Social Enterprise is Changing the Face of Business: Are You Ready?

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In recent years, social entrepreneurs have splashed the pages of The New York Times, Fast Company, and The Harvard Business Review in articles pronouncing the possibilities for this new field. As a business owner, even if you are not familiar with the concept of social enterprise, you are probably feeling its effects. Part One of this article traces the development of social enterprise from its philanthropic predecessors and explains how it is changing the landscape for businesses everywhere. Part Two, which will appear in the next issue of Business Law Perspectives, will discuss how some businesses are adopting aspects of social enterprise and explain some of the legal issues business owners need to consider in connection with such strategies.

The field of social enterprise lies at the convergence of profit and mission. It consists of for-profit corporations, limited liability companies and partnerships whose primary goal, above generating financial profits, is to achieve a social mission. Social enterprise also encompasses non-profit organizations that implement the market-based strategies traditionally utilized by businesses to achieve their social missions.

One example of a for-profit social enterprise is household products company Seventh Generation®, whose mission is to “inspire a more conscious and sustainable world by being an authentic force for positive change.” Seventh Generation® prides itself on considering the impact of its products – from laundry detergent to diapers – on the next seven generations of humanity.

On the other side of the for-profit/non-profit divide is the Georgia Justice Project, a non-profit social enterprise in Atlanta that partners with lawyers and social workers to defend people accused of crimes and help their clients rebuild their lives after being released from prison. To help its clients reenter the work force, the Georgia Justice Project established a landscaping service that provides clients with an opportunity to learn job skills while generating income to further the organization’s mission. Both Seventh Generation® and the Georgia Justice Project serve as examples of social enterprises.

Social enterprise grew out of the more traditional concepts of corporate philanthropy, under which businesses commit resources to charitable causes, and corporate social responsibility (CSR), under which businesses take steps to minimize the harmful impact of their activities on the environment and communities where they operate. Social enterprise borrows from corporate philanthropy and CSR and takes it a sizeable step further. The premise of social enterprise is that it is not enough for businesses to sponsor charitable causes or to avoid engaging in environmentally harmful practices. Social enterprise views business as an integral part of the solution to the world’s most entrenched social and environmental problems.

Contrary to the traditional model of business as a purely profit-seeking concern, social enterprises often take the form of LLCs or corporations with a primary purpose of having a positive effect on a particular social mission. Under this conceptualization, profit and mission are inextricably intertwined. Non-profit or for-profit designation aside, social enterprises and the social entrepreneurship movement are changing the face of business, from increasing the variety of competitors in different markets, to fertilizing competition in unlikely places, to changing what consumers expect from the businesses that make the products and provide the services they buy.

For-Profit Social Enterprises are Uniquely Suited to Compete For a Valuable Consumer Cohort

First, social enterprises present a new type of competition for consumers in a valuable cohort: the upwardly-mobile, outdoorsy, and globally-minded Generation X-ers and Y-ers who are willing to pay more for products they believe in (think: the Apple devotees). For-profit social enterprises that sell social good along with their products and services are fundamentally more appealing to this target group of consumers. One example of a company that successfully draws this cohort alongside a social enterprise strategy is outdoor recreational products company Patagonia®, whose mission is to “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.” Far more than a mission statement, Patagonia®‘s commitment to the environment and humankind is built into the company at all levels. From employing individuals to inspect the factories where its products are made to ensure workers are treated well, to donating 1% of its sales to environmental causes, to creating a protected national park in Chile and Argentina, to recycling old fabrics to make new clothing items, Patagonia®‘s very identity is inextricably linked to its environmental mission. The company’s environmentally-focused identity makes its products uniquely attractive to the twenty and thirty-somethings who are willing to pay more for its Capilene® jackets, mountain-climbing gear, and backpacks than they might at a less expensive outfitter.

Non-Profit Social Enterprises Have a Financial Advantage

In the past, when non-profits provided goods or services, it was because no market existed for those items (or at least, no market existed in which consumers were able or willing to pay enough to allow businesses to provide those items at a profit). For example, soup kitchens provided food that recipients could not otherwise afford, and nonprofit drug treatment centers provided rehabilitation services that patients could not in the private market. Charities were traditionally expected to rely on donations from generous individuals and companies rather than earning their income.

In recent years, social enterprise has popularized the idea that non-profits can implement generate income to fund their work. Savvy non-profit organizations are increasingly participating in the marketplace as providers of goods and services to consumers who can pay. In doing so, non-profit organizations are breaking out of the traditional, donation-dependent mold. The increasing use of earned-income strategies by non-profits means that businesses are sometimes finding themselves competing with non-profit organizations.

For example, the American Cancer Society’s Quit for Life® program provides smoking cessation services to employers and health insurance agencies seeking to provide the service as a benefit to employees and members. The positive brand recognition generated by the American Cancer Society’s association with the program is one reason why employers and others might choose this program over other smoking cessation programs.

Social enterprises formed as tax-exempt non-profits have another advantage: they have access to capital that is not available to for-profit businesses, such as foundation and government grants. Unlike business loans, foundation grants do not need to be repaid. Moreover, nonprofits are generally exempt from federal and state income tax and property taxes, which obviously put them at an advantage when pricing products and services.

Consumer Expectations are Changing

The unique blend of profit and mission that is embodied by social enterprise is changing consumers’ expectations regarding the products and services they buy. Consumers now want their products and services to come with a positive social impact; it is common for companies to promise that their products are made partially from recycled materials and that a portion of the profits from the sale of their products will be donated to charity.

Even companies that do not quite qualify as social enterprises are changing consumers’ expectations by incorporating mission into their activities (and advertising that fact loudly). The growth of charitable sales promotions – arrangements between businesses and charities in which businesses advertise that a certain percentage of the sales of a particular product will be donated to the charity – is one example of how companies are pronouncing their mission to potential customers. Indeed, the prevalence of social enterprise and businesses advertising a social benefit to their products is leading consumers to expect more than just a product or service at a good value.

From presenting a source of competition to altering consumers’ expectations, the proliferation of social enterprise is only gathering steam. Whether social enterprise represents a threat or an opportunity, business owners should be aware of it and the ways in which it is impacting their businesses.