The politics surrounding issues like growing inequality and impending climate disaster means firms are under pressure to demonstrate genuine social responsibility.
US outdoor-clothing manufacturer Patagonia initially pursued profit but later sought to incorporate social responsibility into its business model. Bangladeshi microlender Grameen Bank began as a social enterprise but needed to make money to survive.
How do you fuse the profit motive with social responsibility without going bust or leaving yourself open to the kind of internal conflict that tears firms apart and brings decision making to a standstill?
Writing for Harvard Business Review, Julia Battilana, Anne-Claire Pache, Metin Sengul and Marissa Kimsey present a dual-purpose business model – hybrid organising – and explain how it helps firms to create social good and make money.
Discovering your social mission relies on taking time to do your research. When Grameen Bank paired with water services firm Veolia to provide clean drinking water to Bangladeshi villages, it first worked with industry experts and community leaders to gain a deep understanding of the problems with the existing supply.
As well as the predicted bacterial contamination, the partners discovered that many wells also contained poisonous arsenic. In terms of its social venture, the partnership’s goal was to improve health outcomes in rural populations over the coming decades. But since they’d only be charging minimal prices for their clean water, the need for a separate profit-making venture was also clear; there were twin goals.
To solve the revenue problem, Grameen and Veolia sells water separately to schools and businesses to create about half the partnership’s income. This ensures the sustainability of low prices for local villagers and furthers the enduring goal of creating better long-term health outcomes. It’s a symbiotic relationship between profit and social good that produces results.
But while tracking financial key performance indicators (KPIs) is standard practice, quantifying social progress is harder and requires a willingness to consult with community leaders and expert academics, and to experiment and adapt social performance measures as more information becomes available.
Grameen Veolia Water set four KPIs, which they updated monthly and used at quarterly meetings to guide strategy: the ability to pay for planned investment from its own funds; number of villages with access to its water; rate of rural penetration; and the rate of rural consumption.
Some activities like those of Grameen Veolia – where there’s a clear split between profit making and social mission – are best managed separately. Other organisations create social and economic value simultaneously and an integrated structure makes more sense.
“Think about which organisational activities create economic value and which create social value, how those activities relate to one another, and how you’ll try to balance them.”
Resolution Foods is a US social enterprise that provides lunches for students from low-income families. Every time they sell a sandwich, they make money and provide a healthy meal for a poor child at an underfunded school. An integrated structure makes sense – the same manager is equally responsible for business processes and promoting child wellbeing.
French firm Vivractif hires the long-term unemployed and trains them to collect and repair appliances which it resells in its shops. At the same time, employees receive help with CV writing and interview prep. Providing training delivers social good but takes staff away from the job, impacts profits and increases costs.
Vivractif began by asking supervisors to perform both roles, but it proved hard to recruit people with the right mix of technical and social skills. In the end, the organisation split into two divisions – one to do the social work, the other to take care of the business.
But this structure is primed for conflict. Dual purpose enterprises must, therefore, factor in “mechanisms for surfacing and working through tensions”. At Vivractif, both sides meet each quarter to discuss employees’ progress and to resolve coordination issues with joint planning taking place around things like deadlines.
As Vivractif discovered, it’s not easy to find people with hybrid skill sets which straddle widely differing organisational goals. When you can, it’s a boon, because such staff understand both sides and can work with stakeholders to hold the dual structure together. But these people are comparatively rare, which means you must supplement staff with the perfect range of skills with others who are less well adapted to profit/social fusion.
Hiring people who’ll bring deep knowledge of a particular specialism means you’ll also have to work hard at creating and maintaining a strong sense of shared purpose. Investment firm Vox Capital needs skilled fund managers, but since many have no experience of socially driven investment, the firm carefully screens applicants “for their ability to embrace and thus adapt to the company’s hybrid culture”.
The alternative to hiring people with narrowly focused skills is to go for “clean slates” – people with little or no experience in either business or social enterprise. Bolivian Microlender Los Andes S.S. Caja de Ahorro y Prestamo took this approach, hiring graduates for entry-level roles and making the substantial investment necessary to train them in two separate approaches.
For a hybrid organisation to function properly, “every employee needs to understand, value, and become capable of contributing to both financial and social goals in some form”. That means instituting formal and informal initiatives to “socialise” staff to the firm’s ethos and goals.
“At Vivractif social workers spend at least one day a year alongside recycling supervisors, and vice versa, so that each can learn and relearn about the company from the other perspective.”
At Vox Capital, there’s a time each week when anyone in the organisation may voice a concern about the way the firm is pursuing its social goal of impacting development in Brazil. Employees have, for example, challenged the company to raise capital from ethical sources asking: “Would you take a drug lord as an investor?”
Key to a productive shared culture is the creation of conditions for open expression, conversation and debate, but leaders have a role to play too – in the composition of the board, in their pay awards and their strategic decisions.
Vox, for example, caps the pay differential between the highest and lowest paid member of staff at 10:1. Other firms build shared ownership into their business models or cap dividends to make sure financial goals don’t overpower social ones.
When Fairtrade sneaker brand Veja learned that 70% of the cost of producing high-end footwear went in advertising, it realised that by adopting a “zero-ads” rule it could afford to pay manufacturers a fair price. Instead of advertising, the firm partnered with high-profile outlets to gain traction. Now, with demand increasing, the firm pegs its growth to its manufacturing partners’ ability to scale up.
As a leader, your decisions set the tone – how many companies that talk about the importance of the social good dump their conscience as soon as there’s money to be made?
A NEW WAY
As society becomes more focussed on sustainability, firms must adapt. But as more organisations build tangible social good into their business models, the business model itself needs to change.