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Closing the socioeconomic gap

Public-private partnerships can play a key role in addressing systemic financial inequities among low- and moderate-income communities

Closing the socioeconomic gap
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In 1968, 43% of the total income in the United States went to the top 20% of earners. Fifty years later, that same group brought in 52% of the nation’s income. The fact is, income inequality in the U.S. has been growing for decades, and in many ways has gotten worse. For people of color, that inequality has been especially hard to overcome. For instance, Black Americans continue to earn less than two-thirds as much as their white peers.

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The trickle-down effects of these economic issues have left indelible marks on marginalized communities, preventing many from accessing capital and other financial tools to build businesses, create wealth, and improve their economic standing. It’s an issue that Capital One—which recently announced the Capital One Impact Initiative, a $200 million, multi-year commitment to spur economic growth in low- and moderate-income communities—is working to meet head on. “When one thinks about an initiative around socioeconomic mobility, this is not just a philanthropic endeavor but rather a core of our business model,” says Executive Vice President of External Affairs at Capital One Andy Navarrete.

At a recent panel presented by Capital One at this year’s Fast Company Innovation Festival, Navarette led a discussion that explored financial inequities and the opportunities public-private partnerships present in addressing them, along with executives from the National Urban League, 1863 Ventures, and the Mission Asset Fund. Here are four key takeaways from the event:

1. Effective partnerships require a shared vision
Public-private partnerships can deliver powerful results in addressing issues such as socioeconomic mobility—but only if the organizations involved are aligned on a common goal. For private companies, that means respecting their public partner’s mission and being clear on the desired outcome of the partnership, whether building a micro-lending program or developing a financial wellness curriculum. “There can’t just be a desire to do it because it looks good and checks a diversity box,” said Melissa Bradley, founder of 1863 Ventures, a business development program that provides financing and support to entrepreneurs from historically marginalized communities. “There needs to be a shared vision.”

One way companies can more closely align with their public-sector counterparts is by being patient and flexible. Bradley noted that private-sector firms often move at a faster pace than, say, a nonprofit with a variety of interdependent stakeholders. What’s more, companies may need to focus less on their bottom line and more on the people the partnership is aiming to serve. “It’s really understanding who, at the end of the day, is our beneficiary,” Bradley said.

2. Altruism isn’t the only benefit
Organizations such as 1863 Ventures and the National Urban League, a civil-rights and urban-advocacy group, rely heavily on the resources their private-sector partners bring to the table. But National Urban League President and CEO Marc Morial noted that partnerships to address socioeconomic inequities aren’t just exercises in altruism. Indeed, companies stand to be big beneficiaries from any work they do in helping to address these issues. “One of the most pressing issues facing the nation is the racial income gap,” Morial said. “If you would close that gap … the impact would be an increase in GDP not in the billions or in the hundreds of billions, but in the trillions because of untapped potential.”

There’s a more direct benefit to some of these efforts, too. Take Mission Asset Fund, a San Francisco-based nonprofit that provides loans and grants to low-income individuals. The organization’s Lending Circles micro-loan program is designed not only as a funding mechanism, but also as a way to help borrowers improve their credit scores. “We’re actually extending the pool of eligible borrowers,” said Mission Asset Fund Founder and CEO José Quiñonez. “Those are people that can then walk into any bank and get a loan to buy a house or a car or to invest in their business. So, the real beneficiaries of that activity are the financial institutions.”

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 3. Inclusivity is critical

Credit scores, Bradley said, are a particular thorn in the side of many of the entrepreneurs 1863 Ventures works with. She noted that funding a startup with the help of deep-pocketed friends and families can help protect a founder’s personal finances. But an entrepreneur without that network may end up maxing out credit cards and making other financial moves that ding their financial reputation in the eyes of lenders.

What’s more, Bradley said her research suggests that the cost of launching a business is $250,000 higher for Black entrepreneurs than for their white peers. “We have to figure out ways to fill that gap so that when we hit the marketplace, we are not perceived any less because of what we look like or because of the journey that we’ve taken to get there,” she said.

4. Forget Friedman?

According to economist Milton Friedman’s theory of shareholder capitalism, a company’s only social responsibility should be to maximize profits for its shareholders. The National Urban League’s Morial thinks it’s time to kick Friedman’s theory to the curb in favor of stakeholder capitalism, in which companies seek to benefit not just shareholders, but also customers, employees, and even the local communities in which they operate.

It’s this orientation that Morial maintains will lead to more—and more powerful—public-private partnerships as companies look to serve this broader constituency effectively. “Stakeholder capitalism has to be the guiding principle of business leaders in the 21st century,” he said. “I really think we’re on the cusp of a transformative moment in thinking about American capitalism.”

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Click here to watch this panel from the Fast Company Innovation Festival.

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