The social impact of profit – part two

As discussed in part one, it seems that – while the debate on morality of shareholder profit in social enterprise is never-ending – there hasn’t yet been much debate on the social impact of shareholder profit. While part one looked at the role of shareholder profit in public service delivery, this post will look at how the aspiration to deliver shareholder profit (or lack of it) affects organisations that describe themselves as social enterprises (or as part of the social enterprise movement).

For Craig Dearden-Phillips, of Stepping Out, the fact that his organisation is able to make profit for shareholders has two key advantages. It works: “Partly because this allows 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.

He adds that far from detract from the organisation’s mission to change public services: “I would go as far as saying we are probably a bit more effective on both counts than had we not set out with profit at least partly on our minds.

Using Craig – who I know, like and respect – as an indicative example of a social entrepreneur who might be considering starting a new business. My starting point is that there’s nothing morally wrong with Craig wanting to earn a decent living from the business he’s set up but that isn’t something that has a wider positive social impact in itself. The question is whether the fact that Craig – and any other investors – is able to profit from the success of his business generates a positive social impact that wouldn’t be generated if that opportunity wasn’t there.

In this indicative example, an assumption (which is also my opinion) is that Craig using his expertise to help improve public services is a good thing that will have a positive social impact. In that situation the ability to generate shareholder might have a number of effects:

One is that it could be the deciding factor in whether someone decides to take the risk to start their business at all. It’s always a risk to put time and/or money into a new venture – but it’s a particularly significant risk to give up a well paid and/or secure job to put time and/or money into a new business. To what extent is the ability to receive a return as shareholder necessary for people with a lot to lose to take the plunge and start an organisation that will deliver a positive social impact?

Another point – suggested in Craig’s quote – is that having started a business, the drive for shareholder profit can act as incentive for the business to operate more effectively. If this is then the case, that it could be argued that the ability to receive dividens is responsible for increasing social impact.

Finally, there is there the share of the profit which is not distributed to shareholders but is given to the foundation associated with company to support start-up social entrepreneurs.

So what we end up with is the suggestion that the ability to generate profits means that socially useful businesses such as Stepping Out are started (when they otherwise wouldn’t be) and that those businesses may deliver a higher level of social impact based on the desire to generate profit (while also fulfilling a social mission, and channeling some profit into delivering further social impacts).

Leaving aside the, in this instance, irrelevent question of whether these shareholder profit distributing businesses should be described as ‘a social enterprise’, I’m prepared to accept the first half of that suggestion (would the businesses be started) as being either true and not provably untrue. The second part – do companies distributing profit to shareholders deliver greater or lesser (positive) social impact than comparable companies not distributing profit to shareholders –  might be an interesting piece of research for the Third Sector Research Centre. It would obviously be up to the research team to decide what social impacts could be usefully measured.

The risk-reward question is clearly not just one for social entrepreneurs thinking of starting a new business but also for investors thinking of putting money in to them. Merism Capital are “impact investors taking equity in for-profit social businesses in return for funding of between £50,000 and £150,000.Their position is: “we want to be the first outside money that helps ambitious entrepreneurs build great social businesses. it’s not philanthropy because its money with responsibility: it requires commercial logic and discipline, social focus and profit.”

In this instance the question is not necessarily ‘could an investment happen if shareholder profit was not a possibility?’ – organisations (including registered charities) that don’t distribute profits to shareholders can still take loans and pay interest on them – but (a) whether the sort of social ventures that attract equity investments would attract loans and (b) if they could get loans, whether these organisations deliver greater social impact due to the fact that taken an equity investment than if they’d taken on a loan.

In terms of the negative social impact of organisations distributing profits to shareholders, the issue of increasing economic equality (discussed in part one) applies just as much to social ventures as it does to conventional private companies delivering public contracts. The question is whether that negative impact is outweighed by the positive social impact that those organisations deliver.

A more complicated question is whether social ventures might actively operate in a different, less socially positive, way based on the desire or need to deliver shareholder profit. When the businesses a question are starting up or are naturally fairly small busineses, this could be a question about what suits individuals. Craig might be inspired to deliver greater social impact within shareholder profit distrubting structure, someone else might be more inspired by operating under a charitable structure, others by working for a co-operative.

It’s different when the businesses concerned are larger. In an interview with this blog last year, Social Enterprise UK chief executive, Peter Holbrook makes the point that: “We have to recognise that an awful lot of really fantastic businesses have set up with a strong social purpose, committed to social impact and as they’ve become more successful, they’ve become more and more detached from their social purpose.”

Sometimes the issue, as with one of the examples Holbrook’s examples, The Body Shop, is that in order to grow the businesss takes on investors who don’t share the founders social purpose and is ultimately sold entirely. In other cases it may be that, as businesses get larger, it may be harder to maintain a climate where a dual focus on delivering positive social change and shareholder profit can be maintained. Were the social values of self-styled social purpose company, A4E, very different – at least in terms of their practical application – when the people helping people to find jobs were Emma Harrison and a few people she worked with and managed directly, compared to the present day when the organisation has thousands of employees across hundreds of sites?

