Defeating Global Poverty

There is a growing interest in a new kind of business that is now being referred to as a "social business" or "social enterprise" (I am going to use the former terminology.) I'd like to explain and unpackage this idea a bit and contrast different definitions/perspectives.

The key difference between a social business and a traditional business is that a social business explicitly sets expectations with investors (usually in its bylaws) that it will simultaneously pursue two objectives -- (1) specific positive social impacts/"returns"; and (2) financial returns. Generally, social businesses "warn" investors that the financial returns may be negatively impacted by the social objectives and therefore they seek investors who understand and support these dual objectives when they make their investment. By definition a business must be ultimately self-sustaining ... that is, generate a profit/surplus which can allow the organization to continue without indefinite infusions of investor capital. I say "ultimately" because many businesses have periods of operating losses as they startup or pursue periods of forward investing with the goal of being more sustainable long-term.

So far so good. Then the definitions of social businesses by different people start to diverge.

Non-Profits and Earned Income. There are a few people which consider non-profit organizations which have income generating activities to qualify as social businesses, but most agree that while these may be good activities they are not in themselves social businesses as they continue to rely on donor income to be sustained. I think it is increasingly important for the viability of most non-profits to have a diversity of income sources which include earned income.

Self-Sustaining Non-Profits. There are a number of institutions which have explicit missions to "do good" and have sufficient resources/income to be self-sustaining. These include private foundations, endowments (e.g. universities) and, more recently, operating businesses organized in a trust-type format. An example of the latter are a number of successful microfinance banks which generate profits, often are subject to tax, but are run by trustees (as there are no shareholders) who by law cannot have a personal benefit from the organization. Generally, the foundations and endowments are not considered social businesses even though some of them do have some operational components. For true operating businesses run inside non-share capital structures, these are increasingly viewed as social businesses even though they may face future limitations due to their inability to accept investor equity capital.

Corporate Philanthropy. Many companies have initiatives to "do good." Some organizations commit a specific [small] % of corporate profits to these initiatives. Examples of companies which have institutionalized this are Ben & Jerry's, Google (1% of equity, 1%profits) and RealNetworks (5% of profits). These come under what's known in the business world as the "corporate social responsibility" category. Generally, these initiatives are separate and unrelated to the company's business. There is much debate about whether these are essentially public relations efforts vs. serious attempts to make a meaningful/optimized social impact. See my post on Bill Gates on Creative Capitalism. Most people agree that simply having some "do good" social programs do not make the business a social business.

Yunus Definition of Social Business. In Muhammad Yunus' latest book, he argues for a much narrower view of a social business. He proposes that only two types of businesses are true social businesses: (i) businesses owned primarily/exclusively by the poor; and (ii) businesses where investors are limited to only receive back their invested capital and no more. He says that type (i) provide social impact through the returns they provide to the poor through shareholding and don't necessarily need to have a social mission (although having one would make them an even better social business.) For type (ii), he argues that if the investors have any potential for return above their investment that this will always trump any social objectives.

"Hybrid" Social Business. Then there's a form of social business which has clear objectives for both social impact and financial return. One of the most prominent examples are the many "for-profit" microfinance businesses sprouting up around the globe. These businesses explicitly operate as businesses (with investor capital) and focus on providing valuable products and services to the poor (if not the poorest) citizens/communities. Some argue that these are simply "regular" businesses which happen to focus on a certain market segment ... the poor. In some cases, businesses which focus on the poor/vulnerable are exploitive ... e.g. moneylenders and their re-branded breathern, pay day loan providers. While there definitely are exploitive business models, there are a growing number of examples of businesses which genuinely seek a material positive social impact. [I will cover some controversial examples of highly profitable microfinance banks in a separate posting.] There are a growing number of social investors who are seeking out quality social businesses of this nature ... a good example is Good Capital.

[There are some businesses which have a more indirect impact on a population ... example is mobile telcom operators which appear to increase GDP in emerging markets as subscriber penetration increases ... Merrill Lynch report 0.59% increase in GDP for every 10% increase in mobile penetration ... but generally these are not seen as social businesses.]

Why I Like the "Hybrid" Social Business Model

While I have a lot of respect for one of my current day heroes, Muhammad Yunus, I disagree with his narrow view of a social business because I think it is too limiting on the potential for social impact through the social business construct. Here are a few of my thoughts:

