What is Beneficial State Banks theory of change? a.? How do its product offerings and loan portfolio relate to its theory of cha

CASE: SI-134(A)

DATE: 01/31/16

Jaclyn Foroughi, CFA, and Professor Maureen McNichols prepared this case as the basis for class discussion rather

than to illustrate either effective or ineffective handling of an administrative situation.

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BENEFICIAL STATE BANK (A):

ORGANIZATION AND MEASUREMENT OF SOCIAL IMPACT

We’re not just trying to develop a new bank model at the firm level and hope that has better and

salutatory effects. We’re really trying to change the banking system for good. 1

—Kat Taylor (JD/MBA ’86), co-founder and co-CEO, Beneficial State Bank

In November 2004, as presidential hopeful John Kerry conceded the presidential race to George

W. Bush, husband and wife team and Democratic supporters Tom Steyer (MBA ’83) and Kat

Taylor found themselves at an impasse in their political endeavors. Having served as a delegate

to the Democratic National Convention and as a significant backer of Kerry, Steyer was

considered a certainty for a position in Kerry’s administration. Taylor, meanwhile, had recently

emerged from a 20-year career hiatus, during which she raised four children and supported her

husband’s esteemed career as founder and senior managing member of Farallon Capital

Management. The lost presidential bid was not only disappointing but left the couple seeking

out new avenues to benefit from their time, passion, and energy.

For Taylor, the idea of a beneficial bank was not new; in fact, the notion of starting a bank to

help underserved communities had been suggested to her almost 20 years earlier when Taylor

sought career advice from then-economic advisor to Governor Jerry Brown of California,

Michael Kieschnick. At the time, the idea seemed implausible but now, with their newly

unleashed resources, the idea of community banking as a leverage point in both communities and

the overall financial system seemed almost compulsory. Specifically, they wanted to create a

triple bottom-line 2 bank that produced social justice and environmental well-being while also

being economically sustainable not just in the community but across the financial system. Still,

1 Interviews with Kat Taylor, August 14, 2015 and September 29, 2015. Subsequent quotations are from the

author’s interviews unless otherwise noted. 2 Triple bottom line refers to the measure of financial, social, and environmental performance of an entity over a

period of time.

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Beneficial State Bank (A): Organization and Measurement of Social Impact SI-134(A)

p. 2

determining how best to structure the organization in order to ensure the fulfillment of its

intended benefits presented a significant challenge to the couple.

FOUNDING VISION

Originally established in June 2007 as OneCalifornia Bank and OneCalifornia Foundation, 3

Beneficial State Bank first opened its doors in Oakland, one of the most ethnically diverse major

cities in Northern California. With a vision for providing access to financial services for all

communities, particularly the traditionally underserved, the founding in Oakland was no

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. 4 In addition, despite a decline in the African American population at the turn of the

millennium, African Americans remained Oakland’s single largest ethnic group and had a

poverty rate twice that of the overall population in Oakland. 5 For Taylor, the inequalities present

in Oakland exemplified “communities of high potential”; in other words, those most deserving of

and ripe to embrace change.

Beyond the community, the founders envisioned a more stable financial system that was fair to

the person with the least bargaining power, typically the depositor, and resulted in the long-term

prosperity of responsible consumers and their ecological commons. As Taylor explained:

Over the last 50 years, we let the deposit fund providers—the depositors—believe

that all they're entitled to is a meager amount of interest for the deposits and no

influence over where they go… most depositors are on the 99 percent side, not on

the one percent side. And I think at present there are $12 trillion of deposits in the

American banking system. So those are large numbers. That's the power base we

need to resurrect and make aware of the power they hold collectively. And so we

plan to change the enormously powerful banking model that is abusing its major

stakeholders—depositors.

