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Don Shaffer is at the deep end of the pool when it comes to thinking about financial capital and investing. For 10 years, he led an investment firm based on the economic principles of Rudolf Steiner; serving borrowers who are committed to sustainable practices and investors who value community impact as well as profit.
He grew the organisation in every conventional measure, but also deepened its commitment to its values. He moved the bank from a fairly traditional set of services to focus on a new type of relationship with clients—one that was direct, transparent, personal and based on long-term relationships. It flipped the typical exchange we’ve grown accustomed to with banks. We love his wisdom, kindness, incredibly calm nature and his strong resolve.
This conversation between Don and Small Giants co-founder Danny Almagor is extracted from Issue 55 of Dumbo Feather Magazine: Creating the Next Economy
DANNY ALMAGOR: So I’ve been asked what does love mean in the world of finance? And how can we connect those two words? And maybe we can start there. So we just start on the shallow end and then go deeper, right?
DON SHAFFER: [Laughs]. Well, at RSF we are a financial intermediary. We do lots of investing and direct lending into organisations that would not be in business but for the social-environmental mission that they have. Our purpose is to transform the way the world works with money.
What we mean by that simplistically is to move from transactions to relationships. And that’s a deceptively simple phrase but if you really live it and try to get closer to what it is you’re investing in and also for the entrepreneurs, for them to truly understand where their money is coming from as opposed to it being a black box or totally anonymous source, this is actually a fairly radical act. To take that seriously and to live that into how either you’re approaching it with your investing dollars or the entrepreneur is approaching it in terms of seeking capital is radical.
And so what we believe is that we’re at a turning point right now in the world. There are many, many, many people who are intrigued by this idea of how you can express your core values through your money and through your investments and not have to compromise and wonder, Am I complicit in things like climate change? Am I contributing to things that are not good for the earth or for human beings through my investing? And coming to terms with that and facing that head on and realising that there are choices, there are more conscious choices that you can make now, is a very big deal. There’s so much money that is out there being invested and it’s critically important for us at this stage, with the challenges we’re facing, to believe it’s possible that we can have a loving relationship in the way that we’re investing or the way that we’re seeking capital as entrepreneurs.
Tell us a bit about Rudolf Steiner and in particular the profound wisdom he had around economics. And then how that manifested into RSF Social Finance.
Sure. I didn’t know much about Rudolf Steiner when I started at RSF 10 years ago. And he’s a philosopher, scientist, spiritual seeker from the early 20th century in Europe and made contributions like Waldorf Education, bio-dynamic agriculture; he made contributions to architecture, medicine and healing, a whole range of other things.
He gave a series of lectures in 1922 foreseeing that the world was going to become a more and more globalised economy and that there was going to be more international trade and as a result of these more complex financial systems we were likely to become progressively disconnected from each other as economic actors in the world.
We weren’t going to be able to see as easily where our money was going. We weren’t going to be able to be as visible to each other as participants in financial transactions of various kinds. And he saw this as potentially troubling.
I remember in 2007, 2008, just as I was coming on at RSF as the financial crisis was kicking in in a major way, US Treasury Secretary Hank Paulson, who had been chair of the board of Goldman Sachs previously, was quoted on the front page of the Wall Street Journal when asked what we should do, he said “God help us.” That was his precise advice.
It struck me at that moment that Rudolf Steiner had been quite prescient in what he was seeing. That we had to really go deeply into this question of how we can be more visible to each other in financial transactions and try to understand each other’s needs and intentions.
Things like CSAs or farmer’s markets in the field of agriculture and food are a very concrete examples of where we can have more of a sense of shared risk that’s based on a connection between what’s happening in a transaction. So we are trying to apply those principles and model them in a fairly radical way so that we can bring money in financial transactions back down to earth.
This is at a time where there’s rampant algorithmic intra-day trading in the stock market and that those folks are being rewarded with hundreds of millions of dollars that they’re essentially skimming off of each transaction. So I feel like I’m a financial activist in a way to stand up and say, not just me but thankfully lots of other people standing up;
“Why are we allowing this to happen? Can we do better? Is it possible for us to reimagine our financial system and still have it be as vigorous, still have there be all the healthy benefits of trade that all of us believe in and the benefits of private enterprise? And do so in a way where we stay connected to each other as opposed to things being so opaque and anonymous?”
And one of the things you guys do is instead of setting interest rates; what you do is you bring your lenders and your borrowers together in a room and get them to decide on the rate that should be going between them. That's very cool. I mean the bank I’m with has never asked me what rate I would like. How do you create this model where you get people to see each other?
I often describe it that way actually:
“Imagine if your bank called you and said, ‘As a depositor at the bank we’d like you to come down next Wednesday to meet the people who are borrowing your money.’ And then they’d call the entrepreneurs and say, ‘Why don’t you come on down to the branch next Wednesday and meet the people whose money it is that you’re using to grow your business?’”
It’s those two groups—the investors or the depositors and the entrepreneurs or the business owners leaders—that actually determine what interest rate the borrowers will pay and what rate of return the investors will get. They actually hammer it out together in the same room. One thing that’s really important is that this is an embodied experience—that people are meeting each other face to face. It really makes a huge difference to sit across a table from someone and look them in the eyes and learn more about their stories.
