TEACHING NOTE FOR THE ROCKEFELLER FOUNDATION: INNOVATIONS IN SOCIAL FINANCE

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1 CASE: SI-142 TN DATE: 2/16/2017 TEACHING NOTE FOR THE ROCKEFELLER FOUNDATION: INNOVATIONS IN SOCIAL FINANCE Case Overview When Judith Rodin became president of The Rockefeller Foundation in 2005, she identified a pressing need to re-organize the foundation to meet the challenges in an increasingly complex world. Rodin also recognized that for philanthropy to make meaningful progress in solving the world s biggest problems, it could not act alone. Innovation at Rockefeller: Innovation at Rockefeller dated back to its earliest years, when the foundation funded innovators, catalyzed movements (for example, public health initiatives and the Green Revolution) and leveraged strategic partners. One of Rodin s first steps to regain the spirit of innovation was to hire experts who came from fields beyond philanthropy, global development, and academia. In 2006, she widened the foundation s recruitment net and increased staff diversity. She also disbanded all formerly siloed program areas to inspire innovative thinking. The Rockefeller Foundation also focused on new financial mechanisms to leverage global capital markets in creating social impact. In 2007, it convened experts to discuss how private capital could create social good and coined the term impact investing. Shortly after, the Foundation committed $38 million to help build an impact investing industry. Social Impact Bonds: Among the financing mechanisms that emerged under impact investing were social impact bonds (SIBs). SIBs are a contract between an outcome funder a government agency, an international donor, or a corporation and investors, who supply the initial capital to organizations providing social services. The outcome funder pays the investors back depending on how these services achieve the intervention s outcomes. SIBs are often called pay-forsuccess schemes. In a typical SIB, a local authority identifies a successful intervention. The agency then enters into an agreement with investors who pay for the intervention. The contract sets out social Copyright 2017 by the Board of Trustees of the Leland Stanford Junior University. This note was prepared by Lecturer Laura Arrillaga-Andreessen and the Laura Arrillaga-Andreessen Foundation for the sole purpose of aiding classroom instructors in the use of The Rockefeller Foundation, GSB No. SI-142. It provides analysis and questions that are intended to present alternative approaches to deepening students comprehension of the business issues presented in the case and to energize classroom discussion.

2 Teaching Note for The Rockefeller Foundation: Innovations in Social Finance SI-142 TN p. 2 impact goals and investors will be paid based on the achievement of the goals, often with the savings accrued by the outcome funder through a successful intervention (for instance, reduced recidivism). Some of The Rockefeller Foundation s SIBs included: A social impact bond designed to reduce prison recidivism in Peterborough, U.K. It raised 5 million (The Rockefeller Foundation was a major investor). Although the full impact of the SIB could not be assessed because it was terminated early, the SIB influenced a wider policy change that extended rehabilitation services to offenders across the U.K. A 2013 SIB supported by multiple funders that provided $13.5 million to pay for the training and employment of formerly incarcerated people in New York state. The project targeted 2,000 individuals who were at high risk of re-offending. A 2013 J.B. Pritzker-led SIB to increase the impact of government spending on education. Of 110 four-year-olds identified as likely to need special education, only one went on to require special education services in kindergarten. As a result, government entities saved $281,550. An SIB used to fund the New York City Adolescent Behavioral Learning Experience Project for Incarcerated Youth on Rikers Island that did not meet its initial goals, nor did it make any payments to investors. However, the Rikers Island project demonstrated the importance of SIBs in allowing governments to fund innovation. By 2016, 60 SIBs had launched in 15 countries, raising more than $200 million in investment to address social challenges, with all but one of the 22 projects resulting in positive outcomes. While only four repaid investors in full with a return on their investment, the vast majority of SIBs were still under contract and were still accruing financial returns. SIB Institutional Support: The Rockefeller Foundation was a key supporter of SIBs, deploying $10 million over three years. For the foundation, it was important to intervene while SIBs were beginning to attract interest and to prevent bad deals from stifling growth. The foundation used its funding for SIBs to create and disseminate information about SIBs, fund intermediaries, and provide anchor investments in SIBs to attract other investors. For the foundation, three aspects of the new funding mechanism were of interest: making governments more evidence-based, helping nonprofits get the money the need, and putting forprofit investment towards social good. Position in Course This case is intended for use in a course on philanthropic innovation, social impact, publicprivate partnerships, or funding strategies. This case highlights the evolution of The Rockefeller Foundation s philanthropic strategy as it developed innovative financing models, focusing on the development of social impact bonds (SIBs). The teaching objective is to illustrate collaboration within and between sectors.

