Banker to the Poor (27 page)

The Next Big Idea

For thirty-one years, I've been working with poor people, particularly the poor women of Bangladesh, trying to do the best I could to change their lives. Much of that work was through Grameen Bank, through microcredit, which has become known around the world.

It was my experience with microcredit and with Grameen bank that led me to another idea, one I have been developing for some years now. Seeing that many poor people remain poor, I came to realize that one particular problem lay in our conceptual framework. That led me to address the issue of business.

Today, when we think of business we think of enterprises that are dedicated to making money—to profit maximization. To me, that's too narrow a definition of people as economic participants. Human beings are much more complex than just being instruments for making money. So I began to imagine another dimension—a dimension where human beings want to be of help to other people, to create a new kind of world through economic activity. This requires a new kind of business—one that I call a
social business
.

A social business is a non-loss, non-dividend enterprise, created with the intention to do good to people, to bring positive changes to the world, without any short-term expectation of making money out of it. That is the subject of my new book,
Creating a World Without Poverty.
It describes how social business can change the world and end poverty on this planet.

There I'll be describing what social business is all about, how it can be created, how it fits into all our desires and wishes. This is not something I've had to invent: It's inherent in people, it simply it never had the occasion to release itself. So I'm just describing a framework in which people can express themselves, by creating social businesses, to address such issues as poverty, child labor, homelessness, the environment—anything we see that needs to be changed in order to have a better world. We don't have to put everything on the shoulders of the government. Governments are limited; they cannot do everything, and we have responsibilities as citizens. Social business is one way we can address them.

To free-market fundamentalists, social business might seem blasphemous. The idea of a business with objectives other than profit has no place in their existing theology of capitalism. Yet surely no harm will be done to the free market if not all businesses are profit maximizing businesses (PMBs). Surely capitalism is amenable to improvements. And surely the stakes are too high to go on the way we have been going. By insisting that all businesses, by definition, must necessarily be PMBs and by treating this as some kind of axiomatic truth, we have created a world that ignores the multi-dimensional nature of human beings. As a result, businesses remain incapable of addressing many of our most pressing social problems.

We need to recognize the real human being and his or her multifaceted desires. In order to do that, we need a new type of business that pursues goals other than making personal profit—a business that is totally dedicated to solving social and environmental problems.

In its organizational structure, this new business is basically the same as the existing PMB. But it differs in its objectives. Like other businesses, it employs workers, creates goods or services, and provides these to customers for a price consistent with its objective. But its underlying objective—and the criterion by which it should be evaluated—is to create social benefits for those whose lives it touches. The company itself may earn a profit, but the investors who support it do not take any profits out of the company, except recouping an amount equivalent to their original investment, over a period of time. A social business is a company that is cause-driven rather than profit-driven, with the potential to act as a change agent for the world.

A social business is not a charity. It is a business in every sense. It has to recover its full costs while achieving its social objective. When you are running a business, you think differently and work differently than when you are running a charity. And this makes all the difference in defining social business and its impact on society.

There are many organizations in the world today that concentrate on creating social benefit. Most do
not
recover their total costs. Nonprofit organizations and nongovernmental organizations rely on charitable donations, foundation grants, or government support to implement their programs. Most of their leaders are dedicated people doing commendable work, but since they do not recover their costs from their operations, they are forced to devote part of their time and energy, sometimes a significant part, to raising money.

A social business is different. Operated in accordance with management principles just like a traditional PMB, a social business aims for full cost recovery, and more, even as it concentrates on creating products or services that provide a social benefit. It pursues this goal by charging a price or fee for the products or services it creates.

How can the products or services sold by a social business provide a social benefit? There are countless ways. For a few examples, imagine:

 

• A social business that manufactures and sells high-quality, nutritious food products at very low prices to a targeted market of poor and underfed children. These products can be cheaper because they do not compete in the luxury market and therefore don't require costly packaging or advertising, besides not being under compulsion to maximize profit.
  
 

• A social business that designs and markets health insurance policies that provide affordable medical care to the poor.
  
 

• A social business that develops renewable-energy systems and sells them at reasonable prices to rural communities that otherwise can't afford access to energy.
  
 

• A social business that recycles garbage, sewage, and other waste products that would otherwise generate pollution in poor or politically powerless neighborhoods.
  

In each of these cases, and in the many other kinds of social businesses that could be imagined, the company is providing a product or service that generates sales revenue even as it benefits the poor or society at large.

A social-objective-driven project that charges a price or fee for its products or services but cannot cover its costs fully does not qualify as a social business. As long as it has to rely on subsidies and donations to cover its losses, such an organization remains in the category of a charity. But once such a project achieves full cost recovery, on a sustained basis, it graduates into another world—the world of business. Only then can it be called a social business.

The achievement of full cost recovery is a moment worth celebrating. Once a social-objective-driven project overcomes the gravitational force of financial dependence, it is ready for space flight. Such a project is self-sustaining and enjoys the potential for almost unlimited growth and expansion. And as the social business grows, so do the benefits it provides to society.

