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What is Social Business?

Prefer a video? Watch this :)

http://socialbusinessworld.org/videos/play/michele/59938/introducing-yunus-social-business

 

The new idea, theory and practice of Social Business has been developed and implemented by Professor Muhammad Yunus, Nobel Peace Prize for 2006. It is explained on his website at this page and extensively in his book “Building Social Business: The New Kind of Capitalism that Serves Humanity’s Most Pressing Needs”.

In short, Professor Yunus indicated seven principles to define and categorize a business as Social:

  1. Business objective will be to overcome poverty, or one or more problems (such as education, health, technology access, and environment) which threaten people and society; not profit maximization
  2. Financial and economic sustainability
  3. Investors get back their investment amount only. No dividend is given beyond investment money
  4. When investment amount is paid back, company profit stays with the company for expansion and improvement
  5. Environmentally conscious
  6. Workforce gets market wage with better working conditions
  7. ...do it with joy

Here at Social Business World we like the above 7th principle a lot ☺ and are also open to discuss within our worldwide Community about those principles, the applicability in developed Countries, in different cultures and lifestyles.

Here at Social Business World we’re interested in your opinion about how this new possible capitalism could affect your life and surroundings wherever you live and come from.

There are two types of social businesses whose feasibility we would like to discuss about:

  • A Type 1 social business focuses on providing a product and/or service with a specific social, ethical or environmental goal. A prominent example is Grameen Danone.
  • A Type 2 social business is a profit-oriented business that is owned by the poor or other underprivileged parts of the society, who can gain through receiving direct dividends or by indirect benefits. Grameen Bank, being owned by the poor, is the prime example of this type, although it would also classify as a Type I social business.

 

Below F.A.Qs. on Social Business as posted by socialbusinessearth.org a very active website on Social Business.

1 - Can social business be applied to environmental issues?

Social Business and the environment : Afforestation
Social Businesses could also be created to fight against climate change.  Social business investors, with a strong environmental commitment, could invest in a company which plants trees, increasing the space under forest cover and oxygen in the atmosphere.  Entire tracts of land where forests once existed could be regenerated through social business.  Other potential areas can also be brought under forest cover through social business.

2 - Should social business avoid making profit?

No, it does not avoid profit.  The first aim of social business is to achieve the social objective in a financially sustainable way.  It should not give up social objective to make profit beyond sustainability.  Making profit without sacrificing social objective is welcome.  Social businesses do not give dividends to the investors, all the profit is reinvested in the company for expansion and improving the quality of the product or service.

3 - What kind of non-monetary return could social businesses generate?

Social business is an investment opportunity with "non-monetary returns".  Among these returns the most important one is the "gratification" derived from helping others.  People who are doing good for society becomes role models for others, particularly young generation.  Society as a whole gives them special recognition.  Besides there is a personal satisfaction that one's life has touched other people's lives.

4 - Does this mean that equity investments from the SB fund into social businesses will (1) not cover the management costs or profit for the fund (as no dividend can be given) and (2) will ultimately be a drain on the fund as only the original investment amount can be returned to the fund?

No, Social Business Fund can charge the company which receives the equity an annual "management fee", it can be 1% or so, depending on the actual cost of management. SBF should try to keep it to a minimum. It can be paid, on an annual basis. It may consider giving a grace period until the time when the company comes to the break-even point. This should be negotiated at the beginning and should form a part of the agreement with SBF.

5 - If loans are given, the Fund will receive interests. If equity is given, will the Fund in return receive shares and dividends on equity?

Social Business will pay back the loans according to the terms that they have agreed to repay.
Repay the investments according to social business principles and also pay the management fees/service charges.

The funds which are given to the investees/borrowers can these be loans and equity or loans only?

SBF can also borrow from the people/organizations/businesses/ governments both at low soc bus interest rate and also at market interest rate to meet the demand of the social businesses.

6 - When selecting investees/borrowers, do these need to be social businesses? If yes what type of social business?

Any type of social business is eligible, unless the Fund has any restriction or priority of its own.

7 - Considering the relationship between the Social Business Fund and the investees/borrowers - is this/does this need to be a social business relationship?

SBF will be created with the investment from people / organizations / businesses / governments who want to invest in social bus.

8 - How do you very the measurement of the impact of the social business?

There are third-party sources that will come and assess the impact of the social business. For example, to measure the impact of Shokti Doi, the fortified yogurt that we are producing in Bangladesh, an international organization called GAIN (Global Alliance for Improved Nutrition), has been commissioned to continuously measure the impact on the mal-nourished children eating the yogurt.

9 - How do you measure the success of a social business?

