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Social Business: Doing Good and Doing Well, Too

By Sonjui L. Kumar Email By Sonjui L. Kumar
April 2012
Social Business: Doing Good and Doing Well, Too

This column has often discussed the issue of social corporate responsibility: the idea of companies doing well by doing good, whether focusing on employee health, the environment, or supporting local charities. Certainly, the last decade has seen an extraordinary rise in employee and customer programs that highlight a company’s role as a good corporate citizen. However, traditional corporations, public or private, large or small, must first and foremost maximize returns to their investors, which make these social goals secondary and often ignored. Well, there is a new type of company gaining traction, referred to as social businesses, which turns the tension between doing good and making money on its head. A social business is a for-profit company whose primary purpose is to solve a social problem. Sound like a charity or nonprofit? Look again, for a social business is a for-profit enterprise that is run like any other business and must sustain itself financially while accomplishing its mission. This form of business was first popularized by Muhammad Yunus, the Nobel laureate and father of micro-lending, in a series of books including his most recent publication, Building Social Business: The New Kind of Capitalism That Serves Humanity’s Most Pressing Needs (Public Affairs 2011). Professor Yunus has promoted the concepts of social business by partnering on some high-profile projects with Dannon Yogurt (producing a low-cost high-nutrition yogurt product for the third world) and Adidas (manufacturing a $1 sneaker to prevent diseases that infect barefoot children). Accordingly a number of university, nonprofit and entrepreneurial communities are now encouraging the creation of these social businesses at the private start-up level.

It takes some focus on what makes a business a “social” business to understand its true value to us as a community and why it has caught the interest of both first-time and serial entrepreneurs alike. A key component of a social business is that it must meet a social need. So, the company must solve a societal problem, such as providing healthcare for the poor, serving the educational needs of low-income communities or making loans to under-served markets. Next and as stated above, the business must be established to make a profit and be able to sustain itself financially with profits being reinvested into the enterprise. Although companies can get donations or grants from public or private sources, its primary financial model should be a traditional one focused on maximizing revenues while minimizing expenses. Another essential characteristic of social businesses is to provide market-rate salaries and benefits to its employees. Social business companies may also focus on other societal goals such as operating in a way that is environmentally friendly, employing diverse people, or locating in an area that needs economic activity. Finally, an area of some discussion has been whether investors in social business should recover more than their original investment as a return. Dr. Yunus is emphatically opposed to any return being paid, believing that the social capital of solving a problem should be enough for most investors. An opposing view believes that some return, even if small and not market-rate, is needed to keep investors interested in funding these businesses. Entrepreneurs are choosing the method that best suits their own philosophies.

To support the social business cause, several states, including California and Maryland, have recently enacted statutes that allow the creation of a new form of corporation, called “B” corps or Benefit corporations. B corps are like other corporations in most ways but have three additional requirements: (i) to create a material positive impact on society; (ii) to consider the interests of its workers, community, and environment as part of its fiduciary duty; and (iii) to publicly report on their overall social and environmental performance against an established standard on an annual basis.

So should all businesses be social businesses? The major proponents of the cause say no, it should be viewed as just another form of doing business. It’s not a replacement of the capitalistic tradition but an alternative to it. Similarly, there is no suggestion that social businesses replace our charitable institutions. It should be noted, however, that there are certainly a class of donors that may be much more willing to “donate” funds to a cause that is sustainable and does not solely rely on future donations to accomplish its goals. It’s the same reasoning that’s behind the old adage: “Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.” Social business is still in its infancy and its impact is far from being known, but it’s a trend that is catching on and cannot be ignored by either the nonprofit or the for-profit community.

[Business Insights is hosted by the law firm of Kumar, Prabhu, Patel & Banerjee, LLC.  Sonjui L. Kumar is a corporate, transactional attorney and a founding partner of KPPB.  Her practice focuses on acting as general counsel to privately held companies including foreign companies doing business in the U.S.

Disclaimer: This article is for general information purposes only, and does not constitute legal, tax or other professional advice.]

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