ClearlySo’s Social Business Conference 2012 – Why profit is oh so necessary

ClearlySo organised its inspirational annual Social Business Conference on 9th October at St. Luke’s on Old Street in London.  As we have come to expect from the conference, the venue was an opportunity for a large number of social entrepreneurs to rehearse and present their investment story in front of an audience of other entrepreneurs, social investment intermediaries and even potential angel investors.

ClearlySo’s key note speakers this year were Zarine Kharas and Anne-Marie Huby, the founders of the charity fundraising site JustGiving that has revolutionised the staid charitable giving sector and made philanthropy much more accessible to you and me. Predictably, the audience raised the question of what type of company JustGiving was: “Is JustGiving a for-profit or a not-for-profit?” I am starting to have an allergic reaction to this question as it seems rather absurd. In order to be a “going concern”, i.e. a company or enterprise that survives and (hopefully) prospers from one year to the other, a company must strive to make a profit.  The question should never be: are we trying to make a profit or not? The question should be: what do we do with the profit that we have made?  As such, the distinction should be: are our profits available for distribution or not?  Maybe it is the word “profit” that is inflaming sensibilities? If so, throw out the word “profit” and substitute it with “surplus”. Surely every company is striving to make its earned income exceed its incurred expenses and therefore create a financial surplus. All companies are for-profit, and some are not-for-distribution.

In my mind, whether a venture is a social enterprise or not can also not hinge on a legal form. The label of “social business” should be given according to how the venture sees itself and its raison d’etre, i.e.

  • Does the venture have its social mission enshrined in its Memorandum and/or Articles of Association?
  • Does its staff and management worry about the delivery of the social mission on a daily basis?
  • Does the venture assess, measure and report its social impact internally, to its funders (share or bond holders) and to external stakeholders?

If the answer to all of the questions above are a resounding “Yes!” then it is a social business – even though the venture might turn a profit, be owned and controlled by private shareholders and might distribute, from time to time, some of its surplus to its shareholders.  All companies with share capital have the potential to be social business, but only a few operate and apply their profits in a way consistent with being a social business.

There also seems to be confusion around how social impact interacts with financial return in a social business.  Three models span this spectrum: (i) the 100% for-profit company, (ii) the 100% for-impact company, and (iii) the “inbetween” company.

An example of a 100% for-profit company is the well-known social enterprise Hackney Community Transport (the HCT Group).  At HCT, the team wakes up every morning and worries about maximizing the financial return on their bus routes.  The larger the financial surplus at the end of the financial year, the higher social impact HCT can deliver to its beneficiaries and community.

An example of a 100% for-impact company is the Social Impact Partnership delivering the Peterborough Social Impact Bond.  At Peterborough, the team wakes up every morning and worries about how to maximize the positive impact their organisation can have.  The larger the social impact at the end of the financial year, the higher the financial return the Peterborough team can deliver to its investors.

Interestingly then, in these two examples, a not-for profit charity (the HCT Group) is preoccupied with creating financial return. And, a for-profit company delivering potentially up to a 14% IRR (Social Impact Partnership) is first and foremost concerned with achieving positive social outcomes.  Labels can be so deceiving.

The “inbetween” companies are the most typical.  In these companies, the social impact is interwoven with the financial return such that as the company grows, both its social impact and financial return tend to grow.  An “inbetween” company may have to forego—very occasionally—some of its social impact to ensure financial sustainability.  Ultimately, however, financial sustainability is the great guarantor of social impact.

And this is where we come back to JustGiving. For Zarine Kharas had a very good answer to the question as to whether JustGiving was a for-profit or a not-for-profit.  She said that JustGiving is not constantly seeking to maximize profit, but it is “striving towards profit”.  A social enterprise must strive toward profit because without it, there is only limited sustainability. Blindly maximizing profit in “inbetween” companies, however, is likely to undermine social impact.  Zarine Kharas also said something else that is important: know your business model and know what will make your business model grow. Because, for the “inbetween” social enterprises, it is growth that in 9 times out of 10 will optimise the social impact.

By Annika Tverin, Director at Social Finance

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2 Responses to ClearlySo’s Social Business Conference 2012 – Why profit is oh so necessary

  1. Nick Temple says:

    Interesting post Annika – I agree with what you have to say about profit, and the misleading nature of the non-profit term. Whilst skipping merrily past a definition debate, there are those that would add (alongside social mission in governing docs, reporting / transparency) ownership as part of what they consider a social enterprise to be about; others prioritise impact but it’s worth adding that the legal structures bit is often related to an ‘ownership’ + governance question. Certainly, I would like to see much improved reporting / measurement across the piece, but until that is consistently the case, legal structures will be used as something of a ‘safeguard’. Though this is more the case with social enterprise, and I think you’re talking more social business (the difference between which, for me, is that the former are not-for-distribution…or at least not majority).

    Where I disagree more substantively is the description of HCT as a 100% for-profit organisation…on the contrary, Dai Powell has always been very clear that their objective is to maximise social impact, and that this runs through everything they do. You are right to say that the more profit they make, the more they can reinvest in community transport + other projects, but I’m not sure they’d agree with “At HCT, the team wakes up every morning and worries about maximizing the financial return on their bus routes”. I fail to see why HCT is different in its inter-connected financial + social return from the ‘in between’ companies you describe.

    Finally, I think the emphasis on impact is right. Growing impact is not the same as growing turnover or (always) growing profit, which is why it’s so important to have it enshrined at the heart of the company and reported on with clarity and rigour.

  2. Mark says:

    I think that ownership is the key. I founded a Ltd company and ran it for years as a not-for-distribution. I then sold it to a plc, having been assured by them that I would be able to continue to run it in the same way, but working closely with the other companies in the group (which was the attraction for me as it would enable the creation of some transformative products).

    Of course the plc acted unscrupulously and incompetently, standards dropped, I was powerless to intervene and the customers are now very unhappy (as was I, so I left). In a very real sense the value of that company has been destroyed.

    My new company (as yet spectacularly unsuccessful, unfortunately) is a CIC. So far as I can see this protects the value – which is good for both the customers, staff and the soul of the founder. It also means that the founder can’t cash in, but believe me that quickly palls.

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