In a profit-maximizing company, you measure success by the amount of profit made in a given year and developing the prospect of earning more in future years. In a social business company, you measure success by the success achieved in reaching the social goal in specific measurements (reducing the number of malnourished children, reducing the death of infants, number of people receiving safe drinking water, etc).

10 - Does it only have to be a multinational company investing?

No, anyone, any institution, can invest.

11 - Do the same laws of businesses govern social businesses?

Yes, the same laws that govern a PMB applies to social businesses as well, because there is no other law as yet.

12 - If I do not have the funds to invest, but I have a good idea, whom should I contact?

If you have the motivation, drive and a good idea for a social business, you can apply to a social business fund for financing.

13 - Can someone who started a social business decide to take profit?

Yes, a social business can be transformed into PMB if the owner wants it. Since there is no law governing the creation and termination of a social business, no procedure has to be followed. When laws will be passed there will clear guidance as to the protocol of registration and termination of the status.

14 - What is the difference between a social business type II and a PMB?

Essentially they operate in the same manner. In all its operational practices they are exactly the same. However, a type II social business is either owned by the poor people who receive the dividends, or the profit of the company goes to a Trust which is created for promoting well-being of a specific population or achieve any other social objective.

15 - Do the fund investors get their money back?

It is a "donation" to a social business fund, then the donor makes it clear that he does not want it back. But if it is an "investment" into the fund, of course, the investor will get back the money.

16 - Who will invest in social business? Why?

Social business is based on the intrinsic desire of self-sacrifice that resides in all human being for the promotion of well-being of its own species, all living beings, and the planet. Given opportunity, most people who can afford it will choose to invest in social business. In addition, institutions, foundations, businesses, governments, donors agencies, any entity which is involved in investment or charity will invest in social business.

17 - What is the forecast of sustainability?

In order to qualify as a "business" social businesses must be sustainable. There is no escape from this. Like other kind of business they may go through ups and downs, but it must prove its financial strength at the end.

18 - Who runs the social businesses?

Just like the PMBs social businesses will hire a team of managers and workers to run their businesses. But the mission of the team will be very different than the mission given to the team in the PMBs.

19 - How much do social business managers and workers earn?

Managers and workers will earn market wages to function with incentives as in a PMB. Social business will endeavor to provide better job conditions and financial terms to workers on the lower end of the salary scale. Their working conditions will be watched carefully. Social businesses will be very careful to make sure they do not violate one social objective in order to achieve another social objective.

20 - What is wrong with earning a profit?

There is nothing wrong with earning a profit and taking dividends from a company's earnings. It is very important driving force of the economy. Growth of the economy is linked with profit - making. By introducing the concept of social business we are not condemning PMBs, or arguing for elimination of it. We are only arguing for the introduction of a new business in the market place. Even social businesses will be making profits, but the profit will stay in the company. It will not be distributed to the owners because they do not wish to take it beyond recouping the investment. In PMBs taking profit is the objective of the business.

21 - How can regular businesses and social businesses operate in the same market?

A social business is like any other business. It will follow the same principles of competition, and bring more competition in the market. Consumers will be the beneficiaries. The more the number and varieties of businesses the more is the competition. Social business will strengthen the forces of free market.

22 - Will social businesses create competition with regular businesses?

Social businesses usually produce things which are not produced by traditional businesses, or it targets areas which are not served by other type of businesses, or the prices for the products are very different than the prices of the products of the profit-making businesses (PMBs) Social businesses encourage the PMBs to new areas of business, discover new businesses. Social businesses can compete with PMBs by offering lower prices. For example, a social business may sell drugs at lower prices than the PMBs. In the market place social businesses will offer additional options to people and strengthen the market.

23 - Are social businesses taxed?

Yes, since there is no category of business in the company law known as social business, it will appear to the tax authority as a PMB and will be treated as such. Social businesses will be taxed the same way as the PMBs.

24 - Who can invest?

Anyone can invest in a social business

25 - What is the difference between a donation to charity and donating to a social business fund?

When you donate a dollar to charity, it goes towards a social cause, but then the use of that dollar ends there. When you donate a dollar to a social business fund, it is invested to achieve a social cause and then the amount returns to the fund for re-use. The power of a dollar donated to a social business fund is much stronger and more effective.

26 - What is the difference between corporations with donation programs and social businesses?

A social business is a business. A donation program is a charity program of a profit-making business.

27 - What is the difference between non-governmental organizations (NGOs) and social businesses?

An NGO is a voluntary, non-profit organization that operates, contributes to, or participates in, various projects on education, training or other humanitarian, progressive, or watchdog activities. They usually collect donations for running programs for disadvantaged or distressed people. The difference is that NGOs operate on donations, whereas a social business is a self-sustaining business.

