Social stock market. Really?

There is a movement afoot to create social stock markets. The idea is to replicate a for-profit stock market, like the New York Stock Exchange or Nasdaq, but have it used by social businesses that are seeking a double bottom line.

I don’t get it.

Marketplaces serve a few purposes.  They are aggregators of supply and demand.  They provide cash for growing companies and liquidity for those companies’ investors, and they allow stockholders to buy and sell stocks based on the expectations of future value.

The enthusiasts for social stock markets want to use the power of Adam Smith’s invisible hand to promote these double bottom line businesses. Let greed be the good that Ivan Boesky claimed it to be.

The aggregation function I can understand.  It is extraordinarily difficult to find social businesses in which to invest / donate.  It is a fragmented $350 billion business, with something like 50 organizations in the country with budgets above $50 million (can’t find the article to reference here, so feel free to help in comments below).  That leaves millions of small organizations trying to do good in the world and connect with donor or investor dollars.  Aggregation of supply and demand would be really helpful for this, and a marketplace could do it.  I will set aside for the moment whether greed is really at play in the investors/donors minds in this scenario, as this may just be a way to more efficiently match buyers and sellers rather than taking advantage of the marketplace’s Invisible Hand.

I can also imagine how an “IPO” for a social business might work on the social stock market.  It’s a way for the company to raise money at relatively low cost, giving up equity in their double bottom line (and often not profitable) businesses.  For investors/donors this is another way for them to donate to the company, with the bonus of receiving something more than karma in return.

Now, I run into a little trouble with the IPO.  Like the traditional stock markets, the company needs to promise not to issue more shares whenever they want, or else the price of their shares will go to zero as supply exceeds demand.  Thus, the IPO is going to have to be sized to provide a substantial portion of the funds needed by the organization for years to come.

If the IPO is for an organization that is also funded outside the social stock market by donor dollars, this presents a problem.  Will donors continue to give freely, or only contribute money to the company through stock offerings?  I’m sure some would go each way, with some donors preferring to receive some shares in return for their donation,.  Thus, those yearly donor dollars would evaporate / switch to the IPO.

Since many double bottom line businesses are not profitable, donor dollars remain the “revenue” that allows them to operate.  The social stock market might risk these revenues.

After the IPO, I’m really lost.  Proponents of the social stock markets discuss various rules for the stocks.  For example, some argue that a social company should only have to provide their investors enough value to eventually return the amount they originally invested.  This would be done, for example, through dividends.  Let’s say 5% dividend over 20 years.

Other proponents argue that traders that want to show their support for an organization will want to buy its share on the market.

In both cases, proponents believe there will be an active aftermarket for these shares.  I doubt it.

In the first instance, capping the possibility of economic return from the company will make every share worth less than their IPO price.  In the example of the 20 year dividend stream that equals the purchasing price, the present value of that dividend stream is way below the purchase price.  Unless there is some other value in this stock, the stock will trade way below offer price.

And unless the organization intends a secondary offering, why would the organization care where its shares are trading?  On the traditional stock market, the stockholders can FIRE MANAGEMENT, which makes management very interested in the value of the stock.  I haven’t heard that ability appearing in the social stock market proposals.

In the second instance, traders trade because they believe the actual value of a share is higher or lower than the current price.  How is this value determined?  If it is a metric of social good plus economic good, how is social good estimated?  Is this reforestation share fairly valued versus that feed the children share?  What is the value of trees versus children, anyway?  100 trees per child?  You see the folly of trying to estimate after-market value on a social basis for financial gain.

Traders would also trade if they expected a future merger or acquisition.  Shares always raise or lower as these issues appear on the traditional market.  However, mergers of social businesses are extraordinarily rare, and their affect on stocks that have no control or significant economic provisions would be slight.

The notion that traders will buy stocks because they want to be affiliated with a social business’s mission, then, is all that remains as a viable argument for an active aftermarket in social shares.  But, of course, this is the one argument that is non-economic.  It violates the overall tenant of social stock markets, namely of harnessing the value of markets.  Owning shares merely for the sake of affiliation is a relatively minor driver of stock market value (although perhaps a slight driver for consumer companies and stock held by retirees and employees of companies)

The bottom line for a holder of social stock market shares is that few people will want to buy the shares from you, and trading will be thin.  Expect losses, illiquidity, and no control over your investments.

I HAVE A DIFFERENT PROPOSAL.  Markets are brilliant at baking complex data in to a simple price.  I propose the establishment of a social stock market GAME.  This would be akin to the Hollywood Stock Exchange, which uses fake money to trade futures on movies that are not yet in production.  They also trade movie stars.  It’s all funny money, and it’s highly successful (and accurate at predictions).

While social businesses are not nearly as gossipy as movie stars, a stock market game would answer one very important question.  Measurement.  It is impossible to provide accurate measurement data on who is providing social value.  So, we’ll let the market decide.  When GreenPeace trades at a Price / revenue per share ratio of 1 while the Red Cross trades at a Price / revenue per share of 2, we’ll have the market’s comment on how to measure the social value of the two.

The executive directors of these organizations would care, too.  If the game became successful enough, leaders would start quoting the market’s opinion of their value add to donors, investors, and boards of directors.

And it’s all a game.  No money changes hands.  No greed to confuse the issue.  It’s merely for fun, just like the Massive Multiplayer Online Games that convince people all over the world to spend hours working to generate fake money in their fake worlds in order to buy fake +2 swords.  But MMOGs are big business.

The social stock market game could be fun, the fun would drive trading, and trading would provide an incredible social value – measurement.  Leave the aggregation of buyers and sellers to another solution.  Give me a  measurement solution and we will have solved a major problem in social business today.

Tags: economics, social stock market