As the wealth gap widens and the human population increases, existing models of fighting poverty are becoming more and more inadequate. Can social business be the panacea of this universal ailment?
By Tom Walker
Across the ages, societies have taken care of their most disadvantaged through charity. Be it the various religious orders, the state or philanthropists, they have donated resources to the societies they were a part of selflessly. With the rise of capitalism we see corporations also joining in to play a very large role in giving back to their communities.
The concept of CSR has been gaining momentum for a while now. With the various brands trying to appeal more and more to the modern consumer -one who is ever so increasingly concerned about global and social issues – these brands have been trying to “do good” and “give back” to the community. However, the idea is fraught with complications. The argument is that the market will reward these good deeds – appealing rhetoric, but it doesn’t line up with the facts.
Consider Indra Nooyi, Pepsi’s charismatic C.E.O. Early in her tenure, she realized that consumers would increasingly demand healthier products. She argued that a shift towards healthier products such as fruit juices and lower calorie soft drinks would be good for society at large as well as for Pepsi’s profits. Pepsi followed through with the plan acquiring brands such as Tropicana and launching Pepsi Next – a lower calorie version of the flagship product. These feats would win Nooyi a lot of critical acclaim in the short term while investors remained sceptical. During Nooyi’s tenure Coca-Cola’s stock price doubled while Pepsi languished. This would lead the investors to believe that the socially conscious approach is bad for business and diverts resources from the more successful brands. Pepsi then went on to announce that it would step back from the “business with a purpose” strategy. It goes to show that investors do not want their C.E.Os to focus on social impact if it risks profit.
On the other hand, CSRs are the first to go during cost saving measures. Needless to say that corporate philanthropy typically declines during recessions – when society’s disadvantaged need it the most. The only CSR that seems to survive and succeed are ones that the company is supposed to be doing to enhance profits anyway. For example when General Electric champions investments in clean energy its wind turbine business benefits. In such cases, it is more about business strategy rather than corporate social responsibility.
So how do we come up with a way of harnessing the free market to benefit society? How can we use it to fight poverty? A recent addition has been Muhammad Yunus’ concept of a Social Business. A cause driven business where the investors can only recoup the money they initially invested but cannot take any dividends beyond that. The business’ mandate is purely to achieve one or more social objectives through the operation of the business. The business must cover all its costs, make profit and achieve the social objective at the same time such as healthcare for the poor, nutrition for malnourished children, providing potable water etc.
In social business, investors do not have any desire for profit or personal gain beyond the reimbursement of their initial investment. The business as an entity is free to focus its efforts on meeting its objectives. The profit that is generated stays within the company and is used to meet the social objectives, unlike a traditional corporation where the C.E.O must perform a balancing act of maximizing profit since they have to answer to stakeholders whose desire is to profit above all else.
Traditional corporations use the amount of profit made in a given period as a measure of their success.
They also find it difficult to measure the impact of their social responsibility efforts as there are few tools to quantify social impact. However, the success of a social business is measured by the impact of the business on people or environment – the business’ progress in meeting its social objectives.
As the wealth gap widens and the human population increases, existing models of fighting poverty are becoming more and more inadequate. While existing for profit corporations try to help through their various CSR efforts, they are hindered by their primary objective of maximising profit first. Therefore, if we are to help society’s disadvantaged and punch out poverty we must encourage the formation of social businesses with a new mandate – one whose primary objective is to achieve its social objectives. These businesses are not meant to replace existing models of profit corporations but rather to coexist and enter the market as competitors. As more and social businesses enter the market and help those in need, we may finally harness the power of a free market economy to accelerate the eradication of poverty.