28 - What is the difference between corporate social responsibility (CSR) and social business?

Corporate Social Responsibility (CSR) programs are the philanthropic programs of companies. CSR is part of a corporation, which is a profit-maximizing company. A social business is a company by itself which is dedicated to social impact-maximization. A common way of practicing CSR is by donating money for social causes.

29 - What is the definition of a type II social business?

Type II social business functions as a profit-maximizing business, except that all of the net-profits are placed into a trust, which will help a disadvantaged group of people. Or it could be a profit making business owned by the poor people.

30 - What is the definition of a type I social business?

Type I refers to social businesses that create a product which has a direct social impact. For example, Shokti doi, the fortified yogurt, directly fights malnutrition.

31 - What is the definition of a social business?

A social business is a non-loss, non-dividend company designed to address a social problem. The profits are used to expand the company's reach and improve the product/service.
the company's reach and improve the product/service.

32 - How did the financial and economic crisis affect your social business activities so far?

It affects us in a positive way, because people feel that profit maximizing business is not the solution to our global challenges. The confidence people had in market mechanisms - in the free market with maximization of profit - has been damaged. It didn't work out. In that context, when people are full of doubts and frustration, when you talk about social business, it suddenly makes sense to them. Yes, why not? Why do we always have to go for making money? Why can't we do something like this so that we can balance out? We can strain ourselves in the profit making side, but at the same time use our talent and creativity in social business to solve the world's problems.

33 - Early social business examples are trying to overcome malnutrition, the lack of safe drinking water or to improve access to health care and information technologies in developing countries. What other social business opportunities can we find?

Poverty reduction is only one area of social business. Ultimately all the issues, which are piling up - issues profit maximizing businesses cannot handle all these issues are the subject of social business. If you can create a social business that benefits the environment, everybody benefits from the work. It's a global issue for everybody, rich, poor, middle class - everybody. It's about health, nutrition, water, sanitation and all those things. Social business is supposed to address all the unaddressed issues.

34 - What about the ground realities? How can your yogurt factory, the tiny little seed, grow, if the prices for milk are going up? You cannot simply adjust your selling price, because your customers are extremely price sensitive.

Either the milk price goes up, or if the oil price goes up, the electricity price will increase. Or the temperature comes down, the people are not eating yogurt anymore... These are real life situations that don't put everything over board, but you need to use your creativity. When the milk price went up, Grameen-Danone worked to design a new formula for the yogurt, maintaining high nutritional quality as well as affordability for children.


There are many options, how you can bring nutrition to the poor. Your vehicle might change, but your mission remains the same. We are not a seller of yogurt, we are simply finding a vehicle, which carries the nutrition in a way children will love it. If circumstances change, we will have to find other mechanisms.

35 - In CREATING A WORLD WITHOUT POVERTY, we have a few pages about the cooperative movement, in which we say that a co-op is not a social business because it is not necessarily dedicated to a social cause such as helping the poor. What about a co-op that does dedicate itself to helping the poor--for example, a co-op of poor workers who band together to build and grow a business? Could this be a social business?

Of course, yes. Under second definition it will be a social business if the co-op is owned by the poor.

36 - There seem to be quite a few organizations with social missions that are financially self-supporting thanks to business-style revenue streams from sales of goods and services. However, most were started not through investments or loans but through charitable grants. Am I right in thinking that these cannot be social businesses? If that is the case, does this affect our thinking about Grameen Bank, since in its early years Grameen Bank did receive some grants from foundations and others? Also, is there, in your view, a big disadvantage to using grants as a source of startup capital? If so, what is it?

Getting grants does not disqualify a business to be a social business. General Motors can get government grants, that would not disqualify it as a business. Many companies get land grant, tax benefits, and tax holidays. Important thing is whether it has owners, and can it become self reliant ultimately.
There is nothing wrong in using grant as seed capital along with equity capital (however small) of the owners. But can the company earn more than its operational expenses, so that it can contribute in paying back its grant amount, equity amount etc., in the very long run?

37 - Are you aware of any organizations anywhere in the world that fit your definition of social business, other than Grameen Bank and the various Grameen joint ventures you are working on (Danone, Intel, Veolia, BASF)?

I am not aware of them. I am sure there are some, there could be many almost-like social business, but I am not aware of them.

38 - The definition of relative poverty in Germany is ˜people whose income falls below 60% of the average income". Is that a reasonable definition to use for the purposes of a Social Business Fund there?

I'll not consider this as a good measure of poverty. I'll consider the people who are dependent on government hand-outs, such as welfare payment, unemployment benefits, or involved in informal earning for a living, such as immigrant population, gypsies, etc, as the poor.

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