We ask questions like, “Can we go around to all the investors or depositors in the world and share why are you investing with RSF? And why are you seeking to have positive impact in the world through your investments?” Then we say, “What did this loan make possible for you as entrepreneurs?” Invariably what happens is something that you might think is counterintuitive.
You’d think that the investors would clamour for the highest return they could get and you’d think that the borrowers would want to get the lowest interest rate possible.
We’ve been doing these meetings every quarter for the last nine years, and every time what happens is one or the other of them, unscripted, unprompted, sometimes it’s the investor who stands up and says, “If I took a little bit less return I can see how that would help you Joe or Jane entrepreneur have a lot more impact in the world with all the good things that you’re doing.” Or one of the entrepreneurs stands up and says, “If I paid a little more so there could be more of you investors and more dollars going to organisations like ours, we could really change the world.”
So this is the core principle around interconnectedness that we all have to get with at this stage of where we are in the world. I think that so many more people are connecting the dots and realising that we’re interdependent.
I’m just trying to imagine the room of people. Who are the investors that come into your organisation? What type of people are they that are coming to you?
So we have 1600 investors. And then we have a couple of hundred organisations at any given time that are borrowing money from us. So we have a couple of hundred million dollars on our balance sheet at any given time, a couple of hundred million dollars in assets. And we’ve made hundreds of millions of dollars of loans since 1984 when we started.
The minimum investment in our core loan fund is a thousand dollars. So one thing that we feel is important is to democratise the impact investing movement and allow for more people to participate.
The other thing about the demographics of our investors is that about 70 percent of the assets we hold at RSF are held by women with inherited wealth, a spiritual disposition and a driving passion to change the world. It’s my belief that, for whatever reason, women have a deeper intuitive sense about the problems going on in the world. Whether it’s climate change, community health, poverty. Then they turn out to be a lot less afraid than men to experiment with things like what I just described about our pricing model for our loans. They believe that it’s possible to reimagine something different. Whereas with the big banks and mainstream financial institutions there’s a tremendous amount of inertia and status quo and all the incentives are geared of course to just continue doing the same thing.
I’d like to examine these concepts of short-term and long-term outcomes, because it feels like a lot of these issues that we’re trying to deal with through impact investing—climate change, poverty, et cetera—are right at the edge. And I’d like to know how should I think about those two concepts? Where we’re looking for the long-term but there are some really short-term urgencies in front of us?
Well there are different ways to think about that. Our entire financial system is geared towards short-term outcomes. The CEOs of companies, of listed companies on stock markets, they despise having to have quarterly earnings reports where their entire business is being judged. Every business, every decision is being judged on a cycle of 90 days. If you think about it it’s kind of absurd to expect that long-term value creation with your capital would be judged literally every 90 days and if you hadn’t achieved a very significant number of milestones related to growth outcomes on a quarterly basis, then your stock would get dinged or you’d be replaced and your management team would be replaced or what have you. So everything is geared towards short-term outcomes as opposed to long-term relationships.
That’s again where the love factor comes in. I mean it may seem sentimental to talk about love in the context of finance and economics. But this is really at the heart of it. Of course you would not go into any relationship judging it on a 90-day cycle, right? And so why should you look at your investments differently?
But the point is that I think there’s a correlation between the fact that things are so opaque and anonymous and based on short-term outcomes that if we can’t get soon to a world where financial transactions are more direct and transparent and personal based on long-term relationships then we’re pretty much screwed.
Let’s take climate change. If you’re paying attention this is not a theoretically “perhaps in 20 years” thing. And so if we’re seeing tangible signs now that means we need to start unwinding all the bad things that we’re doing to contribute to it much more quickly and we need to build towards all the more regenerative things that we possibly can think of all the more quickly and all those regenerative things—whether they’re in agriculture or energy, whatever other sectors that you think of when you think of investing related to climate change—you have to be thinking about the long-term ramifications of every part of what it is that’s being affected in the system through your investment. So that’s what I’d say about the urgency. There’s urgency but then long-term investing and how you think about investing is critical to it.
I have to say you remind me of Muhammad Yunus in a sense—Muhammad Yunus the banker to the poor who started Grameen Bank which is a micro-finance bank. And I remember when he started the bank he said, “I looked at what all the traditional banks were doing and I just did the opposite. They were lending to men so I decided to lend to women. They look for security, we’re going to lend to people with no security.”
I’m going to resist the Muhammad Yunus comparison but the thing that is similar I will say, and we of course have studied Muhammad Yunus’ work, is that we’ve lent out as I said hundreds of millions of dollars in loans, and we have a less than two percent default rate over that time which, by any objective standard, is very, very low. And the reason is because we work very hard to build relationships with our borrowers and then we connect them with each other and with the investors.
That’s the key to micro-finance, it’s this associative principle of them connecting with each other and having accountability to each other. So that’s more of how things need to work because what we found is that when you build real relationships, it actually lowers the risk and it increases the fulfilment for everyone involved. So it’s got that dual benefit.