• Investor expectations do matter. If you select investors who are incompatible with your objectives (e.g. they don't value your social impacts), you're going to have a challenge keeping focused on your social objectives. But, this is true for any business ... you need to find the right investors and set expectations very clearly.
• Investors take a portfolio approach. Almost all investors seek to have some diversity in their investment portfolio in order to mitigate risk. If I want to be a social business investor, I'm going to want to invest in multiple social businesses realizing that returns/results will vary. So, if I invest in 10 social businesses and 5 fail (no return, not unusual), 3 have modest returns and 2 have strong returns, I have less risk. I also potentially receive my capital back plus a return (both financial and social.) This means that the successful social businesses are overcompensating me in return (financial and social) and the unsuccessful social businesses are undercompensating me. If I agreed to only received my invested capital back with no financial upside, then I would be losing 50% of my invested capital in this scenario and this should be structured a charitable donation.
• Social entrepreneurs may serially fail. As noted above, it is not uncommon for 50% of businesses (any type of business) to fail. Let's say we have a very eager social entrepreneurs who starts 5 social business which fail and it's only her 6th social business which succeeds. Let's say that she creates huge personal indebtedness in starting the all of these businesses. Why shouldn't she be able to have a reasonable financial return on the 6th business in order to compensate her for the risk and expense she took in developing all of these businesses? Aren't we going to dissuade social entrepreneurs from the necessary risk-taking if they have no financial upside from their personal investment?
• Accessing investment capital. While there is a considerable amount of money in foundations, donor advised funds and other like pools, these funds represent a very small amount of the overall investment capital pool. Most people need/expect to earn a financial return if they are going to commit monies from [their much larger] investment capital "pocket" (vs. their much smaller philanthropic pocket.) So, if you want to attract this capital, you need to offer a financial return even if it is potentially somewhat lowered due to the additional social impact return objective.
  

Since I believe that social businesses should not be artificially limited in their ability to provide financial returns to investors and staff, I am going to use the term "social business" (with the "hybrid" adjective) going forward to refer to businesses which have an explicit and material social objective in their DNA.

Labels: social business, social enterprise, social entrepreneurs, yunus

Muhammad Yunus, 2006 Nobel Peace Prize recipient, has recently released his second book, Creating a World Without Poverty. The centerpiece of this book is Yunus proposal for a new kind of institution called a "social business" which is a for-profit business which has as its top objective a social objective/mission. Yunus makes a passionate argument for the benefit and role of social businesses in helping us move extreme poverty to museums.

Read full book review

Labels: microfinance, social enterprise, social entrepreneurs, yunus

On Tuesday, I participated in a dinner event sponsored by the Seattle International Foundation featuring Nobel Laureate Muhammad Yunus, founder of Grameen Bank and author of Banker to the Poor.

Professor Yunus shared a number of updates and answered questions. Here are some of my notes...

On Grameen Bank in Bangladesh:

• Now serving 7.5 million clients (avg. family size of 5 => 35M+ people)
• 27,000 staff
• Now 80% of poor in Bangladesh are offered microfinance (all MFIs) and targeting 100% coverage by 2012
  
• Most poor countries have 5-10% with the best being 15% coverage of microfinance for poor, so lots of work still to do
• Bank is owned by borrowers
• All capital loaned out comes from savings of the poor (and bank staff)
• Each branch must drive their own savings for capital to loan out ... require that each branch become profitable and capital self-sustaining within 1 year
• Microfinance is very empowering for women ... often first time in their lives that they have anything of their own. Borrowers (women only) decide who will inherit their savings if they die. Interestingly, most women choose their youngest daughter as she has the least opportunity.

On other Grameen-spawned businesses:

• Grameen Phone is largest mobile operator in Bangladesh with 16M subscribers
• Grameen Energy is focused on bringing solar energy solutions to the poor ... reached 100,000 households so far and now aiming for 1M. Cost of solar panels continues to slow down growth of this business. There is great hope that some technology breakthroughs will substantially lower the cost and enable them to accelerate deployment.

On social businesses:

• Yunus continues to be a strong proponent for social businesses ... that is, businesses which exist as commercial entities AND have a mission to have a strong positive social impact
• I think he is right and this is a great new opportunity for entrepreneurs
  

On microfinance in China:

• China has very little supply for microfinance and, next to India, has the largest unmet demand for microfinance
  
• Yunus recently met with senior people in China's central bank on their request to hear about his ideas on microfinance
• Central bankers were initially quite defensive ... holding up their cooperative model as being quite effective in channeling financial services to the poor
• Yunus said that that was quite interesting and that China must be doing something quite differently as in Bangladesh there was also a long-term cooperative system which was widely promoted by the government, but is completely ineffective due to corruption, bureaucracy and lack of relevance.
• This caught the central banker leader off guard and she surprisingly agreed with his assessment and said that they would no longer rely on cooperative model as the cornerstone of China's financial services provision for the poor.

Additionally, Grameen America was formally announced. See my earlier posting.

Labels: grameen, microfinance, poverty, social enterprise, yunus

Muhammad Yunus, the recently announced 2006 Nobel Peace Prize winner and founder of the Grameen Bank in Bangladesh, did an interview that was recently published in Ode Magazine. Here are a few of his quotes:

"What all these pop stars and politicians want, is the usual recipe: charity. But charity is not the way to help people in need; it is not a healthy basis for a relationship between people. If you want to solve poverty, you have to put people in a position to build their own life. Unfortunately, this is not how the aid industry works. Western governments and development organizations think they need to offer permanent charity. As a result, they keep entire economies in poverty and families in an inhuman situation."

