The social impact of profit – part one

Two quotes on the recurringly vexed issue of profit in the social economy:

1.2  Regardless of its legal form, the constitution of a SE will include the requirement  that profits are reinvested in the business or in the beneficiary community – and not distributed to owners/shareholders/investors.” – from Senscot’s new Voluntary Code of Practice for Social Enterprises, launched at Social Enterprise Exchange last month.

… we also seek, quite unashamedly, to make a profit and we focus hard on this too. Partly because this allowa us to be successful, live reasonably well and grow our founding mission. And partly because this does create a meaningful surplus which we can share with others through the Stepping Out Foundation. I suppose what I am getting to here is that our being a for-profit organisation doesn’t in any way detract from our primary mission – to change public services.” – From former social enterprise ambassador, Craig Dearden-Phillips of Stepping Out explaining why he chose to launch his current company as profit-making venture:

All businesses attempt to make profit*.  This includes charitable businesses that describe profit as ‘surplus’. The big arguments in the social enterprise movement at the moment are mainly about profit distribution and, specifically, shareholder profit (where the shareholders in question are individual directors and owners rather than members of a co-op).

It’s comfortable for one-wing of the social enterprise movement to declare themselves as being opposed to shareholder profit, and for another to say that there’s nothing wrong with shareholder profit as long as the organisation concerned makes a positive social impact. Comfortable because both positions avoid engagement with the more complicated question: ‘what is the social impact of shareholder profit?’ or, more usefully ‘what is the social impact of shareholder profit in this situation?’

It’s a question for social entrepreneurs and, in markets that are dictated or dominated by the state, it’s also a question for politicians. This initial post (briefly and in no way comprehensively) considers some of the complicated issues around shareholder profit from public service delivery. Part two will look at the equally complicated issues about how shareholder profit affects organisations that consider themselves to be social enterprises (or some variant of the term).

In recent months, there’s been (widely perceived) outrage that Emma Harrison, the boss of back-to-work provider A4E, pocketed £8.6 million in dividends from her business that receives almost all its income from public contracts.

It seems unlikely that the cause of this outrage is not that people, as represented by the Daily Mail, believe that shareholder profit from the spending of taxpayers’ money is a bad thing in itself.

Large numbers of private companies supply goods – for example, chairs** – to the public sector. Directors of companies selling chairs may make even more money in dividends than Harrison. While many of us might support a positive decision by a public sector agencies to buy chairs from a social enterprise, there’s not a sense of moral outrage when they (hopefully) chose the best chairs the market has to offer based on their available budget.

Public sector agencies buy a lot of chairs but, they’re not a single customer, and if even they were they wouldn’t buy enough chairs to fundamentally dictate the shape of the market. It is unlikely that anyone in the UK is running a successful chair-making business based solely on their ability to convince a few public sector commissioners that they should buy their chairs.

The ability to generate shareholder profit drives people to start businesses selling chairs. Part of the profit generated is spent on making cheaper and/or better chairs. Or if isn’t, new businesses enter offering chairs that are better and/or cheaper.

Attitude to shareholder profit from chair manufacture does have a social impact. If distributed-profit from making chairs goes to a few rich people, it increases economic inequality. If most distributed-profit making chairs goes to all the employees or members of a co-op, it reduces economic inequality. If profit is not distributed at all but is spent on delivering services into the community that is also likely to reduce inequalities.

As social entrepreneurs, we might want to see more companies in social ownership – I’m not assuming this is true for all social entrepreneurs – but we probably wouldn’t argue that private profit from chair manufacture is fundamentally wrong in principle. Even it were legally possible to ban private investment and profit from chair manufacture – or stop public sector agencies buying chairs from companies generating private profit – we’d end up with worse, more expensive chairs.

The situation is different when private companies, charities and social enterprises are delivering public services – services that they deliver to the public on behalf of the public. In many instances – as with back-to-work provision delivered by A4E and others – the government is the only customer. It decides on the size of market (including deciding whether or not the market even exists).

As with chair manufacture, the fact that profit from delivering public services leaves the social economy and goes to a rich individual (or, as in other markets, groups of rich investors or foreign government’s sovereign wealth funds) has a negative social impact in itself in terms increasing wealth inequality.

The question is whether that negative social impact is outweighed by the positive impact of profit-distributing providers in the market. If, for example, shareholder profit-distributing providers such as A4E got 25% more people (or even 10% more) back into work than the job centre (or civil society providers who don’t distribute profit) then it would suggest that the shareholder profit motive was generating positive social impact in the back to work market.

And the positive social impact of hundreds of thousands more people finding work would be far greater than the negative social impact of some rich people getting richer. Unfortunately, that isn’t what’s happened so far.

In a situation where the government is taking money off the taxpayer and giving to some organisations in order to get things done, politicians clearly need to consider the overall social impact of that decision. It may that there’s a clear argument, in the particular instance of back-to-work provision, as to why their shareholder profit motive will ultimately contribute to better overall social impacts (even if it hasn’t so far). The point is that politicians have a responsibility to make that argument – to make clear that it’s not just a case of giving our money to some people who are already very rich.

