Social Enterprise: A Nonprofit, For Profit, or Something In Between? 

What is a social enterprise?

  • A social enterprise is an organization applying commercial strategies to maximize improvements in human and environmental well-being; can include maximizing social impact alongside profits for external shareholders

Organizations can be social and profitable in three main ways:

1) Social By Sharing – “Social” because they share some or all of their profit with other charitable organizations or causes

  • Finnegan’s Beer, which donates 100% of its profits to combat local hunger
  • Latitude Agency, which donates 50% of its profits to empower those in extreme poverty
  • Tom’s Shoes, which donates one pair of shoes to someone in need for each pair purchased

2) Social by Selling – “Social” because of:

  • What they sell – the product/service when used by customers, results in a unique & compelling social (not just private) value, or
  • To whom they sell – sell a conventional private good but to a population currently not served by the market

Examples:

  • Revolution Foods, which sells extraordinarily fresh, healthy meals to school cafeterias in order to combat obesity and improve child health
  • Thedatabank, which sells software and IT services to nonprofit organizations, which traditionally are under-served by the technology industry because they have lower purchasing power
  • D.Light Solar, which sells solar light and power products to people in the developing world who do not currently have stable electricity

3) Social By Sourcing – “Social” because of how they make their products or services. Common methods include:

  • Using new environmentally friendly processes
  • Employing vulnerable populations
  • Using minority owned suppliers
  • Exclusive use of sustainable materials
  • Public co-production processes

Examples:

  • Cookie Cart, which employs and provides job training to at-risk teenagers
  • Ten Thousand Villages, which sells products that are sourced from individual artisans from the developing world, using all natural and environmentally sustainable materials
  • Patagonia, which insists on very high environmental standards in its product supply chain

Where do these organizations fit within the classic two traditional organizational structures?

comparison
Organizations within these classic structures can be similar to social enterprises, but differ in some profound ways. Here are traits of socially responsible for-profit businesses and nonprofit and nonprofit social enterprises:

Socially Responsible For-Profit Businesses

  • Business purpose; owners who invest money expecting at least a return of their capital and hopefully ROI
  • Can have a social mission/operate socially responsibly, but not obligatory and no enabling law to inform operations of this sort of enterprise
  • Social responsibility is about operations, not distributions to owners. It is marketplace driver; not a legally required component.

Nonprofit & Nonprofit Social Enterprises

  • Mission driven; no owners; can have “profit” but no person has right to receive that profit
  • Social enterprise’s social mission has primacy and its economic activity is a method of funding the social mission without opportunity for fruits of that activity to be distributed to investors

These types of organizations can placed firmly on a classic bipolar spectrum of purpose:

purpose-spectrum

Social enterprises are obligated to maximize profit and social impact and thus do not fit on this classic spectrum. A revised framework demonstrates:

revised

This revised framework speaks to the fact that a new sector of the economy has emerged, dubbed “the fourth sector:”

4th-sector-mature

This new sector needs to be defined by a new entity type, the benefit corporation:

  • For-profit business (with owners/ROI) that has additional purpose to create “a material positive impact on society and/or the environment”
  • Directors have duty to consider effects of their decisions on all constituencies
  • Business must report how it creates a social benefit
  • Requires states to pass a new law

Benefit corporation statutes have been proliferating across the country:

As of 11/2016
As of 11/2016

Minnesota passed a Public Benefit Corporation Act in 2014. Here is a timeline of the genesis of the law:

  • Spring 2012 – Working Group begin investigating concept Spring 2012
  • Winter 2013 – Drafting Committee formed, met every other week for 6 months
  • April 2014 – Passed in Legislature and signed by Governor
  • January 2015 – Became effective

Some of this content has been adapted from Jeff Ochs