Why Can You Not Do Good and Earn Well? Social Entrepreneurs Caught in a Moral Conflict

Karl Kraus once asked a student about his field of study. The student's answer was "business ethics", to which the Austrian writer and philosopher then replied, "Well, then I guess you have to decide".

As old as this story might be, it has relevance in the present times. The question of what is considered to be "good" and what is considered to be "bad" always plays a major role in business. Earning money and generating profits is considered the domain of those who generate economic assets and promise a high monetary return – entrepreneurs such as Bill Gates or Mark Zuckerberg, top managers of multinational corporations such as Peter Loscher or Josef Ackermann who ensure their stockholders high returns, or even specialized consultants or lawyers who consult those who help build assets through their practice.

Moral concerns arise when the wheel is overturned and economic asset building is directed by greed and carelessness, threatening to put the economy in danger. But even these concerns calm down eventually, and the basic principle of whoever supplies economical value being allowed to earn well remains.

Presumably, earning money is not considered the domain of those who approach asset building differently. Social entrepreneurs for example, take social change seriously but believe in bringing about this change not traditionally through charity but through entrepreneurship and innovation. This breed believes in a combination of economic machinery and a focus on a social mission. It is here where the uneasy questions arise as to what extent a company should remain social so as not to lose its credibility. How is it possible to balance the financial and social risk? How much money is allowed to be generated when doing business with the poorest in the world?

There is no doubt that social entrepreneurs provide great enhancement to state-run supply systems, public welfare institutions or initiatives counting only on donations and sympathy. They conquer the biggest obstacles to large-scale social change in society for ages – flaws in administration, political dependencies, absent professionalism and, especially, the moaning about the evilness and injustice of this world.

Social entrepreneurs are brave and take personal risks. Instead of just seeing problems, they discover market opportunities and detect niches to fill them with solutions to solve a particular plight or state of social emergency. They demonstrate creativity and follow their goals through personal motivation. Of all social entrepreneurs, 95 % persevere and establish scalable systems. In the last 30 years, 3,000 of these social entrepreneurial avant-gardes have been identified in a rigorous selection process by two leading networks, Ashoka and the Schwab Foundation for Social Entrepreneurship, and ever since they have followed the goal of driving change and changing the world.

"Everybody is a changemaker" is their mantra, and Ashoka views its fellows as "Innovators for the Public". Global or customized solutions for local problems are found, be it fair trade, the use of regenerative energies or the supply of microcredit. There is one particular social entrepreneur who embodies this concept like no other – Muhammad Yunus who at one time was almost considered to be a messiah. He managed to establish the Grameen Bank and has played a major role in spreading the idea of microcredit worldwide. In 2006, he was awarded the Nobel Peace Prize and brought the concept of social entrepreneurship into the spotlight. It almost seemed as if the paths of snobby Wall Street traders and starving daily labourers from Bangladesh could perhaps cross to do business together. Yunus received encouragement from some of the world's leading companies like BASF, Danone, Adidas and General Electric, to name a few, to frame a hybrid social business model in which social goals such as fighting against hunger and poverty could be approached in a more business-oriented manner. The concept of social business was thus born and the model is fairly widespread now and is a lever for the fight against poverty and hunger. Suppliers of microcredit have been springing up like mushrooms and ever since then there is rarely a financial service provider that has not yet recognized the potential of poor people. Social Investment Funds developed and Cash and Care came together under captions such as Venture Philanthropy or Impact Investment.

In Mexico and India, microcredit institutions managed to even list at the stock market and it almost seemed as if squaring the circle could actually succeed. The solution of urgent social, educational or environmental problems can be covered with economical interest.

Yunus has always strongly recommended that social business not cast bonuses to shareholders. According to him, the investments should be earned back but the profits should serve only the extension of the social business itself. Yet his calling, which you could almost perceive as a warning, disappears under the social gold fever.

Disillusionment sets in fast. Social entrepreneurs lost their perceived innocence as soon as media reports about microcredit receivers being driven to suicide by social grasshoppers started appearing. There was talk about infidelity and personal gain. Money was said to be made off the back of the poorest, an issue that even without medial exaggeration leads to a core problem of social and corporate trade.

Is it possible to earn fairly well, while doing good? In what way do a social entrepreneur and his orientation for successful financial outcome differ from other commercial entrepreneurs? Whereas the latter are measured by their financial value, this measurement apparently applies to the social entrepreneur only indirectly, if at all.

A social entrepreneur is measured by the social value he generates for society. Yet, the economic principle, whether non-profit or for-profit is being strived for, does not say anything about the social content itself. It is a mere value-oriented decision, which distinguishes the social entrepreneur from other entrepreneurs. Peter F. Drucker, an American management consultant, puts the credo for a social entrepreneur this way: "Mission comes first". If this is not being stated and shown clearly, the social entrepreneur is in danger of being criticized and losing his base. He is accused of false motives and is considered hypocritical and in response quickly switches into a defensive stance. The social goals threaten to dissipate as soon as profit sets in. Up to now, this issue did not have any relevance as almost all social entrepreneurs had to work very hard to survive. At the end of a fiscal year, not-for-profit is the motto but no loss is what really matters.

After years of experimenting and operating in a semi-professional manner, the tide turns. Social entrepreneurs are able to work more efficiently and professionally, backed by the support of organizations like Ashoka and the Schwab Foundation who send them pro bono mandates from consulting agencies, PR agencies or law firms. Universities and business schools take up the idea, starting to analyse their business models and invite social entrepreneurs to discuss their theories and strategies. Social entrepreneurs rise and establish themselves as a constant on forums, where they initiate business deals and find capital. This nourishes a culture of openness, also helping the social entrepreneur to secure his existence.

Social entrepreneurs are committed to an idea and undergo personal risks. They give up possible careers in the real economy and do not think about retirement arrangements. In many cases, it takes years for an idea to develop into a business. Furthermore, social entrepreneurs are magnets and attract people who undergo personal risks themselves for the cause they are attracted to. Even if the present looks grey, they hope for better times to maintain financial stability along with the social impact. Yet, when they start operating successfully and achieve some amount of financial security, they face a new problem. In what way can the profits be spent? Are they allowed to flow to the social entrepreneur so that after years of sweat, he or she can finally earn an employer's salary? The answer: Yes and No.

What matters above all are adequacy, proportionality and circumstances. Yunus' rigorous theory allows distribution in relation to the level of investments. This does not refer to opportunity costs. It's about the hard cash necessary to build the enterprise. Social entrepreneurs have to keep exact and transparent account of these expenses to provide doubtless proof. The profits of social enterprises should furthermore be used to pay employees according to their performance. Salary standards in public service with performance criteria and additional regulations can be a guideline. Should the enterprise turn out to be so successful, generate profits, be valued at a high price or even get traded publicly, these profits should be used to establish new enterprises or support other institutions committed to the common good rather than creating personal wealth.

Summing up, the handling of the profits generated in the field of social enterprises must be determined by the following criteria: Social entrepreneurs commit themselves exclusively to their social mission. The profits should only be used to support and further this social mission. The question of how to handle the generated profit has to be defined very clearly before initiating the business. A disclosure of capital, enlistment of salaries and tax returns should be provided in all countries, similar to how GuideStar does this in the US. Only through absolute transparency and an open communication can a moral conflict be avoided.

Andreas Heinecke

 

Editors Note                                                                                                                             Andreas Heinecke, Founder and Chief Executive Officer, Dialogue Social Enterprise, Germany;       Social Entrepreneur, Schwab Fellow of the World Economic Forum 

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