribute to too many programmes of disparate nature or when they feel compelled to help another organisation along or when they’ve been around for so long they’ve lost sight of what they were set up for. In this scenario, I was concerned if Cooperative was experiencing something like a mission drift and highlighted the potential consequential effects.

Cooperative was set up with the mission of helping needy students stay in the hostel, to raise awareness of privilege and resilience, to demonstrate how ideals of community self-help could be lived out and grappled with in enterprising ways. The student community bought into that and paid for their purchases honestly within a labour-light, honour system while also reaping economies of scale with lower-priced goods. Some might also have patronised the store because they wanted to chip in to the residence fund for needy students. Should the managers of Cooperative decide to divert profits to financing a tuition programme serving lower-income children from another estate, they would have to explain the rationale to the student body. What, then, might constitute reasons to finance VWO? Some questions we discussed were:

  1. Should VWO have a viable operating model, shouldn’t there be organisations, such as the CC, which would recognise the value of VWO and offer to sponsor it? Why has the CC stopped funding it? Is the operating model under question?
  2. Assuming the operating model is robust, is this going to be a one-time financing decision, or is Cooperative seeking to finance VWO continuously? Or would it be more of a short-term debt financing arrangement, as VWO seeks out its next sponsor?
  3. Assuming the operating model isn’t robust, is Cooperative going to take on the task of reviewing and improving VWO’s strategy and operations?
  4. For both (2) and (3), is Cooperative inclined to become a grant-maker of sorts in the future? [This is a rather intriguing idea, actually!]
  5. Wait a minute, how do all these contribute to Cooperative’s purpose / mandate? They probably do in some ways, but how? And is it more impactful than the existing arrangement?

Mission drift can be real, especially when we are concerned about social causes and wish to sustain what we deem to be value-creating activities.

Market Failure

Resuming our conversation, why, then, has the CC stopped appreciating VWO’s efforts? Beyond that, why hasn’t other organisations recognised the value of VWO’s work and stepped in to provide funding for it?

As we discussed those questions, “market failure” popped up in my head. Here, I am referring specifically to the problem of information asymmetry which leads to imbalances in power between the supplier and consumer of a certain good or service.

information-asymmetry-big

 

Assuming that VWO has indeed been impactful, could the CC have gotten hold of some information that prompted it to stop sponsorship while knowing that VWO would be able to continue its programme through student donations or perhaps by finding another sponsor? Would the CC then be able to transfer its costs of social welfare to another party? Taking a step back, are there also existing structural or cognitive barriers in the market of such tuition/mentorship services, such that organisations with a similar mandate as that of the CC have failed to recognise VWO’s value?

On the other hand, was the discontinuation of funding simply a correction for a previous market failure with a dash of principal-agent problem? Assuming that VWO had not been effective, yet the CC, while acting as an agent of the State in promoting social welfare, had its own interests in supporting a non-impactful programme, could it be that the information asymmetry had been corrected and the CC reprimanded by the State?

(Back to) Mission/Rightful Concern + Incentives(!)

Should it have been an issue of market failure, is it Cooperative’s rightful concern? And if Cooperative decide to assist in fixing information assymetry, does it have the capacity to do so? Also, how might it extend help while explaining its decisions clearly and convincingly to the student body? Is it considering a shift in role as a start-up incubator or a grant-maker, or can Cooperative offer financing in some way that allows it to stay true to its mission?

Should it have been a case of a failing operating model, is it Cooperative’s rightful concern? And if Cooperative decide to extend financing help in the case of a failing operating model, what signals might Cooperative be sending? Apart from a mission drift, might it also dis-incentivise organisations which have legitimate concerns in supporting meaningful student activities [student clubs], in pushing for community engagement [the University] and to care for the welfare of their constituents [CCs, Town Councils, etc.]?

We thus came to an interim conclusion that even if Cooperative decides to extend help, it should try not to reveal that first, in case the organisations with legitimate concerns persuade VWO to obtain funding from Cooperative instead. If need be, I suggested that Cooperative could offer to match sponsors dollar for dollar, but, in general, I advised Cooperative to avoid being the key sponsor in this financing effort.

Instead of or on top of financial help, could Cooperative do anything to help or advise VWO on potential market failure problems? It could. After all, Cooperative, with its good track record, has accumulated enough goodwill to help VWO in fundraising and publicity efforts. The dollar-for-dollar approach could further encourage students to support VWO’s programme should they find it meaningful.

Nobody said it was easy.

Legitimacy matters. Information asymmetries could make or break the market, and we want to fix it; it’s just a matter of how and whether it would destroy more than it creates value. Lastly, incentives, both intended and unintended, matter too. And, if after all these, VWO still does not manage to establish a clear value proposition or simply cannot overcome existing issues of market failure, then perhaps it is best to conduct a thorough review of its programme and improve on its viability while yielding as much social benefit for the lower-income children as possible.

Nobody said it was easy. We’ve all got much to learn. ❤

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