Part 1: What is a Social Business
We have been discussing the term “social business” a lot in our blogs and in our conversations with friends and families. The term social business was created by Muhammad Yunus. He is also the same individual who started the concept of microcredit – small loans given to individuals with no collateral so that they can escape the cycle of extreme poverty. Social businesses have existed for a long time, but the term and definition originate with Yunus in his book Creating a World without Poverty: Social Business and the Future of Capitalism. Muhammad Yunus and the organization he started, Grameen Bank, earned the Nobel Peace Prize in 2006 for their work in alleviating poverty through social businesses and microcredit loans.
Yunus defines social business as two types of businesses. The first type is a company that focuses on providing a social benefit rather than on maximizing profit for the owners. This business is owned by investors who seek social benefits such as poverty reduction, health care for the poor, social justice, global sustainability, and so on. The investors invest in the business because they seek psychological, emotional, and spiritual satisfactions rather than financial reward. The second type of social business is a company that works to maximize profit, but it is owned by the poor or disadvantaged. The social benefit is derived from the fact that the dividends and equity growth produced will directly benefit the poor helping to alleviate poverty or assisting individuals to escape it.
Generally speaking, a social business is a for-profit business that does not pay dividends to investors or seek to increase personal wealth. It is run exactly like a for-profit business. It functions like a nonprofit/for-profit business hybrid. Instead of relying on donations, government supports, or grants (like most nonprofit organizations), the business creates its own income by selling a product or service. Instead of keeping profits and paying investors (like for-profit businesses), the business either directly assists the poor or disadvantaged through their ownership or by donating all profit generated to a social cause.
Social businesses do not rely on kindness of heart or charity to sell their product or service. They create a product or service that can compete with for-profit companies in price, quality, and every other area. Then, they use the profit generated to promote a social cause as opposed to increasing their own wealth or the wealth of investors.
For example, this is not Microsoft supporting the Bill and Melinda Gates Foundation. While the foundation is doing amazing things that we fully support, it is not a social business. Microsoft would be a social business if it paid Bill Gates an executive salary and all profits generated by the products went toward eradicating malaria.
Yunus argues that social businesses are the future of capitalism. The need for something in capitalism other than for-profit business is proven throughout history, time and time again. In our opinion, here are two examples in general terms that occurred very recently in the United States. The bank collapse in 2008 was spurred by CITI Group, AIG, and other companies working to maximize profit through hedge funds and risky investments instead of focusing on investors and individuals who have accounts, loans, or insurance through the companies. The oil spill in the Gulf Coast last year happened because BP wanted to find another drilling site to make more money instead of taking into account the risk drilling created for the environment and the citizens of the Gulf Coast who have careers depending upon clean water and healthy animals.
As you can see, for-profit businesses do not always provide the best answers for investors, citizens, or themselves. Not every for-profit business has taken the risks that some companies have taken, and many for-profit businesses do consider environmental effects and impact on the average citizen before making major businesses decisions. However, Yunus argues that social businesses can help to avoid these catastrophes altogether.
Social businesses can work to create jobs and generate economical improvements just like for profit businesses and they can work to ease social problems and create social change just like non-profit organizations. Also, with more income going to support non-profit institutions and social issues, social businesses can lighten governmental burden to support these programs, which will benefit national governments and tax payers.
We do not believe that social businesses will solve every problem, but we do believe that they are a great option that can work to create quality goods and services as well as benefiting the greater community on a level that another fortune 500 company cannot.
Watch for Part 2 on Social Businesses. In this section we will explain Jesse’s social business idea.