In order to implement change in the prevailing banking system, Taylor championed two fresh

views of depositors: first, in a nod to her political advocacy work, depositors were viewed as

neither customers nor beneficiaries but citizens who were entitled to the protection and respect of

the bank in exchange for their patronage; second, citizen bank customers were regarded as

crowdfunders due to the monetary contributions (deposits) of a large number of people used to

support a common project or goal—in this case, beneficial banking. Taylor described:

Banking is actually the original and most important and powerful form of

crowdfunding, not that specific deposits fund specific loans but rather that

deposits always fund a lending practice. We hear that crowdfunding happening all

3 In December 2010, upon acquisition of ShoreBank Pacific, OneCalifornia Bank and OneCalifornia Foundation

changed their names to One PacificCoast Bank and One PacificCoast Foundation, respectively. In July 2014, One

PacificCoast Bank and One PacificCoast Foundation rebranded as Beneficial State Bank and Beneficial State

Foundation, respectively. 4 East Bay Alliance for a Sustainable Economy (EBASE), “2008 Labor Day Census Data Summary—Flatlined:

Economic Pain in the East Bay,” September 2008, p. 1. 5 Ibid.

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Beneficial State Bank (A): Organization and Measurement of Social Impact SI-134(A)

p. 3

the time—a reflection of a desire to create a future you want to see by coming

together. There's certainly nothing more powerful than coming together to create

the FDIC insurance fund, which is backed by the American taxpayer and provides

the ability for banks to attract up to $250,000 risk-free from depositors. And in

fact, because banking is a leveraged model, those deposits are levered nine times

to one of every equity dollar—there were some banks levered 33 times right

before the crisis. So, the lion's share of the funding is the depositors; the cheapest

source of funding other than securitization, and they ought to get to influence the

enabled lending practice.

Finally, in addition to empowering depositors at the individual, community, and system-wide

level, the team was committed to creating an entity that contributed to the long-term

sustainability of the environment.

To accomplish these commitments, the founders aspired to one basic rule: benefit to all, harm to

none. While it was not uncommon for all banks to produce some benefit, the tenet of “harm to

none,” or an unwillingness to fund ecological or human exploitation, distinguished the bank from

the majority of its counterparts (see Exhibit 1 for a summary of Beneficial State Bank’s hopes

and dreams). Taylor summarized the bank’s founding vision:

We are a bank formed in the image of the great socially responsible institutions

like ShoreBank in Chicago, Grameen Bank in Bangladesh, and Self-Help Credit

Union in North Carolina…we were inspired by those efforts to make more broad

social equity and environmental well-being through a business model. We chose

a bank because of the many ways a bank intersects with everyone’s lives from

being the place you get a mortgage, transact business, save money…We wanted

banking to be based on relationships and produce social justice and environmental

well-being at the same time that it’s financially sustainable so that it can persist,

grow bigger, serve more people, and achieve this mission. 6

ORGANIZATIONAL STRUCTURE

Initial Organizational Structure

With the initial vision in place, founders Steyer and Taylor next had to determine how best to

structure the organization. Despite banking’s notorious scrutiny and heavy regulation, the team

navigated the organization process in just under three years. In an effort to institutionalize the

beneficial banking vision, the team created a for-profit bank funded with $22.5 million in capital

provided by Steyer and Taylor. They also created two classes of stock in the bank—one

representing all of the voting rights and another granting all of the economic rights (see Exhibit

2 for a graphic of the group’s organizational structure).

6 Devin Thorpe, “Kat Taylor Does It Her Way: Banking the Underserved,” Forbes, March 6, 2014,

http://www.forbes.com/sites/devinthorpe/2014/03/06/kat-taylor-does-it-her-way-banking-the-underserved/ (October

20, 2015).

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This document is authorized for use only by Meng Chen in Sustainable Value Creation 2022 taught by ROB RYAN, DePaul University from Jan 2022 to Jul 2022.

Beneficial State Bank (A): Organization and Measurement of Social Impact SI-134(A)

p. 4

In order to properly align the triple bottom-line incentives of the founders with the values of its

citizen bank customers, Steyer and Taylor instantaneously donated all of the economic rights to a

foundation of the same name while creating two bank holding companies—“Bancorp” and the

foundation—to hold the voting stock and the economic rights, respectively. As Taylor admitted,

“It's quite unusual for economic and voting rights to be separated. For us, we did it because we

didn't want the voting rights to insist on profit maximization, which tends to come at the expense

of the other bank bottom lines, even though, of course, we and our [bank] regulators want the

bank to be profitable.” At the same time, the foundation was disallowed from selling its stock

without the prior approval of the founders and only then to another nonprofit. With this setup,

any profits earned by the bank could only be distributed to the foundation, which was mandated

to reinvest those proceeds back into the communities and the environment.

