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Putting Business Back Into Social Entrepeneurship. Part One: Why Do we Need Social Entrepreneurs when we have Philanthropy?

As you can see from his photo, the idea didn’t seem to have done much to make Mr. Sloan a particularly fun guy. While corporate America has largely followed his philosophy pretty religiously ever since, the non profit and socially responsible business sector has increasingly been challenging Sloan’s assertion in profound ways; especially over the last decade. These two socially responsible business models do this in decidedly different ways however.

There’s no doubt that social entrepreneurship is a hot topic with philanthropy and socially conscious business schools both in the United States and overseas right now. But are US business schools and other centers for thought leadership in the sector really focusing on the right issues in their desire to bring mainstream business ethics more firmly in line with the social vision that non profit enterprises see as their core missions? A survey of social entrepreneur’s organizational web sites ranging from Ashoka to the Skoll Foundation reveals a great deal of emphasis on the social part of social entrepreneurship. Clearly there is a strong emphasis on making a difference on the ground, and that’s ultimately what it’s all about.

But what about the other side of this business model…the entrepreneurial part? What about the business side of social ventures? This is the first in a series where I will undertake to carefully set forth why I believe we need a stronger emphasis on this area and a more balanced approach to double bottom line business ventures that carefully examines the balance most social enterprise practitioners are striking between social value metrics and financial sustainability. Much of what passes for social entrepreneurship now is not entrepreneurial in nature. In fact it can be argued that it’s really not business at all. Non profits fall into this category. NPO’s are wonderful organizations that do fantastic work around the world and impact society in dramatic ways. Without them governments across the globe would be waging an even more desperate battle against intractable social problems then they already are. But most NPO’s are neither entrepreneurial nor are they true businesses. My reasons for suggesting this have nothing to do with Mr. Sloan’s ideas however. I’m aware that I’m treading into some very controversial waters here. However, I believe this issue is one of the most important faced by the sector if SE is going to ever move with force into the mainstream of the US Economy and take the next step in terms of its impact and value creation.

This is the first in a series on this subject. I’d like to begin with asking a simple question;

What exactly…is an entrepreneur?

Many people associate the word “entrepreneur” with someone who starts their own business. But Stanford University’s J. Gregory Dees extrapolates the concept in much more precise terms that detail a much sharper focus. Depicting entrepreneurs as “change agents” who leverage risk with innovative approaches to solving problems, Dees combines this idea with the approach taken by Peter Drucker; namely that entrepreneurs don’t just cause change, but they are adroit at recognizing it when it occurs in various ways throughout society and exploiting it as an opportunity. Harvard Business School’s Howard Stevenson adds to this the idea that entrepreneurs also leverage assets they do not control in order to create these opportunities. This makes entrepreneurs different from business managers, who restrict their vision to allow only for the resources within their possession.

So we emerge from this with a refined picture of what constitutes an entrepreneur which differs quite significantly from the way social entrepreneurs are often described. In the current environment, entrepreneurialism is often credited wherever we see someone making a difference, irrespective of whether that effort is coming through a traditional non profit organization or something that is more unique and innovative.

There are several issues here that non profits need to address and they need to be clarified in terms of how they relate to the whole issue of why we need a social entrepreneurship model for doing good in society in the first place. Why, after all, can we not simply remain with the same model for non profit initiatives that has served the needs of the market for the last hundred or so years? I believe there are essentially five basic reasons that non profits and philanthropy are differentiated from a true social entrepreneur’s model for doing business.

• Control of resources vs. control by resources
• Mission vs. budget driven enterprises
• Organizational structures that enhance vs. limit freedom and creativity for innovation
• Empowerment vs. entanglement
• Credibility vs. accountability

The Failure of Philanthropy?
Writing in the Stanford Social Innovation Review, Rob Reich, a Stanford professor of Political Science and Ethics, discusses several systemic problems built into the tax code that contribute to problems with philanthropy. Reich notes that philanthropy is first of all, subject to political realities that make it financially more rewarding for wealthy people to give than the poor, thus limiting contributions where they are needed most; in the urban communities.

