This article is part of a debate with other business school professors about whether (and why) we need social enterprises. You can see by my title which side of the debate I’m on.
We Need Social Enterprises
Michael Gordon
michael@profmichaelgordon.com
Private foundations in the United States are required by the IRS to contribute an amount equal to 5% of their net assets each year to charitable causes they support. They invest the other 95%, seeking financial — not social — returns. In fact, the grant-making side and the investment side of foundations are typically completely separate.
We see in this arrangement how economic activity neatly separates making money (which is prioritized) from addressing societal problems — even among organizations whose stated purpose is to address societal ills. Among for-profit corporations, making money is emphasized more strongly, often to the exclusion of any other stated non-financial ends.
And yet the world cries out for help. Ten percent of the world population lives in extreme poverty (The World Bank 2018), nearly a million people go hungry each day (World Hunger Education Services 2018), and we face environmental challenges of the worst kind. These are just the tip of the iceberg (which, unfortunately, are melting).
Who should step up to fix societal problems? Sadly, nonprofits and governments are inadequate for the task. The United States is the most charitable nation in absolute terms (World Economic Forum 2016). Still contributions, which were at an all-time high of $410 billion in 2017, amount to only about 2% of US GDP. This sum includes money from all sources: individuals (70%), foundations (16%), bequests (9%), and corporations (5%). There is broad latitude in what counts as charitable giving, and more than one-third of these charitable dollars was contributed to religious organizations or towards the arts, culture, and humanities, rather than addressing dire needs.
Nonprofits provide important social benefits, but their efforts are diluted by a constant need to fundraise, operating with overhead rates of nearly 37% (Sullivan 2012), and they may find themselves drifting in their missions so that they fit in with funders’ changing requirements. On top of this, while charitable organizations may provide vital, direct services to those in need, these efforts often address symptoms rather than rooting out underlying causes.
If there is too little money among nonprofits to address societal problems, then perhaps we should look to governments or multilateral institutions to address them. Here, too, the sums are paltry relative to the need. Official development assistance reached $142.6 billion worldwide in 2016 (Organization for Economic Co-operating and Development 2017), or less than one-half the level of US charitable giving. From the data I can put together, charitable giving and development aid combined amounts to considerably less than 1% of world GDP. Around the world, governments are losing their appetite for spending on their own country’s social problems. The poorest among them spend paltry sums to support the most needy, let alone make investments necessary lift up the entire population. All told, there is far too little money from governments, development assistance organizations, and nonprofits to address the enormity of our societal problems.
Then, of course, there is the “real” economy — the “business” economy — which operates on a profit-first (profit only?) basis. Can business be relied on to address societal problems? We have seen a dramatic lessening in extreme poverty over the last 25 years: from nearly 2 billion people (37.1%) in 1990 to 700 million (9.6%) in 2015. The great bulk of this decline occurred in China, where infrastructure investments combined with a low-wage (and literate) workforce attracted foreign investment in factories, creating millions of jobs. And today, China is pouring vast sums into Africa through loans, aid, trade, and export credits (Pham, Bello, and Barry 2018). But is this really enough?
The facts listed above obscure other truths. Though the number of those living on $1.90 or less (the definition of “extreme poverty”) has dropped significantly, half the planet (an estimated 48.7%) remains very, very poor — living on just $5.50 a day or less (Lakner et al. 2018). Half of the world’s population can’t obtain essential health services, especially those living in Sub-Saharan Africa and South Asia (World Health Organization and The World Bank 2017). And there are wide within-country disparities in access to health care as well. More than 250 million children — one in ten — are denied an education (United Nations Educational, Scientific 2017). The IPCC warns that, by the end of the next decade, we may lose our opportunity to curtail the most devastating effects of climate change. Its 2018 report states: “With clear benefits to people and natural ecosystems, limiting global warming to 1.5ºC compared to 2ºC could go hand in hand with ensuring a more sustainable and equitable society.” Yet, it warns, this “would require rapid, far-reaching and unprecedented changes in all aspects of society …” (Intergovernmental Panel on Climate Change 2018).
