Capitalism is interpreted too narrowly
Many of the problems in the world remain unresolved because we continue to interpret capitalism too narrowly. In this narrow interpretation, we then create a one-dimensional human being to play the role of entrepreneur. We insulate him from other dimensions of life, such as the religious, the emotional, the political, and the social. He is dedicated to one mission in his business life: maximizing profit. Masses of one-dimensional human beings support him by backing him with their investment money to achieve the same mission.The free market game, we are told, works out beautifully with one-dimensional investors and entrepreneurs. Have we been so mesmerized by the success of the free market that we don’t dare to question it? Have we worked so hard at transforming ourselves absolutely into one-dimensional human beings – as conceptualized in economic theory – to facilitate the smooth functioning of the free market mechanism?
Economic theory postulates that you contribute to society and the world in the best possible manner when you concentrate on squeezing out the maximum for yourself. Once you get your maximum, everybody else will get theirs too. As we follow this policy, we sometimes begin to doubt whether we are doing the right thing by imitating the entrepreneur created by theory. After all, things don’t look too good around us. We nevertheless quickly brush off such doubts by maintaining that bad things happen as a result of “market failures” – well-functioning markets do not produce unpleasant results, do they?
I do not think things are going wrong due to “market failure.” The causes lie much deeper. Let us be brave and admit that they are the result of “conceptualization failure.” More specifically, it is the failure of economic theory to capture the essence of human beings. Everyday human beings are not one-dimensional entities; they are excitingly multi-dimensional and indeed very colorful. Their emotions, beliefs, priorities, and behavior patterns vary so greatly that they can be more aptly described by drawing an analogy with the millions of colors and shades that are produced by mixing just three basic colors in varying proportions.
Social business entrepreneurs can play a key role in the market
Let us postulate a world with two kinds of people, both one-dimensional but with different objectives: the profit maximizing kind and the non-profit maximization kind. The second type is totally committed to making a difference in the world; they are driven by social objectives. They want to give other people a better chance in life. They want to achieve their objectives by creating and supporting a special kind of enterprise. Such businesses may or may not earn profit, but like any other business, they must not incur losses. We could describe this new class of businesses as ‘non-loss’ businesses.
Do we find this second type of person in the real world? Yes, we do. We are all familiar with ‘do-gooders.’ They are the people referred to as ‘social entrepreneurs’ in formal parlance. Social entrepreneurship is in fact an integral part of human history. Most people take pleasure in helping others and all religions encourage this quality in human beings. Governments reward social entrepreneurs with tax breaks and special legal facilities are created so that they can create legal entities to pursue their objectives.
Some social entrepreneurs use money to achieve their objectives; some just give away their time, labor, talent, and skill or make other, useful contributions. Those who use money may or may not try to recover part or all of the money they invest in their work by charging a fee or a price.
Social entrepreneurs who use money can be classified into four categories:
· No cost recovery
· Some cost recovery
· Full cost recovery
· More than full cost recovery
Once a social entrepreneur operates at 100 percent or beyond the cost recovery point, he has actually graduated into another world, the business world with its limitless expansion possibilities. This is a moment worth celebrating. He has overcome the gravitational force of financial dependence and is now ready for space travel! This is the critical moment of significant institutional transformation. The social entrepreneur has migrated from the world of philanthropy to the world of business. To distinguish him from the first two types of entrepreneur listed earlier, we will call him a ‘social business entrepreneur.’
Social business entrepreneurs make the market-place more interesting and competitive: interesting because two different kinds of objectives are now at play, creating two different sets of frameworks for price determination; competitive because there are now more players than before. These new players can be as aggressive and enterprising at achieving their goals as traditional entrepreneurs.
Social business entrepreneurs can become very powerful players in national and international economies. If we were to add the assets of all the social business entrepreneurs in the world today, the total would represent the merest fraction of the global economy. This is not because these assets lack growth potential, but because conceptually we neither recognize their existence, nor make room for them in the market. They are considered freaks and kept outside the mainstream economy. We do not pay attention to them because we are blinded by prevailing theories.
If social business entrepreneurs exist in the real world – as it seems they do – it makes no sense that they are not accommodated within current conceptual frameworks. Once we have recognized social entrepreneurs, the supportive institutions, policies, regulations, norms, and rules can be developed to help them enter the mainstream.
The neoliberal free market is often considered ill equipped to address social problems. Indeed, the market is often identified as a significant contributor to social problems such as environmental hazards, inequality, polarization of political power, health problems, unemployment, ghettoes, crime, etc. Since the market is perceived as having no capacity to solve social problems, this responsibility is handed over to the public sector. This arrangement was widely considered the only solution until command economies – such as in the former Soviet Union – were created in which the state took over everything, abolishing the free market.
