Chapter 1 Social Entrepreneurship as a Form of Humanistic ­Management Michael Pirson – Humanistic Management: Social Entrepreneurship and Mindfulness, Volume II

CHAPTER 1

Social Entrepreneurship as a Form of Humanistic Management

Michael Pirson

Witnessing the various global crises, Milton Friedman’s catchphrase that “the business of business is business,” has outlasted its usefulness. ­Humanistic Management viewed as the form of organizing that protects human dignity and promotes well-being can help address the many crises we suggest. As Michael Porter reformulates, “the business of business is a better society.” By flipping that perspective, Porter suggests that ­managers serve business better when their products and services are fundamentally aimed to promote societal benefits. In that fashion business can retain social legitimacy and make better profits for a longer time horizon. In a much publicized Harvard Business Review article, Michael Porter and Mark Kramer suggest that social entrepreneurs should serve as role ­models in creating “shared value.”

Social entrepreneurs are a form of humanistic managers or organizers. They start out with the objective to improve the state of the world with scalable models that restore human dignity. Mohammad Yunus is a role model social entrepreneur and he claims that the separation of economic and social dimensions has always been nonsensical. Ian Davis, a former managing partner of McKinsey & Company, concurs that the continued separation of the social and the economic is strategically unsustainable for big business (Nicholls 2006, p. 24). Good businesses, he suggests, need to understand that a proactive reduction of the environmental and social problems is also good strategy.

Antony Bugg-Levine, one of the cofounders of the impact investing movement, labels the predominant worldview as “bifurcated.” In a ­bifurcated world businesses have traditionally been responsible for financial value creation, and NGOs and/or the government have been responsible for social value creation. In contrast, humanistic management proposes an integrated perspective where all institutions are producing value in the form on enhanced well-being. Social entrepreneurship then allows the conceptualization of new value propositions to effectively deal with the various global and societal crises (Pirson 2007).

In this chapter, I present a clarification of what social entrepreneurship is and how it differs from other socially oriented and entrepreneurially ­oriented activities. I will also propose that one of the more productive uses of the term implies understanding it as a certain mindset (Pirson 2015). I will then highlight some general forms of social entrepreneurship and provide specific examples from the financial sector. I do this to showcase the power of the integrated, humanistic perspective, which challenges the traditional bifurcated view most dominant in finance (­Pirson 2015). I then propose an outline of the process along which it can be studied and put in practice drawing on my teaching experience in Social ­Entrepreneurship (Bloom and Pirson 2010).

Exploring the Notion of Social Entrepreneurship

In the academic literature there has been a long debate, yet no clear agreement on a definition of social entrepreneurship (Dacin, Dacin, and Matear 2010). Some argue that it is the pursuit of social goals with entrepreneurial means, others argue that it should be understood as the production of social benefits in addition to financial profitability (i.e., generating employment). Still others argue for a wider understanding of social entrepreneurship as impact orientation of any type of organization to solve a social problem (pollution reduction, social injustice etc.) (Dacin et al. 2010). Such an understanding could transcend existing legal definitions of organizations and be applied across sectors including government, nonprofit, or business.

Anticipating the crises of the private and public sectors, Etzioni (1973) suggested that a new form of organization would be needed to provide necessary innovations. That third alternative would combine the efficiency of the market and the welfare orientation of the state. Since the 1980s, the so-called third sector grew faster than any other sector now providing up to 10 percent of employment in the United States alone (Nicholls 2006). Many scholars credit a new breed of entrepreneurs, the social entrepreneurs with the fast growth of that sector (Nicholls and Cho 2006). Social entrepreneurs are similar to business entrepreneurs in the methods they use, but different as they are motivated by social goals rather than material profits. As Leadbeater (1997) observes: “(T)heir great skill is that they often make something from nothing, creating innovative forms of active welfare, health care, and housing which are both cheaper and more effective than the traditional services provided by the government.”

The social entrepreneur, in contrast to the traditional entrepreneur, public servant, or NGO executive, is purpose-driven and impact-oriented (Pirson and Bloom 2012). Social entrepreneurs aim to provide innovative solutions to systemic social problems that are either caused by market or government failure (or sometimes both). They aim at disruption of the current system and not a local solution only (Pirson 2015).

