BUS604: Innovation and Sustainability

The social enterprise versus the profit-driven organization

We considered the financial crisis and its moral causes in the loss of three elements: primary calling, societal embedment, and non-financial values. We next considered six cases of social enterprises that placed the social impact and public good at the heart of their business strategy. The moral and economic problems that caused the financial crisis do not occur here. Social entrepreneurship is a very young field that has not yet stood the test of time: it is too early to say whether it presents universal solutions. The specific character of social enterprises (and impact investments) comes into focus when they are compared with profit-driven organizations.  The main characteristics of a profit-driven organization as revealed in part I are:

1. External goods. Profit-driven organizations focus on external goods like profits. Excelling in business does not aim to excel in the values that are inherent to the business: the only objective is to increase profits.
2. Shareholders. Profit-driven organizations pursue the interests of one stakeholder: the shareholders. The justified interests of other stakeholders are only taken into account when they contribute to the interests of the shareholders or when they are legally required.
3. Worldview. Profit-driven organizations advocate a worldview that considers the individual as both starting and end point, emphasizing the free market and rejecting regulation by the government. If these elements are considered the most important, it can lead to the three losses of direction, context and non-financial values.

Social enterprises and impact investors differ fundamentally with respect to these three characteristics. First, the objective of social enterprises is to realize the internal goods that are inherent to a practice. The Grameen Bank focuses on good financial services for the poor, Tendris on sustainable solutions in poor and rich countries, the Noaber Foundation develops long-term healthcare services mainly in Western countries, and DOB Equity invests (inter alia) in the production of high-quality food. In the view of social enterprises the legitimacy of their 'license to operate' or 'right to exist' lies in the added value for the societies in which they operate: a positive impact on the lives of individuals, families, villages and rural areas.

One of the main challenges in this field is to make the impact of a social enterprise transparent and explicit. This requires that we understand the micro-mechanisms and pre-existing bonds that underlie the success and impact of social enterprises. For example, the Grameen Bank is very successful in granting microcredits to impoverished people without requiring collateral. The 'secret' of this success is a group-based approach that ensures a responsible use of the money which guarantees repayment of the loan. DOB Equity is very successful in East Africa with Tanga Fresh and Prothem. The most important factor in its success was the existing local cooperation between farmers and the fact that the farmers became co-owners of the company. When these micro-mechanisms are understood, transparency about the impact of social entrepreneurship can be created. One way is the so-called social return on investment (SROI). This method makes the social impact of an initiative explicit, determines the indicators that characterize this impact, and translates them into financial parameters. For example, a social return on investment calculation for the main projects of VitalHealth Software showed a social return ratio of two to five. That means that every euro invested in this cooperative resulted in a total social impact of between two and five euros. For the PreventionCompass of NIPED a SROI ratio of 3.2 was calculated.

Second, social entrepreneurs believe that every stakeholder has justified interests that have to be addressed. They also believe that cooperation with every stakeholder is required to develop solutions that work. The projects of the Noaber Foundation and DOB Equity are examples in which different stakeholders are involved to address innovation in healthcare and food production. The role that stakeholders play also comes to the fore in the process to determine the impact of an initiative. In the social return on investment method, not only is the contribution of every stakeholder to the solution valued, but the impact of the initiative on every stakeholder is also calculated. For example, the calculation of the social return of the PreventionCompass of NIPED showed that the employer benefits greatly from this initiative. It is important to note that involvement of stakeholders and maximizing societal impact is a normative characteristic of the idea of the social enterprise and impact investing, and is in agreement with the stakeholder approach and the idea of relational economics.

Third, social entrepreneurs and impact investors do not believe that the free market is the highest value, but pursue social and environmental values. For a PhD dissertation, Henk Kievit interviewed social entrepreneurs and impact investors and found that their activities were inspired by religious beliefs, the good example of their parents, or the feeling of a need to put something back into society. These inspirations drive them not only to pursue social and environmental objectives (first characteristic), but also to involve relevant stakeholders (second characteristic). Additionally, these inspirations motivate social entrepreneurs and social impact investors to accept a below market-to- market rate. The whole field of social entrepreneurship and impact investing shows that the world of business and financial services is not morally neutral, but is driven by a certain worldview and motivated by fundamental values.

