How profitable can for-benefit companies be? It is a matter of basic microeconomic theory that any organization that on the one hand seeks to earn profits but on the other is focused on not only its own profits but is also concerned with the impact of its actions on other people and the planet will tend to either earn less profit than it would otherwise enjoy or it has to pay its staff less than they could make elsewhere. Why? Concerned with a "triple bottom line" such a company is trying to internalize benefits that it will not be compensated for or is trying to internalize costs that it would not otherwise have to bear. It can be shown that either way profits earned will be less than what they would be if the company were instead concerned only with its own profits.
In a market in which funding will only flow to such a company if it pays a competitive rate of return this means that it will have to rely on its staff willingly taking a cut in pay or relying on volunteers to help. Barring this the fact is that investors in a social enterprise will have to be willing to accept less return with greater risk than they would have to elsewhere. In reality of course what we increasingly see is a combination of all three of these things, also included in this mix are grants and subsidized credit that brings the average cost of capital down while appearing to pay private investors a favorable return. By bringing together dedicated staff ,volunteers, and investors social enterprises can reduce their dependence on grants, gifts, and subsidized credit from chariable organizations and governments but in reality dedication and commitment are both necessary ingredients in the process.
For example consider the following scenario. Management realizes that the more labor it employs and the higher its scale of operations the better it will be for other businesses in its area. This could be because of the knowledge that spillovers from its workers to employees of other companies operating in the area. This could be because this company supplies an input that will then be regularly supplied in the local market. The point is that with a view toward the social benefits of its actions this firm will push its level of operations well beyond the level it would if only concerned with short-run maximization of its own profits. Arguably, the long-run profitability of this firm may be increased if the productivity of labor employed by other firms is increased significantly but the fact remains that this social enterprise's short-term profits will suffer.
Assuming that it would have only earned normal profits as a for-profit then by producing more than the profit maximizing level of output it generates negative economic profits. In an accounting sense the books may more than balance, the firm may appear to be profitable but this is only because either stakeholders or staff are willing to accept a lower return (in exchange for knowing that what they have done is of benefit to others) or because grants, subsidized credit, gifts, or volunteers are able to make-up the difference between the accounting profits realized and the economic profits required of a for-profit enterprise.
The Grameen Bank is an example of such an organization. Working with a dedicated staff that could be earning far more elsewhere 22% of every dollar lent comes from donations or the Central Bank of Bangladesh. This is not to be viewed as a failing of the Grameen Bank but rather simple comfirmation of the fact that it is impossible for a firm to either consider costs that it would not otherwise have to bear or consider benefits in making its decisions that it will not receive any direct or immediate compensation for without seeing its short-run profits fall*.
*In the late 1990s Richard Sandor helped to establish the Chicago Climate Exchange (the CCX) in which CO2 emission rights are traded on the private market. The CCX also manages the much more important ECX (the European Climate Exchange). Although enormously profitable at this point the CCX was formed in the late 1990s with the help of a $1.1 million grant from the Joyce Foundation. Sandor is also the father of the interest rate futures market. A question naturally arises as to how much grant money had to be provided to form interest rate futures trading in the 1970s compared to the $1.1 million used to organize the CCX.
The catalysts to growth in social enterprises.
Imagine a Venn diagram with three circles drawn on it. The first is labeled need, the second staffing, and the third, financing. Given growing population and the push worldwide toward industrialization the need circle is growing ever larger each year. The growth in population corresponds to a rising number of people living in absolute poverty while rising population and industrialization together mean growing pressure on the environment. Growth in accumulated wealth, in the stock of human capital, and in the supply of labor mean that the staffing and funding circles are growing as well. This growth in all three circles means that inevitably the degree of overlap should grow over time but there is also at play a shifting of the staffing and funding circles toward the much larger and faster growing need circle as attitudes change and more people become aware of the extent and severity of problems the world's poor and, via the environment, future generations face.
There was serious flooding toward the end of summer of 2007 in Bangladesh, India and Nepal. Former President Bill Clinton appeared on the Oprah Winfrey show early last fall to promote his book Giving and featured the microfinance institution Kiva. In response to the crisis in South Asia one could easily go online and donate money to aid flood victims in South Asia. After hearing of Kiva on the Oprah Winfrey show anyone interested in becoming a lender to someone in any number of developing countries could do so with only a bit of time, a bit of money, an internet connection, and a valid credit card. Computer technology has made it easier to not only learn of problems around the world but also to act on such problems. One hears of the Skoll Foundation on social enterpreneurship, One World Health, Living Goods, Better World Books, Vikram Akula's microfinance organization SKS and within minutes finds the home pages for these organizations, praise and criticism, and discussion of related organization. There is no question that a large part of the growth in activity, refered to above the shifting of staffing and funding circles toward the needs circle as all three grow ever larger, is in part due to the ease with which information can be obtained and action taken. In particular, the flow of funding that as Wei-Skillern et al in their book Entrepreneurship in the Social Sector characterize as highly fragmented (p. 13) has become far less so thanks to the internet.
