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Published: February 24, 2009

 
 

Not Just for Profit

Principles beyond Property
There is now enough experience with these three basic schools of design — stakeholder-owned companies, mission-controlled companies, and public–private hybrids — to begin to identify some broad principles at work. Deeply embedded in them is the aim of delivering human or ecological benefits. A company might be a producer cooperative designed to save the family farm, a pharmaceutical company aiming to defeat disease, an employee-owned firm making the workplace into a community, a microfinance institution seeking to end poverty, a development corporation revitalizing the inner city, or a public company laying a path to sustainability. In tangible ways, all aim to benefit life. Social issues are not relegated to an ethics office in room 201 or left to the whims of particular leaders, however noble they may be.

All the successful examples embody a view of enterprises as living systems. Most economists and law professors still view companies primarily as forms of property, owned through their shares. But for-benefit design starts with the assumption that companies are organically evolving entities, living social systems — in other words, human communities. And their design reflects that view.

These designs also reflect the added complexity of the for-benefit sphere, and the need to encourage innovation while safeguarding against potential abuses. The track record in the microfinance sector shows why safeguards are needed, and why trumpeting good intentions, in itself, isn’t enough. The original Grameen Bank business model pioneered by Muhammad Yunus — alleviating poverty by lending small amounts of money to micro-entrepreneurs who then become depositors, allowing communities to recirculate capital — led to dramatic success in Bangladesh. But it also inspired an international microfinance industry, which today has its own rating agencies, consultants, conferences, institutes, and billions upon billions of dollars in international lending. Central Asia alone is now home to more than 1,000 microfinance institutions. In India, the number of microfinance clients grew 10-fold over four years, to surpass 10 million at the end of 2007. As this industry grew, the mission of the original model was sometimes lost. New microfinance banks dispensed with critical governance features, such as training local lending officers to work closely with teams of borrowers. Instead, many simply lent at the highest rates possible. The result has been a new set of abuses. Banco Compartamos SA, a Mexican microbank portraying itself as a gentler lender to the poor, hugely enriched its initial investors when it went public in 2007. Yet it reportedly made that fortune in part by charging annual interest rates of almost 100 percent to illiterate Mexican mothers.

Some may wonder if these alternative designs are intended to promote or lead to socialism, but in fact the concept of private ownership is deeply intrinsic to them. Instead of doing away with private ownership, these firms redesign it. It has been clear since the days of Adolf Berle and Gardiner Means — who published their breakthrough book, The Modern Corporation and Private Property, in 1932 — that business ownership is often separated from its most vital element, control. These designs go further by concentrating control in a deliberately chosen group, selected as stewards of the firm’s living mission. Ownership shares can be bought and sold like property, but controlling shares represent a living essence that is not for sale — or for sale only under restricted conditions.

In the case of Grupo Nueva, control is vested in the VIVA Trust, which is charged in perpetuity with protecting the vision and values of the firm. In describing the value of the trust, founder Stephan Schmidheiny said, “Now there is an ownership structure that is permanent, reliable, and committed to the long term, and that will not be a victim of speculation or personal whims or the lack of preparedness of a successor; all this reduces risks for the investor.”

 
 
 
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Resources

  1. Arvind Ashta and Matthew Bush, “Ethical Issues in Sustainability, Outreach, and Impact of Microfinance: Lessons in Governance from the Banco Compartamos IPO,” 2008: Case study review of this Mexican microbank.
  2. John Elkington and Pamela Hartigan, The Power of Unreasonable People: How Social Entrepreneurs Create Markets That Change the World (Harvard Business Press, 2008): A guide to social enterprises around the world.
  3. Marjorie Kelly and Allen White, “Corporate Design: The Missing Business and Public Policy Issue of Our Time (PDF),” Tellus Institute, November 2007: Principles for corporate architecture accountable to broader societal interests.
  4. Art Kleiner, “Jack Stack’s Story Is an Open Book,” s+b, Fall 2001: Profile of the founder of one of the most innovative cooperatives, Springfield ReManufacturing Corporation.
  5. Riccardo Lotti, Peter Mensing, and Davide Valenti, “A Cooperative Solution,” s+b, Summer 2006: Describes why some of the most successful companies in Europe, including Rabobank and Italy’s COOP supermarket chain, are stakeholder-owned.
  6. Dana Brakman Reiser, “For-Profit Philanthropy,” 2008: Includes an analysis of Google’s boundary-breaking innovations in for-profit philanthropy.
  7. Corey Rosen and Ed Carberry, Ownership Management: Building a Culture of Lasting Innovation (National Center for Employee Ownership, 2002): Offers concrete, specific ideas on how to structure plans and get employees involved in decisions.
  8. Muhammad Yunus, Creating a World without Poverty: Social Business and the Future of Capitalism (PublicAffairs, 2007): Recounts the founding of Grameen Danone Foods and outlines the author’s concept of social business.
  9. The Fourth Sector Web site: Outlines Heerad Sabeti’s concept of for-benefit organizations.  
  10. The National Center for Employee Ownership Web site: Authoritative source on employee stock-ownership plans, equity compensation plans, and ownership culture.
  11. The National Cooperative Business Association Web site: Has a mission to develop, advance, and protect cooperative enterprise.
  12. Corporation 20/20 Web site: A multi-stakeholder initiative cofounded by author Marjorie Kelly, which aims to develop and disseminate corporate designs in which social purpose moves from the periphery to the core of the organization.
  13. For more business thought leadership, sign up for s+b’s RSS feed.
 
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