The foundation, meanwhile, was organized as a public charity, which was prohibited from being

governed to the interest of or controlled by a private individual. Instead, it retained its public

charity status by supporting the broad missions of three program services: Bridge Housing

Corporation, East Bay College Fund, and The Tides Foundation. Collectively, these programs

sought to:

combat economic distress and encourage community development, encourage

financial literacy, promote affordable housing, and eliminate discrimination by

promoting the provision of loans and investments, including consumer loans and

micro and small business loans, and depository services for disadvantaged

communities and community service organizations. 7

As a result, the investment of bank profits back into the communities it serves and the ecological

commons upon which we all depend represented a virtuous cycle of investment paralleling the

bank’s practice of making loans back into the communities from which the deposits were

recruited to the economy and society the depositors wanted to see.

While bank profits could flow only to the foundation, the foundation was permitted to provide

significant resources and support to the bank. Since inception, the foundation assumed research

and development expenses and “heavily support[ed] the bank in start up mode, covering client

sponsorships, and building the field of Beneficial Banking and Impact Measurement with

resources provided mainly by the TomKat Charitable Trust but also…grants from the Marin

Community Foundation and the Schwab Foundation.” 8 In other words, the foundation acted as a

conduit for recruited charitable capital, a significant competitive advantage for both the bank and

borrowers, reflecting measurable positive externalities.

Governance

As the original founding team, Steyer and Taylor retained seats on the bank’s Board of Directors

with a permanent right to appoint a majority of the Board, assuring that the Board would act in

7 U.S. Department of the Treasury, Internal Revenue Service, Form 990, November 2014,

http://990s.foundationcenter.org/990_pdf_archive/205/205253663/205253663_201312_990.pdf. 8 Beneficial State Bank, “2013 Beneficial Banking Annual Report,” 2013, http://beneficialstatebank.com/2013-

beneficial-banking-report.aspx (October 20, 2015).

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Beneficial State Bank (A): Organization and Measurement of Social Impact SI-134(A)

p. 5

alignment with the founders and their principles. The foundation, meanwhile, consisted of

directors appointed by the three supported organizations in addition to Steyer and Taylor, the two

directors appointed by the TomKat Foundation, with the provision that no private person ever

controls the Board.

Regulatory Considerations

Originally founded as a thrift to source deposits and originate home and commercial loans,

Beneficial State Bank converted to a California state-chartered bank in July 2014. Because the

founders launched the bank just as the housing bubble burst, the bank could not become a scaled

mortgage lender and found it increasingly difficult to meet some of the ratios required of a thrift.

In addition, regulators approached the team in August 2010 and encouraged the bank to purchase

ShoreBank Pacific, a subsidiary of Chicago-based community bank ShoreBank with operations

in Oregon and Washington, which was on the verge of insolvency. Thus, while the mortgage

crisis contributed to a change in the bank’s original charter, it also created a beneficial

relationship with the bank’s regulators. As Taylor described:

We have a non-traditional relationship with our regulators because we actually

embrace regulation—which protects important values like fair lending and access

to capital—but also because we have a mutually beneficial relationship as a result

of the accident of our timing. We were born in 2007. Before we were three years

old, we were asked to buy another community bank because we had a source of

capital and the regulators could not allow all of these community banks, imperiled

by the risky business of the big banks, going down at once. So as a mission-

driven bank, we feel much more positively toward our regulators, and we believe

they towards us.

By converting to a state-chartered bank regulated by the California Department of Business

Oversight (DBO), the bank was able to achieve better alignment with the regulatory agency’s

dual mission of supporting the state economy as well as the stability of the overall banking

system. In addition, because of strong relationships between the California DBO and Oregon

and Washington state regulators, the bank enjoyed reciprocal arrangements in those additional

states where, at the time of the conversion and as a result of the ShoreBank Pacific acquisition

completed in late 2010, operations were already in progress. Meanwhile, the Federal Deposit

Insurance Corporation (FDIC) took a secondary regulatory position behind the California DBO

while the Federal Reserve continued to regulate the two holding companies—Beneficial State

Bancorp and Beneficial State Foundation.

