For social businesses to survive and thrive, we must change the broader business ecosystem's legal structures, sustainability metrics, accountability systems, and funding opportunities
Organisations that pursue social and environmental goals—alongside financial ones—are called “social businesses,” and there are many examples: Revolution Foods provides healthy school meals in the United States, Envie is a work integration social enterprise specialized in recycling activities in France, and salaUno provides low-cost vision care in Mexico. Public excitement for social business models like these has grown significantly—particularly among younger generations. Yet most businesses have continued to operate in the same old way: focused solely on maximizing profit and shareholder value, no matter what the social and environmental consequences of their actions are.
We find ourselves at a crossroads: either the social economy will remain separate from the rest of the economy, or it will permeate the broader global economy and contribute to changing the way all business is done. If social businesses remain a niche in an ecosystem designed to support profit-oriented businesses, then it will be difficult for them to survive, let alone thrive. More critically, if the exclusive pursuit of profit and shareholder value remains the core force driving our economic and social systems, then inequalities will only increase, and we will continue to destroy our natural ecosystems at a speed that endangers not only other species but also humanity itself.
How can social businesses serve as models to reform the rest of the economy, expanding beyond its current niche? Businesses can adapt and learn from the organizational practices that allow social businesses to sustain the joint pursuit of social and environmental goals alongside financial ones: regularly setting and monitoring these dual goals; incentivizing employees to value and support them; and systematically accounting for these goals in making strategic decisions. However, this isn’t enough. Changes must also be made to the business ecosystem to make it easier for social businesses to thrive: improved legal structures, more comprehensive sustainability metrics and accountability mechanisms, and increased access to funding.
What We Can Learn From Social Businesses
Balancing social, environmental, and financial goals is no easy task. Far from it. But my colleagues and I have identified a set of practices that can help enable social businesses to create and maintain a hybrid culture that is committed to the joint pursuit of these dual goals.
First, social businesses can explicitly incorporate their dual goals within written policies and established strategies to make them salient for employees and help prevent mission drift. Setting clear objectives in the social, environmental, and financial realms, and monitoring progress towards their achievement, is critical.
Second, incentive systems and employee training should facilitate the pursuit of these multiple objectives. Raises and promotions should be predicated on progress toward not only financial targets, but social and environmental ones as well. Employee training can work to foster an understanding and appreciation of the social, environmental, and financial components of an organization’s mission. Opportunities to shadow colleagues who work in different parts of an organization can also help bring otherwise disconnected employees in charge of these various components together.
Finally, leadership matters. When social business leaders and board members prioritize working to balance their social, environmental, and financial goals for the organization as a whole, they help promote a culture that enables employees at all levels to do the same. And, we see in our research that organizations whose leaders adopt more democratic decision-making processes, in which employees with different perspectives and expertise can weigh in and have a real say on how to handle tradeoffs and reconcile goals, seem to be better able to sustain the pursuit of financial, social, and environmental objectives.
However, while individual organizations can build a hybrid culture committed to the achievement of multiple goals by adopting the above practices, changes within individual organizations, while important, are insufficient to break social businesses out of their niche. We must also change the broader business ecosystem, enabling social businesses to thrive and push others to embrace the pursuit of social and environmental goals, alongside financial ones.
How the Business Ecosystem Needs to Change
To build a new infrastructure for the business world requires improved and accountable legal structures, sustainability metrics and accountability systems, and increased funding opportunities.
Legal Structures | Until recently, there were few legal structures specifically tailored to social businesses, but this has changed over the past few years. The exact form these new legal structures take varies nation by nation: community interest companies in the United Kingdom, sociétés à mission in France, social enterprises in South Korea, and benefit corporations in certain states in the United States, to name only a few.
However, my interviews with social business leaders suggest that unfamiliarity with and uncertainty about these new legal structures still make it difficult to utilize them. There is therefore a need to systematically assess whether these structures are actually helping social businesses better pursue social, environmental, and financial goals. Policymakers should consider what advantages an organization might gain by utilizing these legal structures in order to ensure companies are properly incentivized to adopt them.
The creation of these legal forms is an important step in changing the institutional environment, but they are not enough on their own. Indeed, their adoption does not guarantee sufficient support for the sustainable pursuit of dual goals. As shown by the recent ouster of the Chairman and CEO of Danone—a multinational food-products business whose United States subsidiary became a benefit corporation in 2018 and which as a whole became a société à mission in France as of 2020—simply adopting one of these new legal forms does not guarantee the requisite support for organizational leadership to be able to pursue social and environmental goals alongside financial ones over the long term. To do so also requires a change in mindset not only among corporate leaders, but also among investors and public authorities. And, to facilitate this change, we need to create a new norm, one that will dictate that we assess the performance of a company not only based on its financial results, but also on its social and environmental impacts.
