There are an increasing number of social businesses which have the opportunity to have both dramatic positive social impact as well as significant generation of wealth. What I’m referring to are what I call “hybrid social businesses” … those which have objectives to deliver social impact and are structured as “for profit” shareholder-type entities. I have written previously that I think that one of the sectors with the most growth opportunity are businesses focused on the world’s poorest and how there is a growing debate on how the wealth created by businesses like Compartamos are distributed.
What I’d like to focus on here is the unearned investment income/assets rather than other wealth that’s created through employee compensation, cash philanthropy gifts of the business, taxes paid and wealth created by customers of business based on the business’ products/services.
Who should benefit from the wealth created by businesses serving the world’s poor?
Of course, there is not one right answer to this question. Here’s a short list of the constituents who could benefit:
- Business founders
- Business management team
- Local Communities
In most situations, unless specific attention is given, the primary stockholders of any business are the investors, the business founders and the business senior management team. It is important that investors are compensated for the often high-risk capital they provide to fuel the business for without this the business wouldn’t exist. The founders also need to be compensated for the significant vision and sweat equity they have invested in this venture as well as likely other failed ventures (see my overview of hybrid social business for more details). And to attract the right growth-capable senior operating managers, they also need to be allowed to participate in the wealth they are leading the creation of.
Is this where wealth sharing should end?
If this is where the wealth-sharing ends, then the result is likely to increase the wealth share of “the few” creating higher societal wealth inequity. Since most of the countries where the highest potential social businesses are operating already have very high societal wealth inequity, this is perpetuating a severe concentration of wealth. Many people believe that the best approach to creating better societies is to encourage the creation of a very sizable middle class which results in many benefits including more accountable government, fairer laws/judiciary, more resilience to economic changes/shocks, increased freedoms/human rights and less violent communities.
The coming scrutiny
I think that this is going to be an increasingly important issue to address as there is going to be increasing scrutiny of “excessive profits” earned by “the few” which are “generated from the pocketbooks of the poor” by populist governments and political parties/candidates. This is an easy “outrageous” story to sell for votes. So, it is wise to get ahead of this issue.
Going further in wealth sharing
I believe there are opportunities to structure social businesses in order to both generously reward investors, founders and managers AND create wealth for other important constituents. Here are a few thoughts:
- Employees could have the opportunity to participate in the company’s success. There has been phenomenal wealth generated through employee participation in stock programs in many companies in the developed world. Of course, this has its risks (as we’ve seen with mismanaged companies like Bear Stearns), but there are many more examples of where this has benefited employees modestly or substantially.
- For certain kinds of businesses it might make sense for poor clients/customers to also have a method to participate in the value being created. This is being done with some microfinance institutions where the clients earn or purchase shares in the company. This has to be structured right though to create a workable governance model. Grameen Bank has done this with board representatives elected by their bank clients. SKS Microfinance has setup a trust to oversee a substantial number of shares owned by their clients.
- The local communities where a social business works are also a consideration for participating in the wealth created. [I’m not talking here about the common 1-2% of profits given philanthropically by many companies, but rather the enterprise value created.] Since most communities where these social business operate have huge common good investment needs, there is an argument to be made that a success social business could provide significant capital to at least bootstrap these community investments.
- When a social business receives donation dollars or subsidized capital, there is an increased responsibility to share the wealth generated more broadly.
All of these new “shareholder” groups introduce more complicated governance issues. Some argue if that if you let these less educated shareholders “vote” that this will create problems for the business down the road. In response to this, some social businesses with substantial share ownership with these constituents appoint capable (and hopefully accountable) trustees to oversee the interests of these shareholders. So, yes, this creates more complexity, but then so does democracy!
I’m interested in hearing about examples of hybrid social businesses which are wrestling with the topic of wealth creation distribution and are experimenting with different models/approaches. Please post comments of examples.