Executive Summary: Social businesses, also known as social enterprises, are organizations that strive to achieve a balanced integration of social objectives and financial sustainability. These enterprises represent a hybrid between traditional profit-driven models and charitable organizations. Originating from a legacy of philanthropy and the social commitments of affluent individuals and large corporations, social businesses today possess a distinct purpose. However, in many countries, social enterprises are not formally recognized as separate entities, as they exhibit characteristics of both charitable and commercial organizations. Consequently, governance frameworks and reliance on grants can vary significantly across different nations. Additionally, levels of revenue and profitability show considerable variation from one country to another. As commercial organizations begin to embrace the ethos of the triple bottom line, incorporating social and environmental commitments into their strategic vision and operational practices, the distinction between social businesses and commercial entities is becoming increasingly blurred. Furthermore, certain products and practices associated with social businesses have faced criticism for potentially exploiting the poor and vulnerable. This article offers a critical assessment of social businesses by examining their governance structures, strategic directions, and ethical challenges.
Introduction:
In recent decades, there has been a significant increase in global focus on social businesses, providing essential insights into their ongoing challenges in creating and delivering social value while ensuring operational and financial sustainability. Social businesses, frequently referred to as social enterprises, are organizations that strive to balance social objectives and financial viability. According to the European Commission, the social business and entrepreneurship sector employs approximately 40 million individuals and engages around 200 million volunteers worldwide. In the UK, social businesses employ 5% of the country’s workforce and 3% of the country’s GDP. Beyond their contributions at the national level, the sustainable operations of social businesses positively influence regional social and economic development. Consequently, social businesses are gaining greater recognition and importance within regional and national development strategy frameworks.
Nobel Laureate Dr Yunus, who currently leads the Interim Government of Bangladesh, introduced the concept of social business. He emphasizes that social businesses prioritize social value over profit maximization. Social business is defined as fluid, but it is crucial to recognize its difference from charities and commercial enterprises. Many countries may lack a clear regulatory framework to differentiate these organizations, yet social business is recognized as a form of business rather than charity. Owners of a social business are not just philanthropic donors; they possess the right to reclaim their contributions. Moreover, social businesses are explicitly designed to reinvest surplus value to tackle societal challenges rather than focusing on the organization’s growth.
Nevertheless, social businesses are poised to become an increasingly attractive option for philanthropists looking to allocate their funds wisely. Rather than making one-time donations, many may choose to invest in sustainable businesses that promise ongoing benefits. In the near future, we can expect to see how these investments will allow potential earnings to be reinvested into the initiatives rather than being distributed to owners, amplifying the positive societal impact generated. Many proponents of social businesses envisage this anticipated change will transform the way philanthropy is approached, leading to lasting change in communities around the globe.
This article offers a critical perspective on how social businesses are perceived and operated in various parts of the world. It seeks to unravel some of the social businesses' inherent and contradictory natures that impede their growth and sustainability by drawing on management philosophies, governance structures, and ethical complexities.
Historical background of social business
Discussion and research on social enterprises have experienced significant growth over the past two decades, spurred by global interest in various business models, including microfinance. Nevertheless, the foundational principle of affluent individuals contributing to social welfare can be traced back to ancient traditions. Major world religions have historically championed philanthropy, as seen in the acts of service promoted by Jesus in Christianity, the concept of waqf (charitable endowment) in Islam, the principle of 'dana' in Hinduism, and the focus on compassion in Buddhism. These instances demonstrate that the commitment to social welfare is deeply embedded in human philosophy and ethical understanding.
In post-industrial societies, business owners started to recognize the critical importance of their employees’ well-being and the welfare of their local communities. Robert Owen, a Welsh textile entrepreneur and philanthropist during the Victorian era, was a groundbreaking figure in this movement, introducing the concept of utopian socialism and spearheading the cooperative movement. He took decisive action to improve factory working conditions, championed experimental socialist communities, and advocated for a more communal approach to child-rearing. As highlighted by Social Enterprise UK, the origins of social enterprise can be directly traced back to the 1840s in Rochdale, where a workers' cooperative was founded to provide affordable, high-quality food, effectively combating the exploitative factory conditions of that era.
The evolution of management practices and philosophies over the last century has been accompanied by an increasing awareness of working conditions and social and communal responsibilities. The early popularity of socialism in the twentieth century contributed to the development of a more responsible approach to management. This transformation was not limited to post-industrial developed societies. Vinayak Narahari Bhave, widely known as Vinoba Bhave, drew inspiration from Gandhi’s philosophy to advocate for land gifting, focusing particularly on impoverished and Dalit communities. Bhave's efforts influenced U.S. social entrepreneur Bill Drayton, who founded Ashoka in 1972. Following that, in the 1980s, Dr. Yunus launched Grameen, which played a pivotal role in popularizing microfinance on a global scale.
Social business in today’s world
As mentioned, social business or enterprise has emerged as a hybrid between a fully commercial profit-seeking model and charities. It is understood that the government has limited capacity to address the wide range of societal needs. Likewise, charity organizations do not have resource capabilities and strategic priorities to cover social and environmental issues. Hence, the business model of social enterprises can offer the right balance and encourage delivering social and environmental value while achieving financial surplus. The model garnered popularity across the world in developed and developing countries alike. Figure 1 shows the spread of social businesses in various parts of the world.