The vast resources controlled by business hint at its potential to heal, but business-as-usual does not appear up to the task of healing the world’s wounds. There are several reasons, aside from the purely philosophical — market failures being the main one. Markets fail when transactions that could improve overall economic or social welfare fail to take place; when transactions that do take place destroy overall welfare; or when transactions allocate resources unjustly or unfairly (Phills and Denend 2005).
Transactions may fail to take place — even when there is profit to be made and value for consumers — when markets need to be created. Market creation is often necessary when entrenched habits get in the way of new behavior, even if that new behavior can lead to better nutrition, improved food production, healthier lives, or many other unarguable benefits — even improved livelihoods. In wealthy countries, companies selling “status” goods (think of early smart phones) can count on early-adopters to pay exorbitant prices that support further product development and, eventually, lower prices and greater adoption. But market creation of this sort is exceedingly difficult in low-income markets. Transactions may fail to occur as well when governments are unable to provide necessary infrastructure — say, roads to distribute goods; or clinics where medicines and care can be administered.
Even where markets might be created, transactions may fail to take place when companies decide there is not enough profit to be had. Although standard economic theory suggests that, if a buck can be made, someone will find a way to make it, for some companies that “buck” may need to be many millions of dollars before they take the opportunity seriously.
Additional arguments are made that business activity can destroy value (though not necessarily immediately or by design). Examples would include: large chain stores out-competing locally owned and controlled business, thus hollowing out communities; or businesses that cause environmental damage. Other business practices can be viewed as unjustly allocating rewards, as exemplified by the “race to the bottom,” in which companies continually seek new locales where they can pay workers ever shrinking wages, despite the hardship for other workers put out of work or the meager lives such miniscule wages support.
Together, these issues mean that the nearly $200 trillion circulating in the global economy is largely being directed not toward the common good but, rather, toward fattening the uncommon wallet.
Still, the fact that there is so much money swirling through the world economy — even though so little goes toward addressing dire problems — means that maybe there’s another way to organize business. Historically, this would not seem strange at all. Initially, incorporation was only granted for the purpose of building a port or a road, or providing some other public benefit. Corporate charters were limited to the time necessary to complete these tasks, and corporations were only permitted to perform activities to fulfill their charter. Although stockholders could benefit, this, too, was seen as a means to the end of providing a common good. Corporate charters were revoked for causing public harm.
Today’s corporations could not be more different. They may endure forever. There is no restriction on what they can do and few restrictions on their relationships with other corporations. Now viewed as “people,” they may actively contribute to political campaigns. None of this was permissible at the outset.
We have moved dramatically away from the time when incorporation was a privilege to serve the common good, to one where the only responsibility of a corporation is to itself. Corporations have begun to act as if their only interest is to shareholders (it’s not; even if we in business schools tell our students the same thing). To benefit their shareholders, most companies barely look beyond their financial noses. A McKinsey survey in 2017 showed that 87% of executives and directors felt pressure to produce results in two years or less (Barton et al. 2017) — a horizon far too near even if companies wanted to address difficult societal problems.
More troubling, not only does business as usual appear less able to address entrenched societal problems, it may be complicit in causing them. Even as organizations such as those in attendance at the World Economic Forum proclaim their desire to “do good,” others argue that they have too much at stake to radically change their behavior; and that if they make only modest changes, they will actually be perpetuating the same systems, with the same built-in advantages, which already dramatically separate the 1% (10%) from the 99% (90%) (see (Giridharadas 2018)).