Part two will look at how shareholder profit – support for, and objections to, it – affects organisations that consider themselves to be social enterprises.

*With the exception of organisations that are engaged in a deliberate process of winding down their operations

**This post is not drawing on any specific knowledge of or interest in chair manufacture

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8 responses to “The social impact of profit – part one

  1. rgashton

    I think there are two issues here. Firstly, is it OK to make a profit as a social entrepreneur and secondly, is it wise for Govt to give one or two companies a mega- contract to make a difference to lives at the grassroots of society.

    On the first, I am in no doubt that to set out not to reward talent or investors is to set out to fail. The greatest social impact will be made when all businesses recognise its value as a point of market difference. To create a separate genre of enterprise is idealistic and valuable for illustrative purposes. A world without shareholder return would not be world that changes very quickly – because all the most talented people would be somewhere else.

    As for Emma Harrison and her big dividend. Yes, it’s hers and she should not be made to feel bad about it. The mistake was Governments. Instead of taking the time and trouble to do the job properly and give contracts to grassroots organisations, it’s given it all to the few.

    Perhaps the pragmatic middle ground is to do what I understand John Lewis do. That is to make sure that nobody earns more than 25x as much as the lowest paid employee. I’m sure Emma Harrison would have still signed up with DWP had that been a condition of contract. Ten perhaps she’d have had the incentive to distribute her profits differently

    • Robert, A good point which reminds me that in 2003 our founder fasted for US government to sign an international covenant on economic rights. This is tied together with ‘proft deployed for social benefit in the UK plan:

      “Profits/surplus derived from the broadband enterprise, as well as any other enterprises which P-CED may see fit to include over time, will be directed to poverty relief and community development needs. Fifty percent of annual surplus will remain in each local community where income is derived, by way of deposit into a local community development bank serving that location. In that locales are part of EU and therefore subject to well-developed rule of law, corruption issues should not present insurmountable barriers such as in Crimea.

      Fifty percent of surplus will be retained by P-CED for growth and expansion. Along the way, all employees of P-CED are to be paid at minimum a wage sufficient to guarantee a decent standard of living in accordance with the International Covenant of Economic, Social and Cultural Rights.”

      The fundamental policy guide for P-CED is the International Bill of Human Rights. IBHR is comprised of Universal Declaration of Human Rights; International Covenant of Civil and Politial Rights, and International Covenant of Economic, Social and Cultural Rights. P-CED’s main focus falls within sphere the economic, social and cultural rights, ICESCR. In that the United States of America do not recognize those human rights and is the only industrialized country not to ratify ICESCR, P-CED operations are not yet compatible with underlying US policy and human rights commitments. In that sense, the US itself must be recommended as ‘not yet ready’, albeit for reasons quite dissimilar to those in Crimea. Thus the decision to first institute P-CED in Europe rather than the US. However, partnerships with US entities will be undertaken insofar as they advance the fulfilment of human rights where they are recognized across Europe under ICESCR. P-CED will also continue advocacy toward US ratification of ICESCR, and advocacy for economic rights in the US in particular. P-CED’s founder and first director is a member of the newly-formed US Human Rights Network.

      P-CED will continue to undertake regional poverty relief efforts with its 50% share of surplus for growth and expansion, both in UK and continuing in Eastern and Central Europe along the lines of previous efforts in Tomsk and Crimea.

      A recent debate on the ethics of Homeless Hotspots in the USA reminded me of this work and our engagement with a former presidential candidate who back then was campaigning the same thing concerning Occupy today.

      http://www.ecademy.com/node.php?id=176296

  2. Oddly enough I come from a long line of chairmakers with an ancestor having patented the Mowatt hinge. The familiy had become economic
    migrants at the time of the Highland Clearances, to settle in the East End

    In the white paper for P-CED it was reasoned that a business could exist to make profit entirely for social purpose instead of going to private hands. At the time it was considered economic heresy.

    The paper concluded:

    ‘There is nothing wrong with individuals becoming wealthy. It is only when wealth begins to concentrate in the hands of a relative few at the expense of billions of others who are denied even a small share of finite wealth that trouble starts and physical, human suffering begins. It does not have to be this way. Massive greed and consequent massive human misery and suffering do not have to be accepted as a givens, unavoidable, intractable, irresolvable. Just changing the way business is done, if only by a few companies, can change the flow of wealth, ease and eliminate poverty, and leave us all with something better to worry about. Basic human needs such as food and shelter are fundamental human rights; there are more than enough resources available to go around–if we can just figure out how to share. It cannot be “Me first, mine first”; rather, “Me, too” is more the order of the day. ‘

    In our UK business plan, it was reasoned:that:

    “Traditional capitalism is an insufficient economic model allowing monetary outcomes as the bottom line with little regard to social needs. Bottom line must be taken one step further by at least some companies, past profit, to people. How profits are used is equally as important as creation of profits. Where profits can be brought to bear by willing individuals and companies to social benefit, so much the better. Moreover, this activity must be recognized and supported at government policy level as a badly needed, essential, and entirely legitimate enterprise activity.”

