GOOD

Where Did Social Enterprise Come From, Anyway?

This moment in history may be a perfect storm for the rapid rise of social enterprise.

In the first installment of our new series on how social enterprise is changing business, Sarah Stankorb looks at the origins of the impact economy and why the sector is blowing up today.


Businesses, even those outside the realm of greedy corporate drones, are designed to earn a profit. Other priorities, like environmental sustainability or job creation, are reached only through happy accidents or marketing ploys to help companies make more money. Surely, if you’re raking in the dough, you can’t be making a difference—at least not on purpose.

This outdated vision of commerce has multiple origins, but if asked, most students of social enterprise will point an accusing finger at Milton Friedman’s 1970 New York Times Magazine essay “The Social Responsibility of Business is to Increase Its Profits.” Friedman’s point (though slightly more nuanced than the title or its interpretation might suggest) was that corporate executives have a responsibility to maximize profit. Frittering away money on other objectives—say, fighting poverty—would cheat stockholders, employees, and customers out of cash that is rightfully theirs.

According to Patrick J. Murphy, management and entrepreneurship professor at DePaul University, Friedman’s point was taken out of context. Still, the simplified banner ran: Greed is good. Who cares about the rest? “That [essay] expressed something in a whole generation of business people that lasted through the 70s and into the 80s, even a little bit into the 90s where there was this tradeoff—you couldn’t do good and do well at the same time,” Murphy says.

On a cultural level, the three-sector split made sense: government, nonprofit do-gooders, and the rest in power suits. For the first two, there was a duty to the public; for the rest, the obligation was to make rich investors—and themselves—richer.

Yet going as far back as the Quakers, some have understood an alternative intersection between money and conscience. Over the same decades that Friedman’s philosophy defined corporate duty, a different sort of animal was evolving—the social entrepreneur.

Among the first to carve out space for social enterprise was Bill Drayton, who founded the nonprofit social enterprise Ashoka in 1980. While traveling in India, Drayton, a civil rights activist who had studied Gandhi's work, discovered innovators whose creative ideas for change were not well understood by their communities. Ashoka championed these public innovators, a term that later evolved into “social entrepreneur.” Today, Ashoka supports more than 2,000 entrepreneurial fellows in more than 60 countries as they scale their ventures.

Around the same time, corporate outliers like Tom’s of Maine and The Body Shop built a following of customers who wanted more than just products from the brands they bought— they wanted to feel like they were doing right thing, too. Of social enterprise, says Jay Coen Gilbert, co-founder of B Labs, a nonprofit advocate for social enterprise, “this was a long process of gestation.”

Over the past decade or so, there has been a spike in growth among companies with a triple bottom line—people, planet and profit. B Labs certified 513 social enterprises in the United States and Canada with some $2.9 billion in revenue combined. “It does represent an evolution of capitalism, from an era that’s been focused solely on the shareholder to an era that’s focused on creating value for all stakeholders,” says Coen Gilbert, referring collectively to everyone affected by a given company, from workers and investors to the local community.

Why now?

This moment in history may be a perfect storm for the rapid rise of social enterprise. One major factor is how the internet has redefined our social circles. “There are less and less boundaries between people, and that includes people in need and other people who are in a position to do something about that need,” Murphy says. Social media also allows young companies to grow organically and establish an early customer base.

High unemployment rates also contribute to sensitivity about social impact, and, Murphy notes, many recent entrepreneurs launch their own companies after losing their jobs. “It’s easy to forget how determined and how entrepreneurial a person can actually be when they have no other options,” he says.

Meanwhile, the global financial crisis precipitated dwindling confidence in corporations whose focus on profit put us all at risk. For those with cash available, socially responsible investing may be a safer bet. “It becomes a risk management technique,” says Marc J. Lane, a Chicago-based attorney and advocacy investing expert. Companies concerned with environmental issues, the welfare of their employees, and customers are “less likely to suffer regulatory action or class-action … I think you’re dealing with a savvier group of managers.”

A new breed of company

Corporate legal structures are finally starting to catch up to our changing business landscape. The traditional separation of charitable work from moneymaking winds back to the Puritan era. “The fact is, we’ve changed a lot since then, and there’s this blending of social and financial objectives,” says Linda Darragh, director of entrepreneurship programs at the University of Chicago's Booth School of Business. “But we’re still hampered by regulatory limitations. That’s why you have all these work-arounds.”

Corporations are registered at the state level, and each state demands managers make decisions only in the interest of increasing shareholder value—which makes factoring in social impact tricky, if not legally risky. In past decades, many social entrepreneurs had resorted to simultaneously adopting nonprofit and for-profit legal structures, a needlessly complex system. “Funders realized that the legal structures were limiting impact, and so more and more policymakers and funders and social entrepreneurs built a movement,” says Marina Kim, director of Ashoka U.

Now, a collection of new entities are mixing profit-seeking and impact: L3Cs, benefit corporations in California and New York, California’s Flexible Purpose Corporations, and Hawaii’s Sustainable Business Corporations. The new designations are about growing investment—and not getting sued by shareholders. Since 2010, benefit corporation legislation in seven states has created an option that protects social entrepreneurs from litigation if they spread their focus to include both profit and social impact.

