Social Entrepreneurs Must Drop the Balancing Act

For-profit social entrepreneurs try to blend profits with public benefits. As business expands, the goal is to create value for shareholders as well as the environment, the local community, or other stakeholders. In his new book, Muhammad Yunus, Nobel Prize-winning founder of microlender Grameen Bank, challenges the "not only for-profit" model that many social entrepreneurs embrace. Instead, he argues, businesses should be dedicated strictly to social causes such as helping the poor—without owners or investors taking a profit. Unlike charities, the companies he calls "social businesses" sustain themselves with earned income that proceeds to further the company's mission.

When you mix profit and social benefit and say that your company will pursue both goals, you are making life complicated for the chief executive officer. His thinking process gets clouded. He does not see clearly. In a particular situation where profit and social benefit need to be balanced, which way should the scales be tipped? What if it is possible to increase profit greatly by cutting social benefits just a little—is that all right? How should one judge? What about in times of economic stress, such as a recession—is it all right to eliminate social benefits altogether in hopes of helping the company to survive? Why or why not? The idea of a "mixed" company offers no clear guidance on questions like these.

In practice, profit tends to win out in struggles of this kind. Most often the CEO will lean—perhaps unconsciously—in favor of profit and exaggerate the social benefits being created. And if the CEO is a little unclear about the real priority, we can imagine that the middle managers and line employees will be even more uncertain. Over time, the social goals will gradually fade in importance while the need to make money becomes more and more deeply ingrained in the company's culture.

food banks' loss: "unsellable" items

Here is a small example. In the U.S., many poor people rely on local food banks to stave off hunger. These food banks in turn rely on donations from individuals, as well as companies, to keep their shelves stocked with food that can be donated to hungry families.

In recent years many food banks have been supported by grocery stores that donate outdated, dented, or mislabeled packages of food that they can't sell. Hungry people are happy to receive these "unsellable" items, and the grocers get the benefit of being good community members. It's a fine example of how corporate social responsibility is supposed to work.

In the fall of 2009, however, many food banks in the U.S. began reporting a shortfall in donations. One reason is that a new business has emerged, by which middlemen buy "unsellable" merchandise from grocers for 30¢ or 40¢ on the dollar. These middlemen in turn sell the goods to low-price stores, which sell them to consumers at a steep discount from the usual price. It's a new source of profits to the grocers—but it means that the once-unsellable food is no longer available to be donated to the food banks.

I can't really blame the grocers for taking advantage of this new avenue of business. Their job is to maximize profit in any way they can. But this example illustrates the danger in leaving the needs of the poor to be served through the generosity of profit-maximizing companies. When profit and human needs conflict, profit generally wins out—which means that people lose.

Social business gives a clear, unambiguous mandate to management. There is no balancing act involved. Every decision the company makes can be measured against a single yardstick: What will enable us to provide the greatest possible benefit to society? This doesn't mean that the decisions are always easy—creative problem-solving is just as difficult in social business as in profit-maximizing business. But at least the manager isn't forced to juggle two sets of mutually contradictory objectives.

Excerpted from Building Social Business: The New Kind of Capitalism That Serves Humanity's Most Pressing Needs by Muhammad Yunus (PublicAffairs, May 2010).

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