Social enterprise - the fledgling fourth sector

By Chip Feiss

Is it possible that a whole new, distinct fourth sector is developing right before our eyes? The modern business world has up to now comprised the private for profit, public/ government and non-profit sectors. But today there is a blurring of the lines between these sectors. There is also a burgeoning global movement, known as social enterprise, which straddles all the other sectors.

But, first, if social enterprise is to become the new fourth sector it will need to overcome some structural challenges. The first is one of definition. The term “social enterprise” has been imbued with many different meanings and become associated with other catchphrases such as “sustainability”, “green” and “corporate social responsibility”.

I define it as a for-profit/non-profit or hybrid business, using private investment to work on common-good social problems.

Virtually daily there is news of another social enterprise initiative, as individuals and institutions such as business schools, where courses on social enterprise are among the most popular, explore alternative ways to create financial and social value. Those involved in launching these new enterprises clearly reject Milton Friedman’s perspective “that the social responsibility of business is to increase its profits”.

Although experiencing a huge upsurge in interest and visibility globally, social enterprise is still in its nascent stages. Today it can be characterised as a fragmented sector filled with many small-scale enterprises struggling with scale. Growth and scalability are important concerns for all businesses but maybe more so for social enterprise, in that the scope of the social problem(s) it is trying to solve is so large.

Innovative work is being done to reach scale,including the development of corporate structures, tax policy that considers the social benefit delivered by social enterprises, the design of systems to measure social value and impact, the creation of social capital markets for improved financing of social enterprises and the development of funding sources and investment instruments.

The establishment of social enterprise as a distinct, flourishing sector faces many challenges, but history is encouraging. Concerns over income inequality, environmental degradation and social justice have prompted people to search for and experiment with new ways to do business.

The recognition by many people of the failure of business and public policy to deal with these issues adequately has led, among other things, to the global proliferation of non-profit organisations. They have doubled in number in the US alone in the past 15 years.

This same awareness motivated people to align their investments better with their values and gave birth to socially responsible investing, which has also seen dramatic growth. In the UK, funds invested with a socially responsible focus have grown from £1bn to £764bn ($1,260bn, €897bn) in 12 years. The opportunity for social enterprise is huge. The Monitor Group estimates that this could be a $500bn-a-year sector within five to 10 years.

There are, of course, those who question the efficacy of social enterprise, including President Barack Obama’s economic adviser Larry Summers, who wrote: “It is hard in this world to do well. It is hard to do good. When I hear a claim that an institution is going to do both, I reach for my wallet. You should too.”

While I also believe it is hard to do well and/or good, I am encouraged by social enterprise, which appeals to a larger part of the human spirit and experience than some of the traditional business models.

Social enterprise is not meant to replace the other sectors but is another way of dealing with common social problems that have not been successfully addressed to date. Is it possible? When history collides with motivation and opportunity anything is possible.

Chip Feiss is a senior fellow at the Center for Business and Government at Harvard Kennedy School of Government

Following the “The catastrophic collapse in governance” in 2008; the Interfaith Center on Corporate Responsibility and the As You Sow Foundation report successful shareowner efforts on resolutions addressing corporate governance, the environment, and human rights. See Social Funds’ coverage here:http://www.socialfunds.com/news/article.cgi/article2724.html

A new survey says YMCA has the most valuable nonprofit brand, followed by Salvation Army and United Way of America and American Red Cross, The New York Times reported June 23 (see charity brand story).

By Scott McKain, co-founder of The Value Added Institute

If my very future depended upon selecting a single person to sink just one basketball shot, I’m picking Michael Jordan.  If my life hung in the balance, and one individual from our history had to present an oration that would determine my survival, I would beg Martin Luther King to speak on my behalf.

So, why in the moment of its greatest trial would General Motors — described by now-CEO Fritz Henderson as desperately needing to succeed in two areas: “product and customers” — turn in its time of crisis to someone with 43 years experience at the phone company?  Don’t get me wrong, Edward Whitacre, Jr. changed the landscape of that great American institution, AT&T, re-shaping it from a monopolistic giant into a diversified, competitive enterprise.  He took the smallest of the so-called “Baby Bells” — SBC — and created a global powerhouse.