3 Teaching Note for The Rockefeller Foundation: Innovations in Social Finance SI-142 TN p. 3 Supplementary Readings This case is part of a portfolio of 10 new cases centered on philanthropy, technology, and innovation. This set of cases (along with previous social impact cases produced by Laura Arrillaga-Andreessen) can be found on the Laura Arrillaga-Andreessen Foundation s website (laaf.org). Paul Brest and Debra Schifrin, Pay for Success and Social Innovation Financing: Serving Santa Clara County s Mentally Ill Residents, Stanford Graduate School of Business, Case No. SI-133 (2016). V. Kasturi Rangan and Lisa Chase, The Payoff of Pay-for-Success, Stanford Social Innovation Review (Fall 2015). Emily Gustaffson-Wright, Sophie Gardiner and Vidya Putcha, The Potential and Limitations of Social Impact Bonds: Lessons from the First Five Years of Experience Worldwide, Brookings Institute (2015). Assignment Questions 1. How did the approach to innovation change at the foundation under Judith Rodin s leadership and in what ways was it a continuation of past traditions? a. Timing for class: 10 minutes for class discussion 2. What were the different strategies the foundation used to support the development of social impact bonds? a. Timing for class: 10 minutes for class discussion 3. Why did the foundation see the promotion of innovative finance as such an important part of its work? Analysis a. Timing for class: 10 minutes for class discussion 1. How did the approach to innovation change at the foundation under Judith Rodin s leadership and in what ways was it a continuation of past traditions? Continuation of past traditions: The Rockefeller Foundation had pursued three types of innovation since its creation in 1913: Funding the innovators: The foundation provided funding and other resources from supporting social innovation labs to funding research on best practices to the individuals working on world-changing social and environmental interventions. In 1919, for example, the foundation provided support for the National Research Council a U.S. nonprofit institution advancing the pursuit of science, engineering, and medicine to establish fellowships in physics and chemistry.

4 Teaching Note for The Rockefeller Foundation: Innovations in Social Finance SI-142 TN p. 4 Catalyzing movements: The foundation provided support for developments and new movements that could be transformative. During the 20th century, The Rockefeller Foundation was responsible for founding the modern field of public health, supporting urban sustainability (by funding the work of Jane Jacobs, the writer and activist who pioneered community-based approaches to urban planning), and catalyzing the Green Revolution, a set of research and development initiatives that dramatically increased global agricultural production beginning in the 1930s. Leveraging strategic partners: Going beyond individual grants, the foundation deployed funding, expertise, and influence in partnerships with government, nonprofits, and the private sector that allowed it to achieve more than the foundation could through grant making alone. In 1919, for example, The Rockefeller Foundation established a Division of Medical Education, which provided grants to medical schools in places such as North and South America, Southeast Asia, Western Europe, and the South Pacific. The grants were intended to increase the resources available to these schools to allow them to improve their teaching and research. 1 Evolving approach: Changing its hiring strategy: In 2006, The Rockefeller Foundation started hiring experts who came from fields beyond philanthropy, global development, and academia, the three pools from which the foundation had traditionally sourced its human capital. The foundation widened its recruitment net to bring in people from political life, experts with backgrounds in strategy, and professionals whose careers were grounded in innovation. Disbanding program areas: The Rockefeller Foundation also began to disband its program areas. The lack of programmatic structures afforded The Rockefeller Foundation greater flexibility: for example, when the foundation began investing heavily in the development of impact investing, it was able to direct all of its resources from across the entire organization towards a singular goal. Experimenting with new financing mechanisms: Rodin realized that new financial products could be developed that would appeal to investors so that global capital markets could help fill this funding gap. The Rockefeller Foundation became a key supporter of SIBs in their early days, deploying $10 million over a three-year period. 2. What were the different strategies the foundation used to support the development of social impact bonds? Investing in infrastructure: In 2007, The Rockefeller Foundation supported the Global Impact Investing Network (GIIN), a nonprofit organization focused on increasing the scale and effectiveness of impact investing. GIIN accomplished this goal by building critical infrastructure, including IRIS, a global reporting standard for measuring and 1 Our History, The Rockefeller Foundation website; (August 14, 2016).

