Social Enterprise Business Models - socentlaw

Social Enterprise Business Models

As I have noted in other work, the social enterprise spectrum theoretically lies between two extremes. On one end of the spectrum are organizations that pursue social and environmental missions and eschew profit motives, as some nonprofit organizations do. On the other end of the spectrum are organizations that focus solely on profit-maximization and disregard social and environmental missions—these are often called profit-maximizing businesses. I think that mainstream media ungraciously labels all businesses between these two extremes as social enterprise and fails to acknowledge that there are significant distinctions between business models at different points along the spectrum. Closer to the profit-maximizing side of the spectrum, you might find corporate philanthropy or corporate social responsibility initiatives. Closer to the nonprofit side of the spectrum, you might find nonprofit organizations using an earned income strategy to sustain a set of social services. Within this wide spectrum, I have seen mainstream media label two particular business models as “social enterprise”—the stakeholder governance model and the “buy-one-give-one” model—which I’ll briefly describe here.

The first model is the stakeholder governance model (also called the stakeholder relationship management model) which is espoused by communitarian and team production scholars and has emerged as a prototypical business model of social enterprise. Social entrepreneurs who employ this model have shifted away from the singular focus of creating shareholder value and embraced a holistic notion that a business’s constituents all deserve a fair return on their investments, whether investments of capital, labor, natural resources, or other factors of production. I believe that this is the type of business model that B Lab, along with other social and environmental impact accounting firms, assess and certify as the gold standard in “doing business well”. [Please correct me if I’m wrong.] One might look to Greyston Bakery, the iconic social enterprise, as an example. Greyston Bakery is a Yonkers, New York-based bakery that dedicates itself to community renewal by providing sustainable employment—including fair wages, benefits, and equity participation—to low-income community members and reinvesting significant profits in the Greyston Foundation, which provides jobs, job training, affordable housing, youth services, and health care to the Yonkers community. Greyston Bakery’s motto is, “We don’t hire people to bake brownies. We bake brownies to hire people.” Greyston became the first social enterprise to register as a benefit corporation in New York when the legislation passed earlier this year. Greyston seemingly treats its factors of production—labor, capital, and land—in an equitable and sustainable manner (although it seems to emphasize labor). This is the essence of the stakeholder governance model, and possibly what many “true believers” in social enterprise think of when they use the term.

The second business model of social enterprise is quite the opposite. It is the “buy one, give one” or “BOGO” business model. Under the BOGO model, a for-profit company sells products or services in a developed nation and donates similar (but different) products or services in a developing nation. The social entrepreneurs employing the BOGO model seem to be less concerned with transforming corporate governance structures and are seemingly focused on the impact that their businesses have on ameliorating an immediate social, health, or environmental problem. The most prominent example of the BOGO model is TOMS, a Los Angeles based shoe company founded by Blake Mycoskie. For every pair of TOMS shoes sold at a luxury retail store in developed countries, the company works with humanitary organizations to identify and give a free pair of shoes to children in developing countries. Other social enterprises that have followed TOMS lead include Warby Parker which donates eye glasses and Baby Teresa which donates baby clothes. Consumers in the developed world can now purchase a wide range of clothes and household goods using the BOGO model.

The BOGO business model is based on charitable philanthropy and has many critics, including me. Corporate philanthropy is a term often used in a derogatory manner by social entrepreneurs and development social scientists that embrace sustainability. The Chinese proverb tells us that “if you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.” The BOGO model relies on marked-up prices in developed countries to pay for the creation of similar products and services in developing countries. The BOGO model also floods developing markets with free products thereby diminishing the need and capacity of a developing country to manufacture and produce its own products for its own markets. To me, the model also relies heavily on the charitable heartstrings of individuals in developed countries who wish to contribute to a social or environmental issue and feel guilty about their own consumerism and privilege. To many, the BOGO business model is not “true” social enterprise.

Nonetheless, this issue is not as clear as it seems. Greyston Foundation, the nonprofit arm of Greyston Bakery, is also corporate philanthropy—profits from the bakery are donated to the foundation for charitable services. What really distinguishes the two models? Would TOMS Shoes be a “true” social enterprise if it adopted a stakeholder governance model for its internal governance structure? If so, it would seem that I am comparing apples to oranges—internal corporate governance to business strategy. That is, one might consider the internal workings of a business—the corporate governance—as the feature that distinguishes regular businesses or nonprofits from social enterprise. Those businesses that adopt a stakeholder governance model of corporate governance are social enterprises, those that do not are not social enterprises, even if they do adopt a business strategy that performs charitable or philanthropic work. What’s your take? Is that distinction too simplistic? What governance or business models have I overlooked?

[Disclaimer: my interest in these business models is partly for an article that I am writing, to be presented at a panel of the Nonprofit Law and Philanthropy Section of the American Association of Law Schools Annual Meeting on January 6, 2013.]

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