"The approach [many take] to poverty is thwarted by our fixed convictions. Poor people are helpless, unhealthy, illiterate and thus stupid, they have nothing, they know nothing, we must take care of them, we must give them food… It is completely wrong to think like this. I am convinced that poor people are just as human as anyone else. They have just as much potential as anyone. They are simply shoved into a box marked POOR! And it’s written in giant letters so that everyone simply treats them the way poor people are treated, because we think this is the way we should treat them. This means it isn’t easy to get out of the box."

This is definitely a very different way of thinking than the current establishment players/experts who claim to serve the poor -- e.g. Jeffrey Sachs, the U.N., Bono, Clinton, Blair and many others. Yet Yunus' success in building one of the world's most successful banks for the poor gives him the authority to challenge the status quo thinking. Yunus is by no means some neo-conservative touting some theory that sounds great but has no on-the-ground substance. Rather he is a practitioner who is much more interested in ways to actually bring opportunity to those who have been denied it by the current powers and systems.

I find this thinking very personally challenging as some much of the lens that I look through towards solving poverty (however incrementally enlightened I may have become in the past few years ;-) still includes a large dose of charity thinking. I keeping thing, "yes, but..." Hmmm... good food for thought and implications for the road forward.

Read the interview and share your comments.

Labels: charity, poverty, yunus

If you have seen the news in the last few days, you will know that Muhammad Yunus (along with Grameen Bank, which he founded) has been awarded the Nobel Peace Prize for his pioneering work in microcredit. This is a very powerful statement about the power of the microfinance revolution to help address one of the root causes of war ... hopeless poverty.

Here are some of the things that impress me about Yunus:

• He is an innovator. The Grameen Bank has continued to re-invent itself and lead the way in developing improved products and services which serve the poor AND are sustainable through generating profit.
• He is an advocate. Yunus uses his access to powerful people to speak on behalf of the needs of the poor. He continues to frame his ideas, issues and questions in plain language which challenge the typical techno-speak of the international development community.
• He is generous. Yunus has generously given of his time, knowledge and influence to help others learn from what they are doing at Grameen Bank in order to implement best practices to help the poor in other areas of the world.

Here are a few (of the many) articles written this past week:

• Yunus' WSJ oped piece about what America can learn from Bangladesh
• Business Week article on what the Nobel prize means for microcredit
• New York Times article on Yunus validating the credit worthiness of the poor

Good Read: Yunus' biography, Banker to The Poor

Labels: grameen, nobel peace prize, poverty, yunus

Muhammad Yunus, founder of Grameen Bank, shared a very compelling vision printed in a recent article in BusinessWeek:

My mission is to create a poverty-free world. I believe that human beings are created to contribute to all other life forms, including their own. But poor people too often spend their lifetime just taking care of themselves because the struggle has been so hard for them. I strongly believe in the unlimited potential of all human beings, not just a privileged few. All kids, when they're born, represent the same unlimited potential in any circumstance.

Poverty is absolutely meaningless and unnecessary in the world. It was just indifference to poverty that created and sustained it. It's not created by the poor. It's created by the system. Once we fix the system in the right way, poverty will disappear.

I'm encouraging young people to become social business entrepreneurs and contribute to the world, rather than just making money. Making money is no fun. Contributing to and changing the world is a lot more fun.

Bono, lead singer of U2 and poverty fighter said "Our generation wants to be the generation that ended extreme poverty."

Now those are visions worth living for!

Labels: grameen, poverty, yunus

I had the opportunity to hear Muhammad Yunus, founder and director of The Grameen Bank, earlier this week speaking at an event in Seattle.

Yunus is very much an activist for practical solutions to defeating poverty. He recounted his story of starting The Grameen Bank, now one of the largest banks in Bangladesh with now over 5M micro-credit borrowers. They also launched a mobile phone company in Bangladesh called Grameen Phone targeting the rural poor which has now become not only the largest phone company in the country, but also the largest company and tax payer! More than 200,000 micro-entrepreneur "phone ladies" are now operating in villages all over Bangladesh renting out phone minutes to fellow villagers. This is a significant service to the rural communities, a profitable business for the phone ladies and a profitable business for the phone company -- a triple win.

The Bonsai People

Yunus is very much an advocate for the potential of the human spirit in every person. He believes that people are poor not because of their own actions but because of the systems that have denied them the ability to reach their potential. Yunus provided the analogy of the bonsai tree. He said that you can take a seed from the largest tree in the forest and put it in a small pot, limit its water and it will grow up as a dwarf tree. Yunus said that this is a good analogy for how potential is not realized by poor people.

Dream Your World

Yunus was asked about how he would talk with well-off children about poverty. He said that we should encourage our children to dream about the world they want. Then we should encourage our children to pursue making that world. Wow!

Social Entrepreneurs

Yunus was asked about what he saw as the next major movement. He talked about a new kind of business person who was building a business to make a profit (for no business will survive without profit) but also to equally value providing a social return. This contrasts with the Wall Street approach of focusing exclusively on maximizing profitability. He envisions an industry developing around social capitalism to run alongside the traditional profit-only focused industry.

Previous post on Grameen and beggars

Labels: book reviews, grameen, microfinance, poverty, social enterprise, yunus