In 2013, the Federal Reserve approached the bank insisting on its compliance with some new

rules under Dodd-Frank (see Dodd-Frank below for further details regarding this law). Dubbed

the “skin in the game rule,” banks over $500 million in assets (later increased to $1 billion in

assets) must have a preponderance of common stock in their capital structure. Given the bank’s

unique model in which the foundation owns all of the economic rights and the founders retain the

voting rights, Taylor felt the same protections as the skin in the game rule were already in force.

As a result of the bank’s constructive relationship with regulators and progressive approach to

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Beneficial State Bank (A): Organization and Measurement of Social Impact SI-134(A)

p. 6

financial reform, the team managed to obtain an alternate commitment that approximated the

rule’s protections. 9

Dodd-Frank

Following the financial crisis of 2007-2010, the Dodd-Frank Wall Street Reform and Consumer

Protection Act was signed into law by President Barack Obama to prevent excessive risk-taking,

protect American consumers, and create the Consumer Financial Protection Bureau (CFPB) to

prevent mortgage and pay-day lenders from exploiting customers. At over 2,300 pages, Dodd-

Frank was the longest and most complicated bill ever passed by the U.S. legislature. Despite its

complex rules and stringent capital requirements, particularly for smaller banks, the team at

Beneficial State Bank welcomed the reform while continuing to favor simplicity. As Taylor

reflected:

Dodd-Frank was long overdue in coming. We had, in my view, a massive

unregulated sector putting at risk a really important role in the economy, so we

embraced that aspect of it. We just would have preferred if it were simpler:

1. Every bank has a Tier 1 capital ratio of 10 percent. 2. Nobody trades securities or some variety of the Volcker Rule. 3. Everyone has a cap on assets of, say, $100 billion with a living will in place. 4. Nobody gets saved. Every bank that fails fails. No bail outs.

Those four simple rules we think would have constrained the system in favor of

the democratic citizenry that funds it, allowed innovation to flourish, and cut

down on compliance regime expense enormously.

Likewise, the team at Beneficial State Bank viewed the creation of the CFPB as a positive

development in the “democratic citizenry” supporting the banking industry. In Taylor’s view:

We really think that CFPB is a very good development. We shouldn’t be fining

banks for bad behavior because it’s just seen as a cost of doing business and

[banking] is a very lucrative business that easily absorbs those costs, especially

when you abuse consumers.

We should be revoking their license and that’s what the CFPB actually has the

authority to do. So if you are a bad credit card lender, then get out of the market

for five years. You should clean up your act. We know about inefficiencies in

regulation. We know them firsthand, but the most important thing to do right now

is to fight the natural inclinations of the most powerful financial system

incumbents to dismantle regulation.

Because of the values embedded in Beneficial State Bank’s founding vision, the bank

distinguished itself from traditional banks and, as a result, traditional banking business

models, including aversion to regulation.

9 For further information regarding the firm’s capitalization structure, see “Beneficial State Bank (B): Evaluating

Social and Financial Returns for Investors,” GSB No. SI-134(B).

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Beneficial State Bank (A): Organization and Measurement of Social Impact SI-134(A)

p. 7

BUSINESS MODEL

Unlike traditional banks, Beneficial State Bank was guided by one basic ideal: benefit to all,

harm to none. While what Taylor called “bigger, better, faster, stronger” banks regularly

engaged in a number of unsavory acts including predatory lending, persistent overcharging,

excessive consumer penalties, unethical employment practices, and financing the unsustainable

exploitation of natural resources, Beneficial State Bank sought to create a new economy that was

“fully inclusive, racially and gender just, and environmentally sound.”

In describing the bank’s business model as it related to the triple bottom line, Taylor said:

Banking is supposed to help low-income economies grow too, and it’s supposed

to be there for the depositors to get their money back when they need to use it

themselves but also to borrow. They pool their money together, so they can

borrow, because life expenses come out in lumpy, non-correlated needs to your

stream of resources.