The problem is that what Whitacre foresaw for his company then — colossal technological change and rapid consolidation — is not the immediate future of the automotive industry.  It was never the case that customers didn’t want to buy a phone; instead it is that we wanted more of the communication services they had to offer in new and exciting ways.  On the other hand, few of us are thrilled by what we have to endure to purchase an automobile.  GM has become so disconnected from its customers, that we will do just about anything to avoid interaction with them.

AT&T grew because of the technological advances in their industry — not because there were so customer-centric that they took existing market share from their competitors.  Which, of course, is the very aspect that GM needs to execute to survive.

When it comes to AT&T Wireless, for example — does anyone doubt that whatever degree of success they’ve had lately was more dependent upon Steve Jobs than the system that Ed Whitacre established?  Apple’s iPhone — and the entire customer experience created by Apple Stores — has driven almost all of the advancements of AT&T Wireless.  If the AT&T stores were regarded as customer focused, why did the vast majority of us go instead to Apple to buy our phones, and only reluctantly endure the AT&T experience?

It is a bit odd that in this time where the Administration is stressing fiscal discipline and reduction in executive compensation that the pick for GM’s Chairman is a man who, according to “Corporate Library,” left his previous position with a retirement package valued at $158.5 million. Yet, you don’t assemble companies like the one AT&T became under Whitacre without knowing your way around all three branches of government.

That’s why the fundamental reason for Whitacre’s selection should be painfully obvious — GM is more focused upon a Chairman who can work with governmental overseers than inspire dealers and create products that connect with customers.  For all of CEO Henderson’s posturing of the past several days — and he’s done a pretty good job at it — it speaks volumes that the selection of GM’s Chairman is someone from another industry that, like the car business, was formerly bloated beyond description, took those who sold their products for granted, and often treats those who spend money with them as chattel.

If the Administration really believed what their hand-picked CEO was saying — that products and customers make the difference — why not be really distinct in the selection of Chairman?  Why not ask Steve Jobs to lead GM instead of returning to Apple at the end of the month?  It would be interesting to challenge him in a similar manner to the provocation he issued to John Scully all those years ago.  Howard Schultz at Starbucks knows a thing or two about the customer experience.  Alan Lafley is retiring as CEO of Procter & Gamble and he excelled at retailing, manufacturing, customer relationships, and organizational change.  Why insist that Roger Penske purchase Saturn to make his point?  He already knows every aspect of the automotive business — and would be someone who would excite the imagination of every car lover on the planet.

In the final analysis, there is really a solitary reason that this particular type of choice is made — GM has a greater desire to get along with the owners than the customers.  The skill that was sought — like I’d have Jordan take the shot or Dr. King give the speech — is not to direct the corporate strategy to create distinct products and distinctly positive relationships with prospects and customers.  What matters most to those who selected Edward Whitacre is simply the ability to work with the regulators.  And, as becomes obvious, it’s now undoubtedly Obama Motors, and not any kind of General, or customer focused, one.

Scott McKain is the Vice Chairman of Obsidian Enterprises, co-founder of The Value Added Institute and author of “Collapse of Distinction – Stand Out and Move Up While Your Competition Fails”.  Read more on his blog at http://mckainviewpoint.com/.

Overlooked by the mainstream media and only rarely discussed in the management journals is the resilience of the Co-operative business model.  The reason for this may well be the lack of management scandals, which have plagued the corporate and the nonprofit sectors over the past 20 years.

Co-operatives have also maintained a low profile in the current economic meltdown. There are almost 10,000 credit unions in the U.S. with 84 million members and assets in excess of $600 billion.  Not one of these defaulted or went to Washington for TARP money simply because they are close to their communities and know their customers.  Credit Union loans were not sliced and diced into ‘collateralized debt obligations’ by Wall Street, given triple a status by the ratings agencies and then sold to institutions worldwide.  These asset managers could not or did not check on the details of the underlying loans, a situation that is almost impossible to be replicated at a credit union.

What exactly is a Co-op?

The Co-operative Industry uses this definition:

“A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise.”

The central role of Values is paramount in the Co-operative community:

“Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others.”

Those values have been firmly recognized by The United Nations with their designation of July 4th, 2009 as the International Day of Cooperatives.

