Nonprofit and For-Profit: Blurring the Line

Their names and purposes buzz with idealism. There is Ventures in Development, whose goal is to raise incomes in western China’s rural Hunan province by helping local farmers to tap export markets. And One World Medical Devices, which sets out to save millions of lives in developing countries by ensuring the safety of vaccine supplies. There’s Distributed Generation Technologies, which promises to “catalyze the future of renewable energy” through its plan to convert organic materials to methane.

Their self-descriptions ring with the sort of missionary rhetoric common to nonprofit enterprises. But none is. Instead, all have won awards at recent business-school competitions — specifically those sponsored by either Harvard Business School or a consortium of the London Business School and the business schools at the University of California at Berkeley and Columbia University. The awards recognize “social enterprise,” an approach said to combine profitability with what Harvard Business School terms “social impact.”

Social-enterprise firms are said to be “social purpose ventures” that meet a so-called double or even triple bottom line — making profits, bringing about social improvements, and even achieving environmental “sustainability.”

It’s a powerfully seductive idea — that new businesses could purposefully set out to ameliorate social ills and, in the process, still turn a profit. Its implicit theme: that business can evolve into a higher-and-better form that includes but transcends selfish motives.

On the surface, it’s an idea that seems to present nothing to dislike. But closer examination reveals both its own internal contradictions and reasons for nonprofit organizations to be concerned. Not only does the social-enterprise concept minimize the challenge of simply running a profitable business but it also sends a message that any or all social ills can be reduced through markets, if only entrepreneurs are creative enough.

One cannot blame business for wanting to wrap itself in the garb of social responsibility. There’s good reason for Goldman Sachs to help underwrite the cost of the Global Social Venture Competition (the Berkeley/ Columbia/London competition), whose guidelines seek applications from projects where “both financial and social goals are integral to its purpose.”

Similarly, Deloitte & Touche provides some of the support for Harvard Business School’s Business Plan Contest, which includes a “social enterprise track.”

Business seeks such moral high ground because, notwithstanding the wealth and vastly improved living standards it has created, private enterprise has never been able to fully shed the patina of antisocial selfishness born with the dawn of the Industrial Revolution. Economists would not dispute Adam Smith’s insight that the pursuit of private gain inadvertently fulfills public interests — that it’s “not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their own interest” — but it is an argument that has simply not proven adept at seizing the public imagination in the way that altruism can.

Thus brand-name companies now compete to demonstrate their social responsibility. Doing so is a good way to both keep anti-globalization protestors at bay and appeal to high-end consumers who might be inclined to buy their coffee more often at Starbucks if it pledges to help struggling, third-world coffee growers.

But well-established firms burnishing their reputations and fending off critics are a far cry from start-up businesses being able to purposefully solve social ills at the same time the cash register rings — and keeps on ringing.

Consider the story of the founder of a start-up manufacturer who sought the so-called triple bottom line by hiring and counseling ex-prisoners and substance abusers, selling a “green product,” and locating his business in an inner-city neighborhood.

He found, however, that it was difficult to find time for much of anything beyond sales — and that that alone was a daunting enough challenge. He was eventually forced to close his doors. One group of student winners in this year’s Harvard social-enterprise competition observed that “we wanted to start a social enterprise, and a for-profit one in particular, because we believe it’s the way that development is sustainable.”

Perhaps, but making a profit is no mean feat and may look only superficially easier than the challenge faced by traditional nonprofit groups, with their relentless need to raise money. The sheer terror and urgency of repaying investors or satisfying shareholders simply cannot be minimized. Put another way, one bottom line is a lot.

Moreover, there’s a good case to be made that the mission statements of so-called social enterprises are little more than spin intended to frame standard profit-maximizing activity in social-action rhetoric.

Indeed, not only is Adam Smith right that, by definition, all private business fulfills social needs (or goes broke trying), but so too, virtually any enterprise can be made to sound as if it’s serving a good cause.

