The social enterprise sustainability myth

Economics for Ecology is an international annual conference event, initiated by students at Sumy State University. In 2010, a social enterprise pioneer addressed the opening plenary for a second time:

“Among three main areas of economics, the financial sphere remains dominant over social economics and environmental economics. The reason for this is very simple: in order for any system of economics to be sustainable over time, it must first be financially sustainable. If a system costs more than it produces, it requires infinite inputs over time. Infinite inputs are not available in a finite world, and we live in a finite world. If we pursue a system that costs more than it produces financially, it must and will necessarily collapse. But now, the financial system itself is broken: it costs far more than it produces.”

In 2004, interviewed about his social enterprise efforts in Russia, Terry Hallman described how he’d sourced the Tomsk microfinance bank and how it became self-sustaining in the second year, going on to seed 10,000 microenterprises.

It was this day, 21 years ago that Terry Hallman delivered his paper on people-centered economics to the White House, having served as a volunteer on the steering group of Bill Clinton’s re-election committee. He warned Clinton of a dystopian future , where large numbers are disenfranchised while wealth accrues in the hands of a minority. We know this to be today’s reality.

This week, we hear from the head of the School for Social Entrepreneurs that wholly sustainable social enterprise is a myth. In his article for Pioneers Post, Alastair Wilson cites the example of a coffee shop in a deprived area, employing people with learning difficulties. He’s quite right, customers aren’t going to pay more than the going rate for any business that does good things for other people, it needs to rely on grants to remain operational.

People-Centered Economic Development, as it became known, had argued that nothing prevented any business from applying profit to create social benefit rather than shareholder returns. It required the consent of its shareholders and directors and for this to be stated in the corporate charter. Unsurprisingly this argument has gained traction and today many question the concept of shareholder value.

McKinsey’s Long Term Capitalism Challenge gave opportunity to describe this re-interpretation of capitalism:

“The same financial discipline required of any conventional for-profit business can be applied to projects with the primary aim of improving socioeconomic conditions. Profitability provides money needed to be self-sustaining for the purpose of achieving social and economic objectives such as benefit of a nation’s poorest, neediest people. In which case, the enterprise is a social enterprise.”

In 2004, we’d introduced this approach to New Labour and the social enterprise community saying:

“Profits can be set aside in part to address social needs, and often have been by way of small percentages of annual profits set aside for charitable and philanthropic causes by corporations. This need not necessarily be a small percentage. In fact, there is no reason why an enterprise cannot exist for the primary purpose of generating profit for social needs — i.e., a P-CED, or social, enterprise. This was seen to be the potential solution toward correcting the traditional model of capitalism, even if only in small-scale enterprises on an experimental basis.”

10 years ago, our ‘Marshall Plan’ proposal argued

‘This is a long-term permanently sustainable program, the basis for “people-centered” economic development. Core focus is always on people and their needs, with neediest people having first priority — as contrasted with the eternal chase for financial profit and numbers where people, social benefit, and human well-being are often and routinely overlooked or ignored altogether. This is in keeping with the fundamental objectives of Marshall Plan: policy aimed at hunger, poverty, desperation and chaos. This is a bottom-up approach, starting with Ukraine’s poorest and most desperate citizens, rather than a “top-down” approach that might not ever benefit them. They cannot wait, particularly children. Impedance by anyone or any group of people constitutes precisely what the original Marshall Plan was dedicated to opposing. Those who suffer most, and those in greatest need, must be helped first — not secondarily, along the way or by the way. ‘

We learned from Mckinsey very recently, that businesses which invests in long term value creation are not only sustainable, they are able to generate as much as 47% more revenue.