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Social Values: How Vulnerable to Profit?

Marcia Stepanek | Wednesday 4th November 2009

There's a boom in the creation of social enterprises but there's also a debate raging among the leaders of this new field over whether the most successful new enterprises will be able to sustain all of their original core values of social good -- especially if or when these new organizations link up with or get bought by for-profit firms. Gabriel Brodbar, director of New York University's Reynolds Program in Social Entrepreneurship, cites this concern as one of the more important topics facing the new field of social entrepreneurship. During a break in the recent PopTech conference for social innovation in Camden, Maine, I caught up with Brodbar; here's an edited transcript of that conversation:

What do you see as the key trends facing those in the field of social enterprise this fall?

Within the socially entrepreneurially-focused organizations out there -- like Ashoka, StartingBloc, NYU Reynolds, Ashoka, Justmeans and others -- I think there's a philosophical debate afoot. The motivation of these organizations has a lot to do with ethical integrity, consistency, and commitment, and it's all good. In all sectors, if you can play around large-scale social change, it's great and if companies don't want to, that's okay too. But a lot of the companies that play in the social enterprise space today were formed because of their desire to realize a specific social change or to realize social impact in a very specific way. Companies like Body Shop, Ben & Jerry's, Tom's Shoes, Stony Field Farms, Honest Tea -- all of these companies have very strong corporate social responsibility [CSR] principles baked into their DNA. There was no b.s. there [when these firms were created]. These principles were all very for-real; there was a tremendous amount of due diligence in the supply chain in terms of their environmental impact and so forth. Honest Tea, for example, did one of the most thorough and honest assessments of its carbon footprint, and they did that because of a genuine commitment to the environment and also a genuine concern for their bottom line. Coca-Cola just took a 40 percent stake in Honest Tea, and I think that within the next six months, Coke could buy a controlling stake in it. This has raised a lot of debate and speculation over whether these new developments will change Honest Tea. And it's not just Honest Tea. There is nothing in place -- no legal entities and no contract that insures that when a social enterprise changes hands that the corporate socially responsible behaviors that are associated with the brand -- the ones that made the company what it is -- are going to continue. There are, I think, some great efforts in play to encourage acquired companies to behave in more socially responsible ways but there is nothing that guarantees these behaviors will continue in the case of partnerships or takeovers by for-profit companies. Should public sentiment shift and suddenly [social enterprises] become less in vogue, what's to insure that these socially responsible behaviors continue beyond the initial relationships?

Do you think it's possible to do well and do good?

Yes, but as far as Reynolds goes, what we're trying to do is to encourage young change-makers, up front, to choose. You cannot serve two masters equally. If you want to change the world, great. We're going to help students do that. But if you want to make money, that's okay too -- but know that the profit side of that equation might wind up suffering based on the other side. I definitely don't think it's about doing well by doing good. I think the desire and need to change the world has got to be paramount, and how well that happens will depend on how sustainable the core values of these enterprises are, either by contract or by law.

So the ideal is to make profits but use much of those profits to sustain the social mission. Pocketing profits is less important.

Yes. Self-sustaining enterprises are the gold standard, of course. I think one of the challenges, though, is in the incorporation rules that exist in the United States. Right now, in many states, corporation bylaws say that the enterprise's primary responsibility is to the shareholders and related stakeholders. Having a primary responsbility to do social good? You can't do it. it's illegal. I mean, I think you can find situtions where a CEO can conceivably get sued for not acting unethically -- if the unethical behavior maximizes shareholder value. I think there also are great examples in the foundation world where you have such a strong firewall between the social mission and how the profits are generated, that you can also run into problems. There was one foundation some years ago that gave millions to an environmental organization to shut down an environmentally egregious hog farm but it turned out that in the foundation's portfolio, the biggest holding was in that hog farm. There are conflicts like this that are not uncommon.

You're saying that in these cases, you create a problem by your investments and then attempt to solve that problem by your philanthropy and the cycle continues.

Yes, and in the foundation community, the disconnect is that trying to align your fiduciary responsibilities with your social mission is not the order of the day for some foundations. To me, that's obscene. It's a huge impediment to doing social good that you set out to accomplish, chiefly for social enterprise organizations that exist in this no man's land between for-profit and nonprofit companies.

What should be done?

I think the social entrepreneurial community needs to ensure that these organizations' missions persist even as these companies change hands over time. There are examples of social entrepreneurs who had to leave their companies once they were taken over and once the boards of directors opted to ignore social principles in the selling of these companies. People like Seth Goldman [the founder of Honest Tea] feel the solution is still in the marketplace -- that if you create a product that people want, they will insist that those principles remain as part of the product. There are also a lot of exciting ideas floating around, like the Good Guide, where you can check the environmental impact of a design and there's a rating system involved so that consumers know which products remain true to their missions.

So your view is that there needs to be more than intent and the power of the marketplace to insure the sustainability of a company's socially good values?

Yes. It definitely remains to be seen, the degree to which these new enterprises are still able to have the impact they were hoping to have when another company takes a controlling stake in what they do. Seth Goldman is very confident that he will have the opportunity to impact Coke but I haven't seen that happen before in a David and Goliath situation. Additionally, a legal entity means more than simply protecting the social principles upon which a company is founded. It's also about how companies are allowed to issue stock and hand out dividends and so forth. There is a movement to put legislation on the books in California and other states the will allow social enterprises to lock in their principles regardless of future ownership.

And without such legislation or other legal way of protecting core social values, is this new field of social enterprise in danger of becoming obsolete down the road?

It would certainly put some of these enterprises' core values into jeopardy. The feeling is that this is one of the critical parts of a socially entrepreneurial structure that is needed.

What do you think?

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Recent Comment

Jeff Mowatt | Posted: 15 November 2009

We didn't start as a non profit. Instead the approach was to reason and lay down the principles of what profit was for. Clearly, social benefit should outweigh the potential harm done in creating weath in the first instance.

"Economics, and indeed human civilization, can only be measured and calibrated in terms of human beings. Everything in economics has to be adjusted for people, first, and abandoning the illusory numerical analyses that inevitably put numbers ahead of people, capitalism ahead of democracy, and degradation ahead of compassion."

http://www.p-ced.com/1/about/background/

We've since since legal forms such as CIC and L3C arise which protect at least the amount of profit that can be distributed. The original model proposed that the organisational charter be modified to make the principles the entire point of the enterprise and I believe that B-Corps is following such a path, for example. .

Equal Exchange | Posted: 9 November 2009

I meant to say that co-ops can be either for-profit or non-profit.

Posted By: Rodney North

Equal Exchange | Posted: 9 November 2009

Co-operatives offer many opportunities to create more socially responsible enterprises that are:
- scaleable
- not held hostage to maximizing profits
- can be either for-profit
+ are democratically controlled by their members (who could be shoppers, workers, farmers, small merchants, etc - depending on the type of co-op)

In Spain, Italy and the UK they have probably taken the most advantage of this model, especially in the Basque country and in Emilia Romagna, where co-ops can represent 20+% of the local economy.

But even here in the US the co-op sector represents about $200 billion in economic activity and 2 million jobs. see http://www.NCBA.coop

Posted By: Rodney North