Let us one of the most prominent social entrepreneurs of our time, Muhammad Yunus, the 2006 Peace Nobel Laureate, to illustrate that understanding: When Yunus started out his venture, Grameen Bank, he did not ever envision becoming a banker. He was a professor of economics interested in understanding and eradicating poverty in his native Bangladesh. After some failed attempts to help farmers gain higher harvest levels, he tried to understand the root causes of severe poverty and explored the countryside with a couple of his students. He found out that many of the local entrepreneurs selling baskets had basically become enslaved by money lenders who asked for exorbitant interest on their loans ­(Schneider 2008). Having no alternative access to credit, they used them, which is a clear market failure. However, at the time, the banking system in ­Bangladesh was state-run. Still, bankers did not consider the poor “bankable” or creditworthy. After all, they did not possess anything that could be collateralized in case the loan could not be repaid. Yunus thought that what they have is aspiration and the willingness to work hard if given a chance. Also, he thought if they get loans as a group they become responsible for each other and peer pressure can act as a “social” collateral. He started a project in an existing bank to dole out small sums of money as so-called micro loans. The project went well and the bank earned its money back with interest. In fact, the repayment rate was a lot higher than for traditional loans (about 98 percent). Still, no bank wanted to pursue this idea and adopt microcredits and in the end Yunus was forced to give up his academic job to start his own bank, now known as Grameen Bank. Since that time, microcredit and the idea that the previously unbankable, uninsurable, not creditworthy poor can become participants in a more inclusive market has been demonstrated over and over. So much so that the entire banking system adopted it, and it is now harder to find a traditional bank that does not have a microcredit program than one that does. Thus microcredit banking has become a systemic innovation that can help poor people to get out of poverty. Yunus claims that he wants to work toward a world where poverty does not exist anymore, but where it can only be seen in a museum (a poverty museum much like we explore dinosaurs) (Pirson 2015). This mindset is fundamentally solution-oriented and different from those that aim at “managing” poverty. Many NGOs and the government are blamed that the problems of poverty are not getting better, but in fact many organizations benefit from keeping the status quo. They work to manage the problem, but not to make the problem go away. In contrast, social entrepreneurs work toward making their work unnecessary.

This example, I suggest, can highlight the uniqueness of social entrepreneurs and the organizations they create. Still, social entrepreneurship has many facets and represents an umbrella term for a considerable range of innovative, dynamic, social value-creating ventures (Pirson 2008). Social enterprises usually borrow and mix approaches from business, charity, and social movements, and they represent a new force in the social and environmental sectors. They aim to solve societal problems in order to deliver sustainable social value (Pirson and Lawrence 2010). Michael Porter, a prominent business school professor suggests that social entrepreneurs can be role models for current day business leaders as they help alleviate inequity and sustainability problems and are able to build trust with stakeholders on a larger scale (Porter and Kramer 2011). Many suggest that social entrepreneurs should equally be role models for leaders in government, higher education, nonprofit agencies, and churches. The typical qualities of social entrepreneurs are listed below (Figure 1.1).


Figure 1.1 Social entrepreneurship dimensions

  • What is a social entrepreneur?
    • Characteristics

      Purpose-driven (vs. Financial)

      Impact oriented

      Providing an innovative solution

      to a systemic social problem

      caused by market/government failure

      Aiming at disruptive innovation

  • What is social entrepreneurship?
    • Mindset

Models of Social Entrepreneurship

As Dacin et al. (2010, p. 45) state, “the dual mission of social entrepreneurial ventures provides both interesting opportunities and constraints.” Even though a wide range of social enterprises has emerged, Alter (2006) suggests that three main categories are defined by the emphasis and priority given to financial and social objectives: external, integrated, and embedded social enterprises.

External Social Enterprises

In external social enterprises, social value-creating programs are distinct from profit-oriented business activities. The business enterprise activities are “external” from the organization’s social operations and programs. Businesses can partner with not-for-profit organizations to create external enterprises that fund respective social programs and/or operating costs. This stage represents an incremental adoption of social value ­creation objectives. Examples for external social enterprises are partnership ­programs such as ProductRed, in which companies can join and sell their products for a markup, which in turn funds the United Nations’ Global Fund or similar licensing partnerships with the World Wildlife Foundation (WWF). The relationship between the business activities and social programs is supportive, oftentimes providing financial and nonfinancial resources to the external program.

