Social Enterprise: Non-profit, Business or Buzzword?

Some of my friends has been working for a new form of organization that refers themselves as Social Enterprise. I found it hard to understand what Social Enterprise means, thus my motivation for this essay.

So far, I have learned that the topic is not very good for dinner conversation, it can go unexpectedly heated: I always wait until the end of a nice meal to bring up the subject. One time, my friend just left the restaurent angrily. I should have expected that: my friends are making real contribution to the society, while I am suggesting that they don’t know what they are working for.

Who am I, to criticize what they do?

Non-profit or Business?

"A social enterprise is an organization that applies commercial strategies to maximize improvements in human and environmental well-being, rather than maximizing profits for external shareholders. Social enterprises can be structured as a for-profit or non-profit..." (Wikipedia retrieved 2013.10.9)

This first paragraph of Wiki brings up more questions than it answers:

  1. "Improvements in human well-being" vs. "maximizing profits for external shareholders".

    • What does "improvement in human well-beings" means?
    • Isn't it the case whenever one "maximize profits' it also "improves human well-being"?
  2. (Social Enterprise) Be structured either as "for-profit" or "non-profit".

    • Is it possible that the owner takes too much profit?

social enterprise as a non-profit

how much well-being did you create this year?

"Improvement in human and environmental well-being."

I am asking the obvious question here, but really, what does one mean by the above statement? *If you have convinced your rich partner to invest in social enterprise, which one will you choose? *

  • One that grow rice: human improves a lot, yet environment hurts a bit.
  • One that helps some human by many
  • One that helps many human by some

You do need to choose, because no matter how rich your are, there will always be a greater needs for resources, financially, but also your own time, you will have to prioritize.

After one year, you will face another problem, how well did your organization do? Of course, you have helped some people, but was it good enoough? Maybe the investment is more needed in other organization.

external shareholders ≠human well-being ?

Since external shareholders are human, when their shareholders' well-being increase, it's always true that at least some human well-being increase. I guessed the real meaning of the statement, is that when maximizing shareholders' profit " the environment suffers too much" or "most of the human suffers", the above trade-off problem that non-profit face.

I can imagine there will be some kind of balance score card, or well-being index been introduced. The core question remains the same: how will you decide on the weighting of the well-being index?

This is a characteristic of non-profit: people are making decision by subjective good will. Isn't it strange: for the 10,000 species that extinct each year, the only endangered species that (have caught our attention ) we can name are panda, and polar bear. Drinking problem is more sexy than shit problem. Orphan in Africa more in needed than orphan in town.

Not that the above problem isn't worth solving, but the real problem is: how should we allocate our resources? What is the trade-off between different goals? Which brings up my next question:

commercial strategies, a new idea

If social enterprise were to succeed where non-profit fails, how is it different?

It claims that the use of "commercial strategies" is something innovative, yet is it? Social enterprise dated from 1978, and it seems unlikely to me that any non-profit prior to that never use any commercial strategies. Most of the non-profit are very good in using their resource efficiently; exploring innovative way of creating marketing buzz (consider green peace); organization wise, many job functionality are similar.

If by "commercial strategies", it means by doing financial transaction as their main source of revenue, consider the following: a scout group that funds itself by selling cookies and t-shirt, a religious group by selling candle (or even Indulgentia), a rock band that sell their own CDs, artists selling their painting, will they qualify for social enterprise?

Non-profit is doing everything they can to survive, it's hard to believe that they will just leave rock unturned. Social Enterprise observes that "having an organization to rely on donation is not very stable", and of all the people, I think that people running the non-profit knows it the best.

Commercial strategy is not a new idea, and even with the help of donation, non-profit dies. Social enterprise prides themselves by not taking any donation, yet we believe that cutting off option increases ones' chance to live.

why non-profit is not sustainable?

"Why non-profit dies?" is a difficult question, but maybe we can gain from a related question: "Why for-profit dies?", business are out-of-business because:

  • people inside made mistake or become lazy
  • sometime business has to bet, from a probability standpoint, there will be wrong bet
  • been replaced by more efficient business

Non-profit can suffer from the above challenge, and even more: optimizing for money is easier than optimizing for good. Since non-profit doesn't have a clear feedback on how to allocate its resources, it's a bigger challenge.

Of the best performing company in 50 years ago, only six remains today. I am not aware if such data exits for non-profit. For newly established social enterprise, it needs to benchmark itself to another ratio: the 10% startup survival rate. The same logics apply here, if a pure startup that has only making money as its own goal has a 10% of success rate; a social enterprise that wants to make money while doing good at the same time will have smaller probability to succeed.

social enterprise as a business

will it be worth stealing?

If we consider social enterprise as a business, is it a good business to get into? If it's good business, there will be many people that wants to steal it, and it's a good thing, because you will have competitor, different organization race themselves for the cause, and eventually it will become an industry.

I don't know if any of the social enterprise has faced competition problem, nor am I aware of any new industry of such. Maybe it's safe to say that the owner has put a lot of good will in it.

price of good will

What is price of good will worth? This is not a philosophical question, but a realistic one: if the owner/employee is committed full time at the social enterprise, how much wage should one takes? Taking no profit, one can't survive, taking all profit, it become a for-profit (and feeling kind of guild).

