Insights and Analysis

Blurring Lines between the Profit and Non-profit Sectors

March 12, 2008

By Barnett F. Baron

Corporate social responsibility, corporate philanthropy, and corporate community engagement are terms that have been used more or less interchangeably to describe the relationships between the modern corporation and its shareholders, its employees, the communities in which it operates, and others, including government and civil society.

These concepts have been discussed within the corporate community for many years, but the discussion has now made prime time. The January/February issue of Foreign Affairs includes an article on corporate citizenship by Klaus Schwab, CEO of the World Economic Forum. In that article, Schwab disaggregates corporate engagement with “the community beyond its shareholders” into five core components: good corporate governance (“how a company behaves when no one is looking”); corporate philanthropy; corporate social responsibility; corporate social entrepreneurship (“transformation of socially and environmentally responsible ideas into products or services,” with microfinance being the most frequent investment); and global corporate citizenship (“a company’s role in addressing issues that have a dramatic impact on the future of the globe, such as climate change, water shortages, infectious diseases, and terrorism”).

From my perspective, the article reads more like a sermon than an analysis, but it demonstrates that issues of appropriate corporate engagement on global warming and the environment, on creating jobs through micro-finance, on changing the terms of trade for agricultural commodities, on environmentally appropriate manufacturing processes, on preserving clean water, and on improving workplace standards throughout the global supply chain, are now clearly part of mainstream discourse.

To the great disappointment of NGOs around the world, this has not resulted in larger and more predictable flows of cash for their own causes. Many corporations seem to believe engagement is not the same as philanthropy, which Schwab defines as “engagement that does not go beyond writing a check or handing out donated goods.”

Instead, corporate engagement is viewed as part of a strategy for business success. It is a way to increase employee satisfaction and retention; and to increase a brand’s attractiveness to consumers, who are paying more attention to the social and environmental credentials of the products they choose to purchase.

Within this mix of motivations, making cash donations to nonprofit organizations or other community groups to support their programs is not a central focus. Overall, excluding the exceptional cash donations made in response to the 2004 tsunami and Hurricane Katrina, cash contributions as a component of corporate engagement have been steadily declining in recent years.

Supporting this trend, recent national surveys in the U.S. suggest that consumers give much more weight to corporate behavior than to their financial contributions. In a national consumer survey conducted in the first quarter of 2007, for example, the respondents overwhelmingly defined corporate citizenship as treating employees well (29%), protecting the environment (15%), being responsive to consumer needs (14%), making non-financial contributions to the community (volunteering, providing company goods and expertise 9%), and only then contributing to charitable causes (3%).

Remember that in the United States, unlike many Asian countries, the corporate sector is not the major source of charitable donations to social causes. Individuals are by far the major contributors. Of the $295 billion that Americans donated to charities in 2006, for example, only 4.3% came from corporations (about $12.7 billion), 12.4% came from foundations ($36.5 billion) and the vast majority ” 83.4 % ($245.8 billion) came from individuals. This pattern has persisted ever since data on charitable contributions began to be collected in 1964.

From my perspective as a nonprofit executive and a scholar interested in philanthropy, one of the most interesting developments in recent years has been the growing convergence of nonprofit and for-profit methods of financing social benefit organizations.

In the traditional charity model, philanthropists are supposed to act on purely altruistic motives, to give back to the community. If the public thinks their donations are motivated by business interest, they are accused of being insincere and their donations are “tainted.” But increasingly, this traditional model of charity is being challenged. For example, the 2006 Nobel Peace Prize was awarded to Mohammed Yunus and the Grameen Bank, a nonprofit organization that applies modified banking methods (no collateral but charges market-based interest rates) to provide microloans to millions of poor women in Bangladesh. The Grameen model is being replicated around the world, supported by a mix of philanthropic donors and for-profit investors. Yunis is perhaps the most famous champion of what he calls “social business enterprises,” enterprises that are based on market principles but dedicated to improving the lives of the poor. As he frequently says, he doesn’t care if these social business enterprises are organized as for-profit businesses or NGOs ” what matters to him is their commitment to improving the lives of the poor. The Grameen family of enterprises consists of more than a dozen for-profit and nonprofit organizations, including Grameen Telecoms, which controls 70% of the mobile phone market in Bangladesh, and had after-tax earnings of more than $94 million in 2005.

