BADM 737-30 Managerial Ethics & Social Responsibility
Prof. Robert Thompson
Spring 2019 Week 11 Assignment
BENIFICIAL STATE BANK MODEL- BENEFIT TO ALL HARM TO NONE
The community Beneficial State Bank, serving areas of California, Oregon, and Washington, completed its fourth successive year of normalized profitability in 2017 while still focusing to deliver and fulfill its mission to promote environmental sustainability and social justice. Beneficial State bank’s grew 20% roughly through loan and deposits and through 3 aligned acquisitions. State Bank through its Beneficial model and operations made positive impact on individuals, various communities, and the prevailing banking system.
At the same time, husband and wife creators of the bank, Tom Steyer (MBA ’83) and Kat Taylor (JD/MBA ’86), found themselves at a crossroads. As the sole providers of capital to the bank during the formation and, as a result of the bank’s unique organizational structure, the couple remained the only investors in the bank almost a decade after its founding. With the bank’s assets approaching $1 billion, the team envisioned scaling the business for both economic viability and impact to nearly five times the current size in the coming years. In order to achieve this goal, however, the founders would have to consider the introduction of additional investors
One California Bank and One California Foundation established in 2007, Beneficial State Bank first opened its doors in one of the most ethnically diverse city in Northern California- Oakland. With a vision to make banking accessible by all sections of the society, opening of a branch in Oakland was no coincidence. With about 17.6 % of Oakland’s population as below poverty line coincidence. In 2007, approximately 17.6 percent of Oakland’s general population was below the poverty line and nearly 40 percent of Oakland residents earned less than twice the federal poverty rate. Although the African American population they remained the largest ethnic group in Oakland with poverty rate twice that of federal poverty rate. Taylor realized that this community in Oakland would be most open and accepting of the change. With the mission to serve all ethnic groups and with the focus on the interest of the depositor, Taylor emphasized on a stable banking system that would be fair to everyone especially to people with least bargaining power. He envisioned a financial system which would allow the depositor to benefit and grow in the long term.
Taylor had 2 fresh views on the depositors-
1. Depositors are citizens and as a Financial institution, it is Bank’s responsibility to protect and act in the best interest of the citizen
2. Consider depositors as crowd funders since they make monitory contribution through deposits
The foundation was organized as a Not for Profit and was prohibited from being governed private individual with a mission to serve its three program services:
Bridge Housing Corporation;
East Bay College Fund; and
The Tides Foundation.
To better serve the interest of the depositors, Steyer and Taylor donated all the economic rights to a foundation of the same name Beneficial State Foundation. They also formed two holding companies— “Bancorp” to hold the voting stock and the foundation to hold the economic rights, respectively.
To separate the economic and voting right it quite unusual, Taylor purposely split it to avoid voters focusing on and making decision around profit maximization which sometimes comes at the expense of the crowd funders. The foundation was also prohibited from selling its stock without the prior approval of the founders, and even with the approval they could sell it to another nonprofit. With this setup, any profits earned by the bank were distributed back to the foundation, which further re-invested the proceeds for the development of the communities, depositors, crowd funders and the environment.
BUSINESS MODEL & STRATEGY
Unlike other traditional banks, Beneficial State Bank’s had different ideals and was guided by the principle benefit to all, harm to none. While other financial institutions constantly engaged in unethical and unscrupulous activities, malpractices and financing the projects that posed great threat to natural resources, Tylor through Beneficial State Bank created an institution that was racially and gender just, and environmentally sound. To carry out the successful implementation of his mission of creating banking for people with low income and under the poverty line, the team at Beneficial State Bank ensured that it’s human resources accurately reflected its stated goals. In the summer of 2012, the bank launched the first of its well-regarded summer internship programs aimed at giving participants exposure to the challenges faced by a bank tailored to serving the community.
The business model was as under:
1. Perpetual Non-Cumulative Non-Voting Convertible Preferred Stock: The investment plan was devised in a such way that investors had an option to convert to preferential shares to fixed number of Class C shares at a 20% premium by the end of the fifth closing anniversary. At the time of conversion Bancorp had no ability to block conversion and the conversion could be only rescinded by the investor himself.
2. Three-Year Put- In a 3-year put, investor has an option to redeem the security at a predetermined price after 3 years.
3. Capitalization and Voting-Under the capitalization structure, to retain the voting, all Call A shares were eligible for stock split of 20 to 1. This allowed the management to retain control of all Class A Shares with voting rights.
4. Buyback Option- Buyback option was extended to the investors to fulfill the liquidity needs of the investor. While a bank does not promise a buy back option, they do provide dividends on the shares held by the investors over the period of investment.
Analysis of Beneficial State Bank- Beneficial State Bank Vs other traditional Banks
Beneficial State Bank: Benefit to All, Harm to None analysis are categorized under 4 heads:
Valuable – Critical resources valuable to the firm are essentially Financials, Marketing, Human resource and operations management. BSB values all these resources and hence they can thwart the competition successfully by creating customers that add values to the business. 23% of the customers contribute to more than 84% of the sales revenue. Charles Ewald, Heidi Krauel Patel, Jaclyn
Beneficial Bank strategy is built on successful innovation and localization of products, new niches are emerging in the market and Beneficial Bank strategy is built on successful innovation and localization of products Is the resource valuable to Beneficial Bank. According to C. Foroughi of the case study following are the critical resources that are valuable to the firm – financial resources, human resources, marketing expertise, and operations management.
Rare – “Valuable resources should be rare to prevent new entrants to the market. BSB firm has invested to build a special relationship with its customers. Customers alone contribute over 80% of BSB’s revenue. However, BSB No Marketing Expertise within the Beneficial Bank, as most of the competitors also have decent marketing know how
Costly to Imitate –Imitation of core differentiation of products of Beneficial Bank is difficult and can happen in following two ways. Duplication of the products by the competitors. Competitors can come up with the substitute products. Risk of coping Intellectual Property, Copyrights is low It is very difficult to imitate the culture and community dedication.
Organizational Competence & Capabilities- Competence depends upon the execution team and the strategy of the firm and the capabilities of the firm. Since all capabilities are not fully utilized at BSB, they only have temporary competence.
Beneficial State Bank is a true social responsible company that follows the disruptive model. While most traditional banks concentrate on profit maximization, BSB has a disruptive business model. CEO and co-founder Kat Taylor has explained through their mission and vision for the bank that they want to serve the community better and at the same time maintain sound environmental. BSB as impacted the society in a positive way. They have made banking available to the everyone, even to those sections of the society with income below the poverty index. Beneficial State Bank sets a paradigm for other banks to follow. They have unique not for profit model of banking model wherein all revenue again flows back into the non profit foundation. Despite being not for profit institute , they have out performed many of the other financial institutions.
Source: Beneficial State Bank, 2016