So, I think in the beginning, we just thought we needed to be a really good bank,

helping the poor communities and our environment. But, in fact, depositors and

communities have chronically gotten left out of the main functions of banking by

design and we have to create a model that gets them back in, permanently. We

have to change the banking system for good.

Competitive Strategy

In a world of functionally identical technology and commoditized banking, creating a

competitive advantage was difficult to attain but even more difficult to sustain. Beneficial State

Bank made the decision to pilot a form of “pay-for-performance” in this spirit. With a focus on

commercial lending and because of the bank’s unique structure in which “the bank is owned by a

nonprofit public charity foundation, it can both provide capital to buy down interest rates and

recruit capital from other charitable capital to buy down interest rates.” In this pay-for-

performance model, borrowers would be offered rewards or rebates on interest rates for

producing positive externalities such as affordable housing units, renewable kilowatts, and

sustainable food. In turn, borrowers would obtain a lower cost of debt (at no expense to the

bank), making both the borrower’s business and the bank more competitive in the market.

Traditional banks, however, would be unable to partake in these advantages because, as Taylor

revealed, “then you would be taking charitable capital and it would benefit the bank on its way to

the borrower…and you can’t do that when you have private shareholders.”

As one of 111 banks nationwide granted Community Development Financial Institution (CDFI)

status by the Treasury Department, Beneficial State Bank was entitled to a number of

competitive advantages. First, the bank was qualified to apply for technical and financial

assistance awards to enhance the ability of CDFI organizations to support the low-income

communities served. In September 2013, the bank was awarded a $1.3 million financial

assistance grant to use for financing capital, loan loss reserves, capital reserves, or operations. In

September 2015, the bank received a $2 million financial assistance grant in addition to awards

under the Bank Enterprise Award (BEA) program, which provided awards to banks correlated

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Beneficial State Bank (A): Organization and Measurement of Social Impact SI-134(A)

p. 8

with the percentage increase in dollars associated with the bank’s investment in distressed

communities. Second, the bank could access the CDFI Fund’s Capacity Building Initiative,

which offered a variety of training and technical assistance to CDFI’s interested in strengthening

their organizations. Finally, by combining CDFI certification with the Certificate of Deposit

Account Registry Service (CDARS), Beneficial State Bank was able to provide multimillion-

dollar FDIC insurance coverage earning CD-level interest. Because this service was only

available to community and regional banks in the CDARS network, smaller banks like Beneficial

State Bank could compete more effectively with larger traditional banks. While not

insignificant, these advantages were necessary for CDFIs to fulfill the missions underserved or

not served at all by non-CDFI institutions.

Human Capital

In order to carry out the bank’s mission, the team made it a priority to ensure that its 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. One important feature of the

program was the Beneficial Banking Curriculum and Speaker Series, “a weekly series of

educational workshops led by experts in the fields of banking, community development finance,

impact investing, and supplying credit to underserved populations.” 10

Through the program,

interns were given more insight and a swifter learning experience while training to be the next

generation of stewards for change. In addition, Beneficial State Bank’s mission and model

allowed all employees to work in concert with their values and purpose.

With a Living Wage policy 11

stipulating that the bank will pay 150 percent of living wage in all

markets in place, Beneficial State Bank was committed to attracting and retaining a workforce

that would, like its citizen bank customers, be financially secure and economically empowered.

In addition, the bank’s roughly five dozen employees were supported in their own community

work through paid volunteer time as well as matching donations. Finally, echoing the bank’s

own commitment to social justice, the bank strived to ensure gender and ethnic equality and

equity by not only have relatively equal proportions of both genders within the organization but

also employing women in senior positions. In fact, the International Living Future Institute’s™

JUST™ Program, which provided transparency for organizations to voluntarily disclose aspects

of their operations, assigned Beneficial State Bank low marks for gender diversity because it

employed too many women—a knock that Taylor accepted proudly.

MEASURES OF SOCIAL IMPACT

For both accountability and superior performance quality, Beneficial State Bank devised a

number of metrics to measure the impact of their efforts and the success of their mission. First,

the team developed an internal point structure that would award a point for every loan that fell

within its targeted lending sectors a

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