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Life Arts    H3'ed 3/7/11

Social Business vs Profit Maximization: Which business model deserves to be dominant?

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Muhammad Yunus, originator of the microcredit concept, has helped lift millions of people out of poverty in Bangladesh and other developing nations. For his efforts, Yunus was awarded the 2006 Nobel Peace Prize. In his 2010 book, Building Social Business , he takes on a new challenge: offering an alternative to profit maximization, our currently dominant business model.  He introduces the concept of a Social Business, which is a for-profit entity whose primary mission is to benefit society.  Briefly, the seven criterion of a Social Business are: 1) the business objective is to overcome a problem threatening society, 2) the firm attains financial sustainability, 3) investors do not make a profit, 4) profits stay in the firm for expansion, 5) the firm is environmentally conscious, 6) the workforce receives market wages, and 7) the work is done with joy.

More than elimination of poverty

Because the focus of Yunus' book is on the elimination of poverty, some readers might conceive of the Social Business model primarily as a tool for helping the poor. As such, they might not appreciate at first the degree to which the model could benefit relatively wealthy countries, including the United States. In my view, the United States is in desperate need of a Social Business model, not so much to raise people out of dire poverty, but to reduce the severe social and environmental damage that results from the dominant profit-maximizing model. In our dominant model, the legal purpose of a corporation is to maximize shareholder profits. There is no other legally binding concern, aside from compliance with laws. And compliance with laws is not even mandatory; in many cases it is simply a business decision. If noncompliance and payment of resulting penalties makes more economic sense, then laws can be broken. Thus the profit-maximizing corporation is not bound to any social or moral purpose. It is bound only to an economic one.

One might argue that the profit-maximizing model has served us well. After all, America is a wealthy nation that has achieved stunning technological breakthroughs. But while the profit-maximizing model has played an important role in furthering our development, such development has come at a unacceptably high price. Roughly half of the people on the planet still live in poverty (on incomes below $2.50 per day) and we are on the verge of destroying the very ecosystems on which all life depends. Already the U.S. EPA warns that citizens should not eat ocean fish regularly due to high mercury levels. Pesticide residues are now found in every corner of the planet. A swirling vortex of plastic particulates twice the size of Texas has formed within the currents of the Pacific ocean. Species are going extinct at rates unseen since the last great die off 65 million years ago and scientists now warn that the sixth great extinction event, this one caused by humans, is upon us. The global economy has crashed. Climate change will soon threaten our ability to grow enough food to support our rising population. And increasing wars and social unrest are predicted for the coming decades as people strive to cope with resource shortages and a deteriorating world. Looked at from this vantage point, the profit-maximizing model can be seen as a tragic and colossal failure. The U.S. and the rest of the industrialized world needs the Social Business model as much as a sinking ship needs life rafts.

The Social Business as an alternative

Would the Social Business model be any less destructive than the profit-maximization model? I believe it could be far less destructive. But to see how, we first must define in concrete terms what a Social Business is. While the seven criteria given by Yunus are an excellent starting point, they are too vague to allow implementation. As the saying goes, "The devil is in the details."

In the book-in-progress, Social Business and E-Democracy in America: Two proposals , I offer a Social Business model designed for the U.S. market. While Yunus places emphasis on cooperative ventures with profit-maximizing businesses and large foundations, I welcome support from both of these but place emphasis on the cooperative efforts of a large population of citizens. I see the Social Business model primarily as a grassroots campaign, run and controlled by the people. In my view, this independence is vital to assure that the dominant business model does not end up stunting the growth of the Social Business model. In fact, it is my hope that the Social Business model will one day become the dominant model. The profit-maximizing model is based on greed, and unchecked greed is inherently corrosive. In contrast, the Social Business model is based on service to society and the environment. Our world is rapidly self-destructing and we are now forced to make a choice between selfishness and love. Which do we want as a base for our society?

A Social Business is formed for the purpose of benefiting society and the environment. It is not formed to provide excessive benefit to an individual or group of individuals. And it is not formed to harm the economy by becoming so large that it dominates. For example, suppose that you and your friends pooled your money to invest $100,000 in a new Social Business. In its third year, the 10-employee firm invented a fantastic product and received a buy-out offer from a profit-maximizing firm for $50 million. Questions now arise as to what to do with the offer or its proceeds.

Should the firm be allowed to sell out? By doing so, it redirects property that was partially created with social investment dollars into the hands of a profit-maximizing entity. In the end, it is the profit-maximizing entity that gains the greatest benefit. If they do sell out, what should happen to the proceeds. Should the owners be allowed to pay themselves a $50 million bonus? Or should they be allowed to split the $50 million equally between all 10 employees? Suppose that the firm kept its product, grew quickly, and in 15 years established a monopoly, or even became too big to fail. Would that be good for society?

Questions like these can help us better define what a Social Business is and what it is not in the American context. In my opinion, few people would choose to invest in a Social Business if others can profit excessively, while they themselves are prohibited from doing so. On the other hand, many might be willing to invest in a Social Business if they knew that the social good would be maximized, even while owners and employees make a fair wage.

The Pool

In the example above, you and your friends funded a pool in order to make an investment. I propose that Social Businesses could flourish in America, without changing any laws, if the criteria defining a Social Business were tightened and if a central Pool was used to hold funds destined for investment. The Pool would also receive monies paid out by the Social Businesses that it spawns. Over time, with new investment money coming in and with a return on investments accumulating, the Pool would grow. A mother company would control the Pool. The Pool would be divided into sub-accounts, one for each member of the mother company. Each member would be able to control and monitor his or her portion of the Pool, and fund the Social Businesses of their choice.

Importantly, members would not be allowed to remove funds from the Pool for personal use, except as repayment of investments made beyond their membership dues. In this way, members would not make a profit on their investments and Yunus' criterion three is fulfilled. By removing personal gain from the system, the focus is instead placed on maximizing the social gain. The social investors are not thinking about themselves, they are thinking about society at large.

A new or existing Social Business that desires funding would submit a proposal to the membership. If members choose to fund it, the new firm would contract with the mother company to receive the funds. The firm would be required to repay the funds to the Pool, along with interest, fees, and certain portions of its profit. In this way, the wealth of the Pool would slowly increase over time, allowing ever larger numbers of Social Businesses to be funded.

Eleven criterion of a Pool-Based Social Business

A Pool-Based Social Business (PBSB) is offered as a specific implementation of Yunus' concept for the American market. Details are provided in the book, but briefly Yunus' criterion are adjusted and amended to maximize the social good and to encourage members (of the mother company) to participate and invest. The PBSB criteria are summarized below. Here, firm refers to a new or existing Social Business that is seeking funds from the Pool.

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John Boik, PhD, is founder of Principled Societies Project, co-founder of the LEDDA Partnership, and author of Economic Direct Democracy: A Framework to End Poverty and Maximize Well-Being (2014).

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