Integrated Social Enterprises

In integrated social enterprises, social programs overlap with business activities but are not synonymous. Social and financial programs often share costs, assets, and program attributes. The social enterprise activities are thus “integrated” even as they are separate from the organization’s profit-oriented operations. This type of social enterprise often leverages organizational assets such as expertise, content, relationships, brand, or infrastructure as the foundation for its business (Alter 2006). The ­Aravind Eye Hospital in Madurai, India is an example of an integrated social enterprise. It serves cataract patients in a main hospital, where wealthy patients pay a market fee for their surgery. The profit surplus created by these fees is then used to pay for the surgery of poor patients in the free hospital (Rangan 1993). The relationship between the business activities and the social programs is hence synergistic, adding financial and social value to one another. In the integrated approach, two separate arms of a venture still exist that pursue different but mutually supportive objectives.

Embedded Social Enterprises

In the embedded social enterprises, business activities and social programs are synonymous. Social programs are self-financed through enterprise revenues and thus the embedded social enterprise can also be a stand-alone sustainable program. Since the relationship between business activities and social programs is comprehensive, financial and social benefits are achieved simultaneously. Businesses that serve the base of the pyramid (Prahalad 2005) could be regarded as such embedded social enterprises, and the group of enterprises structured by the Grameen and The Bangladesh Rural Advancement Committee (BRAC) groups present other approaches.

For example, the Grameen Bank model of microloans is based on the disbursement of model microloans to the poorest of the poor without collateral. Since these loans are often the only chance for this clientele, the payback rate with interest is beyond any traditional rates (greater than 90 percent), and profit can be earned. As such, profitability can serve a social goal of eliminating poverty. In recent years, however, more traditional players such as Citibank and Banco Compartamos in Mexico have adopted microfinance models that adapt the original business model to satisfy profit maximization strategies (Rennison 2008).

Business Models of Microfinance

Examining microfinance, the most mature area of social entrepreneurship, provides a way of highlighting the various business models adopted in the area of social entrepreneurship. This section focuses on two examples: Grameen Bank and Accion International.

Grameen Bank

Pioneered by Muhammad Yunus and Grameen Bank, microfinance has gained increased visibility in the marketplace. Yunus founded the Grameen Bank (the word “grameen” means rural, in Bengali) in Bangladesh in 1983 (www.grameen-info.org). Its business model centers on lending small amounts of money (called microloans) primarily to poor women to enable them to earn a living through self-employment. No material collateral is necessary to take out a loan, but borrowers provide a social form of ­collateral. That is, borrowers organize in groups of five and each group member needs to repay his or her loan on time, while ensuring that other group members do the same. Failure for even one borrower to meet a payment jeopardizes the future borrowing possibilities of all. This model ­establishes a delicate dynamic between “peer-pressure” and “peer-support” among Grameen borrowers and is credited with the high loan repayment rate of 95 percent. Despite the delicacy of the ­business model, the bank had inducted 8.35 million members (96 percent women) in 81,379 ­Bangladeshi villages by 2011. A stabilizing feature of the business model is the ownership structure of Grameen Bank. Similar to cooperative banks, the poor borrowers largely own the bank (93 to 95 percent), while a small minority (5 to 7 percent) remains in government hands. The fact that the formerly unbankable people now own their own bank strengthens the commitment to the bank and helps explain its ­success. In that sense, the organization model strengthens the business model.

Looking at the business model more closely, Grameen Bank provides four types of loans: (1) income-generating loans with an interest rate of 20 percent, (2) housing loans with an interest rate of 8 percent, (3) higher education loans with an interest rate of 5 percent, and (4) a zero ­percent interest loan for struggling members of society (beggars). ­Traditional banks know how to work with the first three types of loans. This section highlights the rationale for a zero percent loan program for those most deeply afflicted by poverty.