When it started, for instance, Wal-Mart might well have claimed to be “bringing a full range of product choices to previously underserved rural consumers.”

Social enterprise, in other words, is, at best, more rhetoric than breakthrough; at worst, it is a corruption of the basic Adam Smith idea of private enterprise.

It is a pretension, however, that threatens the raison d’être of nonprofit social-service enterprises. Simply put, if for-profit firms can tackle social problems, why do we need philanthropy? A moment’s reflection should make the answer clear.

As Peter Frumkin, a professor of public affairs at the University of Texas at Austin, stresses in his book On Being Nonprofit, there are some services that are of benefit both to individuals and the larger society for which the individuals being helped simply can’t pay. As Mr. Frumkin puts it: “There will often be areas that are underserved by the market and the state. When such shortfalls occur, nonprofit and voluntary organizations can and do enter the picture…by providing needed services to those who lack the ability to pay.”

All citizens benefit when services are available to ex-offenders and drug addicts, or when children from disadvantaged backgrounds gain new academic skills — but such “customers” often cannot afford to pay for the services that will help them. Thus the need for philanthropic or government support, a choice contingent, in part, on which one thinks is most effective.

To be fair, it’s important to note that some “social enterprise” business plans call for firms to “channel” their profits — that is, to reinvest them in the enterprise rather than serving the private purposes of founders and investors. (Indeed, this is the promise of the Harvard students whose Ventures in Development hopes to turn the down and milk of rural Chinese yaks into major exports.)

All well and good, but there’s simply no reason to tout such a promise as a radical break with the past. There has long been a minority of paternalistic or benevolent business owners willing to forgo or minimize personal gain. Such is the pledge of Paul Newman in promoting his Newman’s Own line of food products. But business owners always have the option of giving away their profits. This is called charity.

What’s more, one must wonder whether such a “rechanneling”- of-profits model could truly be sustained. The founders of a so-called social enterprise will probably move on to other things; their successors may seek or demand better personal returns. In addition, competitors who make no promise to put their profits into good works may enter the market, and that might put untenable profit pressures on the socially responsible business. Put another way, it’s easy for someone as rich as Paul Newman to give away profits to charity, but not as easy for a fledgling entrepreneur.

To be sure, market-style disciplines can be brought to bear on the nonprofit social-service market — if, for instance, clients were given vouchers (either by philanthropy or government) with which to shop for assistance. And it is certainly not impossible for those who found and manage nonprofit social-service providers to borrow approaches from the for-profit management playbook.

The “social entrepreneur” may well — and should — seek to earn some revenue through fees, where possible; to measure results; and carefully track the costs of service. One can take this too far, however. The argument of Jed Emerson, former executive director of the Roberts Enterprise Development Fund, for a new kind of accounting — the “social return on investment,” which allows businesses founded to hire the disadvantaged to nominally show a profit — is a tortured one, based on the unverifiable claim, for instance, that such enterprises save government money in the long run.

Dubious, too, is the claim of Muhammad Yunus, founder of the Grameen Bank — which pioneered the idea of giving small loans to the poor — that his is a new sort of “break even” business, which can serve impoverished people and sustain itself through earned income. He minimizes the importance of the wide range of government and philanthropic support with which Grameen Bank was initially capitalized.

There is no reason to shrink from the fact that there is a bright line that divides the nonprofit and for-profit worlds — something about which Adam Smith himself was clear.

Claims that for-profit businesses can serve the same sort of purposes as nonprofit organizations threaten to blur the line — and risk sending a message to donors that investments in private for-profit firms, dressed up in a prospectus of cause-related rhetoric, are as good or better than philanthropy. One does not substitute for the other. We need both.

Howard Husock is director of the Manhattan Institute’s Social Entrepreneurship Initiative, an award and research program, and a research fellow at the Hauser Center for Nonprofit Organizations, at Harvard University.