But this did not last long. With command economies gone, we have returned to the artificial division of work between market and state. In this arrangement, the market is the exclusive playground of the personal gain seekers, overwhelmingly ignoring the common interest of the people and the planet. In recent years, initiatives that make profit seekers aware of social responsibilities while maintaining their profit-maximizing objective have gained momentum. These sometimes take the form of self-imposed restrictions on activities and/or of the creation of a philanthropic window with profit.
With the global economy continuing to expand year on year, personal wealth in many developed countries reaching unimaginable heights, technological innovations accelerating this trend, globalization threatening to wipe weak economies and the poor off the map economically, it is time to consider the case for social business entrepreneurs more seriously than before. Not only is it unnecessary to leave the market solely to personal gain seekers, it is extremely harmful to mankind as a whole. It is time to move away from a narrow interpretation of capitalism and broaden the concept of the market by giving full recognition to social business entrepreneurs. Once this has been done, they can make the market work as efficiently for social goals as it does for financial goals.
A social stock market
So, how do we encourage the creation of social business entrepreneurs? What are the steps that we need to take to facilitate social business entrepreneurs playing an increasingly larger role in the market place?
First, we must recognize social business entrepreneurs in our theory. Students must learn that there are two kinds of businesses:
· Business to make money
· Business to do good.
Young people must learn that they have choices to make about which kind of entrepreneur they would like to be. If we broaden the interpretation of capitalism, they will have a wider choice to mix these two basic types in proportions that suit their personal objectives.
Second, we must make social business entrepreneurs and social business investors visible in the market-place. As long as social business entrepreneurs operate within the cultural environment of the present stock markets, they will be restricted by the existing trading norms and conditions. Social business entrepreneurs must develop their own norms, standards, measurements, evaluation criteria, and terminology. This can only be achieved if we create a separate stock market for social business enterprises and investors – a ‘social capital market.’ Investors could invest money in the causes in which they believe and in the companies that they think are achieving particular missions best. Some companies listed on this social capital market may be excellent at achieving their missions, while simultaneously making very attractive profits. Obviously, these companies will attract both social, goal-oriented investors and personal, gain-oriented investors.
Making a profit does not disqualify an enterprise from being a social business enterprise. The basic deciding factor is whether a social goal is the enterprise’s overarching goal and is clearly reflected in its decision-making. There will be well-defined, stringent entry and exit criteria for a company to qualify for listing on the social capital market and, if applicable, to lose that status. Soon companies will emerge that will succeed in mixing social and personal goals. Investors must remain convinced that companies listed on the social capital market are truly social business enterprises.
To this end, I suggest several rules and guidelines. These include:
· Profit making by social business enterprises is legitimate, under the condition that investors do not receive any dividends or receive only token dividends. A social business enterprise is designed and operated as a business enterprise to pass on all the benefits to its customers. It reverses the profit maximization principle by means of the benefit maximization principle.
· Social business enterprises should generate enough surpluses to repay the invested capital to the investors as early as possible. It is up to the investors to decide how quickly they want their money back. They may get their money back to reinvest in other social business enterprises or in traditional profit maximizing enterprises. They may even decide to reinvest the surplus in the same social business enterprise that generated the profit.
· Social business enterprises should generate surpluses for their expansion, the improvement of quality, increased efficiency, introduction of new technology, and innovative marketing to reach the deeper low-income layers, particularly women, children, and disadvantaged communities.
· Investors will need to be clear that they are investing in a social business enterprise for a return that is much broader than an immediate gain in dollar and cents. They invest in a social business enterprise because they feel an urge to make a difference and share their lives with other people. They invest because they feel that they can contribute their creativity, innovativeness, and entrepreneurial abilities to solve complex social and economic problems and, consequently, improve the quality of people’s lives – including their own. If an investor wishes to withdraw his investment from a social enterprise, he may do so by selling his shares to the existing shareholders or to a new shareholder who accepts the philosophy, practice, and conventions.
Until social stock exchanges are created, existing stock exchanges could open a window to facilitate the trading of social business enterprise stocks. All companies categorized as social business enterprises could be listed under a separate category of companies. For easy recognition of social business enterprises, each company could identify itself by adding the suffix "SBE" to its name, as in Grameen Danone Foods SBE.
My feeling is that there are many people around the world who are ready to make investments in social business enterprises if only they could reach out to them. Foundations and philanthropists may find it very attractive to invest part of their charity money in social business enterprises.
Together with the creation of a social stock market, we’ll need to create rating agencies, appropriate impact assessment tools, indices to understand which social business enterprise is doing more and/or better than others, so that social investors are correctly guided. This industry will need its Social Wall Street Journal and Social Financial Times to make all the exciting stories, as well as the negative ones, and analyses known to keep social entrepreneurs and investors properly informed and forewarned.
Within business schools, we can start producing social MBAs to meet the demand of social business entrepreneurs and to prepare young people to become social business entrepreneurs themselves. I think young people will respond very enthusiastically to the challenge of making serious contributions to the world by becoming social business entrepreneurs.