Arguably another factor in addition to the ease of funding is that both in terms of funding and staffing there are a growing number of upper-middle class and wealthy people whose knowledge of the world is quite a bit broader than their parents and grandparents. They also increasingly are searching for some meaning in their own lives, are conscious at some level of their good fortune and wish to share it rather than hoard it. The growth of modern cities allowed a shift from the street-alley segregation (where although separate the wealthy and the poor lived in proximity to each other) that Stuart M Blumen refers to in his book the Emergence of the Middle Class to areal segregation (where the middle class and wealthier segments of society could and do live largely separate lives). In a very interesting way perhaps modern media has created a virtual world where it is far more difficult to grow up shielded and largely unaware of the problems of others and the environment and has helped move us back toward a time where it was harder to ignore the plight and misfortune of others.
The need for social enterprises.
As laudible as social enterprises are it is an important question whether or not these needs couldn't be far better served by government. Herman Daly has long advocated that government set the stage for the private sector by insuring, prior to market activity, that what he refers to as intragenerational equity and intergenerational equity are taken into account. In a world in which historical accident is relevant (such as England's endowments of coal, iron ore, and water transport in the age of coal and steam or our own endowments in the U.S. of coal, iron-ore, oil, and water transport in the age of steel) and in which the scale of activity has risen so much relative to its resource base (as in populous areas throughout the premodern period or the industrialized world now) attention must be paid not only to efficiency but to justice as well. The faster a society pushes use of renewable resources beyond their sustainable limits and the faster it depletes its stock of nonrenewable resources the more future generations are liable to suffer and the less equitable the allocation of natural resources will be over time. The more economies allocate resources of all sorts to the satisfaction of the relatively trivial needs of economically better off consumers and businesses rather than the abolutely basic needs of the poor the less equitable the allocation of resources will be at the present time. Social entrepreneurs, by definition, seek to promote a more equitable allocation of effort both now and in the future or in short, doing what Daly has long advocated sovereign governments should be doing. The question therefore arises whether or not social enterprises are not only growing because it has become easier to become informed of where needs are and to organize the resources needed to affect change but also because of an increasing awareness of how far short of the mark governments have been in taking the initiative and following through. Indeed Kaushik Basu in his Prelude to Political Economy identifies clearly how easily recommendations given to politicians by experts can be expected to be completely ignored (see chapter 7 of Basu's Prelude pp. 169-173).
Because of their ability to act without having to navigate choppy political waters, to act without having to divine the preferences of politicians, to act without having to try to persuade them of the value of a given program, or to act without having to enlist the support of others to persuade policy makers, social enterprises are far better at initiating change than governments can be. Ironically they are inherently inferior to government in being able to sustain a certain level of activity or to achieve a sufficiently high enough scale. No small part of the limited ability to sustain effort over time is because it is difficult for social enterprises to capture the benefits generated by programs they've initiated as easily as governments can. For example, one might envision a social enterprise in which schooling is provided to elementary age students along with a stipend to cover the loss of income the family suffers as their children attend school rather than work. If this important work was carried out on a wide enough scale by the state the stock of human capital might grow. In turn, the level of output per worker would grow, and given current capital labor ratios, the expanded real per capita income would generate increased tax revenues and therefore be a self-liquidating investment. In contrast it is hard to imagine a patch work of social enterprises working independently that could offer similar opportunities on a wide enough scale to make much of a dent in the problem in a short enough period of time. It is equally hard to imagine their capturing the benefits that accrue only with a lag to other businesses in terms of more easily trained, more flexible, and therefore more productive workers. In short, there are places where social enterpreneurs will be able to step in but many others where benefits are either delayed or shared by the community at large in which they will not be able to step in as easily.
The other major drawback to social entrepreneurship is that it is difficult for social enterprises to achieve the sort of scale needed to really bring about change. Primarily this is due to the continual need to find staff and those willing to provide financial support who will readily take on added risk or responsibility for lower returns in the numbers required to keep up with the growing needs of the world economy for help.
