Social Business: a sustainable way to do good

The Author with Muhammad Yunus

The term “Social Business” was coined by Muhammad Yunus, founder of Grameen Bank and Nobel Peace Prize Laureate in 2006. A social business is first and foremost a business that is managed and staffed by people, paid at market-rate salaries or as near as possible, and for it to be sustainable, has to make a profit.

Normal businesses are profit-maximising, for the benefit of its shareholders. All businesses have to make a profit to sustain itself. A loss-making one eventually have to shut its doors unless it receives donations, in which case it becomes a charity. Profit-maximising companies, which a majority of companies are, have to generate profit not only to sustain itself, but also generate profits for its shareholders.

Social businesses are different. Its purpose and business goal is to overcome poverty or some other social issue such as education, health, access to technology or environment. Its profits are used to sustain itself and also grow so as to make a bigger difference for its social goals. Its shareholders and investors have to commit to keep all its profits with the business.

To achieve such lofty objectives, everyone – founders, management, staff and investors – must be aligned to the same goals. The primary characteristic for a social business is its creativity. Its founders and management have to be very resourceful in addressing the social problem in a way that achieves both its profitability and social goals.

As a comparison, normal businesses typically already find it a challenge to make a decent profit; a social business has the added challenge of having to solve a social problem as well.

One main reason for the distraction in a normal business is due to investors of the business – they expect dividends, which comes from a share of the profits. The management therefore cannot focus only on the social mission.

It is therefore a requirement that investors in a social business not take any additional dividend after they have gotten back their initial investment, leaving management to be able to be creative in expanding the business, and thereby its social impact. This condition makes a social business different from other ‘social enterprises’.

It also means the return on investment to the investors is at most, exactly one and no more.

This requires a very special kind of investor – those who truly want to see social change happen. Often philanthropists, on understanding this concept, prefer to channel their charitable dollar into social businesses so their single dollar can radically have more than one life.

They too, have become entrepreneurs and investors – investing in improving the social condition sustainably.