Social Enterprise Workshop

On May 19-20, WDI hosted the workshop “Social Enterprise and Entrepreneurs in Emerging Markets: Framing the Issues.”  The workshop focused on ways in which socially-oriented organizations are adopting commercial strategies to increase effectiveness and decrease grant dependence.  We brought together a small group of academics and practitioners to share their research and experiences, and to help frame a research agenda for exploring social enterprise in emerging markets. 

 

Participants presented research or experiences in one of three panels; 1) Cross-sector partnerships, 2) Social Enterprise, and 3) Non-profit strategies to achieve commercial sustainability and policies which affect the development of the third sector.  Below is a brief summary of the proceedings.

 

As noted by WDI Director Bob Kennedy, there were seven recurring themes, which serve as a useful outline of the workshop discussion.

 

 

Jesse Moore brought up the issue of social enterprise capitalization.  An important dynamic to investigate is the relationship of social enterprises to capital:  if the company fills the role of funder, the company tends to own the relationship.  SE needs independent capitalization.  DFID (Britain’s aid agency) funded a model to address this problem, in which the agency funded both the company’s and the nonprofit’s presence at the table equally in a project designed to provide water and sanitation for the urban poor.  Moore commented further on the U.S. & Canadian governments’ very different relationships with the private sector and the nonprofit sector:  at the same time as it has adopted the role of hands-off enabler of the private sector, it has clamped down on the nonprofit sector and taken an increasingly hands-on tack.  Moore would like to see the government serve equally as an enabler for the nonprofit sector.

 

 

 

Jesse Moore emphasized the importance of providing new evaluation tools that measure both social and financial benefits of the partnership.  One idea floated was a social enterprise report similar to the “Doing Business” reports, in which countries are rated for the speed at which someone can set up a business, and there is an incentive not to come last and potentially deter foreign direct investment.  Other models floated were the USAID sustainability index, the Civicus civil society index project, the Johns Hopkins “Diamond”, and the “social accounting” concept.  The USAID Business Development Services framework in the microenterprise field was considered to be too restrictive, and participants recommended a model with fewer schema and less measurement. 

 

In the search for metrics, the group liked the idea of evaluating social enterprises based on the five forms of capital.  They are:  human capital, social capital, financial capital, engineered capital, and natural/environmental capital.

 

 

 

Roberto Gutiérrez stressed the importance of balancing this value exchange, noting that perceived fairness of the partnership is an important measure of its success.  According to Gutiérrez, the skills required to manage an alliance are focused attention, trust building, institutionalization, communication, and collaborations as learning tools.  The initial barriers can be numerous:  culture, conflicting goals, confusion, control, capabilities, competition, and costs being only a few. 

 

According to Jesse Moore, the goal of partnerships especially in microfinance should be to “move towards discomfort”:  that is, the development sector is concerned about putting risk onto poor people through the loans, and the banking sector is concerned about investing in unproven, “low-value” clients.  He argued that social enterprise is the hybrid where both sectors meet in the middle.

 

Kim Alter saw these partnerships as creating a relationship between two very different poles, rather than a meeting in the middle of a continuum between private and nonprofit.

Alter suggested that WDI could play a “matchmaking” role between the two sectors (and their government), since although private and nonprofit should exist along a continuum as suggested by Jesse Moore and Lee Davis, the work as it is now is more to build a bridge between two distinct sectors.

 

There are benefits achieved from marrying the two sectors, but the “Challenge of Convergence” often pits two very different approaches against each other.  Jesse Moore gave an example of the non-profit sector’s tendency to tolerate and provide additional support to non-performers, versus the for-profit sector’s tendency to let non-performers go if they become too problematic.

 

Moore presented a number of key areas for future research:  how to get grant-minded personnel spotting investment opportunities; how to avoid mixing charity and social enterprise (“goodwill is often the starting point for partnership, but can be problematic); how to get real convergence from complimentarity rather than common goals, and avoid cloaking beliefs because partnering demands honesty about intentions; sharing profit when one sector doesn’t do it and the other has profit as a core instinct; and providing “minimum rules, maximum tools” (value that Moore suggests WDI might be able to provide).

