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Friday, January 29, 2010

Will the Real Social Entrepreneur Please Stand Up?

How can you distinguish a business entrepreneur from a social entrepreneur? The answer is not as straightforward as it once was, says Abraham George, founder of The George Foundation, an NGO focused on poverty alleviation in southern India. Both are focused on profitability, margins and returns on investment. But social entrepreneurs go a step further, not only aiming to use their business activities to benefit society, but also involving society's poorest members -- now often referred to as the "Bottom of the Pyramid" -- in efforts to reduce poverty and raise standards of living.

That's all well and good, explains George in this opinion piece, but it is increasingly unclear who "the poorest of the poor" are. Definitions vary widely, which often means marketing strategies, growth plans and even products and services are not catering to the world's poorest people. In the worst cases, even well-intentioned social entrepreneurs are misleading investors and the general public -- and more importantly, letting down the billions of people living in poverty.

The concept of social entrepreneurship as a characterization of social responsibility for business organizations has gained considerable popularity. There is growing belief in development and donor communities that this form of for-profit activity might be the long-sought way to alleviate poverty at the so-called Bottom of the Pyramid (BoP) -- the poorest segment of society. Yet, there is no consensus within these communities about what social entrepreneurship is and how the BoP is defined, making it easier for conventional for-profit activities to claim a higher social-service status than many ought to. What constitutes social entrepreneurship serving the BOP segment, and how can BoP be defined so that the poor are better represented?

At the heart of a social entrepreneur's activities are business principles that organize, create and manage a venture to bring about social change. Social entrepreneurs usually have novel solutions to society's pressing problems. Some work through non-profit or citizen groups, and most are now in the private sector.

While both business and social entrepreneurs measure performance in terms of profitability and return on investment, a social entrepreneur also includes the impact she or he makes on society -- the so-called "double bottom line." The main aim of a social enterprise is to further social and environmental goals for a good cause in a financially sustainable manner. In its purest form, social entrepreneurships are non-profits that reinvest the money they make to achieve a social goal. Most social enterprises are built on business models that combine a revenue-generating objective with social-value generation. Put another way, they redefine entrepreneurship as we have long known it by adding a social component.

Business entrepreneurs are constantly seeking ways to increase profits through more sales, higher margins, new markets and product expansion. Social entrepreneurs may also seek higher profits, yet be willing to accept lower margins and operate in more difficult market environments as long as they are able to offer social benefits. The very nature of their field activities may reflect a pursuit of what they call a "mission-related impact," as opposed to normal businesses that are more concerned about such issues as competition and product differentiation.

Unlike activities that focus solely on contributing to social-service causes, social entrepreneurs must find a way to balance the mission-related impact and the desire to maintain or enhance profits. Social entrepreneurs often emphasize cost reduction to achieve sufficient margins, and use innovative techniques to serve their market. The degrees to which social entrepreneurs pursue social impact as opposed to profitability vary considerably, but in all cases financial sustainability is fundamental. However, external investors in social enterprises usually do not have high return expectations and are often willing to forgo returns if they can see significant social benefits from an enterprise's activities.

The Quest for Economic Equality

Today, many ventures claim to be social enterprises, some with the professed goal of poverty alleviation. However, in the frenzy of associating with social good, many of their assertions are not scrutinized sufficiently. In the absence of precise conditions to validate their claims, it is difficult to identify the entrepreneurs whose main goal is wholly focused on reducing poverty.

A social entrepreneur aims to add value via incremental benefit, which accrues to a segment of society. Social entrepreneurs who aim for economic equality target an underserved or highly disadvantaged population that lacks the financial means to achieve transformative benefits on its own.One well-known social entrepreneur is Muhammad Yunus, who founded Grameen Bank to provide microfinance in Bangladesh, for which he received a Nobel Peace Prize in 2006. His pioneering work was based on offering credit to people unable to obtain loans from banks and other conventional sources so they could set up and run their own small business ventures. Grameen and several other organizations that have improved the lives of disadvantaged people certainly fit the definition of a social enterprise.

Subsequently, a new microcredit industry mushroomed in developing countries, with most providers claiming that they can lend money profitably to the poor. They present themselves as organizations serving the BoP, and by default, the poor. However, there is reason to be skeptical about their motives, business practices, performance and the benefits they offer. Usually, the general public believes that microcredit and other for-profit companies primarily operating in the rural parts of developing countries have made poverty reduction one of their primary goals.

I would like to offer some clarity here. Social entrepreneurship can come in many forms, creating products and services that improve consumer safety, offer environmentally friendly goods or services, and contribute to poverty alleviation and other worthwhile initiatives. Many of these ventures are valuable to the economy and society in general. The problem arises when some of the initiatives say their main goal is to alleviate poverty, often in the hope attracting public support and investment from the philanthropic community, despite the fact that they do not meet the minimum criteria to be a poverty-alleviating enterprise.

According to much BoP literature, a BoP venture is a revenue-generating enterprise that sells goods to, or sources products from, people at the "base of the pyramid" in order to improve their standard of living. Some observers have refined the definition as revenue-generating enterprises that directly create "social value" for BoP communities through a product or service. Recent studies go so far as to exclude companies that sell non-essential items to BoP communities. All this aside, a for-profit venture that claims to be a social enterprise alleviating poverty must meet at least one of the following criteria:

  • Employ and/or train proportionately significant numbers of poor people in its main business activity (for example, making mosquito nets or processing vegetables) rather than using them as sweepers, porters or other cheap manual labor.
  • Produce or offer essential products or services (health care, education, housing, food, clean water and the like) at affordable prices to people who earn US$2 or less a day.
  • Make credit available to poor people at reasonable rates (no higher than twice the rate charged by banks to their creditworthy clients) for personal or business uses without unfair or unethical lending practices.
  • Offer technical, material or financial assistance to enable the poor to engage in family-run businesses, with returns to investors generated from products made from the activities (producing dairy products from cows and buffalos, making designer quilts and cushions sold at attractive prices to affluent consumers and so on).

In each of these criteria, a social enterprise employs the poor in its business activity (beyond menial labor) at fair wages, makes it possible for them to start their own entrepreneurial ventures, and/or offers essential, yet affordable, products or services. The poor must benefit directly from the activities and be from the BoP.

Saying the poor will benefit from the trickle-down impact of a regular business that is run by or for people with higher incomes does not qualify that business as a social enterprise; otherwise, every corporate entity, including Wal-Mart, would fit the definition of a social entrepreneur. What's more, the product or service purchased by the beneficiary must be affordable. Without such qualifiers, classifying social enterprises would mean accepting exploitation of and extortion from the poor in the name of social good, as in the case of local money lenders who charge exorbitant interest rates to people who badly need loans to meet emergencies.

Social entrepreneurship is a noble business activity that can serve all segments of society. But it is not necessary to appear to be helping the poor to gain an elevated social or moral status in business. Some entrepreneurs might prefer to invest in social enterprises rather than in regular for-profit businesses, but investment must be sought under the right premise. Not to do so is highly unethical, especially because it relates to the poor.

Read in detail:

Forget yourself for others, and others will never forget you.

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