Different from traditional banks, which consider the poor unbankable, Grameen Bank views the poor as future customers who need and deserve banking services like anyone else. Begging is not considered a choice but a last resort. Grameen aims to restore the dignity of their struggling members and to help them find a dignified livelihood, send their children to school, and graduate into becoming regular Grameen Bank members. The bank’s ultimate goal is to see that no one in the villages that it serves has to beg for survival. For that reason, the program provides basic support through publicly declaring beggars as members of Grameen Bank. Each member receives an identity badge with the Grameen Bank logo to let everybody know that this national institution stands behind them. Further, the members are covered under life insurance and loan ­insurance programs free of charge, and existing Grameen groups are encouraged to become their mentors. This form of social support is combined with favorable loan conditions, which require only the repayment of the ­principal in installments according to repayment ability. By 2011, more than 111,297 beggars had joined the program. Grameen states that of the more than U.S. $20 million disbursed, 80 ­percent has already been repaid. ­Additionally, roughly 20,000 people have left ­begging and are making a living in a sales profession. Among them, roughly 10,000 ­beggars have joined Grameen Bank groups as mainstream borrowers. Here, social value creation reinforces financial value creation through the shared value business model.

Using innovative business models, Grameen Bank has shown that poor people can work themselves out of poverty and can become bankable. In that sense, Grameen is developing its own highly loyal customers. Not only is Grameen Bank serving the needs of the poor, but it is also doing well financially. Grameen Bank declared a 30 percent cash dividend for the year 2010. This is the highest cash dividend declared by any bank in Bangladesh in 2010. Whereas donations and grants largely funded the bank during its early years, the bank has been entirely self-funding and profitable since 1998.

Accion International

As one of the early players in the global microfinance industry, Accion International further developed and refined the microfinance model. In 1961, Accion International started as a “private peace corps” focusing on community development with programs in Venezuela, Brazil, Colombia, and Peru (Quelch and Laidler 2003). During the 1970s, the firm started its first experiments with microcredits in Brazil and then replicated them in ­Ecuador and Colombia. In the 1980s, Accion International tested Grameen Bank’s solidarity group model and deployed it widely. Witnessing the power of microcredits for local entrepreneurs, the firm developed a business model based on the belief that microcredit institutions need to be self-­sustaining and that the poor can pay commercial rates of interest (Quelch and Laidler 2003; Chu 2005).

The leadership of Accion International considered scaling up operations as a requirement to eradicate poverty. Accordingly, funding from private philanthropy and development agencies was insufficient to reach the millions of poor in Latin America. To reach sufficient scale, the firm emphasized establishing a formal network across Latin America as well as involving commercial banks. Using the vehicle of a U.S. bank-backed credit guarantee, local banks provided loans directly to the local Accion International chapters, which then disbursed the loans to microentrepreneurs. In the 1990s, Accion International committed to lending U.S. $1 billion in five years and accomplished this goal, proving a serious market need (Quelch and Laidler 2003; Chu 2005). Consequently, the firm supported the push toward a commercialization of microfinance.

As microfinance became regulated, Accion International helped to establish commercial microfinance banks. These banks were able to rapidly increase their loan portfolio because the capital markets provided funds through financial instruments, such as bonds and certificates of deposit (CDs), and other commercial banks invested in them using their deposits. Since the return on equity of these microfinance banks often exceeded that of conventional commercial banks, Accion International pushed the commercialization even further. In the 2000s, the firm helped to transform their nongovernmental organization (NGO)-based network members to become commercial banks. In some cases, these banks even started publicly listing their stock such as Banco Compartamos in Mexico. These commercial microfinance institutions raised concerns from many traditional players in the banking industry because their returns consistently exceeded the returns of conventional banks by 250 to 500 percent (Chu 2005). As Accion International is aspiring to increase the scale of microfinance even further, it is now advising traditional commercial banks such as ABN AMRO, Citibank, and others on how to establish microcredit programs (Quelch and Laidler 2003; Chu 2005).

Lessons Learned for Socially Responsible Finance and Investing

Grameen Bank and Accion International both started with the goal to eradicate poverty. Taking that perspective allowed them to find opportunities where traditional banks did not. In fact, it allowed both organizations to look beyond the existing customer base and create attractive and novel business models. However, while sharing some elements, their business models have led them in very different directions. Grameen Bank mainly pursues an integrated strategy of serving the market in Bangladesh directly. Accion International provides microcredits, acting as a conduit and embracing a very commercial strategy aimed at scale.

