A technology-based theory of Social Enterprise

A specter is haunting the globe since the sixties – the specter of Social Enterprise.  All the powers of old have entered into a holy alliance to exorcise this specter. Like all ‘holy alliances’ of the past, they will fail, not least because it offers genuine alternatives for communities that are really neither served by commercial providers nor by government programs that produce results meaningful to their needs. Social enterprises are created on the fault lines between market forces and charity, between the necessity of averting unrest and discontent and the imperatives of continuing to create opportunity on which a knowledge-driven economy depends. Venture philanthropy, CSR and charitable foundations, classic and also non-traditional cooperatives have experimented for some time with a broad range of initiatives. They range from microcredits to social direct investment to many versions of small-scale, targeted help with self-help. Sometimes their underlying objectives include social engineering and sometimes they do not.

But overall, social enterprise is here to stay. It is no threat to for-profit operations, nor does it erode their realistically perceived market potential. Only at the fringes of predatory capitalism (think sub-subprime mortgages, pre-paid credit cards accruing fees greater than their ‘credit line,’ bad-faith insurance policies or violations of implied consumer trust) need it be expected that semi-charitable service to less than privileged target audiences, sometimes to the ultra-poor, would somehow interfere with bona fide generation of profit and other aspects of commercial shareholder value.  

While the traditional political left finds itself at a loss for effective solutions and its reflexive reach for Big Government and entitlement spending has failed resoundingly over considerable parts of the twentieth century, isolationist concepts such as opposition to free trade in North America or quasi-isolationist proposals fashionable in Europe such as taxing machines or hard drives as “job killers” do not resolve anything. Social enterprise attempts to put technology and education to differently prioritized uses that ultimately all aim to put existing tools and concepts to a smarter use with greater holistic value creation for the public interest. It is not synonymous with volunteerism.

Political and philosophical views about the proper role of government or the optimum size and funding of the welfare state may well differ across many cultures and political flavors. It will continue to make for die-hard election issues. What cannot differ, though, because it operates on the very principles of a free market and in the organizational, structural and legal forms and tools of private enterprise, is the use of imaginative entrepreneurial means to effect impactful social change. Whether one wants to proclaim socialism dead or simply hibernating, the conclusion “if you can’t beat them, join them, they must be doing something right” has been demonstrated more than impressively across all the success stories of Eastern Europe as well as by the legacy of Deng Xiaoping, the man who transitioned China from cultural revolutionary chaos to capitalist juggernaut (yet was also responsible for the 1989 massacre at Tienanmen Square) with all its remaining environmental and civil libertarian issues. But one of Deng’s unforgettable aphorisms is particularly memorable in this context: “Poverty is not socialism. To be rich is glorious.”

In response to that notion, social enterprise aims to create common wealth and imaginative solutions to social problems by applying more than a single, P&L based standard of priorities and yardstick for results. Perhaps this is not necessarily true for the bottom line of each entity but as a global phenomenon, social enterprise is a high-value-added contributor to micro- and macroeconomic infrastructure and to targeted problem-solving in communities.

Social entrepreneurs provide needed services at low cost and at a low margin. Once their product is perceived as advantageous, customers quickly come to consider it essential infrastructure – and it is common knowledge that low-margin, high-volume transactions are not an inherently unprofitable proposition. Whether it is politically correct to some or not, one may conclude that success in this sector is primarily about the quality of ideas: human nature does not value gratuity unless it can be shown to be also good business or to create practical value by indirect means (for which the internet is an obvious example: while parts of it are still struggling with long-term viability of their business model, overall value creation has been such by near-universal consensus that ‘nickel-and-diming be damned.’). The internet as a variant of social enterprise? You bet. It meets a dozen reasonable criteria for the latter:

(1) Creative financing
(2) Little or no short-term profitability but much short-term attention
(3) Little or no customer tie-up or obligation
(4) Few if any barriers to access
(5) Few if any aspects of prestige or exclusivity – rather, inclusivity is emphasized
(6) Intangible value creation exceeds monetary value creation
(7) If intangible value creation were properly accounted for, valuation would be astronomical
(8) Innovative service based on bridging differentials in knowledge and training
(9) Scalability
(10) Responsive to critical thought about social problems
(11) Embracing the complexity of diversity through innovation
(12) Redefines public interest
Accounting for social value is challenging in that its valuation often requires considering concepts of damages: loss or damage avoided rather than profit accruing (on which GAAP is ultimately based). At the root of this paradox lay a variety of reasons, primarily simplicity of accounting standards and deep-seated reluctance to engage with hypotheticals – which every consideration of either concept inevitably involves.

