The Revolutionary Potential of Social Enterprise

Over the past forty years, we’ve become accustomed to the legal, economic, organizational, and moral distinctions between for profit and non-profit enterprises.  For-profits, like McDonald’s and Proctor and Gamble, provide goods and services in exchange for money which then gets distributed to workers, owners, investors, and the like.  Non-profits, like Feeding America or the Salvation Army, provide free or nominally priced services to those who likely could not afford them otherwise.  Their income is through the generosity of individuals, philanthropists, and governments/taxpayers and spent to pay employees and subsidize these services’ cost to clients.  Money left over may be socked away for a rainy day or invested into expansion.  There are no investors or shareholders in the for-profit sense (nonprofits still take out bank loans and other lines of interest-bearing credit).  This institutionalized distinction between for-profit and nonprofit, I believe, is becoming incoherent and social enterprise demonstrates the revolutionary potential.

First, a hypothetical.  What if McDonald’s wanted to become a nonprofit, what would it take?  Under the IRS definition of a 501(c)(3) it would need to be operated for an exempt purpose whose income does not “inure” to controlling individuals or shareholders.  I may be wrong, but a $1 McDouble seems like a charitable price for feeding those in poverty.  The key difference I believe is the “inuring” of profit.  So, McDonald’s could re-privatize its ownership, change certain lines of investment capital, rework its executive benefits and viola! (I ignore the political limits because they are less relevant to my point here).  In fact, Panera Bread now has a self-sustaining nonprofit arm integrated with its restaurants.

What social enterprise has demonstrated is that you don’t have to give away things for free to be a nonprofit.  This is an inversion of what business students say – “You can do well and do good.”  This is the revolutionary potential of social enterprise.  Many for-profit business could qualify as charitable.  Many charities could turn a profit and still be providing a social good.  The line between socially beneficial and business is being recognized as transient because there are not many activities that could not be considered “charitable.”  The distinction we’re accustomed to is the artifact of a custom whereby services for those in need were organized by nonprofits.  For-profit entrepreneurs and executives are only now realizing that, for the most part, the only thing preventing them from being a nonprofit is “inuring” profit.  The biggest disadvantage to filing as a nonprofit is the access to investment capital.  Hence comes the L3C designation.

L3C stands for a low-profit limited liability company.  Essentially, they are for-profit companies that, for providing a social good or service, can accept return-bearing investments from traditional nonprofit sources, like foundations and governments, (called “program related investments“) but cannot have profit as a “significant purpose.”  While the initial rationale for the L3C was to enable would-be nonprofit organizations to gain more (traditionally capitalist-like) investment, it can go both ways.  Would be for-profit companies (who happen to provide a charitable service) can adopt the L3C as a sign of their ethical commitment to consumers. (What operations and rules define profit as a non-“significant purpose” is left wide-open (4th paragraph), hence I only assert that the L3C is an ethical signal, rather than an operational restriction)

Capitalism would be completely different if the business community recognized that what many of them produce could be considered charitable in a legal sense.  Imagine a world where McDonald’s, Walmart, and Coke are nonprofits (or L3C’s. I want to address the question of capital access in a later discussion).  They already provide cheap food, clothing, potable water, and other essential items to billions of people.  Would you buy a burger from a nonprofit McDonald’s or a for-profit Burger King?  Would Walmart clothes still be made in sweatshops?  How silly does the ideology of shareholder value sound now?

There is no clear push for this radical of a restructuring of capitalism.  But, the emergence of new energizing strategies in business, social enterprise in particular, indicates that Americans are seriously challenging our assumptions that conducting business is ultimately just for profit and providing services to those in need is just charity.  How far we could take it seems pretty revolutionary.

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Business, Civics, and Entrepreneurship

My research and engagement in the Chicago community seem to be converging on a nexus embedding business and civil society, or the economic and nonprofit sectors.  In the academy, this research is emerging around the concepts of social capital/social networks, social movements and mobilization, and social innovation/entrepreneurship.  In the Chicago civic scene, this convergence is occurring around the tech community and tech startups, the infusion of technological innovation in local organizations, and the first waves of post-dot com, CSR business students.  While I doubt this nexus is wholly novel, I want to pull out the strands to offer up some possible connections between what social scientists are thinking and what community activists are doing.

Social Capital, Networks, and Chicago’s Tech Community:  The basic idea behind social capital and social networks was originally worked out by James Coleman.  While network research originated in the 1940’s, the concept of social capital crystallized thought about how the structure of social networks explains innovation, diffusion, norm enforcement, and resource flows.  Social capital essentially refers to the particular assets a person or group of people have due to the way they’re connected with each other and to other groups.  For example, two groups with overlapping membership are more likely to share information and innovation than groups that are not connected (called “structural folds“)

New technologies are ubiquitously useful in organizations (from marketing, communications, organizational learning, etc.),  social life (keeping up with friends, meeting new people, finding a spouse, etc.), and community organizing (collaboration, advocacy, new forms of protest, etc.).  In theory, this should mean that tech human capital (an individual’s technical know-how) should be almost infinitely transferable across networks. Basically, a tech person could be a contributing member of any network.  Thus, the continual rate of innovation in the tech sector should encourage a high rate of social change in all sectors as everyone builds a website, creates a Facebook page, sends their donors newsletters, and so on.

