Social Business: What It Is and What It Is Not: Professor Mohammed Yunus, 2007
We need to introduce another kind of business-one that recognizes the multi-dimensional nature of human beings. If we describe our existing companies as profit-maximizing businesses (PMBs), the new kind of business might be called social business. Entrepreneurs will set up social businesses not to achieve limited personal gain but to pursue specific social goals.
To free-market fundamentalists, this might seem blasphemous. The idea of a business with objectives other than profit has no place in their existing theology of capitalism. Yet surely no harm will be done to the free market if not all businesses are PMBs. Surely capitalism is amenable to improvements. And surely the stakes are too high to go on the way we have been going. By insisting that all businesses, by definition, must necessarily be PMBs and by treating this as some kind of axiomatic truth, we have created a world that ignores the multi-dimensional nature of human beings. As a result, businesses remain incapable of addressing many of our most pressing social problems.
We need to recognize the real human being and his or her multifaceted desires. In order to do that, we need a new type of business that pursues goals other than making personal profit – a business that is totally dedicated to solving social and environmental problems.
In its organizational structure, this new business is basically the same as the existing PMB. But it differs in its objectives. Like other businesses, it employs workers, creates goods or services, and provides these to customers for a price consistent with its objective. But its underlying objective – and the criterion by which it should be evaluated is to create social benefits for those whose lives it touches. The company itself may earn a profit, but the investors who support it do not take any profits out of the company except recouping an amount equivalent to their original investment over a period of time. A social business is a company that is cause-driven rather than profit-driven, with the potential to act as a change agent for the world.
A social business is not a charity. It is a business in every sense. It has to recover its full costs while achieving its social objective. When you are running a business, you think differently and work differently than when you are running a charity. And this makes all the difference in defining social business and its impact on society.
There are many organizations in the world today that concentrate on creating social benefit. Most do not recover their total costs. Nonprofit organizations and nongovernmental organizations rely on charitable donations, foundation grants, or government support to implement their programs. Most of their leaders are dedicated people doing commendable work. But since they do not recover their costs from their operations, they are forced to devote part of their time and energy, sometimes a significant part, to raising money.
A social business is different. Operated in accordance with management principles just like a traditional PMB, a social business aims for full cost recovery, or more, even as it concentrates on creating products or services that provide a social benefit. It pursues this goal by charging a price or fee for the products or services it creates.
How can the products or services sold by a social business provide a social benefit? There are countless ways. For a few examples, imagine:
A social business that manufactures and sells high-quality, nutritious food products at very low prices to a targeted market of poor and underfed children. These products can be cheaper because they do not compete in the luxury market and therefore don’t require costly packaging or advertising, and because the company that sells them is not compelled to maximize its profit.
- A social business that designs and markets health insurance policies that provide affordable medical care to the poor.
- A social business that develops renewable-energy systems and sells them at reasonable prices to rural communities that otherwise can’t afford access to energy.
- A social business that recycles garbage, sewage, and other waste products that would otherwise generate pollution in poor or politically powerless neighborhoods.
In each of these cases, and in the many other kinds of social businesses that could be imagined, the company is providing a product or service that generates sales revenue even as it benefits the poor or society at large.
A social-objective-driven project that charges a price or fee for its products or services but cannot cover its costs fully does not qualify as a social business. As long as it has to rely on subsidies and donations to cover its losses, such an organization remains in the category of a charity. But once such a project achieves full cost recovery, on a sustained basis, it graduates into another world – the world of business. Only then can it be called a social business.
The achievement of full cost recovery is a moment worth celebrating. Once a social-objective-driven project overcomes the gravitational force of financial dependence, it is ready for space flight. Such a project is self-sustaining and enjoys the potential for almost unlimited growth and expansion. And as the social business grows, so do the benefits it provides to society.
Thus, a social business is designed and operated as a business enterprise, with products, services, customers, markets, expenses, and revenues – but with the profit-maximization principle replaced by the social-benefit principle. Rather than seeking to amass the highest possible level of financial profit to be enjoyed by the investors, the social business seeks to achieve a social objective.
Social Business Profits Stay within the Business
A social business differs from a charity or an NGO or a nonprofit group in another important way. Unlike those organizations, but like a traditional PMB, a social business has owners who are entitled to recoup their investments. It may be owned by one or more individuals, either as a sole proprietorship or a partnership, or by one or more investors, who pool their money to fund the social business and hire professional managers to run it. It may be also owned by government or a charity, or any combination of different kinds of owners.
Like any business, a social business cannot incur losses indefinitely. But any profit it earns does not go to those who invest in it. Thus, a social business might be defined as a non-loss, non-dividend business. Rather than being passed on to investors, the surplus generated by the social business is reinvested in the business. Ultimately, it is passed on to the target group of beneficiaries in such forms as lower prices, better service, and greater accessibility.
Profitability is important to a social business. Wherever possible, without compromising the social objective, social businesses should make profit for two reasons: First, to pay back its investors; and second, to support the pursuit of long-term social goals.
Like a traditional PMB, a social business needs to have a long-term road map. Generating a surplus enables the social business to expand its horizons in many ways – by moving into new geographic areas, improving the range or quality of goods or services offered, mounting research and development efforts, increasing process efficiencies, introducing new technologies, or making innovations in marketing or service delivery so as to reach deeper layers of low-income people.
However, the bottom line for the social business is to operate without incurring losses while serving the people and the planet and in particular those among us who are most disadvantaged-in the best possible manner.
How long will it take for investors to get back their investment in a social business? That is up to the management of the social business, and the investors themselves. The proposed payback period would be, specified in the investment prospectus: It might be five years, ten, or twenty. Investors could choose the appropriate social business in which to invest partly on the basis of this time frame and on their own anticipated needs, as well as their preference for a particular social objective.
Once the initial investment funds are recouped, investors can decide what to do with those funds. They might reinvest in the same social business, invest in another social business or a PMB, or use the money for personal purposes. In any case, they remain as much owners of the social business as before, and have as much control over the company as before.
Why would investors put their money into a social business? Generally speaking, people will invest in a social business for the same kind of personal satisfaction that they can get from philanthropy. The satisfaction may be even greater, since the company they have created will continue to work for the intended social benefit for more and more people without ever stopping. The many billions of dollars that people around the world donate to charitable causes every year demonstrate that they have a hunger to give money in a way that will benefit other human beings. But investing in a social business has several enormous differences from philanthropy.
First, the business one creates with social business is self-sustaining. There is no need to pump in money every year. It is self-propelling, self-perpetuating, and self-expanding. Once it is set up, it continues to grow on its own. You get more social benefits for your money.
Second, investors in a social business get their money back. They can reinvest in the same or a different social business. This way, the same money can bring more social benefits.
Since it is a business; businesspeople will find this as an exciting opportunity not only to bring money to social business but to leverage their own business skills and creativity to solve social problems. Not only does the investor get his money back, he still remains an owner of the company and decides its future course of action. That’s a very exciting prospect on its own
Chapter taken from CREATING A WORLD WITHOUT POVERTY: by MUHAMMAD YUNUS, published by PublicAffairsTM, a member of the Perseus Group, USA, 2007, pp 21-25