One of the biggest challenges facing the social sector is lack of scale. We have many talented and determined social entrepreneurs, many non-profits doing wonderful work, but how many achieve the scale of impact that can really move the needle on the immense problems the world faces?
In the commercial world, new innovative ventures with high growth potential may secure investment from angels or venture capitalists, so that they can grow rapidly to achieve full scale. To offset the risk of backing early-stage ventures, investors usually take equity stakes. The losses on failures are offset by high returns on successes. But in many countries for-profit companies cannot easily adopt a social mission, and in many others social organizations cannot distribute profit – and therefore cannot take equity investment. Without substantial philanthropic or government subsidy, their growth may be blocked.
There is plenty of opportunity to tap if we can get the system right: in the UK, one in five people wishing to start a business wants it to be social. This is the rationale behind a new concept, the profit-with-purpose business.
The new model has been developed as part of the Social Impact Investment Taskforce created under the UK presidency of the G8. Chaired by Sir Ronald Cohen, the Taskforce covers the full range of measures to boost impact investment to $1 trillion over the coming years. One of four Taskforce working groups considered how to enable businesses that want to achieve social mission to be recognized and to ‘lock in’ to social impact, ie to bind the company to pursue social impact for the long term – even through a change of ownership.
Non-profits have a clear regulatory regime: no personal gain, no profit distribution. The profit-with-purpose model does not have these requirements, so we need strong alternative criteria if we are to credibly claim this is a truly social type of enterprise. To this end we designed three pillars:
- Intent to achieve a social mission, included in the company articles
- Duties for directors to strive to achieve that social goal
- Reporting on the impact created to an accredited standard, along with wider transparency on the business’s environmental, social and governance arrangements so there are no hidden negative impacts
The hope is that this will give confidence that profit-with-purpose businesses can make a financial return as well as being truly social businesses committed to delivering social benefit for the long run.
In many countries this is a new concept, so the working group report includes measures to help countries adopt the new form rapidly. It includes a framework (the intent, duties and reporting model outlined above) and a draft piece of legislation for use in countries where company law does not currently permit the combination of social purpose and profit. It also recommends the B Lab reporting framework.
B Lab operates both a reporting framework and the B Corp accreditation system; it is closely connected to Sistema B, which operates in South America. B Corp accreditation includes five areas, one of which is impact. As enterprises do not have to meet the criteria in all five areas, it is possible for an enterprise to qualify as a B Corps without having a purposeful social impact. It is likely that, to be a profit-with-purpose business, you will have to pass the impact test.
For many people, and in many cultures, profit and social purpose just don’t mix. Mission drift is a genuine risk, and it is important that these businesses should be locked into social impact. But there are plenty of non-profits that achieve little impact, and plenty of for-profits that achieve a lot. Profit-with-purpose business is designed to combine profit distribution and social impact, to attract the best entrepreneurs and investors, and to lock in social mission.
We have an opportunity to test out something new and potentially groundbreaking here. A model that could attract more entrepreneurs and more investors, and get great innovations to scale more quickly. The B Corp accreditation in the USA and Sistema B in South America have shown the way; now we are adding the social intent in the company constitution, duties on the directors to pursue the social intent, and perhaps a tighter test for accreditation, making the impact test mandatory.
Pilot work by UnLtd in the UK shows that commercial angel investors are interested. Could this be the new social business frontier, the breakthrough to scale, that we need so desperately to tackle pressing social and environmental challenges?
Lead image caption: Building social housing in Canada.