"The plan was that everybody in the factory would work according to his ability, but would be paid according to his need"

The Tramp's Speech from "Atlas Shrugged," by Ayn Rand

Consider the following problem: you need $100 to survive, your employee needs $200 (since he has five kids). Is it fair to let him have $200? What about $300? Is there a point where it become unreasonable, yet how do you justify your call?

Business are efficient because it has a clear incentive system. It might not feel fair, but at least it's clear. The idea is that "fairness" is difficult to define (if justice were so obvious we wouldn't need a judicial system), but if everyone was clear on the outcome of his work, and he got several option to choose from, then fairness is reached.

Another problem, if you and your employee have reached an agreement on how much to make, and there is this marketing talent that you want to hire, the talent doesn't want to have bare minimun, yet you know that he can brings in ten time more than his wage. Will you hire him? If no, you missed the chance to have better talent, and your future impact will always be limited. If you hire him and to keep things fair, you will need to raise your existing employee wage to the market price. By not paying your employee what he is worth, isn't that against the well-beings of human?

The other problem is of incentive. Investing a business includes all sort of risk, by investing in you, the investor is taking risk, the return of investment is their incentive to invest. By denying their return of investment, you cut out the possibility of a greater investment, which is needed for you to make impact, leading your cause to suffer.

What if there were a system that can do good?

The Token Utopia

Imagine we were to give any people in needs a set of token, there are many people that wants to help you, and in the end of day, you choose the one item that is most important to you, as a sign of appreciation you give him your token. In their turn, they can use this token to give it to someone that helps them.

Those that helps people, gain token, and can be re-use to help more people, when there is a kind of helps that people no longer need, the token one can get from such service decrease, and he knows that he can move on to other kind of service.

The rule implied by this system, is that one can't only take, if we run out of token, we must help someone else before we asked other to help us.

That's how company works, think of this question: whenever you spend money, do you received something you desire? Every business can only gain money by providing something people want. Of course you can argue that the company should deliver greater good at a lower price, taking greater care for its employee and the environment. Yet the fact is that you can choose from a competitor, or starts your own business to compete with them. The fact that you are still buying from them, is because it delivers some value that you need.

The feeling for unfairness rise from the fact that some company are making the amount of money beyond our imagination: How can a software be more important then a car? But that's our choice, we actually wants things that surprise ourself: 7 years ago, who will believe that we will spend more on internet connection than cable?

Also keep in mind that every company faced a lot of risk, Apple with its cash reserve can only survive so long if it doesn't innovate. Just like non-profit, they are doing everything they can, just to barely survive.

Social enterprise wished to established a business that does more good and a non-profit that is more sustainable. Yet from my observation, it fails to address the core problem the two, only yielding to more problem.

social enterprise as a buzzword, or worst

Another perspective is that we consider social enterprise a buzzword. I am from a marketing background, from a realistic standpoint, I think buzzword are good: it simplify a concept, making easier to understand, at the same, we gain a new word in our vocabulary, so why not?

Overtime, buzzword just nullify and lost its marketing hype. When company such as Salesforce.com claims themselves as social enterprise, you can expect in the near future, the word will lost its charm.

That's not the worst thing that can happen with buzzword, the worst thing is that it feeds you with a wrong concept. It's powerful to think that there is a magical way to make business doing more good, and non-profit more sustainable. It will encourage more entrepreneur, and this is good, but having the false believe of having a magic bullet is dangerous: in the Boxer Rebellion, boxers believe they have bullet proof body, that concept kills them. If you are starting any business, the successful rate to benchmark is 10%, the social way of doing business won't increase your option, it will decrease it. It's tempting to say that one discover a new way of doing business, yet to really make improvement, one must learn from past mistake.

It can also be dangerous to external people: social enterprise prides itself for not taking donation, from wikipedia:

(Social Enterprise) do not aim to offer any benefit to their investors,

(What's the difference between a donation and an investor that doesn't look for financial benefit?)

(…) except where they believe that doing so will ultimately further their capacity to realize their social and environmental goals.

This marks all the difference between non-profit and for-profit, such decision is supposed to be made by some good judgement. Yet any plan for sustainability should be based on a clear system, not on someone good will. It is exactly because of this difference, that most countries have different regulation to separate non-profit and business. The real harm, is when people intends to donate, yet the money goes straight to the owner pocket.

By positioning your organization as social enterprise, you are asking people to believe your goodwill. Yet, a sustainable organization shouldn't depend on your good will.

This intends as a draft of my current idea, in the hope of more discussion. I do hope to be able to cover additional example on this subject, including:

  • 1940 grocery store in underdeveloped Taiwan
  • Amazon, which have use all profit to re-invest
  • Wall mart, company that hires and sell to the poor
  • Foxconn, hiring workers at a market competitive wage
  • TED, the non-profit that sells $6,000 ticket to the elite of the society
  • Grameen Bank: the micro-financing bank
  • RedCross
  • CSR, Corporate Social Responsibility

2013.10.9 Muyueh