In recent articles I have alluded that I believe the corporate world could do with a little more ethics and social consciousness. Following on from this I would like to talk about an exciting business concept that I have been heavily involved with in recent months.
Traditionally, the corporate structure is limited to two main overriding frameworks. That of the profit seeking organisation and the non-profit or charitable organisation. Private enterprises chase profit to satisfy the financial goals of the owner(s) and public for-profit companies must maximise profit for shareholders by legal obligation. Business is carried out to generate excess funds to be channelled to relatively few with ownership rights. Meanwhile, non-profit organisations such as charities generally rely on philanthropic donations, government funding or angel investors to enable their existence. Fundamentally, this involves obtaining funds from relatively few and distributing small amounts to a large number of recipients for free. These are two ends of the spectrum, literally polars apart in respective raison d’être. A viable third way, a hybrid of these two models has emerged – social business.
A social business venture operates as a regular, self-sustaining enterprise generating revenues from commercial activities. This could be through the provision of education services, manufacturing, professional advisory services etc. These organisations are designed to operate as any other traditional profit-driven enterprise, trading goods and services, receiving revenue from customers, paying market competitive salaries to staff and so on.
What separates social business from the two common models discussed earlier is that profits are re-directed to activities of the business, such as expansion, or otherwise used to fund corporate social responsibility programs. Investors receive their initial investment in full, however no profits are paid.
Nobel laureate and founder of Grameen Bank, Muhammad Yunus, is also a pioneer and champion of the concept he describes as...
“a social business is outside the profit seeking world. Its goal is to solve a social problem by using business methods, including the creation and sale of products and services. One [kind of social business] is a non-loss, non-dividend company devoted to solving a social problem and owned by investors who reinvest all profits in expanding and improving the business.”
Building on Prof. Yunus’ definition with a social cause as the primary activity, I believe any enterprise can operate as a social business. For example, an education enterprise can be created within a developing country that teaches Australian exchange students. Beyond start-up capital, no further funds are required as operations generate self-sustaining revenue. Profits received obtained can then be used to build schools within the local community. In this example the social cause is not the primary purpose of its existence but part of a new type of multi-sided business model. Enterprises can organise the social programs they fund around their core business. This can build on the elements that their customers value most, thus creating a very robust competitive advantage. It would not surprise me if this type of business model is increasingly used by today’s non-profit organisations. Recent global financial turmoil provided a stark reminder that international pools of donation funding for such outlets is limited and not guaranteed in times of turmoil.
There are some limitations to this idea. It relies on owners with an ethical mantra not seeking profit. Naturally, in a wealth-driven society the number of such investors is tiny relative to profit seeking equivalents. Furthermore, growth may be slowed in the absence of profit seeking investment funds, and the treatment of tax and legal structure is yet to be clarified in most countries. However, these issues need not necessarily hinder social business ventures. Tellingly Jack ‘Maximise Shareholder Value’ Welch, Forbes magazine ‘Business Leader of the Century’ and one of the main voices for profit-maximisation in business, has openly admitted this ideal has a number of irreconcilable flaws, particularly in relation to long-term environmental and social sustainability. Subsequently, private and government investors have shown an increasing appetite for social business entrepreneurialism. As an outlet for philanthropic funds, social business will return all monies invested and once operational, to remain self-sufficient in perpetuity. With a solid business model and good management of course ;-)
Further reading:
Eisenmann, T., Parker, G. & Alstyne, M. 2006 “Strategies for two-sided markets”, Harvard Business Review, October 2006.
Singh, R. 2010 “The Fabric of Our Lives: The story of Fab India”, Penguin Viking, London.
Yunus, M. 2010 “Building Social Business”, Public Affairs, New York.