“Driving Global Recovery through Cooperatives” is this year’s International Day theme and it focuses on recovery rather than crisis.  It aims to highlight the role that cooperatives have in not only promoting economic growth, but also in promoting ethical values - values that have been severely challenged during the financial and food crisis. It underlines that cooperatives can effectively contribute to global economic recovery and that they will do so in respect of the Cooperative Values and Principles, which guide their operations.

The Principles follow seven internationally recognized precepts:

•    Voluntary and Open Membership
•    Democratic Member Control
•    Member Economic Participation
•    Autonomy and Independence
•    Education, Training and Information
•    Cooperation Among Cooperatives
•    Concern for Community

A brief history:

Co-operatives started out as small grassroots organizations in Western Europe, North America and Japan in the middle of the last century; however, it is the Rochdale Pioneers that is regarded as the prototype of the modern co-operative society and the founders of the Co-operative Movement.

The Rochdale Pioneers:

In 1844 a group of 28 artisans working in the cotton mills in the town of Rochdale, in the north of England established the first modern co-operative business, the Rochdale Equitable Pioneers Society The weavers faced miserable working conditions and low wages, and they could not afford the high prices of food and household goods. They decided that by pooling their scarce resources and working together they could access basic goods at a lower price. Initially, there were only four items for sale: flour, oatmeal, sugar and butter.

The Pioneers decided it was time shoppers were treated with honesty, openness and respect, that they should be able to share in the profits that their custom contributed to and that they should have a democratic right to have a say in the business. Every customer of the shop became a member and so had a true stake in the business. At first the co-op was open for only two nights a week, but within three months, business had grown so much that it was open five days a week.

The principles that underpinned their way of doing business are still accepted today as the foundations upon which all co-operatives operate. These principles have been revised and updated, but remain essentially the same as those practiced in 1844.

In the US, since 1916 the National Cooperative Business Association was the first, and remains the only national organization for all types of co-ops in the country. Dedicated to developing, advancing and protecting cooperatives, for nearly 80 years the NCBA has been the national voice for U.S. cooperatives, helping them compete in changing economic and political environments.

Internationally the Association has worked in the developing world for over 60 years, helping to empower local communities through cooperative development.

A 100 years after the Rochdale Pioneers’ Co-op was founded in the UK, the NCBA formed the Freedom Fund in 1944, to help cooperatives recover in war-torn Europe.

The following year, it played an integral role in creating the Cooperative for American Remittances to Europe, which provided economic relief to war-torn Europe. NCBA President Murray Lincoln was the first president of that organization, now known and recognized worldwide as CARE.

Some interesting facts and figures:

# Worldwide, some 750,000 cooperatives serve 730 million members.

# U.S. cooperatives serve some 120 million members, or 4 in 10 Americans.

# 29 cooperatives have annual revenue in excess of $1 billion, including such well-known names as REI, Land O’Lakes, Inc., ACE Hardware, Sunkist and Ocean Spray Cranberries.

#The top 100 co-ops have a combined $117 billion in revenues.

# Cooperatives range in size from large enterprises, including U.S. Fortune 500 companies, to single, small local storefronts.

# 270 telephone cooperatives provide service to two million households.

# Some 250 purchasing cooperatives offer group buying and shared services to more than 50,000 independents businesses.

# Cooperatives operate in every industry including agriculture, childcare, energy, financial services, food retailing and distribution, health care, insurance, housing, purchasing and shared services, telecommunications, and others.

# About 30 percent of farmers’ products in the U.S. are marketed through more than 3,000 farmer-owned cooperatives.

# Approximately 900 rural electric cooperatives own and maintain nearly half of the electric distribution lines in the U. S., cover 75 percent of the land mass and provide electricity to 37 million people.

# More than 1,000 mutual insurance companies, with more than $80 billion in net written premiums, are owned by their policyholders.

# More than 6,400 housing cooperatives provide homes for 1.5 million households.

Throughout the World, cooperatives are providing co-op members with financial services, utilities, consumer goods, affordable housing, and other services that would otherwise not be available to them.

The U.N.’s conference “Driving Global Recovery through Cooperatives” in July will bring the Co-operative business model to the attention of a broader business audience, perhaps Wall Street can find time to listen to some inspiring success stories.

