Social Business: Challenging the Traditional Way to Do Business

Author: Nika Salvetti

Originally Published at Peace and Conflict Monitor on: 01/24/2012

 

Today’s financial crisis is challenging conventional economic and business paradigms by questioning their ethical and socially responsible behaviours.

The reliability of such paradigms is questioned, demanding more transparency, business ethics and social responsiveness from all sectors of society, government institutions included.

Before falling into the mistake of going back to ‘business as usual’ while adopting ad-hoc and superficial solutions, researchers and analysts urge practitioners to search for a new modus operandi in the ways in which governments deal with their public finances, how the private sector implements its business practices, and how society responds to its production and consumption habits in respect to a more balanced equation between scarce natural resources and human needs/wants.

So before falling into the trap of ‘business as usual’, researchers, philanthropists and business leaders from different countries and economic sectors are exploring and implementing alternative frameworks which will respond to markets’ needs and challenges in a more responsible and sustainable way. Examples of such research centers looking at different approaches include the Next Economy Project of the Academy of Business in Society (Cambridge University); the Business Fights Poverty Think Tank (Geneva); the World Business Council for Sustainable Development; the New Economic Foundation in London; and the Yunus Center in Bangladesh; to mention just a few of them.

Along these lines, Professor Yunus, 2006 Nobel Peace Prize Laureate for his work with the Grameen Bank in Bangladesh, took on the challenge to design and implement a new business model called Social Business, which attempts to counter the conventional business paradigm mainly focused on profit maximization.

The model strives to convince business leaders to refocus their attention on different goals rather than solely profit seeking. It provides mechanisms to produce profits not for the sake of profit maximization but for the need of solving social problems.

So, while a traditional business plan is designed to maximize profit, the new social business model aims at solving a social problem while reinvesting the profits earned in the expansion of the business to provide further social services or products.

According to Yunus, the current economic theories assume that human beings are selfish in nature, and that any action in the business arena is devoted to raise profits for the owners and shareholders, taking into limited account the impact of their decisions on the society.

If such behavior prevails, it would be very difficult if not impossible to look at solutions to promote sustainable growth in a more responsible way. As he mentioned during his recent visit to Brussels to attend the event on “Promoting Social Business in Europe”, there is an urgent need to call for creating the foundation of a new human civilization to build a world without the failures of the present civilization, namely poverty, unemployment, and degradation of the environment and healthcare.

So, what is social business?

It is a hybrid formula between the traditional profit-maximization business and a not-for-profit organization, which relies on donations.

It is a non-loss, non-dividend company whose primary goal is to solve a social problem by using business means but denying the redistribution of dividends among its shareholders (TYPE I of Social Business). Examples of this approach are the joint ventures between the Yunus Center and DANONE, BASF, and VEOLIA waters, to name a few.

It can also be a profit-making company owned by poor people, either directly or through a trust that is dedicated to achieving a specific social goal. A famous example is the Grameen Bank set up by the poor farmers’ loan borrowers (TYPE II of Social Business).

It is a concept based on self-containment and self-reliance under conditions to avoid making profits for personal needs, but rather focusing on solving key social problems faced by the population of a certain context.

The idea is inspired also by the need to look at alternative means of happiness, which are not only measured by economic indicators (income, economic growth, return on investment, maximization of profits) but also by qualitative indicators (well-being).

The worldwide recognition enjoyed by the Happy Planet index is an example of how the population is eager to experiment with alternative indicators for measuring well-being and wealth (NEF, 2009).

And again, the fact that a social business recognizes the fundamental criteria of business shows that it responds to the need for respecting human dignity and promoting capability (Sen, 1999). Social business is not a donation or a charity, but it calls for ownership and engagement as well as responsibility.

In fact, those engaged in social business promotion and investment need to respect the essence of it and respect market conditions to recover their initial capital and current costs. At the same time, those who benefit from the services and goods produced by a social business will have to pay for it.

Professor Yunus and Dr. Reitz from the Grameen Creative Lab elaborated the 7 key principles of social business, which are (Yunus, 2010):

1. The business objective is to overcome poverty, or one or more problems that threaten people and society, not to maximize profit.
2. The company will attain financial and economic sustainability.
3. Investors get back only their investment amount. No dividend is given beyond the return of the original investment.
4. When the investment amount is paid back, profits stay with the company for expansion and improvement.
5. The company will be environmentally conscious.
6. The workforce gets market wage with better than standard working conditions.
7. Do it with joy!

Such principles are in line with and inspired by the need to promote more responsible and socially driven behaviour in business, taking responsibility for our actions and their impact on society.

The social business approach fits perfectly within the social responsibility framework, which highlights “the responsibility of any organization and individual for the impact of its decisions and activities on society and the environment through transparent and ethical behaviors that would contribute to sustainable development, taking into account the expectations of all stakeholders, being compliant with the Law and it is embedded and integrated with in the organization and externally”(ISO Guidelines, 2010).

Social business also stresses the business philosophy of Porter and Kramer (2011), which claims that “Not all profit is equal. Profits involving a social purpose represent a higher form of capitalism, one that creates a positive cycle of company and community prosperity” (Porter and Kramer, 2011).

Social business is a good example of an approach to business that is both responsible and contributes to growth and jobs. But it is crucial that all companies, not just social businesses, take their impact on the wider society more responsibly.

However, what will be the trigger factors that pressure the business society to adopt more socially responsible approaches? Would a stricter regulatory framework focused on a clear set of development goals be able to promote such approaches? Or do we need more innovative fiscal policies to guide society to respond to today’s challenges in a more coordinated effort?

For now, we welcome such a fresh and innovative approach, opening the debate on challenging and reviewing conventional ‘formulas’ and frameworks at both the business as well as governmental levels. Furthermore it gives us hope that our leaders can adopt these strategies and reframe them towards the fulfillment of the wider goals that will contribute to a more sustainable and responsible world.

Footnote:

Bio: Nika Salvetti is a UPEACE Affiliate Professor currently living in Bangladesh.