Defining Social Enterprise

Social enterprise is a term that has broadly been used to describe the interaction between charitable or humanitarian practices with business practices. Broadly, social enterprise seeks to incorporate the financial sustainability inherent in business with the promise social impact provided by charitable organisations. The new wave of social enterprise has led to a plethora of new “social enterprises” delivering impact in a range of issue areas across the globe. For organisations and entrepreneurs looking to maximise their social impact over an extended time horizon, we offer a new definition.

Social Enterprise – A business that sells socially beneficial goods or services.

At the heart of this definition is what we believe to be a natural order of human incentives, specifically external moral versus financial incentives. We postulate that when circumstances play extreme financial and moral incentives against each other, that people and organisations, by and large, will eventually react to their financial incentives above their external moral incentives.

For example, many traditional businesses have a “Corporate Social Responsibility” (CSR) fund or a series of CSR initiatives aimed at achieving positive social impact. A frequent criticism of CSR platforms is that they solely exist to improve the company’s public relations. However, for this discussion, let us assume that these companies seek to deliver real impact and lasting benefit. After all, this manifesto is intended for organisations looking to maximise their social benefit over an extended, nearly infinite, time horizon.

Imagine a typical large corporation, a manufacturing firm perhaps, that operates a series of CSR initiatives aimed at providing funds to build schools in a small African nation. At the time of creation of the CSR initiatives, individuals throughout this organisation could understandably be proud of the work the company is doing with respect to CSR. They would be, in some fashion, fulfilling their moral incentive to help their fellow man.

Assume now that this company undergoes extreme financial pressures. Its sales are being undercut by foreign competitors using cheap labour, its costs are rising due to the burden of excessive regulations, and financial anxiety is rife throughout the ranks of upper management. The extent of the financial pressures is so severe that layoffs are soon to commence and shareholders are becoming increasingly nervous. With people’s jobs and the future of the firm on the line, how might the internal accountants and financial controllers likely act when reviewing the proportion of funds to send to build schools in the aforementioned African country?

If your guess was that they would severely cut the CSR budget, that they would respond to their financial incentives above their external moral incentives, you were right. The extent to your correctness? In the US following the Global Financial Crisis (GFC), Fortune 500 companies cut their CSR budgets by approximately 54.4% with firms in Europe and the rest of the world cutting their 28.5% and 23.3% respectively.

What does this mean for firms trying to maximise their social benefit over the long run? That financial and external moral incentives should be intertwined if they want to continue their impact in times of financial difficulty.

In short, if a company were to mix their external moral and financial incentives, they would get financial benefit from what fulfills this external moral incentive and thus increase the likelihood that they can fulfill their moral incentives over a longer time horizon.

Put differently, they would be a business that sells socially beneficial goods or services, or as we define it at Project Everest, they would be a social business.

This concept can be applied to donation financing that supports the operation of charities. Individuals, like companies, face a variety of financial and moral incentives. Research has shown that, like companies, individuals donate less to charities during times of economic hardship. What this in turn means is that charities’ funding is independent of their work.

In terms of social impact, for a wide variety of areas of need, e.g. education, provision of drinking water, etc, the transactional nature of social enterprise helps to ensure that solutions to problems are valued and needed by the prospective beneficiaries. In other words, if people value solutions enough to pay for them, albeit very little in absolute terms as they are required to do with social enterprise, the solutions themselves can be considered to solve social issues that beneficiaries actually want to be solved.

This contrasts to charity models of humanitarian relief whereby prospective beneficiaries are given goods and services free of charge. The practice of giving freely, as altruistic and fulfilling as it may be, is inherently vulnerable to solving solutions to issues that are only perceived by Western charitable organisations and donors; often termed “White-man problems”.

So in an effort to sustainably solve problems that the people in the disadvantaged communities we work in recognise, we develop social businesses that aim to solve a variety of development issues; each by selling socially beneficial goods and services.