The business models in the field of microfinance vary widely. They range from social value creation and poverty reduction to ­simple ­profit-making. For example, many criticized Banco Compartamos because it achieved very high profits by increasing interest rates on their microloans to more than 80 percent per year. In July 2010, India’s biggest microfinance institution, SKS Microfinance, went public. Soon after, the government shut the firm down because it charged usurious interest rates. In both instances, Muhammad Yunus publicly stated his disagreement with the business model, saying that the poor should be the only beneficiaries of microfinance. By contrast, Michael Chu, former CEO of Accion International, contends that commercial microfinance is the only way to sustainably eradicate poverty. He further states that any cap on interest rates would be counterproductive because profit margins attract more providers and ultimately drive down interest rates.

Increasingly, companies and organizations in the developed world see developing countries as unexplored high-volume, low-margin markets for their products and services (Hart 2010). According to Sundelin (2009), an unmet demand of roughly $300 billion for microfinance services remains, which presents an opportunity for responsible financial industry players. To pursue this opportunity, traditional players need to study the success factors of existing microfinance institutions and possibly rethink their traditional approaches. As Sundelin suggests, revenue models can be based on interest only or a combination with joining fees and commission fees for both borrowers and lenders. Additional revenues can come from donations, sponsoring partners, or advertisers. To ensure repayment, banks need to learn how to use social collateral instead of financial collateral by developing a system of peer support and peer pressure.

While some organizations, such as Grameen Bank, operate as direct local lenders, others operate by aggregating several lenders to spread the risk. Still others engage by providing interest-bearing financial securities to microfinance institutions. Whereas the former may be harder to implement, such a direct presence may help to increase growth outside the financial service sector. Microfinance organizations that have established brands and high quality relationships with local entrepreneurs in remote markets can leverage these trust-based relationships as a platform for developing and distributing various products and services (Sundelin 2009). An interesting example is Grameen Shakti in Bangladesh that leverages the brand and infrastructure of Grameen Bank’s nationwide microfinance program. It was created in 1996 to reach rural people with clean and affordable energy in a country where 80 percent of the people still do not have access to electricity. The revenue model is often based on several shopkeepers sharing one system, with the electricity enabling new business opportunities. By 2002, Grameen Shakti reached break-even and by 2008 it had installed more than 180,000 solar home systems, installing more than 8,000 new ones each month. As such, these novel business models become a source of competitive advantage that goes beyond the financial sector and provides opportunities for responsible corporate engagement in general.

The Case of Social Impact Investing

Microfinance has paved the way for other types of financial services for the base of the pyramid. Social impact investing has emerged as one of many lessons from microfinance and is elevating several basic insights. Two of the leading organizations in the field of social impact investing are Acumen Fund and Calvert Social Investors. This section provides a discussion of their respective business models and presents lessons for traditional financial players who want to engage in socially responsible finance.

Acumen Fund

Jacquline Novogratz founded Acumen Fund in 2001 with the goal of demonstrating that business acumen together with philanthropic ­capital can build thriving enterprises that serve vast numbers of the poor (­Ebrahim and Rangan 2011). Based on the insight that the markets alone cannot solve the problems of poverty and that charity and aid are not enough, the Acumen Fund developed an approach that seeks to bridge the gap between the efficiency and scale of market-based approaches and the social impact of pure philanthropy.

Acumen Fund labels patient capital as its approach of raising charitable funds from individuals, foundations, and corporations, which it then invests as equity or debt in enterprises serving the base of the ­pyramid markets. These enterprises could be both for-profit and nonprofit ­organizations that focus on delivering services to the poor in the areas of water, health care, housing, energy, and agriculture. Besides financing these ventures, Acumen Fund engages actively in capacity building with its ­investees, much like venture capitalists would. A typical investment ranges from $300,000 to $2.5 million in equity or debt and engenders a five- to seven-year commitment from Acumen, placing high potential young professionals with investees to provide onsite capacity-building assistance. In contrast to the traditionally much shorter investment spans of grant makers or banks, Acumen refers to its approach as patient ­capital for impatient people (Novogratz 2007; Friedman 2007). The fund’s stated aim in investing patient capital is not to seek high returns, but rather to jump-start the creation of enterprises that improve the ability of the poor to live with dignity. As Novogratz notes, patient capital differentiates itself by the long time horizons, the increased risk tolerance, and the goal of maximizing social rather than financial returns. Further, patient ­capital provides management support and the flexibility to seek partnerships with governments and corporations through subsidy and co-investment when doing so may benefit low-income customers.