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Just announced:

The Global Co-operative Development Fund

UK credit card provider Co-operative Bank, in collaboration with Deutsche Bank, has launched the first development fund for co-operatives.

The bank believes that its customers wants it to play a part in tackling global poverty and the new fund is one of the ways that it can achieve this aim.

Head of structured and asset finance at the bank Richard Wilcox said: “Investing in co-operatives can contribute to the economic development of a country, helping to alleviate poverty and reduce economic vulnerability - while providing a competitive risk-adjusted return.”

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Views on the culpability of schools in the economic meltdown range from one extreme to another, as do the prescriptions for how to win back the trust of business and students.

MBAs pledge to do good

Graduating students from Harvard Business School are lining up in their droves to sign an oath which requires them to “create value responsibly and ethically”.

The oath is the brainchild of second-year Harvard MBA Maxwell Anderson, who hoped that 50 per cent of the Harvard class of 900 students would sign up to the oath by graduation this week. The oath was initiated just three weeks ago.

Mr Anderson was encouraged by two of Harvard’s most influential professors, Nitin Nohria and Rakesh Khurana, in developing the oath. The two have been particularly vocal in the idea of developing management into a profession on a par with law or medicine.

See: FT.com 6.7.09

Here is a great idea for capturing user-generated content from the front lines of philanthropy at home and abroad; two video cameras for the price of one:

Flip Video Spotlight has approved more than 1,200 charitable organizations as Participating Partners for this program. They include charitable groups working across a diverse set of causes including youth development, poverty alleviation, conservation, and more. These Partners range from small local organizations to national charities with multi-million dollar budgets. All share an interest in using video to achieve their goals.

http://flipvideospotlight.com/

Flip Video Spotlight provides steeply discounted access to selected Flip Video products to qualifying charitable organizations. To start, charitable organizations apply online to become a Participating Partner. If approved, Participating Partners join our online community and receive access to the Flip Video Spotlight storefront. For each Flip Video Ultra camcorder purchased through the storefront, Flip Video Spotlight donates a free unit.

Learn more by reading their Eligibility Guidelines and submit an application.

Flip Spotlight also works with for-profit companies who want to provide video equipment as part of their corporate philanthropy.  

Life as a TARP wife

The wife of a big time financier whose firm has accepted billions in TARP funds has penned an article for Portfolio. “Confessions of a TARP wife” is all about her new “financial abstinence,” which no longer includes “multi-star Michelin hotspots.” The essay reads like a parody (as if cribbed from The Onion), but I think it was meant to be taken seriously.

“Choosing Versailles to host World War I peace negotiations could not have been more complicated than my attempt to select the perfect spot for our annual dinner.” Really? She’s now “shopping in her closet” because “God forbid someone catches me out in something new.” When she buys presents, she “has the package sent to their home. I don’t want to be spotted climbing into a taxi, laden with Bergdorf Goodman shopping bags.” So who is the mystery scribe? The New York Post has fingered her as Liz Peek, the 60-ish wife of Jeffrey Peek, whose CIT Group took $2.33 billion from the Troubled Assets Relief Program last fall. She declined to comment to the paper.  Source: FierceFinance’s Jim Kim.

Joel Kurtzman writes:  “I hope you find the attached annual update of the Opacity Index useful in your endeavors.” 

It is no surprise that risks have increased worldwide over the last year, as the latest release of the Opacity Index shows. The United States, in particular, has continued its fall from 4^th  place, when we began our analysis, to 13^th, place, in 2009, with continued downward momentum. This unprecedented decline is accounted for by regulatory and enforcement lapses. But equally important, the performance of boards of directors in the United States has failed to improve, despite rules stemming from Sarbanes-Oxley legislation which have now been in effect for quite some time. The demise of several major financial institutions is representative of poor board oversight and regulatory and enforcement laxity, among other things.  

On a positive note, the world in general has made progress with regard to the adoption of international accounting standards and some countries – notably China – have seen declines in corruption levels.  Best Regards,Joel Kurtzman

Kurtzman Group/Milken Institute  http://www.kurtzmangroup.com   

Read: “Global Edge: Using the Opacity Index to Manage the Risks of Cross Border Business,” Harvard Business School Press