Sustainability Metrics and Accountability Mechanisms | While in theory commendable, corporations’ announcements of their intentions to pursue goals beyond maximizing shareholder profit have proved insufficient to drive real change. For example, businesses that were part of the US Business Roundtable in 2019 may have signed a joint public statement to consider the interests of their employees and stakeholders beyond just shareholders, but they proved to be 20 percent more likely to fire their employees at the start of the COVID-19 pandemic than companies that did not sign the statement. They were also less likely to donate to relief efforts, to offer customer discounts, and to shift production to pandemic-related goods. In contrast to mere statements of good intentions, research has shown that mechanisms to ensure organizational accountability are key to driving real change within the business ecosystem.
One way to create these accountability mechanisms is by developing sustainability metrics that evaluate all companies, not just social businesses, on their social and environmental performance alongside their financial performance. Organizations and initiatives that have developed and maintained sustainability metrics such as the Global Reporting Initiative, Sustainable Accounting Standards Board (SASB), and the Impact Weighted Accounts Initiative, have laid the groundwork for a more comprehensive reporting landscape. The creation of these metrics is only a first step, however; government action will be needed to ensure that organizations in turn take substantive steps to track, report, and improve their social and environmental impacts.
While governments across the world can monitor and support the convergence of sustainability standards into a holistic global framework, a word of caution is also in order: developing and maintaining such a convergent set of standards should be an evolving process, and we must be careful about how exactly such metrics will be used and updated because sustainability issues are dynamic. Supporting this point, practitioners like Jean Rogers, founder and former CEO of SASB, have emphasized the need for standard setting to enable and incentivize industries to address emerging problems before those problems become fully entrenched.
With careful creation and maintenance of a holistic framework, nations could further support the growth of social businesses by ultimately adopting a progressive corporate taxation scheme that would take into account social and environmental impacts. When combined with effective enforcement of existing legislation, a progressive corporate taxation system could help pave the way for critically necessary change to the business ecosystem.
Access to Funding | Even in an environment with improved legal structures and better sustainability metrics coupled with an accountability system, capital will be needed to start and grow social businesses. But social businesses face continuing challenges in accessing this necessary capital, because they don’t conform with perceptions of either the typical for-profit or the typical social organization. It can be hard to exist in two different worlds and convince investors of their legitimacy in an ecosystem still structured to support one or the other.
The development and growth of impact investing has helped to address the need for funding companies with positive social and environmental impacts; the Global Impact Investing Network’s 2020 annual survey estimates that the current global impact investing market is approximately $715 billion. But despite the steady growth of the impact investing market, many stakeholders worry that companies will deceptively brand their products as impact investments, without regard for their actual social and environmental effects. Indeed, the GIIN’s 2020 survey also found that social investors’ concerns about these deceptive practices, dubbed “impact washing,” were the most cited challenge that respondents expected to face in the next five years.
Some potential strategies to help alleviate these challenges include the development of a system of incentives and infrastructural supports to drive the continued growth of the sector, as well as a unified baseline of transparency for impact investors and the organizations that they fund. These changes coupled with the use of sustainability metrics that can be used to hold companies accountable would help create more trust and go a long way toward assuaging concerns about “impact washing,” and impact investing more broadly.
The flaws of the shareholder-centric model—exacerbated both by the 2008 economic crisis and the present COVID-19 pandemic—have resulted in an increasingly unequal society as well as in the continued and rapidly increasing deterioration of the environment. It is clear that the status quo is unsustainable. In this context, social businesses can be at the forefront of a more socially and environmentally conscious ecosystem that places human beings and the planet at its heart. Yet, as we’ve seen, social businesses cannot drive this change on their own. The institutional context in which organizations operate must also change and governments need to take action to change the rules of the game and incentivize all businesses to embrace the pursuit of social and environmental goals alongside financial ones. And we have it within our power, as citizens and consumers, to facilitate these critical changes.
Time is of the essence. The COVID-19 pandemic is an inflection point. We can either decide to learn from this crisis or continue business as usual at our own and our planet’s peril. While alone, we cannot effect change at the required scale, we can unite forces to push for change through collective movements, as Tiziana Casciaro and I explain in our forthcoming book Power, For All: How It Really Works And Why It Is Everyone’s Business. Together, through control of valued resources, whether our votes, our voices, or our wallets, we can exercise the power needed to change our economic system. It is up to us to rise to the challenge of ensuring that businesses that account not only for financial but social and environmental impacts become the norm and not the exception.