Far too many have not only been left out by the forces creating this sorting of wealth, but put in a position nearly impossible to recover from, often by laws, regulations, and decrees that reinforce their plight. Structural barriers arise in different guises, each of which privileges business interests over societal interests: the Latin American debt crisis and debt restructuring that favored foreign banks and investors over the ability of local governments even to support citizens’ need for food and health care; redlining neighbors in the United States after World War II, which prevented many blacks from buying a home — an act considered fundamental to wealth accumulation; the dissolution of labor unions, which were once a backstop against poverty and a guarantor of a middle-class wage; the legacy of slavery, which built wealth for one group at the terrible, and continuing, expense of another; the extraction of natural resources, which, when done injudiciously, devastates both economies and the environment.
Current criticisms of business range from the relatively benign (businesses act without sufficient awareness of the needs of anyone but shareholders) to the hostile (some businesses knowingly act to undermine the rights and opportunities of their workers and the communities in which they operate when it is expedient). In the United States we see reaction to such criticisms in the forms of B-Corp certification as well as many new legal forms that have recently arisen, including benefit corporations, L3C’s, and social purpose corporations. We see similar reactions around the world including Muhammad Yunus’s urging that the true nature of business is as a social business — “a business with a social mission at its core, 100% dedicated to solving human problems.” Each of these can be viewed as a manifestation of a social enterprise, as can companies created as ordinary for-profit businesses, co-operatives, and even nonprofits. Greg Dees, one of the earliest scholars in the area of social entrepreneurship, listed other traits of the idealized social entrepreneur (and thus, implicitly, social enterprises), including being innovative, bold, and being focused on constituencies served and outcomes created (Dees 1998). Social entrepreneurs, and the enterprises they create, combine business perspectives and discipline with a passion for a cause to create organizations intent on changing the world. In so doing, they can overcome market failures and remake systems that dramatically improve the world.
How Social Enterprises Address Market Failure
KickStart International began in 1991. Its mission is to develop and sell money-making tools that poor people in Africa can buy and use to lift themselves out of poverty. Its best known product is an irrigation pump, which allows smallholder farmers to farm more efficiently and grow cash crops (even during the dry season), which can be sold for profit. A nonprofit itself, KickStart establishes a supply chain in which all parties make money: manufacturers, suppliers, shopkeepers, and certainly farmers. KickStart, too, makes money on each sale. Yet, in its nearly thirty years of existence, it still must rely on outside subsidies.
Why? Because changing people’s behavior is so difficult, and KickStart must continually do marketing (in time-consuming, hands-on ways) to convince people to buy its product — even though it is extremely effective, saves time, and pays for itself within a year. There are no “early adopters” champing at the bit to show off their flashy, new purchase (and pay associated price premiums). Indeed they tend to hide their newly gained wealth from friends and family lest they come for it. The need for a long-term subsidy is quite typical for an organization producing goods for which there is a true need but for which the market is still being created.
OneWorld Health, an affiliate of nonprofit PATH.org, focuses on the tropical diseases of the poor. These diseases — including malaria, TB, dengue fever, and others —are almost entirely off the radar of most pharmaceutical companies, even though they affect 1.4 billion people a year, causing $10 billion dollars in lost productivity (Health Poverty Action 2018). Because of the extremely high costs associated with developing new drugs and the lack of customers’ ability to pay very much (if anything) for them, OneWorld Health decided to become a nonprofit pharmacy. This opened the door for other pharmacies to donate their drug “discards,” —including those that were older, out of patent, or produced side effects — so they could receive tax advantages.
Consider visceral leishmaniasis (VL): the second most deadly parasitic disease in the world. It is drug-resistant, requiring $100 to treat, and, often, hospitalization. OneWorld Health determined that a drug developed in the 1970s by the for-profit company Pharmacia (since bought by Pfizer) was effective against the disease. Pharmacia had given the rights to the drug to the World Health Organization because the antibiotic required a patient to receive an injection on twenty one consecutive days, rendering it “obsolete” given newer, oral antibiotics. To OneWorld Health, this seemed to be an inconvenience at most, and certainly one well worth it for patients in Bihar, India, who otherwise faced a range of much more “inconvenient” symptoms, including death, without treatment. OneWorld partnered with Gland Pharma, an Indian firm, who produced, at cost, a $10 lifetime cure for VL. The nonprofit Janani administered the drug through its health clinics.