Thus, a social business is designed and operated as a business enterprise, with products, services, customers, markets, expenses, and revenues—but with the profit-maximization principle replaced by the social-benefit principle. Rather than seeking to amass the highest possible level of financial profit to be enjoyed by the investors, the social business seeks to achieve a social objective.

Social Business Profits Stay Within the Business

A social business differs from a charity or an NGO or a nonprofit group in another important way. Unlike those organizations, but like a traditional PMB, a social business has owners who are entitled to recoup their investments. It may be owned by one or more individuals, either as a sole proprietorship or a partnership, or by one or more investors, who pool their money to fund the social business and hire professional managers to run it. It may be also owned by a government or a charity, or any combination of different kinds of owners.

Like any business, a social business cannot incur losses indefinitely. But any profit it earns does not go to those who invest in it. Thus, a social business might be defined as a
non-loss, non-dividend business
. Rather than being passed on to investors, the surplus generated by the social business is reinvested in the business. Ultimately, it is passed on to the target group of beneficiaries in such forms as lower prices, better service, and greater accessibility.

Profitability is important to a social business. Wherever possible, without compromising the social objective, social businesses should make profit for two reasons: First, to pay back investors; and second, to support the pursuit of long-term social goals.

Like a traditional PMB, a social business needs to have a long-term road map. Generating a surplus enables the social business to expand its horizons in many ways—by moving into new geographic areas, improving the range or quality of goods or services offered, mounting research and development efforts, increasing process efficiencies, introducing new technologies, or making innovations in marketing or service delivery so as to reach deeper layers of low-income people.

However, the bottom line for the social business is to operate without incurring losses while serving the people and the planet—and in particular those among us who are most disadvantaged—in the best possible manner.

How long will it take for investors to get back their investment in a social business? That is up to the management of the social business and the investors themselves. The proposed payback period would be specified in the investment prospectus: It might be five years, or ten, or twenty. Investors could choose the appropriate social business in which to invest partly on the basis of this time frame and on their own anticipated needs, as well as their preference for a particular social objective.

Once the initial investment funds are recouped, investors can decide what to do with those funds. They might reinvest in the same social business, invest in another social business or a PMB, or use the money for personal purposes. In any case, they remain as much owners of the social business as before, and have as much control over the company as before.

Why would investors put their money into a social business? Generally speaking, people will invest in a social business for the same kind of personal satisfaction that they can get from philanthropy. The satisfaction may be even greater, since the company they have created will continue to work for the intended social benefit for more and more people without ever stopping. The many billions of dollars that people around the world donate to charitable causes every year demonstrate that they have a hunger to give money in a way that will benefit other human beings. But investing in a social business has several enormous differences from philanthropy.

First, the business one creates with social business is self-sustaining. There is no need to pump in money every year. It is self-propelling, self-perpetuating, and self-expanding. Once it is set up, it continues to grow on its own. You get more social benefits for your money.

Second, investors in a social business get their money back. They can reinvest in the same or a different social business. This way, the same money can bring more social benefits.

Since it is business, businesspeople will find this as an exciting opportunity to not only bring money to social business but to leverage their own business skill and creativity to solve social problems. Not only does the investor get his money back, he still remains an owner of the company and decides its future course of action. That's a very exciting prospect on its own.

Broadening the Landscape of Business

With the entry of social businesses, the marketplace suddenly finds itself with some new and exciting options, and becomes a more interesting, engaging, and competitive place. Social concerns suddenly enter the market place on an equal footing, not through the public relations window.

Social businesses will operate in the same marketplace with PMBs. They will compete with them, try to outmaneuver them, and seek to capture market share from them, just as other businesses do. If a social business is offering a particular product or service that is also available from a PMB, consumers will decide where to buy, just as they now choose among competing PMBs. They will consider price, quality, convenience, availability, brand image, and all the other traditional factors that influence consumer choices today.

Perhaps for some consumers, the social benefits created by the social business will be an additional reason to buy from it—just as some consumers today prefer to patronize companies with a reputation for being worker-friendly, environmentally conscious, or socially responsible. But for the most part, social businesses will compete with PMBs on the same terms as we see in traditional capitalist competition—and may the best company win.

Social businesses will also compete with one another. If two or more social businesses are operating in the same market, consumers will have to decide which one to patronize. Again, product and service quality will probably be the main determining factor for most customers.

In addition, social businesses will compete for potential investors, just as PMBs do. Of course, this will be a different kind of competition than we see among PMBs.

Consider two profit-maximizing businesses that are competing for investment dollars—two auto makers, for example. The competition here will turn on which PMB is perceived as having a greater future profit potential. If most investors believe that company A is likely to be more profitable than company B, they will rush to buy shares of company A stock, because they expect to earn higher dividends in the future, and they also expect to benefit from continuing growth in the overall value (or
equity
) of the company. This launches a positive cycle in which company A stock rises in price, making investors happy.