Acumen Fund invests in organizations that have business models capable of bringing affordable, life-changing products and services to parts of the world where markets have failed before. Many of these businesses create jobs and lead directly to economic growth. Over the past 10 years, the Acumen Fund has affected the lives of more than 40 million people by investing upward of US$ 60 million in 57 enterprises, thereby creating more than 35,000 jobs.

Calvert Social Investment Foundation

The Calvert Group, one of the first socially responsible mutual fund managers, offers individual investors a variety of screened socially responsible portfolios of public equities, bonds, and other money market products (Emerson and Spitzer 2006). In the late 1980s, the Calvert Group began to explore investment strategies that not only screened out social value destruction but also sought to create social value with its investments. This discussion eventually led the fund to commit to investing 1 ­percent of its assets in community development finance intermediaries. To facilitate this style of investing, the Calvert Group eventually founded the Calvert Social Investment Foundation (Calvert Foundation) in 1995 with the support of national foundations including Ford, MacArthur, and Mott.

The Calvert Foundation aims to affect community investment by refining practice and investments so that individual investors can actively participate in community investing. The Calvert Foundation makes loans to organizations that are effective in developing or rehabilitating affordable homes, financing small businesses, providing essential community services, and creating jobs. These loans represent what the Calvert Foundation labels as community impact investing. Community investing differs from pure philanthropy as it provides loans with interest and differs from traditional microfinance in that the denomination is higher. In the community investing process, interested investors provide capital and Calvert ensures the due diligence process and provides loans to socially beneficial organizations. Investors receive the principal back and earn interest but possibly at a lower than market rate. Although community impact investment functions like a traditional loan, it creates both a social and financial return on investment.

The business model of such community impact investment can be highlighted through the Calvert Community Investment Note, Calvert Foundation’s flagship investment product. Structured as a general recourse obligation of the foundation, the notes are designed to provide average investors with a safe and convenient way to direct invest in community development and other blended value-generating projects and enterprises. The notes are highly customizable and investors can purchase them in increments of $1,000 with a minimum $1,000 investment. Investors can choose the profile of the investments underlying their notes, targeting specific geographic regions and programmatic areas. They can also select the maturity of their notes (ranging from 1 to 10 years) and the interest rate (ranging 0 to 3 percent). The Calvert Foundation can build completely customized community investment portfolios for those investing more than $50,000 in capital (Emerson and Spitzer 2006).

As of 2011, the Calvert Foundation has invested nearly $200 million in 250 community organizations in all 50 U.S. states and over 100 ­countries. The portfolio comprises investments in a diversified mix of ­­­high-­­impact organizations whose missions cover a range of social causes and innovations including the following: affordable housing, microfinance, Fair Trade coffee, small business development, and the establishment of essential community facilities, such as charter schools, daycare centers, and rehabilitation clinics. As of 2011, investors and supporters have helped build or rehabilitate more than 17,000 homes, create 430,000 jobs in both the United States and developing countries, and finance more than 25,000 cooperatives, social enterprises, and community facilities.

Based on the success of Calvert’s investments and the increasing demand for such shared value investing opportunities, Citibank has reached out to Calvert. Calvert is now advising Citibank and its customer base, mostly the high net-worth individuals to help the investment process. Similar to Accion International, Calvert wants to become a service provider to traditional banks that have difficulty establishing their own product and services for socially responsible investments.

Corporate Social Entrepreneurship

Microfinance and Impact investing have by now been adopted as integrative approaches in almost any big bank. Goldman Sachs in turn announced the acquisition of an impact investing boutique and Bain Capital created its own impact investing arm. Blackrock, the largest asset holding company also decided to practice impact investing, most often to manage future risk better. Mostly though, businesses and especially most large corporations have made use of social value creation’s external model. Many have set up external foundations that are independently managed and only share their funder’s name (e.g., Alcoa Foundation, Ford Foundation, Gates Foundation, etc.). While this model can certainly create social value and enhance the brand image, these models are often criticized as “cleaning up the mess” that the economic organizations have left. The overall positive impact on the world is questioned.