Today, due to OneWorld’s efforts in securing this drug, paromomycin, from the World Health Organization and bringing it to market affordably, it is on WHO’s List of Essential Medicines, thereby providing an effective tool to combat VL around the world. As this example exemplifies, even a life-saving drug for which there is demand and a cost-efficient means of production may require the ingenuity of a social enterprise to overcome the market failures that can mean the difference between life and death. Recently, and years after OneWorld Health’s founding, a consortium of about 500 American hospitals has banded together to form Civica Rx, a nonprofit generic drug company. Its goal is to ensure an adequate supply of affordable generic drugs, just as severe price hikes and drug shortages are badly hampering hospitals. As can often occur, the innovation spawned by one social enterprise is adopted (and adapted) by another — often with the knowledge and full approval of the originator, which recognizes the potential for additional good.
In a similar vein, products to treat serious diseases often are not developed because profits are deemed to be too small. This is what David Green discovered when he worked with the Aravind Eye hospital in India. In that country, blindness can be a death sentence, since one can no longer work. Green’s research led to the conclusion that intraocular lenses, artificial lenses that replace natural lenses during cataract surgery, could be manufactured for less than $4, a nearly 50-fold reduction over their selling price to hospitals by major medical manufacturers, with patients paying considerably more. Green developed Aurolab, a nonprofit manufacturing company, to manufacture intraocular lenses (and subsequently other medical supplies). His approach was to ruthlessly cut costs (but not quality), bringing badly needed medical supplies to the poor in the developing world at affordable prices. His model — high quality, low cost, to a tens of millions of poor people — stood on its head the model advocated by “modern” medical supply firms, which seek large profit margins from far fewer patients.
Redressing Structural Flaws
Modern day hospice care can be traced back to London just after World War II. Nearly a decade later, the practice was transplanted to the United States and, during the intervening decades, legislation in this country was introduced and voted down, hospice care was more rigorously studied, the idea of palliative end-of-life care crept into mainstream consciousness, until finally, in 1983, Medicare established a Hospice Benefit to cover the costs for those in hospices. Since then, the number of patients receiving hospice care has risen above 1 million per year (nearing one-half of all end-of-life patients today).
From this abbreviated history, we can see how the efforts of a social activist (Dr. Cicely Saunders, of St. Christopher’s Hospital near London) eventually influenced the very fabric of how we can care for those nearing the end of their lives: with compassion, dignity, more cost-effectively, and, perhaps curiously, in ways that often both improve the quality and prolong the length of their lives. What was begun as the effort of a compassionate social entrepreneur blossomed into institutionalized support for hospice care through Medicare and certain states’ Medicaid programs. This shift to a more de-medicalized view of end of life care has also produced significant financial savings within the health care system.
We may be seeing something similar in health care itself. For half a century, doctors have been frustrated by their inability to attend to their patients’ “social determinants” of health — such as malnutrition, being homeless or extremely transitory in their housing, not having reliable and even slightly convenient transportation, and other factors. Health Leads, a revenue-generating nonprofit, has been working for over two decades to fill such “social prescriptions,” which the doctors they support can now write. Health Leads’ own efforts resembled those undertaken by Dr. Jack Geiger thirty years earlier. Few in the health system now doubt that attending to social determinants leads to better health outcomes, but Health Leads is showing that it also reduces system costs. The World Health Organization has issued an in-depth report on the importance of social determinants. The efforts of Health Leads and similar organizations have led to the Declaration of Alma-Ata, which called for “Health for All,” defining health as “a state of complete physical, mental, and social well-being …” and insisting it is a human right. In the United States, programs like Comprehensive Primary Care Plus, Accountable Health Communities, and 1115 Medicaid Waivers are enabling health systems across to country to address social needs as an essential part of care. A movement to reform health care, begun by social entrepreneurs, is afoot
Social entrepreneurs and their enterprises are equally engaged in rooting out and eliminating systemic problems in other areas, including criminal justice reform, human trafficking, lack of access to effective education, and the destruction of the environment. They can be exquisite in fashioning solutions tailored to highly specific local problems. Yet many seek also to redress an underlying, unjust economic system that favors the wealthy over the poor, directors over employees, profit over people. They aim to transform business for societal good — in ways that more equitably share profits and re-consider the very nature of ownership and control of business.