For Peter Holbrook, socially enterprising structures – which are mostly not for shareholder profit – are essential to embed social value in the business: “It’s important that leaders recognise that at some point, whether they die or change jobs, they will move on and the values that they set up the organisation with, may or may not be lost. Is that a risk people are willing to take?

Ultimately, as new models and sources of finance emerge in the social economy, there will be a greater number of social ventures set up with the intention of distributing shareholder profit (while also achieving a social mission). This is not something that’s morally right or wrong, different business models will be appropriate for different people and groups based a wide range of factors including what they’re trying to achieve and their financial starting point. What we should avoid is the idea that whether or not a business distributes profit to shareholders is irrelevent to its social impact. For better or worse, it’s a fundamental part of it.

 

 

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4 responses to “The social impact of profit – part two

  1. David, For us the starting point was the same, reasoning in a white paper that

    “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.”

    The response for a long time was no so much a debate as one of dismissal, with a few notable exceptions. One was the Vatican encyclical Caritas in Veritate which reasoned:

    ‘This is not merely a matter of a “third sector”, but of a broad new composite reality embracing the private and public spheres, one which does not exclude profit, but instead considers it a means for achieving human and social ends. Whether such companies distribute dividends or not, whether their juridical structure corresponds to one or other of the established forms, becomes secondary in relation to their willingness to view profit as a means of achieving the goal of a more humane market and society’

    In 2011, the same reasoning is offered by a mainstream business school in the concept of ‘Creating Shared Value’ from Michael Porter at Harvard I note this in my blog, which describes the evolution of what many, perhaps suggesting Vatican influence, describe as the ‘Fourth Sector’
    .
    http://www.ecademy.com/node.php?id=132188

    In hindsight, the beginning of 2008, proves to be something of a turning point when Bill Gates suggests that a more ‘Creative Capitalism’ is needed. At the same time we lobby the US Senate to help establish “an alternative form of capitalism, where profits and/or aid money are put to use in investment vehicles with the singular purpose of helping the world’s poorest and most vulnerable people ”

    In his article written at this time, our founder reasons that while all business has social impact and the impact of the Information Revolution has been of enormous social benefit, social enterprise is the first determiined effort to address the needs of those who fall through the cracks that traditional capitalism doesn’t reach.

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

    Until now, there may not have been much of a debate within the confines of UK social enterprise, but there has most certainly been outside it.

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  2. For me share equity is imperative to successfully scale a social enterprise and is the reason that the focus of the social enterprise movement in the UK to date has been at a small-scale local community level. It’s as if the ‘sector’ leaders would rather a limited by guarantee enterprise has positively impacted the lives of 10,000 people rather than a limited by share enterprise impacting the lives of 100,000 people but also paying out dividends.

    Social entrepreneurs need to be encouraged and rewarded for investing their own time and money into setting up a social venture. And I see no conflict between maintaining a positive social impact and a healthy financial balance sheet. If founders are worried that their social values will not continue after they move on and believe that a legal structure will prevent this then I would argue that they have failed to create a strong, ethical and social culture. There continues to be a good discussion about the future of social enterprise here http://www.profitisgood.co.uk/social-enterprise-mission-achieved-hello-better-business/

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    • Beanbags admin

      I don’t disagree about social entrepreneurs being rewarded – or, at least, having the option of being rewarded – for investing their time and money in a venture. I think might be one of the big shifts will see over the next few years.

      While there’s nothing new about social entrepreneurs putting in lots of time and some money (by foregoing income if not directly), it’s currently relatively unusual for people to view their start-up social ventures as an investment with possible long-term financial benefits.

      Part of the objection to shareholder profit from some within the movement needs to be understood in the context that lots of the bigger social enterprises currently around have been primarily funded with public money in their early stages.

      I agree with you that a legal structure won’t necessary preserve the social values of an organisation but what it can do lock the assets for a social purpose – in some cases, I think this is important.

      Not sure I agree that changes of direction are down to founders failing to instil a strong enough culture. If the run an ethical, social business then you sell it someone else, they can do what they want with it – including fundamentally changing its priorities.

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  3. If we’re a business David then paying people for their time and money is a normal expectation. In our case “all employees 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.”

    In the example of our work in Ukraine, a commitment of 12 man tears, we put our investment at around $750,000 (12 man years plus project costs)

    Writing to PwC in December 2010 we also point out the additional value of our IP which had been violated by their partners USAID and the British Council.

    From Richard’s blog, I was appalled to read from Rory Ridley-Duff that they, (I presume Sheffield Hallam or members of the co-op movement), had been visiting the British Council in Eastern Europe. I can now see why this was a question Rory avoided.

    http://www.ecademy.com/node.php?id=175417

    When social enterprise becomes a matter of pushing each other out of the way, particularly where there’s an issue of lives being lost, then there is clearly no ethical progress from slash and burn capitalism.
    .

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