But in assessing social enterprise, it is impossible to avoid a close and methodical look at hypotheticals. How could one otherwise account properly for cost and benefits of a policy that avoided civil unrest and disobedience, or that facilitated access to education or medical care? It requires dealing with what-if scenarios that are by their very nature speculative but nonetheless extremely relevant. A classic example is the valuation of a war not waged. Irrelevant? Speculative? Perhaps, but at the same time, common sense renders notions of “relevance” here obsolete.

Social enterprise is widely understood to aim at impact, a non-financial goal that is still somewhat in search of a definition. To measure impact, the Social Reporting Standard (SRS) was developed 2008 in Germany. In the end, the chief difference between commercial and social enterprise is the acceptance or rejection of adequacy and significance of GAAP. Accepting conventional accounting standards greatly reduces complexity and provides for clear and simpler guidelines. Rejecting them as basically meaningless – how else would you call a concept that declines to assign a value to most intangible factors that so obviously make up the majority of matters of importance in life? – necessarily leads one to call for a fundamental review of accounting as a tool and of the manner it is relied upon.

Peer-to-peer processes, open access and open technologies are closely related with the emphasis on overcoming unnecessary functions of intermediaries. Even the function of social venture capital has been adopted successfully by organizations like Ashoka.

Still, social enterprise and entrepreneurship function above all within the realities of any purpose-driven business organizations – for the sake of long-term viability and sustainability, but also because allocation of limited resources has to follow certain principles. Those principles may well have been distorted in for-profit organizations by their often single-minded emphasis on one-dimensional values, but have nonetheless proved to be effective.  The common ground with for-profit entrepreneurship is that, as a fundamental operating premise, social enterprise is not based on reliance on government, subsidies and regulation, primarily because of government’s well-known and seemingly incurable deficits in productivity: Experiments around the globe from 1917-1989 have testified to the resounding failure of the creed that elected public officials with limited (or, even worse, unlimited) terms who are advancing special interests are capable of or even motivated for achieving effective and lasting solutions for significant social ills. Based on this conclusion, social entrepreneurship, just like any form of entrepreneurship, is seldom partisan, since political parties are representatives of the statist and governmental universe, and operate through its mechanisms, not through those of private enterprise. While their purposes may reflect a broader variety of tangible and intangible benchmarks, social enterprises are most successful where they embrace, not reject, forms of organization and management that enable value creation, even if the valuation applied to measure it far exceeds principles and practices commonly reflected in financial statements.

In other words, any value-creating organization basically needs to follow – with appropriate concessions – methods similar to those already proved effective in private enterprise in general, even though its specific tool set may be selected through the prism of a considerable difference in values.

Because it is often – and in indirect ways ultimately always – related to problems of qualification, social enterprise is closely linked to educational issues. Today’s educational system has failed a growing segment of society in terms of access and attainment of de facto minimum standards: the era when someone with a legally required minimum of education could still make an honest living is a matter of the past. Once, a warehouseman needed to be strong and orderly to get the job. Today, this will not happen without a substantial extent of computer skills and technical literacy. Because the need for educational qualifications is exacerbated by the impact of technologies that increasingly eliminate almost any opportunities for unskilled and even low-skilled labor, it stands to reason that any push by social enterprise to remedy this outcome needs to address – or at least act as a catalyst for – the same educational and technological deficiencies as they affect social, analytic and navigational competencies in a knowledge- and service-based economy. A developed society that spends as much as it does on retirement and health care (and their subsidies), on security expenditures with marginal results at best, and on other controversial projects, needs to start spending a lot more, and a lot smarter, on cost-effective preventive measures and future opportunities for the entirety of its current and potential workforce.

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