The tech sector in Chicago is a dynamic, surprisingly dense social network of career professionals, entrepreneurs, and technophiles whose substantive interests extend beyond Perl and BuddyPress to monitoring global corruption, increasing connections within the nonprofit field, and offering people collective coupons.  This diversity and the transferability of tech human capital indicate a relatively diffuse network structure connecting techies across these different groups, yet the widespread implementation and experimentation with technologies, new businesses, and initiatives indicates that this diffuse network is still highly mobilized.  This gets to my second thread.

Social Movements and Technological Implementation: The social movement literature in the social sciences was revived by the civil rights moment which deeply affected a generation of scholars.  The results of this inquiry have been a highly profitable framework centered around the concepts of resource mobilization, framing, and opportunity structures.  More recently, social movement outcomes, non-state-directed movements, individual motivation, and emotions have been added to the mix (among others).  This toolkit of concepts and empirical research has been so profitable in fact, that the concepts have attracted the attention of sociologists in other sub-fields, particularly economic sociology who are applying the concepts to business innovation and organizational change.

To innovators and civically engaged business professionals, this direction should come as no surprise.  Accomplishing change, whether implementing new supply chain controls or obtaining subsidies for a new plant from the state, very often seems like a social movement.  More generally, Rao’s book Market Rebels reveals some two hundred pages of economic mobilizations from computer clubs to AAA (the automobile association) that brought computers and cars to every home in the America.  Being a leader, even a business leader, means mobilizing resources, framing your strategy, and seizing opportunities.

In Chicago, and I’ll stick to the tech community, there is a social movement pushing technological innovations to anyone who will listen.  The goals range from online donor best practices and consulting to re-envisioning the Magnificent Mile with augmented reality.  The outcomes have been a mass experimentation with new tech mobilizations (think the Pepsi Challenge and its role in brand-building).  Doubtless, Chicago is not special among major metropolitan areas in this mobilization.  In our consciousness, new technology is an experiment leading inexorably to some future that we create and that we must be part of.  This experiment knows no sector (remember infinite transferability) and always has a theory of what the world could and should look like.

Social Entrepreneurship and New MBA’s: Social entrepreneurship is a new concept, maybe two decades old, that’s become integrated into a new domain along with social innovation (maybe a century old?) and social enterprise (maybe fifty years old).  This domain, both academically and practically, integrates other concepts that cross sectors like privatization, public entrepreneurship, public-private partnership, and venture philanthropy.  The academic-practical integration has probably occurred because the social entrepreneurship/innovation domain has been actively developed in business schools.  While I cannot verify this genealogy yet (I’m working on it), it very likely that the domain resonated with the corporate social responsibility movement that was already resonating in 1990’s, ethically vacuous business schools.  Then, the tech bubble burst.

To demonstrate this conjunction, let me point out the Stanford Center for Social Innovation. It was created in the late 90’s in Stanford’s business school as a joint project between business faculty and Silicon Valley moguls.  Silicon Valley was also the origin of Venture Philanthropy (though Rockefeller III officially coined the term).  The tech boom and bust of the late 90’s was the pinnacle of the first public wave of experiments with new technology.  It brought with it new values (tech savviness, innovation, being the next Silicon Valley) and a new vision of reality (a mature Web 1.0) that picked up on older values and practices and propelled them forward.  The burst bubble was a trauma, like 9/11, that altered not only our collective vision of reality, but of our potential.  New technology was going to bring us a new world, but there is no panacea.

Corporate social responsibility took a serious hold in business school communities (particularly in business ethics) and theories of the role of business in the 90’s.  This renewed discussion of corporate responsibilities beyond shareholder value created fertile ground for the growing discussion over social innovation and social entrepreneurship which emerged as a distinct domain in the mid and late 90’s.  In the early 2000’s, the ever-expanding role of new technologies defining world-changing innovation along with a new discussion over responsibility seems to have created an existential revisioning of doing business which matched innovation and responsibility.  Hence, Harvard started sending MBA’s to developing countries to work with social enterprises, businesses providing essential goods like clean water and sustainable irrigation.  Assuming a two-year program, these socially conscious, tech MBA’s have been graduating since 2004 or 2005.

In Chicago, these MBAs have teamed up with older generations of social entrepreneurs and civic leaders and created a number of civic groups mirroring these new trends, often with names that use the phrases social entrepreneurs, social enterprise, and social innovation.  (you can typically find your local group through Meetup).  These economic activists are creating footholds of practice and organization that connects like-minded activists (business, techie, and otherwise) to pursue socially-conscious innovations.  In this, we see an example of how all of this ties together – technology, social networks, and social movements.  New tech is a mobilizing force that has become diffuse throughout our social networks, yet still remains coherent.  The business of technology, embedded in these civic networks and creating new ones, are a distinct driving force linking the civic and economic in a mutually interested, mutually active experimentation oriented by a socially conscious (yet still mutually suspicious) vision of the future.

Conclusion: The academic and practical convergence of the civic and economic through a number of topics and new groups, while not thoroughly historically novel, will drive change in both.  Business may have turned a corner in the marriage of social and innovation.  Civic organizations may be turning a corner in adapting to the extent and level of innovation and uncertainty.  Academics will likely soon face the challenge of synthesizing social capital/network and social movement research with the ever-present interaction between businesses and civic organizations now most apparent in the problems surrounding social entrepreneurship, social enterprise, and the new technological revolution.

As for the government, this is America, the most a-governmental of all advanced countries.  The government, I believe, does play a role around this.  But, it appears that the business/civic-government interface is occurring on different grounds (remember privatization and public-private partnerships).  There are thematic similarities, but I believe these are very different domains of debate.  There are significant implications for the role (or lack thereof) of government, but I’ll reserve that for other, possible articles.

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