We will need to arrange financing for social business entrepreneurs. New banking models need to be developed. New angel investors will have to emerge. Social venture capitalists will have to join hands with social business entrepreneurs.
The potential for social business enterprises
I believe there are many potential developments that - once understood – may fuel the growth of social business enterprises. These include:
· Existing companies of all shapes and sizes may launch their own social business entrepreneurs to test the water. A part of their annual profit may be devoted to the creation of social business entrepreneurs as a part of their corporate social responsibility activities. They may create social business enterprises themselves or they may partner known or potential social business entrepreneurs. Specialized companies may be created to provide matchmaking services between traditional entrepreneurs and social business entrepreneurs in respect of possible partnerships.
· Many companies with their own foundations may create "Social Business Enterprise Investment Funds" in addition to their philanthropic activities. The advantage of such a social business enterprise fund would be that money would keep on growing, giving the companies more financial power to create more social business enterprises.
· Individual entrepreneurs who have achieved success and/or suffered failures in conventional businesses may feel an urge to try their creativity, talent, and management skills in establishing and running their own social business enterprises. If they succeed at their first social business enterprise, they may be so inspired that it may even become a habit. They may discover just what an exciting business social business can be.
· International and bi-lateral donors could start creating "Social Business Enterprise Funds" in recipient countries to support social business enterprise initiatives.
· Children of successful business families could decide to devote themselves to social business enterprise because their traditional businesses are already successful and there is little challenge for them. They may be attracted by new challenges and the rewards of social business enterprises.
· Young entrepreneurs without inherited businesses may decide to start out their careers with social business enterprises rather than traditional businesses because they seem so ‘cool’.
How to make a start
One good way to get started would be to launch a design competition for social business enterprises. There could be local, regional, and global competition. Prizes for successful designs could come in the form of equity financing for social enterprises and/or partnerships to implement social projects. All the submitted social business proposals could be published so that these could become the ‘open source’ starting points for social business entrepreneurs in the next cycle.
A social business entrepreneur could even start the social capital market as a social business enterprise. A business school or several business schools could join hands to launch this as a project and trigger serious business transactions.
We should not expect a social business enterprise to provide all the answers to a social problem right from its founding. It will most likely proceed one step at a time. Each step may lead to the next level of achievement. Grameen Bank is a good example in this regard. I never had a blueprint to follow when creating Grameen Bank. I took one step at a time, always thinking that this step would be my last. But this was not to be. That one step led me to another step – a step that was so interesting that is was difficult to walk away. I faced this situation at every turn.
I started my work by giving small amounts of money to a few poor people without any collateral. Then I realized how good these people felt about these loans. I needed more money to expand the program. To access bank money, I offered myself as a guarantor. To get the support of another bank, I converted my project into the bank’s project. Later, I turned it into a central bank project. Over time, I saw that the best strategy would be to create an independent bank to do the work. So we did. We converted the project into a formal bank, borrowing money from the central bank to lend money to the borrowers. Donors became interested in our work and wanted to support us. We received loans and grants from international donors. At one stage, we decided to stop taking money from donors. This led us to focus on generating money internally by mobilizing deposits. We soon arrived at a stage when Grameen Bank had more money in deposits than it lent to borrowers. Today it lends out half a billion US dollars a year in loans (an average of $130 per loan) to 6 million borrowers without collateral and maintains a 99 per cent repayment record.
We introduced many programs in the bank: housing loans, student loans, pension funds, loans to purchase mobile phones to become the village telephone ladies, loans to beggars to become door-to-door salespeople person. One led to another.
Besides Grameen Bank, we have also created many other companies: a renewable energy company (Grameen Shakti), Grameen Healthcare Services, Grameen Phone, Grameen Telecom, Grameen Agriculture, Grameen Fisheries & Livestock, Grameen Communications, etc. The latest company that we launched is of particular interesting to this chapter: a 50:50 joint venture between Grameen and Danone called ‘Grameen Danone Foods, a Social Business Enterprise’. (I include some relevant sections of the joint venture agreement in the Appendix.) I invite all companies to think of creating social business entrepreneurs as part of their business. They'll find it an exhilarating experience.
We started out by assuming a world with two kinds of people: one kind wants to make money; the other kind wants to do good. But in the real world there are only people of one type with two types of interests in varying proportions. It is important that we recognize these two types of interests in our business world, because it is important for mankind and the planet. As people become increasingly worried about the current state of capitalism, the potential for social business entrepreneurs is growing. If we create the right environment, social business entrepreneurs can use market mechanisms significantly and make business an exciting place for fighting social battles in ever more innovative and effective ways. Let us now get serious about social business entrepreneurs. They can create hope for the future of human society and brighten this gloomy world for us all.
 Partially based on a contribution to Nicholls, “Social Entrepreneurship - New Models of Sustainable Change” Oxford University Press, 2006