    4 years later we were calling on the US Senate to support this approach in international development. The following article asked whether any business can be considered social and concludes:

    ‘The term “social enterprise” in the various but similar forms in which it is being used today — 2008 — refers to enterprises created specifically to help those people that traditional capitalism and for profit enterprise don’t address for the simple reason that poor or insufficiently affluent people haven’t enough money to be of concern or interest. Put another way, social enterprise aims specifically to help and assist people who fall through the cracks. Allowing that some people do not matter, as things are turning out, allows that other people do not matter and those cracks are widening to swallow up more and more people. Social enterprise is the first concerted effort in the Information Age to at least attempt to rectify that problem, if only because letting it get worse and worse threatens more and more of us. Growing numbers of people are coming to understand that “them” might equal “me.” Call it compassion, or call it enlightened and increasingly impassioned self-interest. Either way, we are all in this together, and we will each have to decide for ourselves what it means to ignore someone to death, or not.’

    http://www.ecademy.com/node.php?id=169617

    It’s good to know that the author wasn’t ignored in Scotland, at least.

  3. Alisdair Cameron

    If, for example, shareholder profit-distributing providers such as A4E got 25% more people (or even 10% more) back into work than the job centre (or civil society providers who don’t distribute profit)

    Leaving to one side the easy jokes to be made at A4e’s expense (but they are shockingly bad) I’d say the problem lies within that hypothesis. Why should a shareholder profit-distributing provider outperform whatever terms are in their contract? There’s no incentive at all to so,generally. Their legal duty is, first and foremost to those shareholders, for whom keeping the profits coming in is priority. And “efficiency” thinking might say that they do just enough, and no more, to keep the money and contracts coming in, never busting a gut because they believe in the activity, and always trying to cherry-pick.
    Of course, this could be an argument for better,tighter contracting/commisioning, with more sophisticated performance-related rewards, and I’d not disagree, but there will always be the risk of gaming the system by those whose motives are profit first. All systems can be gamed,after all.

    • Indeed they can Alisdair,

      The legality of shifting the priorty of shareholder returns is argued in the
      P-CED paper and the principle proposed has since featured in a variety of new business forms from the CIC model onwards:

      “If a corporation wants to donate to its local community, it can do so, be it one percent, five percent, fifty or even seventy percent. There is no one to protest or dictate otherwise, except a board of directors and stockholders. This is not a small consideration, since most boards and stockholders would object. But, if an a priori arrangement has been made with said stockholders and directors such that this direction of profits is entirely the point, then no objection can emerge. Indeed, the corporate charter can require that these monies be directed into community development funds, such as a permanent, irrevocable trust fund. The trust fund, in turn, would be under the oversight of a board of directors made up of corporate employees and community leaders. ”

      Taking this a step further, since this was a critique of traditional capitalism, it was reasoned that economics should be “measured and calibrated in human terms”. This social rather than financial outcome can be illusrated by the impact of the initial project, which led to the creation of 10,000 microenterprises in Russia.

      One of the most significant impacts from deplying this in Ukraine was to argue in a strategy paln for several changes in childcare legislation such that children could be removed from institutions and these were implemment by government in the next year. The impact over the next 3 years was a 40% increase in domestic adoption, without any of the investment called for in social enterprise.

      For another illustration, listen to what Muhammad Yunus says about the “bottom line” of Grameen Danone
      .

  4. Beanbags admin

    @Robert. On point 2, I think you’re right that it’s politicians who are primarily to blame for the A4E situation (and plenty of other lower profile instances of outsourcing services to small numbers of large private companies).

    I think you’re being generous suggested the government made a mistake in contracting with A4E and similar companies rather than grassroots providers. It’s been a deliberate policy and I’m not clear what social benefit it is supposed to deliver. I’m not questioning the morality of profit in this instance – though it’s legitimate to do so – so much as the practical function.

    @Alisdair. I think there’s lots of instances where the pursuit of shareholder profit and positive social outcomes coincide.

    I, like you, struggle to understand the theory of how or why this might happen in largescale block contract public service delivery (let alone the practical reality which, in the case of back-to-work provision, currently speaks for itself).

    In terms of back-to-work provision, I’d support a trial of a voucher system where unemployed people could buy back-to-work support from a provider of their choice.

  5. Recycle as if your life depended on it

    Many major programmes have huge cost overruns, sometimes in the billions. Harrison’s £8.6m is the status quo. Ignoring social entrepreneurs in favour of “trusted companies” is also the status quo. Part of it is due to fear, part due to laziness on the part of sponsors and fund managers.

  6. Pingback: The social impact of profit – part two | Beanbags and Bullsh!t

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