Social Enterprises and the Single-Responsibility Principle

I recently had the privilege of being a judge for Cruz Cares, which describes itself as “a pitch contest for social change.” Four non-profits and two for-profit companies competed. Each entrant had an idea about how to make the world a better place. The judges were instructed to rate each pitch on the basis of its potential social impact, financial viability, and the likelihood that the project could be successfully implemented.

The winner was unanimously agreed by the five judges to be Rising International, a non-profit that is fighting female poverty by organizing an analog to Tupperware Parties. Instead of selling plasticware, Rising International’s parties feature goods made by women in Afghanistan and other poor countries, and are sold by women in the United States who are themselves in difficult circumstances. Both sets of women make money, and the women in the United States develop skills and connections that help them transition to more traditional employment. It’s a very clever idea, has already attracted over 19,000 foreign artisans, and seems to have the potential to scale.

The second- and third-place companies were also non-profits, despite the fact that both for-profit companies are competently managed, have reasonable business plans, and are led by people with the sincere desire to do good. The experience reinforced one of my long-held beliefs: the only goal of a for-profit company should be to make as much money as possible.

All successful companies do some social good, even if completely by accident. Successful companies almost always provide cheaper goods, better service, or some other benefit to their customers; if they didn’t, it would be hard for them to remain in business. And, of course, all business provide jobs to their employees. (Of course, businesses may also do social harm, and some may do more harm than good. That’s a good justification for laws and regulations.)

But, a business that does good just by doing business is distinct from a “social enterprise,” i.e., a for-profit company with a social mission.  The public-benefit corporation is a new corporate form designed specifically to support social enterprises; PBCs have duties to shareholders like ordinary companies, but have an explicit permission (and, perhaps, even an obligation) to take socially beneficial actions that might otherwise be considered financially irresponsible. (For that reason, PBCs are protected from fiduciary-duty lawsuits by shareholders when taking actions consistent with their social mission.)

I expect that most social enterprises will be unsuccessful businesses. It is hard to build a company. It is even harder if you are also constrained by a social mission. Suppose you have deliberately hired people in an impoverished country and paid them an above-market wage to help them escape poverty while learning a useful skill. Now, suppose that you discover technology that could eliminate all those jobs, delivering a better product at a lower price. Should you adopt it? Do your competitors value your mission enough to pay more than they would pay a competitor who does adopt the new technology?

Or suppose that you need to raise capital for your business. Many venture capital firms have a duty to their limited partners to attempt to maximize profits; they will likely be unwilling to invest if they feel that you are not committed to maximizing profits. Most non-profits are not willing to make high-risk investments in for-profit companies, even in companies with a social goal that aligns with the non-profit’s objectives. Can you find enough investors motivated enough by your social mission to compensate for the loss of those who are purely looking for financial return?

I suspect that most social enterprises struggle to advance their social mission. It’s hard to have a significant social impact, even if you are entirely focused on a particular problem and have abundant resources. If you have to pay corporate taxes on your income, and cannot accept tax-deductible donations, will your profits provide enough resources to accomplish your goals? Can you hire managers with business expertise, domain expertise relevant to the industry in which you operate, and who can also be valuable in accomplishing the social mission?

In short, my objection to the social enterprise concept is that it violates the business version of the single responsibility principle; the software-engineering guideline that states that each function, class, or module should accomplish a single purpose. My advice to entrepreneurs who wish to accomplish a social purpose is to emulate Bill Gates; build a profitable business, and then use your resulting personal wealth to target a social mission.

I make an exception in the case in which the social mission and the business mission are very closely related. For example, if your social goal is to increase the availability of pre-natal ultrasound in the developing world, and you know how to build cheaper, more portable ultrasound devices, it might be that the best way to realize the social goal is to build a for-profit business selling your new ultrasound devices.

I would also exempt social enterprises in which customers, employees, or business partners find the social mission so attractive that the business is more profitable with the social mission than it would be without it. For example, I recall a company that donated to a percentage of revenue to charity, and, as a result, unapologetically offered its services at a higher price than its competitors. Personally, I would never be a customer (as I would rather make my own charitable donations), but perhaps some people prefer the “fire-and-forget” approach offered by this company. But, in a case like this, the social mission can equally well be viewed as a reasonable profit-motivated business plan; even if entirely sincere, the social mission is an exercise in customer segmentation.

In fact, I believe that most existing for-profit enterprises that espouse a social mission are profit-maximizers. For example, I suspect that Red Hat’s advocacy for the social benefits of open-source (as opposed to proprietary) software helps it to attract and retain employees, helps Red Hat employees to obtain important positions within the open-source community, and endears it to some of its customers. Thus, I think it makes perfect sense for Red Hat to eschew proprietary software; whatever short-term windfall it might reap from building proprietary software is overwhelmed by the benefits it gets from its commitment to open-source. Thus, there is no reason for a Red Hat shareholder to object, even if that shareholder is motivated entirely by profits and completely uninterested in the social mission.

Thus, I believe that corporations should strive to maximize profits, and leave social goals to non-profit entities — unless those social goals are extraordinarily well-aligned with the business plan. As an entrepreneur, my goal will always be to make money, and as an investor, I will invest only in companies that are clearly focused on making money.

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