Let’s brand the “profit-for-purpose” social enterprise as Capitalism 2.0
The not-for-profit shops we all know and love, like thrift stores and animal shelters, conduct business and are fulfilling a beneficial social purpose. This form of nonprofit social enterprise is widespread and growing, but I wouldn’t say it is revolutionary in the way I’m thinking. My focus is on a relatively new approach to business called the “for-profit social enterprise”, and if it grows to a large enough scale it could have profoundly positive impacts on the U.S. and the world.
The current world leader in this approach to social business, the U.K., especially Scotland, has created a legal vehicle for for-profit social enterprises called “Community Interest Companies” (CIC’s). The creation of legal status is important and at the heart of the revolutionary potential of social enterprise. The legal form one chooses for a business entity has important financial implications related to raising money, paying taxes and public transparency. And so it is for the social enterprise (SE) – a new set of regulations and rules from the government determines the financial structure and opportunities for the future.
Social enterprise legal forms are different in every country, but a review of the various approaches from the U.K., the E.U., Australia and Canada show an emerging trend with common elements:
- The SE must be created and operated to fulfill a social or environmental mission first and foremost;
The profits must be returned to fulfill this mission either wholly (100%) or partially (more than 51%);
- Dividends paid to investors must be limited to a percentage of net profits, usually between 0-35%;
- Assets of the SE are “locked” in the way assets of nonprofit 501(c)3 organizations are locked;
- eaning that they can only be sold to another SE or nonprofit entity pursuing a similar mission;
- The financial accounting of the SE must be open to public review in a manner similar to nonprofit organizations.
Social enterprises in the U.S. are currently operating as small businesses in many sectors, such as restaurants, food production, and reuse/recycling programs. Their profit-for-purpose missions include job training and skills development for hard-to-employ populations, environmental protection, housing for the homeless, youth development, and economic justice. The only legal form that requires an American for-profit social enterprise to pursue their social mission first and profit second is called the “Low-profit Limited Liability Company” (L3C).
The future holds the potential for SE to grow into something much more significant than it is today, and, dare I say, could be a social revolution in how we view capitalism itself. I am imagining a social enterprise with a large work force, capital assets and marketplace savvy sufficient to partner with local governments to pursue the community-scale public missions that require new infrastructure for climate-smart waste, energy and transportation systems. The traditional “single bottom-line” (profit) business approach is clearly not working fast enough to prevent global warming from increasing, so a new approach is needed.
I can imagine bigger and better outcomes for our communities when SE links arms with the government to spearhead the creation of well-funded facilities to support Zero Waste and Zero Carbon goals. The SE wouldn’t necessarily have to do all the direct work, it could play an oversight role by subcontracting out projects to private sector companies willing to support the mission and limit their profit-seeking in exchange for an increased degree of market safety. I would call it a form of negotiated competition.
The strength of this new approach would be that the government, representing the community interest, would establish a clear vision and goal for the future, while the SE would bring the sector expertise and transparency to the table. Together this public-private team would be constantly monitoring, planning, analyzing and adjusting multiple contracts and programs, always with the dual goals of achieving tangible progress while participating in the financial gains and losses within a negotiated range.
Could it work? My experience running a recycling social enterprise tells me it can because we did it on a small scale. In the 1990’s we grew a network of ten small recycling drop-off centers throughout our County in cooperation with the local governments. Our social enterprise designed, financed, and operated the centers on behalf of the government in exchange for negotiated risk/reward contracts with the goal of our SE making around a 10% profit each year, getting our investment back, and after ten years turning over the ownership and operation of the centers to the local government. Public ownership of the green infrastructure is essential for ensuring longevity and scale regardless of market forces.
The future growth of profit-for-purpose enterprises offers the traditional business sector new ways of participating and supporting social and environmental programs that have high non-financial benefits but limited profit opportunities. The financial operating systems for our nations are a bit like computer operating systems, and we all know how even the best of those are given “upgrades”.
I think Social Enterprise is an upgrade to capitalism, and that can be nothing but good in these times of social and environmental challenges.
Eric Lombardi has been working at the cutting-edge of the Zero Waste and Social Enterprise Movements across the world since the mid-90’s. His working mission has been to transform the “waste management” industry into a resource management industry.
Eric is a SEWF 2018 speaker and is chairing Sustainable Planet – the opportunity for social enterprise engagement on Friday at 2.15pm