I co-founded a social business called Univicity in July 2009. We incorporated Univicity as an L3C, a low-profit, limited-liability company, which is a relatively new type of entity in the U.S. designed to bridge the gap between a for-profit and a non-profit with charitable /social benefits. L3C early adopters consider themselves social entrepreneurs. We want to create a sustainable business, not another unsustainable non-profit pilot program.
There are differing opinions on what constitutes a social enterprise or business. Let’s examine the opinions of several leaders on the subject, including Muhammad Yunus, Peter Drucker, and John Mackey.
Muhammad Yunus, author of Building a Social Business, describes the Seven Principles of social business:
- The business objective is to overcome poverty, or one or more problems (such as education, health, technology access, and environment) that threaten people and society–not to maximize profit.
- The company will attain financial and economic sustainability.
- Investors get back only their investment amount. No dividend is given beyond the return of the original investment.
- When the investment amount is paid back, profit stays with the company for expansion and improvement.
- The company will be environmentally conscious.
- The workforce gets market wage with better-than-standard working conditions.
- Do it with joy!!
Yunus wrote this about L3C‘s:
The legal and financial structure of the L3C makes it possible for an organization like a foundation to invest money in a business with social purposes and recover its initial investment, while eschewing, if it chooses, any further return. However, the big difference between and L3C and the social business is the creation of profits to benefit owners and the payment of dividends from those profits are part of the agenda of the L3C, while they are deliberately excluded from the concept of the social business. In my judgement, making selfishness and selflessness work through the same vehicle will serve neither master well. Yunus pg. 129
Yunus believes it is immoral “to pursue the usual business goal of maximum profits–from the poor.”
Peter Drucker, considered the father of modern management, would reject Yunus’ premise about the “..usual business goal of maximum profits.” In the book, The Essential Drucker, Drucker writes:
The root of confusion is the mistaken belief that the motive of a person–the so-called profit motive of the businessman–is an explanation of his behavior or his guide to right action. Whether there is such a thing as a profit motive at all is highly doubtful. The idea was invented by the classical economists to explain the economic reality that their theory of static equilibrium could not explain. There has never been any evidence for the existence of the profit motive, and we have long since found the true explanation of the phenomena of economic change and growth which the profit motive was first put forth to explain.
It is irrelevant for an understanding of business behavior, profit and profitability, whether there is a profit motive or not. That Jim Smith is in business to make a profit concerns only the Recording Angel. It does not tell us what Jim Smith does and how he performs.
In fact, the concept is worse than irrelevant: it does harm. It is a major cause of the misunderstanding of the nature of profit in our society and of the deep-seated hostility to profit, which are among the most dangerous diseases of an industrial society. It is largely responsible for the worst mistakes of public policy–in this country as well as in Western Europe–which are squarely based on the failure to understand the nature, function, and purpose of business enterprise. And it is in large part responsible for the prevailing belief that there is an inherent contradiction between profit and a company’s ability to make a social contribution. Actually, a company can make a social contribution only if it is highly profitable.
Yunus says, “When you mix profit and social benefits, and say that your company will pursue both goals, you are making life complicated for the CEO.”
In his article, Conscious Capitalism, John Mackey, CEO of Whole Foods, agrees that pursuing both goals makes life complicated for the CEO, but nonetheless, it is an essential purpose of any corporation. Mackey disagrees Yunus on the Social Business goal #3 by writing, “Investors deserve competitive returns on their business investments; otherwise they will withdraw their capital from the business and redirect it to alternative investments which give them higher returns.”
A wall exists between non-profits and for-profits consisting partly of the stereotypes that exist in our society today. Non-profits are viewed as good because they have altruistic, idealistic goals. For-profit companies are seen as greedy, only existing to maximize profits.
For-profit companies are subject to market forces. If they can’t increase productivity, eventually, they will not make a profit, and go out of business. Non-profits, on the other hand, have few external incentives to operate more efficiently. I’ve seen many non-profits that have 50% overhead and think nothing of it. As long as they are reaching their soft goals–doing good, then everything is OK.
L3C – Three years later
It’s been three years since we started our L3C. The original idea of attracting a program related investment (PRI) from a private foundation worked. However, it only worked once. Most foundations want to write checks to non-profits. Private investors want to invest in for-profit companies with a solid business model. There simply aren’t that many investors willing to put money into a company without any return on investment. Most investors have one pocket for donations and another for investments. The hybrid L3C isn’t trusted by either side. So, the L3C by itself does little to move the industry forward toward a social business.
My Conclusion: Conscious Capitalism is way to go
- A successful business can perform a social good. There are many ways to make this happen. We started a software company in Haiti called Transversal and developed software for the humanitarian market. Our current product, MerchantPro, is managing the electronic voucher programs for UNDP, CARE and CRS that are currently impacting thousands of Haitians who would otherwise starve or continue to live in tents.
- For US entities, stick with the tried-and-true LLC. The LLC has the same corporate structure as the L3C and everyone understands it.
- Humanitarian organizations can be catalysts. Non-profits can invest in a humanitarian development opportunities before the marketplace has determined if their is a sustainable business model. However, non-profits need to partner with the private sector from the beginning, otherwise, they risk losing all of their research, development, and momentum. The business partners need to be involved at all stages of the program: design, implementation, monitoring, and evaluation. This will force innovation into humanitarian development programming–something sorely lacking today.
- Once a business model is proven, non-profits need to get out of the way. I’ve seen many businesses destroyed by NGO’s during an emergency response. It’s tough for business to compete with NGO’s who give away something long enough for the private sector to go bankrupt, then the NGO leaves the country–leaving no services to fill the void. Instead, there are PLENTY of opportunities for the non-profit sector to invest in areas where there is no proven business model and invite the private sector to partner.
- The social good should be baked into the DNA of the private sector. I believe the younger entrepreneurs will make this happen. Companies like Tom’s Shoes are able to make money and serve a social good. Consumers seem to be willing to pay more for great products that serve a great cause.
What about you? Have you used your business to change the world? I would love to hear your story.