Second, Reich points out that public policy that offers tax deductions for giving to 501(c)3 organizations also removes potential taxable revenue from government funding that might otherwise go to poor communities. These funds are not replaced in urban communities proportionate to how they are removed from them. The reason for this is because charitable giving, 76% which comes from living individuals, is weighted heavily in favor of religious institutions and not where it can benefit urban problems. Coupled with the fact that more donor dollars go to other causes anyway, the resulting tax deductible contributions are thus missing from the pie that is shared by poor communities when it comes to philanthropic giving.

Together human services and social welfare giving totals only 11% of philanthropy from living individuals, while religious organizations receive 60%, the vast majority of which goes to facilities and institutional overhead like salaries. The end result is that money funneled to these admittedly worthy causes, is also money that is subtracted from funds government has available for deployment in the most impoverished American communities.

My purpose in this series is not to bag on philanthropy but I mention these problems here to establish at least in part, that there are hidden factors with charitable giving that need to be seriously studied before we have a clearer picture of how giving really impacts society and whether we are getting what we’re paying for when it comes to charities. In this discussion I am more interested in looking at the first of our five factors that offer an indication that in spite of charitable giving and philanthropic participation in non profit enterprises, we need social entrepreneurs now more than ever before.

Resources: Do you control them or do they control you?
Ask virtually anyone who has ever worked in the non profit sector what their biggest problem is, and without hesitation they will tell you it’s funding. There is simply never enough money to meet the needs. Non profits depend on five basic sources for funding, government grants, private donations from individuals, philanthropic foundations and corporate sponsorship. Larger organizations generally have one or more grant writers whose only job is to find funding through the various programs available. For small non profits, the grant proposals are usually written by the person managing the organization, in addition to the many other things they have to do.

Whether large or small, non profits all share one thing in common. They are sustained by a life blood of revenues that is externally sourced; that is, they are dependant for their survival on funds provided by somebody else outside the organization. This relationship between non profit organizations and their funding partners; government, foundations, corporations and individuals, represents a long-standing balance of power that is decidedly in favor of those who control the financial purse strings. There are multiple reasons this is true.

The Shrinking Financial Pie
The United States is facing a critical problem with shortages. In the post World War II baby boomers generation that grew up in the 1960’s and 70’s, Americans had a very large workforce that was created in the spirit of post war optimism that saw American economic and military power as the answer to problems both foreign and domestic. This massive workforce was well constructed to meet the needs of the day, agriculture, industrial manufacturing, communications technologies and the global distribution of not only products, but something even more influential; the American culture itself.

As America’s baby boomers have aged and are now retiring and dying, the number of Generation X and Y workers following in their footsteps is much smaller. Generation X by some estimates is half the size of the boomers, meaning that there are far fewer workers available to support retirement for an aging population that is not only much larger, but living much longer than any previous group. Neither is this the only problem. As the boomers age and retire, the skill set necessary for Generation X and Y to compete is radically different than it was for their parents and grand parents.

The global information economy has pushed technology and the means to produce and distribute quality products worldwide to even smaller developing nations. These countries have far cheaper labor costs and the outpouring of US jobs to outsourcing and offshore competitors does not bode well for the boomers. With their vast numbers dependent on a far smaller workforce to sustain their retirement, and with the US slice of the global economic pie rapidly declining in many industries, the boomers face a retirement far different than they planned on.

As the smaller workforce faces the loss of market share an economic surplus, so does the US economy face the prospect that there will not be nearly enough money to pay for the social services and investments in our urban communities that are needed by our poorest people. In other words, the economic pie that has previously supported non profits through both private and public funds is drying up. The era of non profits relying on external sources of revenue from government, foundations, individuals and corporate charity is rapidly closing because we no longer have the funds.