Social enterprise governance structures and operational modalities vary significantly across different countries. While many stakeholders assert that regional, national, supra-national, and international funding initiatives are essential for the sustainability and growth of social enterprises, their impact can differ markedly from one nation to another. A survey conducted by the British Council revealed that social enterprises in Bangladesh and Algeria derive a relatively small proportion of their income from grants. Specifically, 91% and 97.0% of these enterprises reported receiving less than a quarter of their income through grants. In contrast, social enterprises in Indonesia and Jamaica rely heavily on grants. 43.0% and 52% of enterprises in Indonesia and Jamaica received up to more than 25% of their income from grants. Figure 2 summarizes the survey results demonstrating significant differences among countries.
Figure 2: Proportion of social business income, earned through grants. Source: https://www.britishcouncil.org/sites/default/files/more_in_common_global_statehttps://www.britishcouncil.org/sites/default/files/more_in_common_global_state_of_social_enterprise.pdf
The degree of turnover and profitability varies significantly across different countries. Due to disparities in currency and other macro-environmental factors, comparing the average revenues of social enterprises can be challenging. Additionally, social enterprises differ in size and industry. For instance, prominent organizations like Grameen (Bangladesh), Ashoka (US), and Oxfam (UK) operate on a large scale and have a global presence. In contrast, many others are small and serve only regional markets. Nonetheless, the survey conducted by the British Council indicates that, in many cases, social enterprises struggle to achieve profitability. Greece and the UAE report some of the lowest success rates in this area. In contrast, a larger proportion of respondents from Ethiopia, Sri Lanka, and Vietnam reported generating profits. Figure 3 provides a snapshot of the comparative scenario.
Figure 3: Survey results showing whether or not social enterprises make a profit. Source: more_in_common_global_state_of_social_enterprise.pdf
Challenges and remedies:
Figure 4: Social business and CSR model. Source: (Hudon and Sandberg, 2013)
As noted, social enterprises often lack separate recognition in many countries. Moreover, they face a considerable funding gap, estimated at $1.13 trillion globally. Thus, it is imperative to reevaluate the fundamental concepts and philosophies surrounding social enterprises. We must urgently revisit the concept of social business as articulated by Yunus, particularly in today's rapidly evolving landscape, where the core principles of conducting business are undergoing a profound transformation. Figure 4 demonstrates the differences between various business models based on the research findings of Hudon and Sendberg (2013). The article was published more than a decade back. In today’s world, many commercial organizations are adopting the triple bottom-line ethos: people, planet, and prosperity. The triple bottom line theory offers a new set of metrics to measure business success, encompassing an organization’s impact on social welfare, ecological sustainability, and economic fairness.
The concept of corporate social responsibility (CSR) has transformed from merely being regarded as an obligation to become a core philosophy within organizations. Professor C.K. Prahlad introduced the idea of bottom-of-the-pyramid marketing to highlight the significant business opportunities that can be tapped into by engaging with impoverished populations. He posited that it is possible to address both social and commercial objectives simultaneously. As a result, the distinctive nature of the social business model warrants further examination.
Today, contributing to social and environmental well-being is seen as an integral part of the operations of profit-driven businesses. Consequently, the distinctions between commercial organizations and social enterprises, as illustrated in Figure 4, are becoming increasingly blurred. Additionally, social enterprises often face challenges operating within a business ecosystem where their partners primarily focus on profit. This issue is particularly significant for small and medium-sized social enterprises, which rely heavily on ecosystem partners to develop supportive and collaborative networks.
One could argue that social enterprises' primary challenge, or the very concept itself, is building their credibility and demonstrating a commitment to ethical and responsible management and business practices. For example, the allegations of sexual exploitation against Oxfam employees led to significant backlash, resulting in the UK government suspending its funding. Microfinance, often referred to as microcredit, which Dr Yunus described as a means to consign poverty to history, has faced substantial criticism, not least due to the exorbitant interest rates imposed on poor borrowers. It was found that the Mexican microfinance institution Compartamos imposed interest rates exceeding 100% on its impoverished borrowers. A report from the UK government indicates that interest rates for microfinance generally fall within the range of 20 to 50%, potentially outweighing any benefits it can offer to the borrowers[1]. Scholars have divided opinions in terms of the actual contribution of microfinance to poverty alleviation. One can question whether microfinance should be considered a social business product due to its unethical pricing and the contested impact on social and economic benefits.
Hence, it is necessary to assess whether social businesses should retain their distinct identity or operate like commercial entities with a similar strategic vision and operational efficiency. It is also essential to address the issues of unethical products and practices of social businesses, which can exploit poor and vulnerable people and diminish their value.
Dr Bidit L. Dey
Associate Professor in Marketing
Sheffield University Management School (the University of Sheffield), UK
LinkedIn: Bidit Dey | LinkedIn
Further references:
Hudon, M. and Sandberg, J., 2013. The ethical crisis in microfinance: Issues, findings, and implications. Business Ethics Quarterly, 23(4), pp.561-589. ((PDF) The Ethical Crisis in Microfinance)