Whereas corporate social responsibility activities through separate foundations can be a promising first step, corporations will have to go beyond traditional charity and become more involved in a strategic value integration. As Porter and Kramer have advocated, corporations will benefit from being more proactive and moving toward the integrated and perhaps even the embedded model of social entrepreneurship. Austin, Leonhard, Reficco, and Wei-Skillern (2006) propose the concept of ­corporate social entrepreneurship to more closely align social and financial integration. They define the concept of corporate social entrepreneurship (CSE) as the “process of extending the firm’s domain of competence…through innovative leveraging of resources, both within and outside its direct control, aimed at the simultaneous creation of economic and social value.” When implementing CSE in corporations, several areas need to be considered: The capacity of the organizational leadership, the quality of the strategy, the organizational structures supporting the strategy, and the systems that are designed to support the implementation.

Leadership

When implementing CSE in corporations, the role of leadership is crucial. That said, CSE cannot be a one-man show, but needs to be lived throughout the organization. A successful leader therefore provides vision, legitimization, and empowerment. The former CEO of Danone, Frank Riboud worked with Grameenbank to establish Grameen Danone, which provides yoghurt to feed the malnourished children. Without his vision and support this venture would not have gone off the ground. Following Austin et al. (2006), the leader needs to have the capacity to envision a company in which the social dimension is a central and integral part of the corporation’s very being. The leader also needs to create an internal environment that signals the appropriateness and the desirability of the CSE process. Third, the leader needs to enable other leaders and change agents in the company to build and execute that process.

Strategy

Austin et al. (2006) further suggest three key strategic elements for CSE: Alignment, leveraging core competencies, and partnering. With regard to alignment, both the social dimension and the business dimension of the company’s strategy must be aligned with one another; the closer the alignment, the greater the potential for joint value creation. As far as leveraging core competencies is concerned, CSE focuses on discovering creative ways to mobilize and deploy the company’s key assets—those components of the business that are essential to its business success, such as technology, talent, image, infrastructure, procurement and distribution systems, and communications. The third strategy is partnering. While there are many CSE actions that are unilateral and internal, creating alliances with other entities is a particularly powerful form of entrepreneurship.

Structure

Structure needs to follow strategy. The corporate social entrepreneur needs to create innovative organizational forms within the corporation to advance the new social mandate. Separate social responsibility departments often become marginalized and in turn function suboptimally. The key is to integrate social responsibility into the core corporate structure and into its daily operations. It is crucial to find new ways of interdepartmental collaboration to truly embed social commitment into the organization.

Systems

The process of social value creation requires operational support. The decision-making process has to integrate social and financial considerations and needs to include all stakeholders to ensure legitimacy. A top-down approach to decision making is often detrimental while a discursive stakeholder dialog seems more promising. The organization also needs to provide a combined learning and performance-oriented measurement and management system, such as a balanced scorecard. It should hold managers accountable and support their learning to achieve set goals. Another useful support system is an effective economic and social value communication process, which—based on stakeholder dialog—is required to continuously build support internally and externally.

Conclusion

As Porter and Kramer (2006) contend, corporations are not responsible for the whole world’s problems, nor do they have the resources to solve them all; governments and citizens will have to do their share. That, however, does not exempt businesses from acting responsibly or having a co-responsibility to act. In fact, businesses will have to actively address social and environmental needs, not only for the benefit of society, but also for their own benefit. Social entrepreneurship and its dual value objective can serve as an interesting model for traditional corporations in fulfilling growing societal expectations (see Paine 2003). It also serves as a blueprint for organizations that actively want to serve authentic human needs. By reducing inequities and decreasing their environmental impact, such organizations can become more life-conducive and enable our system to better address issues relevant to human survival. Efforts to find shared value in operating practices and in the social dimensions of a competitive context have the potential to not only foster economic and social development, but to also change the way companies and society think about each other. The current dichotomy with business on one side and society on the other can be overcome. Business is part of society and a more integrated view will serve both business as it becomes more competitive (see Porter and Kramer 2006) and society as it becomes more humane.

Questions

  • What is social entrepreneurship and how is a social entrepreneur different from a traditional entrepeneur, an NGO executive, a head of a government agency, or a professor?
  • What are the general forms of social entreprise and which form presents the most challenges/opportunities for ­corporations?
  • If corporations want to adopt social entrepreneurship what are the four key areas they need to consider?
  • Why would social entrepreneurship be a form of humanistic management?

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