Moving Forward
The ideas presented in this paper reflect emerging practice. Making businesses’ focus on societal problems become commonplace will take shifts in financial and human capital. On the financial side, we see the advent and rise in acceptance and importance over the last decade of impact investing. Its foundational principle is to create investment opportunities where societal concerns rank at least as high as financial considerations. Investors seek out these investments, even investments with sub-market-rate returns. Institutions such as private wealth management practices in most major banks are rushing to meet the demand. Many early-stage impact investments are in social enterprises. New products such as socially-directed exchange traded funds are creating new options for everyone to participate in the “impact economy.” These new developments in financing business should spur the creation of more social enterprises.
Impact investors are awakening to the need to provide “patient capital” necessary for longer-term impact from socially desirable business activity. RSF Social Finance facilitates investments in, among other areas, environmental sustainability, sustainable food systems, and local social change. Among its non-standard practices, RSF brings together lenders and loan recipients to negotiate mutually acceptable interest rates; and it has, on occasion, looked favorably at very long-term business plans, including one 50-year business plan of a Yerba Mate beverage company. That time horizon helped convince RSF that the company was not engaging in “casino capitalism” — looking for investment now in order to quickly flip the company — but rather growing the business as the owners’ life’s work.
Impact investing is also an antidote to finance that creates no actual value. Lawrence J. Lau, professor of economics at Stanford, puts it starkly: “Today, the overwhelming bulk of foreign exchange transactions in the world, which total about US $1,250 trillion a year, compared to the total value of world trade of less than US $50 trillion (less than 4 per cent), is for speculative purposes” (Lau 2016).
In sum, impact investing seems to be “on the money” when it comes to directing financial resources to address societal problems, or at least it’s getting there. What about human resources? Young people crave careers infused with social purpose. Their energy, innovation, and intention to change the world align with the ideas of social enterprise and social entrepreneurship. But business education is letting them down.
Business schools provide students with a powerful set of tools and resources to start, run, and lead organizations. But there is a monolithic form these organizations assume. Any entrepreneur starting an organization will seek venture capital. If the organization (a for-profit) hits gold, it will either become a public company or be acquired. (Of course, the company will be in tech the blockchainier, the better). Between startup and exit, it will demonstrate a ferocious commitment to … itself.
Larger, established organizations, including public companies, share this ethos, directing their efforts to grow bigger, more profitable, and be better positioned for any threat or opportunity. Those in the broader ecosystem operate in equally self-reinforcing and self-protecting ways. Venture capitalists, for instance, mostly fund others who look like them (white, male), are educated at a tiny group of select schools (Stanford, Harvard, a few Ivies), and live in California, New York, or Massachusetts. If you’re a woman, are of color, or don’t have the right pedigree, good luck!
Might business education be different? Of course. As (Davis 2018) explains, we can start by directing businesses’ focus outward — to serve human needs before corporate interests. This means thinking about social impact ahead of, or at least along side, financial performance; and giving as serious attention to metrics of societal impact as we do return on investment. It means holding up as examples in our teaching successful for-profit and nonprofit social enterprises. And most important it means acknowledging that we are at a moment in history when the world can no longer endure the effects of any type of activity that further threatens the planet or further divides us, economically or socially. Business, with its massive influence, must be directed toward the social good, as must the way we teach it.
References
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