5 Teaching Note for The Rockefeller Foundation: Innovations in Social Finance SI-142 TN p. 5 communicating social impact, and ImpactBase, an online database of impact investment funds and products designed for investors. Making sizeable investments in early SIBs: For the foundation, it was important to intervene while SIBs were beginning to attract investor interest in order to prevent badly structured deals from stifling the market s growth. The Rockefeller Foundation also provided anchor investments in SIBs that paved the way for other investors to join. In the Peterborough SIB, for example, it used PRIs. And in 2013, its grant was used for the New York state recidivism SIB with a first loss guarantee (providing financial cover against loss), which reduced the risk for and helped attract impact investors to the deal. Leveraging its brand: Both The Rockefeller Foundation as an institution and Judith Rodin as an individual had a well-known and credible brand among governments, nonprofits, and investors. By providing support and backing to SIBs they were able to demonstrate trust in the model, which allowed greater funding, interest, and innovation to flow towards the SIB market. Building knowledge: The Rockefeller Foundation created and disseminated information on SIBs and funded experts to write policy briefings about the new financial tool. Additionally, the foundation held convenings and conducted studies to get critical partners to agree on definitions, goals, and strategies. Funding intermediaries: The Rockefeller Foundation funded other organizations in the space in order to build out the field of social finance. In 2009, The Rockefeller Foundation began funding Social Finance UK, a nonprofit created in 2007 to develop a social investment market in the U.K. In 2011, it made a new grant of $500,000 to Social Finance Inc. to help introduce SIBs in the United States. 3. Why did the foundation see the promotion of innovative finance as such an important part of its work? Government innovation without taxpayer risk: SIBs enabled innovative ideas to be tested at no cost to the taxpayer. For example, the success of the Peterborough pilot, even though it was terminated early, influenced a wider policy change with the launch of the U.K. s Transforming Rehabilitation program, which extended rehabilitation services to offenders across the U.K. By creating savings that could be shared with investors, the SIB mechanism could harness private sector funding for social innovation. Leveraging additional capital towards social and environmental problems: The Rockefeller Foundation recognized that philanthropic dollars, government financing, and development aid made up only a fraction of what was needed to address the world s biggest problems. Rodin and her colleagues recognized that new financial products could be developed that would appeal to investors so that global capital markets could help fill this funding gap. For example, though The Rockefeller Foundation gave $200 million a year in grants, it used innovative methods to leverage almost $2 billion (in private capital and also capital from governments) from that $200 million.

6 Teaching Note for The Rockefeller Foundation: Innovations in Social Finance SI-142 TN p. 6 A shift towards outcomes-based funding and evidence-based policymaking: SIBs presented a new way of using private investment to increase and accurately assess the impact of government spending on education. Pritzker spearheaded a $7 million investment in placing high-needs children into high-performing preschools in Salt Lake City and Park City, Utah. Returns to the investors were to be based on the cost savings made as fewer students failed and more progressed through their schooling without needing special education services. The project demonstrated positive and measurable results. Of 110 four-year-olds who had been previously identified as likely to need special education in grade school, only one went on to use special education services in kindergarten. Because fewer children required special education and remedial services, school districts and government entities saved $281,550 in the school year. The results, which triggered the first payment to investors for any SIB in the United States, helped show how government investment in preschool could be an impactful and cost-saving intervention. Teaching Approach The Rockefeller Foundation: Innovations in Social Finance case is appropriate for a 50-minute teaching module including both a lecture and a discussion. Key themes for discussion include: Strategic philanthropy Social finance mechanisms Public-private partnerships Innovation in philanthropy Please see the LAAF website (laaf.org) for Stanford Graduate School of Business Lecturer Laura Arrillaga-Andreessen s complete portfolio of Stanford Graduate School of Business case studies, teaching notes, and learning resources that she has created since 2000.