 

 

 

Jesse Moore raised the question of how to reach the donor community more effectively with social enterprise.  Donors are not yet thinking about social enterprise along the venture philanthropy model:  you have to accept some bad apples with the good.  One potential confidence-builder is to adopt a peer group model like the Grameen Bank, where co-evaluation prevents the group from wasting money collectively since all eyes are on group members.  (The members in this case are nonprofits starting a social enterprise.)

 

Katherine Schad noted the demand for social enterprise promoters to synchronize the movement’s message.  Many social enterprise funders have leapt before they looked, and there is now a real need for a common vocabulary to translate into something that fits in donors’ funding categories.  She suggested looking to the model of the public-private partnership, as a concept that is better known than social enterprise among donors.  Schad also noted that one of the negative motivations for international donors to invest in social enterprise is to use it as an exit strategy:  in Kazakhstan and Kyrgyzstan, international donor phase-outs have left NGOs searching for alternative funding.

 

 

 

Conference participants warned about enterprises that were not sufficiently related to the organization’s mission.  Still, some argued that social enterprise should change the mission, since adopting social enterprise as an operating style can lead to positive changes within an organization.  Kim Alter noted the importance of creating a culture of social enterprise within the organization, “led by mission and driven by markets.”  She displayed three kinds of social enterprises:  embedded, symbolized by a diamond within a circle, wherein the social enterprise is fully integrated into the organization’s mission; partially embedded, in which there is some overlap of mission and income generation but still not full integration, although these can often be workable (as in Counterpart International’s Tajikistan bakery); and external, in which the income generator and the other parts of the organization are completely separate and linked only tenuously.

 

 

 

Lee Davis expressed a concern for preventing overblown claims of full self-sufficiency or huge profits from tarnishing the social enterprise field.  He emphasized the need to go slowly and to keep to a reasonable scale, noting that it’s important at this stage to prevent overblown claims to aid agencies about the wild success of social enterprise, when investment in SE is just like investment in private markets – you win and you lose.  Also, USAID and others might be tempted to push social enterprise as an exit strategy in regions where they are reducing their presence (like Central Europe), and this can result in a prematurely large scale.  Davis also emphasized the importance of legal environment, since it often dictates the institutional culture of the social enterprise, and its likelihood of being embedded or external, and since evidence suggests the former may work better, legal reform becomes even more important to the implementation of SE.

 

 

 

Douglas Rutzen divided obstacles to social enterprise into several categories:  formation, internal governance, NPO activities, government regulation, termination and dissolution, tax exemptions for NPOs, and donor support.  Rutzen echoed the sentiments of other workshop participants calling for case research to understand the legislative framework on a country-by-country basis, as the first step in trying to improve the legal environment. 

 

The political, cultural, social, and legal obstacles to establishing an enabling legal framework vary tremendously by region and country.  Participants agreed on the importance of studying the comparative context among countries.  This is a necessary precursor to promoting legislation in individual countries, and preferred over trying to implement some type of “boilerplate” legal recommendations in these disparate settings.

 

The distinction between technical issues versus political will was addressed, and participants hope to address the image of SE with developing country governments.  A particularly haunting note sounded by governments was the complaint that “unfair competition” from enterprising nonprofits would harm the private sector.  In a potential counterpoint to this argument, it was noted that tax collection rates for small and medium-size enterprises in most developing countries are very low, so there would be little revenue lost to government if nonprofits were to take over any private market share.  A short-run solution was also proposed:  nonprofits could hire CPAs to find nonprofit tax law loopholes just like corporations do.  Also, Rutzen noted that there is surplus real estate in the developing world, but too often these funds go to the GONGOs, or government-organized NGOs typically run by cronies.  

For full workshop preceedings, see Workshop Minutes