Social enterprises: heralding a new era

By Marcus Coetzee, November 2007.

This is the era of social enterprises – organizations that think of themselves as businesses with a social purpose. Social enterprises are happy to make a profit and do so with a smile on their face and conscience in hand. They also tread in the traditional turf of both businesses and nonprofit organizations. They see themselves as organizations from a new paradigm, and the organizations of the future.

1. Social enterprises challenge existing paradigms

Social enterprises challenge the traditional paradigm that saw nonprofit or non-governmental organizations as being distinct from businesses and governments. Businesses were seen as selfish, sometimes ruthless, and profit-seeking. Governments were seen as oppressive, frequently neglecting the needs of communities and civil rights. In contrast, nonprofit organizations saw themselves as noble and selfless organizations on a crusade to rescue and protect the oppressed, and make our society a better place for all. However, these stereotypes are losing their validity as organizations fail to conform to their stereotypes.

Nowadays we have more and more nonprofit organizations and businesses becoming social enterprises. We have nonprofit organizations that not only compete with businesses, but make healthy profits that they use to boost their cash reserves. We have governments that are competitive in global markets and governments that are committed to human rights. We also have businesses that are active in the fight against poverty. For example, PEP Stores may have done more for social development in South Africa than thousands of nonprofit organizations. This business has served poorer communities and purchased many of its supplies from businesses it has helped set up in these communities.

2. The double bottom line

As concepts such as “tomorrow’s company” and the “good corporate citizen” gain ground, we will see more businesses defining themselves in terms of both their economic and their social purpose. Progressive businesses will follow the lead of businesses such as Johnson & Johnson, which since 1943 has defined its purpose in terms of its responsibilities to its customers and to society at large. Similarly, nonprofit organizations will need to include economic issues in the definition of their purpose. The enterprising Pioneer Human Services, famous for rehabilitating criminals and other marginalized individuals through its social purpose businesses, has already done this. Pioneer states “We’ve got two bottom lines — the money and the mission.”

Whether businesses like it or not, they need to become increasingly strategic in the way they deal with social issues. Businesses that fail to embrace their broader role in society will soon realize how shortsighted they’ve been. As businesses move beyond the superficialities of corporate social investment and become aware of their social impact, nonprofit organizations will realize that they are no longer unique and that they also, justifiably, should make a reasonable profit to avoid lurching from one financial crisis to another.

3. It is a moral duty to make a profit

A distinguishing feature of social enterprises is their emphasis on generating an income as opposed to simply venturing forth with a begging bowl. Even those social enterprises that receive donations tend to consider them prepayments for a service purchased on behalf of their beneficiaries. Social enterprises actively sell the social changes they wish to create in society, and package their services and brand themselves accordingly. Where many nonprofit organizations feel it is immoral to make a profit, social enterprises believe it’s their duty to make both a social impact and a financial profit. This allows them to manage their financial risks and improve their future social impact. Needless to say, social enterprises draw insights from the successes of both nonprofit organizations and businesses.

4. Social enterprises can have any legal form

Social enterprises also don’t attach any importance to whether they have the legal form of a nonprofit organization or a business. Instead social enterprises judge themselves by their purpose and nature. Furthermore they embrace corporate governance that promotes not just good citizenship but also enterprise, prudence and accountability to their providers of capital.

5. The importance of measuring outcomes

An important lesson social enterprises have leant from businesses is the need to be accountable to investors. Unlike many nonprofit organizations, social enterprises only consider themselves effective if they can provide convincing evidence of having achieved their stated outcomes. In other words, simply doing good is insufficient evidence of making a social impact. Social enterprises believe that activity measures must be supplemented by measures of outcomes.and businesses, governments and nonprofit organizations should follow their lead.

6. Business solutions to social problems

A principle that many social enterprises have embraced is that it is possible to design a business solution to a social problem – a concept which the traditional nonprofit organization may find heretical. For example, Mohammed Yunis established the Grameen Bank to help millions of women in Bangladesh break free of the poverty cycle, and the bank has been self-funding since 1985. In another example, the Acumen Fund helped establish a business in Tanzania to provide millions of families with affordable and specially-treated mosquito nets – and this fund recovered its investment. In Cape Town, NICRO is following Pioneer’s lead and is busy establishing a number of social enterprises to employ and rehabilitate ex-prisoners. NICRO’s decision follows a realization that ex-prisoners without jobs present a danger to society. These are but some of the examples of how social enterprises are using business solutions to solve social problems.

The groundbreaking report entitled ‘Investing for Impact – Managing and Measuring Proactive Social Investments’ by FSG and the Shell Foundation on ‘proactive social investments’ endorses the value of business solutions to social problems. Shell’s research found that it was possible for investors to earn both a social and financial return on their investments in social enterprises. This opens up opportunities for social enterprises seeking to scale up their operations and tap into finance made available by South Africa’s black economic empowerment codes.

7. A changing philanthropic landscape

The philanthropic landscape has changed dramatically as philanthropists with self-made fortunes, most recently Bill Gates and Warren Buffet, have become increasingly interested in addressing social issues. They bring a new mindset to philanthropy and are quite likely to succeed where the welfare paradigm has failed. These new era philanthropists think like venture capitalists, and are, in a sense, venture philanthropists. They have an appetite for risk and understand the value of being actively involved in their ventures, as well as investing in their organizations’ capabilities. These individuals will steadily change the way we seek to solve social problems.

8. A paradigm revolution

Clearly we are in the midst of a paradigm revolution. Nonprofit organizations and myopic businesses know that their days are numbered as social enterprises enter the fray. Although they may try to hold on to their traditional ways of “doing business”, they are likely to become irrelevant or fail. A new paradigm will becoming increasingly evident as “new” concepts are embraced by organisations and society: concepts such as “social enterprises“, “social entrepreneurship“, “venture philanthropy” and “social accounting.” Ultimately, both nonprofit organizations and traditional businesses are faced with a choice: adapt to the future or become a relic of an outdated paradigm.

Marcus Coetzee is a business strategist who helps leaders to think clearly about the future. To find out more about how he can help you, call 0828799131 or visit Marcus Coetzee.co.za.

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