August 27, 2009

Understanding Socially Conscious Businesses

by mikemoyer in Articles0 Comments

In business the term “socially conscious” is thrown around a lot these days and I’m not sure people really understand what it means to a business model. And, while I am certainly not against being charitable or socially conscious, I think it is important that entrepreneurs need to carefully understand the implications of being socially conscious and build a business model that reflects that understanding.

I recently saw a business plan for a company that wanted to make money by drilling water wells in Africa. It wasn’t a very compelling plan. My gut tells me that while there is an obvious need for water wells in Africa there are not a lot of investors clamoring to get in on the market. Perhaps it is because the people who really need the wells in Africa don’t have the money to pay for them. So, a for-profit business in the African water well market doesn’t seem like a hot new venture no matter how cool the technology. I’ll bet a non-profit charity has cornered much of the African water well market for communities that can’t afford to pay for them.

To the investor, “socially conscious” means there probably isn’t much money in it and it will feel more like a charity than an investment. Herein lies the problem. If I invest in a stock and the company decided to give the money to a charity that would otherwise be paid as dividends, I’m going to be angry. I would just as soon they paid me so I could determine what charity I would like to give to, if any.

Corporate structures allow for two primary types of entities in the US:  for-profit and a not-for-profit. This means you have to pick one and, if you are an entrepreneur trying to raise money from professional or angel investors, I recommend you choose the for-profit kind. This doesn’t mean you can’t be socially conscious. However socially conscious in a not-for-profit organization is the point, in a for-profit business it is a marketing strategy.

It is important to understand that a fundamental difference between a not-for-profit and a for-profit entity has to do with how the money or wealth flows through your organization. Moving money or wealth is the fundamental purpose of any business. In a nutshell, for-profit companies should be designed to gather wealth and not-for-profit companies should be designed to distribute wealth.

For-Profit Organizations

In a for-profit business there are three basic roles an individual can play. The roles are 1) investor, 2) employee and 3) customer. (Of course there are other roles like supplier, partner, agency, etc. but even these roles fit under one of the other three. For instance, a supplier or agency could also be thought of as an employee of sorts.) Investors put money in the organization with the basic expectation that the business will provide a return. That is, money or wealth will flow towards the investor. The money will ultimately come from customers which means it will flow away from customers towards the investors. The role of the employee, therefore, is to maximize the flow of money from the customers towards the investors in the most efficient way possible. Good employees are those who spend the least money to get the most money flowing back to the investors. Good employees are rewarded by the investor who allows some of the money to be diverted into the employees’ pockets.

To reiterate, in a for-profit business the role of the employee is to maximize the flow of money or wealth from customers towards investors.

Investors ←$− Employees ←$− Customers

Not-for-Profit Organizations

In a not-for-profit business there are also three basic roles an individual can play. The roles are 1) benefactor, 2) volunteer and 3) beneficiaries. On the surface these roles sometimes seem to be somewhat parallel to the for-profit model. However, they are quite different. The purpose of the organization is pretty much the opposite of a for-profit business.  Benefactors (which seem sort of like investors) put money in the organization with the basic expectation that the business will not provide a financial return. Rather, the money (or wealth) will flow through the organization to the beneficiaries. The job of the volunteer (even paid volunteers) is to maximize the flow of money from the benefactors to the beneficiaries in the most efficient way possible. Good volunteers are rewarded by the benefactor who allows some of the money to be diverted into the volunteers’ pocket.

So, to reiterate, in a not-for-profit company the role of the employee is maximize the flow of money or wealth from benefactors towards beneficiaries.

Benefactors −$→ Employees −$→ Beneficiaries

Given the differences in money flow, it begins to be clearer why socially conscious businesses run into issues. They often start treating the investors’ money like a benefactor’s money and they start treating customers like beneficiaries. For instance, the water-well company may spend the investor’s money on the water-well digging service and provide charge the customer very little.While the customers may not be upset about getting more than they pay for investors are likely to be fairly angry. Mixing these two business models will never create a sustainable business. You will need to pick one or the other in order to have a successful venture- period.

This doesn’t mean that for-profit companies have to be socially irresponsible. It does mean, however, that employees who understand the difference between the models make the direction of the money flow the top priority. In fact, a business that does not realize the right money flow is being socially irresponsible. A for-profit business with no intent on flowing money back to investors is being dishonest as is a not-for-profit business that is providing a financial return to benefactors.

Many for-profit businesses have developed great marketing models using socially conscious messages and business practices. Patagonia, for instance, has an environmental and social slant that is very well done.

In a business it is best to keep your eye on the ball. There is a need for socially conscious products and services and the need can be filled by the right for-profit business as long as it doesn’t get in the way of the money flow. If it does get in the way you have a problem. Decide in advance what the long-term goals are and choose a structure that will allow you to meet them.

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