Social Impact Businesses – The Profit Conundrum

13 April, 2012

There has been a lot of brouhaha in the Indian media recently about the exploitation of poor people by microfinance institutions whose stated objective is to serve the poor and alleviate poverty. This has of course added more fuel to the raging debate on whether businesses that are meant to provide services to base of pyramid consumers and create positive social impact, can and indeed should be structured as normal profit making enterprises.

Mohammed Yunus, the most celebrated social entrepreneur on the planet, strongly believes that any business that intends to provide services to alleviate poverty or address social concerns has to be structured as a "Social Business". A Social Business according to Yunus, is one in which the profits are ploughed back into the business and the owners do not take out any dividend. Further, investors in a social business are allowed to recover their original investment and nothing more.

Yunus represents one end of the spectrum in this debate with his rigid stance that profit and social good cannot co-exist. In his book 'Building Social Business', Yunus says, "Most people who want to start a profit maximizing business are focused on earning money- preferably lots of money, because the amount of profit is the yardstick by which success is measured". The problem with this theory is that it reduces human motivations for starting a business to a binary mutually exclusive state – either mindless profit maximization or a hallowed desire to be the savior of the downtrodden. In reality human motivations are a lot more complex and multidimensional. Wealth creation is a very important motivation for most entrepreneurs; however, it is not the only motivation for most entrepreneurs. In fact, I will stick my neck out and say that if an entrepreneur is focused only on profit maximization he or she can never build a great business.

Having said this, I think the real issue in the 'dilution of objectives'  debate is not about the entrepreneur's motivations in isolation but the pressures on the entrepreneur to compromise the social objective upon raising investment from a PE fund, especially if the fund is not a philanthropic or 'patient capital' investor. An emerging asset class, called Impact Investments, comprises investors who have social impact objectives, apart from financial returns. Impact Investors follow different philosophies- Monitor Institute in their Investing for Social and Financial Impact Report classifies them as those who prioritize optimal financial returns with a floor social impact (Financial First Investors) and those who prioritize optimal social returns with a floor financial return (Impact First Investors), with multiple layered structures in between.  Whatever be the philosophy of the 'for profit' investors, there are several voices who vehemently argue that the return expectations will create pressures on the entrepreneur to compromise social objectives.

In my opinion too much is being made out of this, especially in the light of the recent microfinance issues. Market based solutions by their very nature have competitive forces that prevent exploitation of consumers. Moreover, PE funding brings in rigor, accountability and efficiencies all of which enable better service delivery and products to the intended consumers. At the same time businesses that serve Base of Pyramid consumers should stop creating a halo around themselves or misuse their so called social credentials to place themselves on a pedestal.

Anurag Behar, the Chief Sustainability Officer of Wipro, sums it up brilliantly in a recent blog on Mint  "Why place on entrepreneurs the burden of living up to the image of an SBE (Social Business and Social Entrepreneurs)? Most businesses serve a social purposeâ"some bigger, some lesser. So long as they function legally, with fairness and with high quality, we should just value them and their social role, without deifying them. Let's just celebrate the success of these innovative entrepreneurs, and be grateful to them for that. And those who want to get deified as an SBE should live and die by the definition of Yunus."


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Social Impact Businesses – The Profit Conundrum

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