Disillusion with excessive profits fuelling rise of ‘social enterprises’

This article was originally published on NBR by Nathan Smith. If you’re a National Business Review subscriber, you can read the article here.

Excessive or unfair profit is tough to hide from consumers in the internet age. Companies aren’t necessarily trying to hide anything, but the “conscious consumer” is forcing change by putting their dollar where they think it will make the most social difference.

In this post-2008 world of criticism of perceived predatory commercial entities, and as sustainability gathers corporate adherents, businesses are evaluating how to structure as a “social enterprise” rather than the traditional “financial enterprises.”

The idea of social enterprise is simple, and plenty of businesses have operated as such for years without a formal label. These are organisations applying commercial strategies to maximise improvements in human and environmental well-being, including social impact, alongside profits for external shareholders, according to a 2009 book on the movement by Columbia University’s Janelle Kerlin.

Social enterprises can be structured as a for-profit or non-profit and may take the form of a co-operative, mutual organisation, disregarded entity, social business, a benefit corporation, community interest or a charity organisation. What differentiates social enterprises is that their social mission is as core to their success as any potential profit.

Christchurch City Council councillor for Fendalton-Waimairi Raf Manji, who in a previous life worked in finance, is encouraging of the social enterprise trend and says it is clawing back the original meaning of business.

“If we think back to Adam Smith and the theory of moral sentiments, business has a moral purpose by providing goods and services people need. On top of that, we’ve developed a financial sector which has grown over time as percentage of GDP and, more importantly, as percentage of profit. That’s not generally a good thing because it tends to just churn in its own space.

“And we’re coming out of 30 years of a neo-liberal framework based on the market solving problems. Social enterprises try to hand the ability solve problems back to the community itself. Business brains are helping solve problems of health, education, poverty and other issues,” Mr Manji says.


Broader focus

Finance especially has always been an integral factor of business. He says greater efficiencies could be discovered (or rediscovered) by deploying capital with a broader focus.

“The traditional philanthropic model was to make as much money as possible and then give it away. That’s outdated.

“A better bang for your buck is with a social enterprise model in which the community-based outcomes are embedded in the corporation. A blended approach looks for patient capital, solidarity finance or virtuous capital, all of which employs finance for a social outcome alongside the financial,” he says.

Community and Voluntary Sector Minister Jo Goodhew says companies adopting this thinking don’t necessarily consider themselves as a single group with a common purpose. Rather, they are individual entities taking a social enterprise approach.

“Plenty of companies following the trend don’t even call themselves social enterprises and others are simply interested in taking the social approach. At the same time, there is a burgeoning desire for information on how to do it successfully because there’s already a high failure rate for SMEs and many can’t make the transition on their own.”

Most industries are grappling with more automation, employment problems, productivity slowdown and the increasing cost of capital. New Zealand isn’t yet feeling these effects as acutely, but long-term interest rates have dropped between 250 and 300 basis points in the past three years.

Bloomberg World Sovereign Bond Indexes reports $10 trillion worth of government bonds globally are at negative rates, so it could be argued investment money is free, finding its way into asset markets and driving bubble-style outcomes. Capital is extremely unproductive at the moment.

“Automation is eliminating jobs, and in the next 10 or 15 years that will increase. So there’s a lot of stuff coming down the chain which means either we accept a world of higher unemployment or employ people to do things outside a financial profit motive.

“So rather than being productive in terms of financial return, people could be productive in social return. This could be called the third way,” Mr Manji says.


Public/private collaboration?

Central and local government has a large part to play in this evolution, and could actually be regarded as social enterprises already, the minister says. The entrepreneur community is certainly at the forefront, but larger companies and investment firms are getting involved.

“But unashamedly, all these companies are trying to make enough money to deliver on their social outcomes.

“It’s just a different kind of consumption-based business. It taps into the fraction of people who want to spend but want to buy from a company who will use money as more than just a profit. For products with multiple options, an extra motive might be the reason they purchase one product over another,” Ms Goodhew says.

Mr Manji grabs onto the word “convergence” as a description of what’s happening by bringing together the social, environmental and financial worlds.

“Those can’t really be split. It’s about being comfortable with a return on capital coming later than usual. It’s about knowing a shift will have an immediate social return. It goes back to the idea of social finance being a social enabler aimed at the real economy.

“The traditional philanthropic model simply gives money away. With a social enterprise model, investing money and actively participating in an organisation can have different benefits for investors. So it’s realigning the way we think about business,” he says.

Ms Goodhew is actually encouraged by the present nexus of public and private in facilitating social enterprises. But the overwhelming message from business is they want the government to “get out of their way” so they can get on with organising, she says.

“Both government and corporates are discussing a system change and how they might approach this collectively. It may be that a strong independent organisation emerges for dealing directly with the government, but at the moment there seems to be good communication.

“In a way, we’re going back to the future. But also dealing with some of the ways in which the system has gotten out of control,” she says.