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David Brodwin's blog

The Chamber's Secrets

Mention the Chamber of Commerce, and most people think of a benign organization comprised mostly of small business owners who meet for networking and mutual support in local chapters across the U.S. But today's Chamber is anything but that, according to Alyssa Katz's extensive research, recently published as "The Influence Machine."

Founded in 1912, the U.S. Chamber of Commerce has been shaped by its CEO Tom Donohue into a powerful lobbying and campaigning machine that pursues a fairly narrow special-interest agenda. It's now the largest lobbying organization in the U.S. (ranked by budget). It mostly represents the interests of a handful of so-called "legacy industries" – industries like tobacco, banking and fossil fuels which have been around for generations and learned how to parley their earnings into political influence. The Chamber seeks favorable treatment for them, for example, through trade negotiations, tax treatment, regulations and judicial rulings.

Katz says that in order to understand the Chamber's priorities, you need to follow the money. This isn't easy: Due to a loophole in U.S. nonprofit laws, the Chamber and similar nonprofits don't need to disclose who provides the funds they use to lobby and promote candidates in elections. But 2012 IRS data reveals a pattern: Of $164 million in contributions to the Chamber, more than half of the money came from just 64 donors, says Katz. And the top 1,500 donors provided 94 percent of the total donations.

Indeed, the "entire business model of the U.S. Chamber is premised on providing secret support for lobbying and campaigns," says Katz. The Chamber "fights regulations on behalf of companies that don't want to be publicly associated" with the positions they are advocating. The best evidence for this consists of documents that surfaced during tobacco litigation. According to Katz, the litigation revealed five large checks from the tobacco industry to the Chamber, along with documents in which the industry told the Chamber exactly what they expected to be done with the funding.

Katz and others report that most of the Chamber's funding comes from a small number of companies and industries and is used to advance a relatively narrow special-interest agenda. But what about all those millions of small businesses across the U.S. who join local chambers? It turns out that each local chamber is an independent entity; the individual local chambers don't necessarily subscribe to the U.S. Chamber's policy agenda, and most of the dues collected by local chambers stay at the local level. So while the U.S. Chamber claims to represent millions of small businesses, from a financial standpoint that's not the whole story.

In some respects, if not most, the positions taken by the Chamber are well to the right of how most small business owners think. For example, the Chamber does not accept the science on climate change and fights policy action to lower carbon emissions. But according to scientific polling by American Sustainable Business Council, 64 percent of small business owners believe government regulation is needed to reduced government emissions from carbon plants. (Full disclosure: I'm a co-founder of the Council.)

Much of the criticism leveled at the Chamber comes from the political left, but the Chamber also gets criticized by businesses it claims to represent, notably over its positions on climate change and tobacco. For example, Apple and Pacific Gas and Electric (the dominant utility in Northern California) have cut connections with the Chamber over its opposition to action on climate change. A group of individual local chambers split with the U.S. Chamber over climate change, and this breakaway group now calls itself Chambers for Innovation and Clean Energy. More recently, the pharmaceutical chain CVS Health quit the Chamber over its efforts to fight anti-smoking policies around the world. The Chamber also draws flak from libertarians and others on the far-right who view it as promoting crony capitalism. For example, the Chamber supports the Export-Import Bank, but Heritage Action calls the bank "corporate welfare," and the bank is opposed by conservative activist groups Freedom Works and Americans for Prosperity.

Business owners who recognize that the U.S. Chamber does not represent their views are coming together to create alternative organizations. American Sustainable Business Council, with a national network that represents about 200,000 mostly small businesses, is one of these. It is hosting a public conversation with author Alyssa Katz next month in San Francisco.

A major long-term challenge for the Chamber is what to do when one industry group's interests collide with another's. The Chamber has a reputation for supporting legacy industries, industries like tobacco, firearms, and oil that have been around for generations and often are no longer particularly innovative or strategic for our economy. But often a policy that supports these legacy industries undermines legitimate business interests of other, more innovative and forward-looking companies. For example, the Chamber protects the tobacco industry. This brings in hefty fees, but it imposes higher care costs on every business large enough to buy insurance for its employees, including innovators like Apple, Google, Facebook and Uber. Can the Chamber's pro-tobacco stance really be justified as pro-business overall? The more the Chamber's positions and actions are profiled by Alyssa Katz and others, the more business owners will need to ask themselves: Does the Chamber speak for me?

David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report October 22, 2015.

How to Avoid the Success Trap

Sustainable Economy

Most startup companies welcome a huge surge in demand. What's not to like? Soaring demand lets a startup attract venture capital and get big fast. Then the entrepreneur can cash out via an initial public offering of stock or some other deal.

But ironically, surging demand and rapid growth are extremely dangerous to so-called social ventures, businesses that pursue the triple bottom line of people, planet and profit. When demand grows, these companies need to raise a lot of money to finance expansion. Investors who can put up this much money expect to get a large amount of stock, and they often win a controlling position on the board. But "the new leadership is not as committed to the impact business model," says Bonny Moellenbrock, executive director of Investors' Circle, the largest network of impact investors focused on early stage companies. As a result, the company's social or environmental mission often suffers or gets rejected outright.

This trap of success is the main reason we find few if any large, publicly-traded triple-bottom-line companies in our economy. The problem isn't that these companies can't scale; the problem is that as they raise money, their mission gets undermined by investors who care only about the financial bottom line. But now, new financial structures are being developed by the people who start triple-bottom-line companies (so-called social entrepreneurs) and the people who provide the seed financing (so-called impact investors). These alternatives to the standard venture capitalist model were explored last week at Social Capital Markets or SOCAP15, a leading conference for impact investors and social entrepreneurs.

The essential idea is to move away from the IPO or corporate sale as the main way to compensate the investors. Under alternative models, investors get their money back gradually and steadily over time, rather than all in one big pop. And they get paid off in cash rather than in stock. Typically, the startup pays the investor a small percentage royalty of net sales every quarter. This royalty continues until the investor gets all their original investment paid back plus a healthy profit. Both sides benefit: By keeping the percentage small, 3 to 6 percent or so, it protects the company from having to pay out so much cash that it is crippled. But by continuing the royalty until a high return has been paid back, it guarantees that the investor will be well compensated for the risk of investing in a startup.

This is a very different model from conventional venture capital: In the conventional model, the investor gets unlimited potential upside, but also unlimited risk and little control over timing of the return. In this alternative approach, the upside is capped, but the downside is greatly limited as well. As a result, the investor can do just as well on a risk-adjusted basis.

Big City Farms, a food startup based in Baltimore, is raising money using a new financing approach. It seeks capital to build a network of 25 indoor urban farms that will provide nutritious food to local shops and restaurants, and employ disadvantaged Baltimore residents. Their deal terms commit them to pay back investors through two separate streams of cash: One is a 3 percent royalty on sales, and the other is a fixed interest rate of 12 percent, with payments deferred for two years. These two cash flows continue until the initial investment has been paid back in threefold over seven years. By the end of the deal, the investors will have made 20 to 25 percent on their money, which is not unreasonable given the risk involved in a startup like this. And the entrepreneurs will have retained control over the stock and their mission.

As these new approaches take hold and prove their value, they will likely open up a lot more funding to social entrepreneurs. At first, they will be attractive mostly to angel investors and others who invest in small, early-stage companies. But over time "they are sure to attract institutional investors as well when they reach the necessary institutional bite-size," says Moellenbrock. That will definitely accelerate the growth of a more sustainable economy.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This article appeared in U.S. News & World Report October 14, 2015.