The social enterprise and the idea of corporate social responsibility

Corporate social responsibility is now a catch-all term that recognises the societal responsibility of companies. The main idea is that companies have to consider the impact of their actions on society and should pursue the welfare of society as a whole along with their own interests. There are four components:

1. Economic responsibility: be profitable.
2. Legal responsibility: obey the law.
3. Ethical responsibility: be ethical. An obligation to do what is right, just and fair, and to avoid doing harm.
4. Philanthropic responsibility: be a good corporate citizen. Contribute resources to the community and improve the quality of life.

Another well-known version of corporate social responsibility is the so-called Triple-P approach as formulated by John Elkinton. In this approach social responsibility is summarized in three parameters: People (social justice), Profit (financial returns) and Planet (ecological limits). The basic idea of this approach is that a sustainable development of our society requires a social, economic, and environmental bottom line. In the last decade these ideas of corporate social responsibility have gained a firm footing in the business world. Many enterprises publish a corporate social responsibility report that covers its various responsibilities. In addition, several institutions publish lists of the ten, fifty or hundred organizations they rate as the most socially responsible.

The ideas of social entrepreneurship and corporate social responsibility have a lot in common. In both approaches economic, social and environmental values are acknowledged. In both approaches it is believed that the responsibility of the organization goes beyond legal regulations and that the legitimate interests of stakeholders have to be taken into account. The main difference between these approaches is that social entrepreneurship is first and foremost concerned with social and environmental objectives, whereas corporate social responsibility aims for a balance between social, environmental and economic values. This difference is (partly) rooted in the worldview of the main participants. For social entrepreneurs profit is a 'tool' to achieve the mission of an organization and a condition of gaining access to the capital of impact investors. Impact investors will accept a below-market rate when social or environmental goals have to be met. Corporate social responsibility, on the other hand, defines profit as one of its objectives and the commitment of the shareholders and investors depends on this objective; generally, a below- market rate will not be accepted.

Social enterprises, impact investing and the future of global society

Social entrepreneurship and impact investing have gained significant momentum in recent years. Estimates indicate that impact investing can become a new asset class or investment style that will grow to $1 trillion by 2020. In the same period, the total amount of financial assets will grow to about $900 trillion. This means that by 2020 impact investing will still only represent 0.1 per cent of all financial assets. However, the impact of social entrepreneurship and impact investing may be much larger than suggested by this figure.

The most important reason is that these approaches have a larger influence on local and international development than the mere size of the outstanding loans would suggest. Why can impact investing have a larger influence than its size suggests? Maximilian Martin states that impact investing is a sufficiently proven concept that governments can use as leverage to change the  world. He sketches four fields of global problems or 'megatrends', in which social entrepreneurship and impact investing will play a key role:

1. Massive pent-up demand at the bottom of the pyramid, i.e. the 4 billion people with annual incomes below $3,000 in local purchasing power.
2. Driving green growth. Environmental risks, shortage of raw materials, and ecological scarcities threaten humanity. A changeover to a green economy is required to support sustainable growth.
3. Reconfiguration of the welfare state. In many countries the welfare state is threatened by financial problems. The expenditures of government on healthcare, education, and welfare are higher than the revenues. A reconfiguration of the welfare state is required to guarantee a sustainable future.
4. Emerging 'lifestyles of health and sustainability' (LOHAS) consumers. In many countries, the awareness of consumers is growing that a paradigm shift is required with respect to lifestyle, health and sustainability. LOHAS consumers are willing to spend more on products designed to be environmentally sustainable and socially responsible.

The social initiatives presented in Part II all belong to these categories: the Grameen Bank, DOB Equity at the bottom of the pyramid, Tendris in green growth and LOHAS consumers, and the Noaber Foundation in the reconfiguration of the welfare state and LOHAS consumers.

Martin concludes that businesses shifting sustainability to the core of their business model "will see their ability to create value enhanced" and countries with a coherent and realistic embrace of impact investing will "see the lives of their citizens improved". It goes without saying that investments in these fields have a big impact on the development of the global world. Their impact is much larger than might be expected based on the amount of money involved. The examples of Grameen Bank, Tendris, the Noaber Foundation and DOB Equity speak volumes.