At the same time this is happening, social needs in the US are increasing rapidly. Immigration is a powerful force driving this. So is the declining state of the American public school system that is not preparing students adequately to compete in a technologically sophisticated world without borders. The number of non profits competing for available resources is increasing, while the funds they are competing for are decreasing directly disproportionate to need. When you add all this up, it represents an extraordinarily difficult market for non profit organizations and philanthropy to continue to do what they have done to this point in time.

Large non profits like the American Cancer Society, the American Heart Association, the United Way and the March of Dimes will continue to draw funding across the board from the same sources they have previously. But even these organizations face renewed rounds of belt tightening at a time when the sector has greater challenges than ever before. For non profits and philanthropy based organizations, there is no denying that they no longer are in control of their own resources. The resources are now controlling them .

The Rise of Social Metrics Tools
A few years ago non profit organizations needed to do little more than produce a nice presentation requesting funds, make some networking contacts with the sources they targeted and produce a modicum of accountability with the money in order to sustain the revenue they needed, or at least most of it.

Those days are gone forever. Fueled by both the dwindling supply of resources and increasingly tough competition for those resources, funding agencies and individuals are relying now on science rather than their heart strings when deciding what to fund, and how much to fund it for. New tools designed to measure effectiveness like prevention science research studies and measurement tools borrowed from other fields and customized to fit the social services intervention models have resulted in NPO’s having to now justify every dollar they receive. And this new expectation of accountability is also sustained not only with demands to show need, but to prove the efficacy of programs as well.

Well publicized examples of graft and corruption in the non profit sector resulting in increased IRS regulatory control have also driven reform-minded foundations that now expect that every dollar they give is justified and proven to be effective not with Power Point presentations, but with testing and measurement tools that are unforgiving and unmoved by emotion.

These new realities have placed enormous pressures on non profits that were already struggling to survive. One school of thought takes a Darwinian approach to this problem, and suggests that smaller non profits unable to keep up with the need to hire researchers and grant writers or manage large budgets with technology and manpower, should simply move over and die to free up additional funds for organizations that they deem more deserving.

The net effect of all this is pressure from below (need) and above (resources). The necessity to stay competitive and dialed into the never-ending search for funds has had another extremely damaging impact on NPO’s…the diverting of critical attention from their core mission as controllers of their own course and direction towards the need to satisfy and document every detail requested by those in control of the money. Left unchecked, at some point this can quickly turn organizations away from the vision they began with as the funding agencies decide who and what they will fund, for how much and for how long. Entire organizations have succumbed to the loss of their vision as they have morphed into nothing more than entities fighting to survive for the sake of survival.

This is an extraordinarily damaging malaise. The primary purpose of non profits is to bring vision and commitment together with action. When NPO’s have their organizational models, their mission objectives and their community vision significantly impacted by pursuit of funds in order to survive, compromises result. In turn, innovation and creativity are stifled, passion is eliminated, and the core values that birth these organizations to begin with wind up being sacrificed to corporate management systems that know nothing of the real power behind the metrics. The politics of organizational management and risk averse cultures

Earlier I detailed briefly some problems with philanthropy having more to do with the systemic issues that impact giving than the motives or methods of charity itself. In similar fashion I turn now to point out the fact that the non profit sector is also highly vulnerable to the changing structure of social and political systems surrounding it. Non profits have to ask for money from people who usually know less about their field than they do, yet they control the power that determines if they survive or not.

Non profits are suddenly highly susceptible to losing the very vision and dedication that makes them so unique simply because they ultimately have little or no power over their own survivability. They are working with a business model designed in the 1940’s and meant to exist in a world where there was little or no shortage of money, manpower, and good will from those around them who funded them merely because they asked them to.

Non profits are also extraordinarily vulnerable to the excesses of corporate mismanagement that accompany the kinds of changes we’ve been talking about. A great many people volunteer their time without pay to work for these organizations, but the emerging business culture that NPO’s are now expected to work with is highly destructive to the very motivational factors that drive volunteerism; centralized authoritarian control, the subjugation of creativity and bottom-up initiative, and an inner sense that people are doing something they love to do for the sheer joy of it, not because must quantify and justify every move they make in order to justify their own existence.