“Current corporate law requires them to only consider the impact of their decisions on shareholders, but in order to earn their certification, B Corps amend their articles such that they’re required to consider the impact of their decisions on society as well,” says Coen Gilbert. For more than 500 companies, it’s a way of addressing the tension between money and mission.

The alternative L3C (low-profit, limited liability company) is available in nine states. Lane, who authored the L3C law in Illinois, says they are designed to track federal tax requirements investments made by foundations. Foundations are required to distribute 5 percent of their assets for charitable purposes annually. Investing in L3Cs gives them a chance to invest and potentially recoup funds. “Grants are the riskiest thing you can do,” Darragh says. “You give it away, and it’s gone. So, for this, you can actually generate a return.”

The fourth sector

These new business entities are helping dig a wide fourth sector alongside the public sphere, nonprofit organizations, and for-profit business. For years, some nonprofits dabbled in limited earned income models or ran for-profit subsidiaries to supplement donations. Now, L3Cs, benefit corporations, and the state-specific formations in California and Hawaii are in the mix, too.

Unlike nonprofits, a profitable social enterprise is self-sustaining, and proponents are bullish about accessing larger pools of private capital that will make it possible for these businesses to grow much faster—and have more impact—than organizations reliant on donations. There’s already a growing socially responsible investment pool to draw from—$3.07 trillion, according to a 2010 estimate by the Social Investment Forum. Social enterprise hubs, university programs, accelerators, and incubators are also planting seeds for growth of the movement.

Still, there are many needs that the social enterprise market doesn’t reach, “so there will always be a role—and an important role—for nonprofits and government to play,” Coen Gilbert says. Those other sectors are necessary, he adds, but in some ways insufficient. “In order to solve society’s greatest challenges, we need to mobilize the power of business to help scale solutions—and business can scale solutions much quicker and with many greater resources than can nonprofits.”

Photo via (cc) Flickr user opensourceway

Articles
via Real Time with Bill Maher / YouTube and The Late Late Show with James Corden / YouTube

A controversial editorial on America's obesity epidemic and healthcare by comedian Bill Maher on his HBO show "Real Time" inspired a thoughtful, and funny, response by James Cordon. It also made for a great debate about healthcare that Americans are avoiding.

At the end of the September 6th episode of "Real Time, " Maher turned to the camera for his usual editorial and discussed how obesity is a huge part of the healthcare debate that no one is having.

"At Next Thursday's debate, one of the candidates has to say, 'The problem with our healthcare system is Americans eat shit and too much of it.' All the candidates will mention their health plans but no one will bring up the key factor: the citizens don't lift a finger to help," Maher said sternly.

Keep Reading Show less
Politics

There is no shortage of proposals from the, um, what's the word for it… huge, group of Democratic presidential candidates this year. But one may stand out from the pack as being not just bold but also necessary; during a CNN town hall about climate change Andrew Yang proposed a "green amendment" to the constitution.

Keep Reading Show less
test
Me Too Kit

The creator of the Me Too kit — an at home rape kit that has yet to hit the market — has come under fire as sexual assault advocates argue the kit is dangerous and misleading for women.

The kit is marketed as "the first ever at home kit for commercial use," according to the company's website. "Your experience. Your kit. Your story. Your life. Your choice. Every survivor has a story, every survivor has a voice." Customers will soon be able order one of the DIY kits in order to collect evidence "within the confines of the survivor's chosen place of safety" after an assault.

"With MeToo Kit, we are able to collect DNA samples and other tissues, which upon testing can provide the necessary time-sensitive evidence required in a court of law to identify a sexual predator's involvement with sexual assault," according to the website.

Keep Reading Show less
Health

Villagers rejoice as they receive the first vaccines ever delivered via drone in the Congo

The area's topography makes transporting medicines a treacherous task.

Photo by Henry Sempangi Senyule

When we discuss barriers to healthcare in the developed world, affordability is commonly the biggest concern. But for some in the developing world, physical distance and topography can be the difference between life and death.

Widjifake, a hard-to-reach village in northwestern Democratic Republic of Congo (DRC) with a population of 6,500, struggles with having consistent access to healthcare supplies due to the Congo River and its winding tributaries.

It can take up to three hours for vehicles carrying supplies to reach the village.

Keep Reading Show less
Health
via Keith Boykin / Twitter

Fox News and President Trump seem like they may be headed for a breakup. "Fox is a lot different than it used to be," Trump told reporters in August after one of the network's polls found him trailing for Democrats in the 2020 election.

"There's something going on at Fox, I'll tell you right now. And I'm not happy with it," he continued.

Some Fox anchors have hit back at the president over his criticisms. "Well, first of all, Mr. President, we don't work for you," Neil Cavuto said on the air. "I don't work for you. My job is to cover you, not fawn over you or rip you, just report on you."

Keep Reading Show less
Politics