Mohammed Yunis believes that the way to overcome persistent poverty is to create sustainable income-earning opportunities for millions of people. Income is development.

Others in the academic and business communities also tell us that it is irrational to condemn organizations that are committed to improving the lives of the poor to rely solely on grants and donations. Charitable grants and donations, they argue, are infrequent, small when measured against the need, project-restricted, time-limited, and unpredictable. Just like start-up businesses, nonprofit organizations working to improve the lives of the poor need time and financial support to innovate, experiment, adapt, and grow to scale.

This line of thinking has led to a growing interest in social enterprise, social entrepreneurs, and social capital markets. How to create sources of funding for social benefit organizations that are predictable, flexible, and sufficient in scale to support their sustainable growth and development? It is within this thought process that we find the convergence of for-profit and nonprofit business methods. Let me illustrate this trend by citing just three of many possible examples: Google, the Omidyar Network, and the Acumen Fund.

Last month, Google announced plans to devote up to 1% of its profit and equity to “make the world a better place.” Google’s initial plan is to spend $175 million on a combination of grants and investments in carefully selected for-profit companies in five areas: renewable energy; designing hybrid automobiles; micro-finance in Africa; education, health, water, and sanitation in India and East Africa; and software development for the early detection of infectious diseases and natural disasters. What makes this interesting is the way in which Google proposes to mix charitable contributions and for-profit investments. Google chose not to go through their foundation, but to set up, a for profit company. This way, it could function minus the rules imposed on foundations: fewer legal restrictions, fewer rules about advocacy and lobbying and fewer potential tax and legal penalties.

Pierre Omidyar turned eBay into one of the most successful companies of the dotcom era, and became a multi-billionaire in the process. He set up a charitable foundation in 1999, but five years later, in 2004, he closed the foundation and created the Omidyar Network in its place. The Network funds both nonprofits and for-profits, as long as they create social value. In the past three years, Omidyar has invested more than $60 million in nonprofit organizations and over $45 million in for-profit organizations. A small sampling of Omidyar’s nonprofit grantees include Ashoka, the global network of social entrepreneurs; Center for Effective Philanthropy, devoted to improving the governance and performance of U.S. foundations; GlobalGiving, an internet-based platform to encourage individuals to make charitable contributions for economic development projects around the world; Guidestar, the main internet-based information source on US foundations and NGOs; Keystone, a UK-based NGO working to create global reporting standards for philanthropic donors; the International Development Law Organization; and numerous organizations working in the fields of renewable energy, providing economic opportunity to the poor, and the creation of open information networks. I chose these examples because they are not typical of corporate donations. The issues are complex and their solutions are long-term. These sound more like Asia Foundation grants.

Omidyar’s for-profit investments thus far have been largely concentrated in a variety of social investment funds that provide low-cost capital for microfinance and in the development of open source software and information technologies, especially those that enable individuals and social benefit organizations to connect to each other through the web.

The Acumen Fund is a nonprofit organization based in New York that operates like a venture capital fund for the poor. It was established in 2001 with start-up grants from Cisco Systems, the Rockefeller Foundation, and two “angel investors.” In its own words, Acumen “seeks to prove that small amounts of philanthropic capital, combined with large doses of business acumen, can build thriving enterprises that serve vast numbers of the poor through innovative, market-oriented approaches.” Through its network of offices (in Kenya, India, Pakistan, and the U.S.) and its partners, Acumen identifies social entrepreneurs who are developing low-cost products in health, water, housing, and energy that have potential commercial viability.

Examples of Acumen investments include a factory in Kenya that produces low-cost anti-malarial drugs and mosquito nets; leveraging loans and loan guarantees to create the first commercial mortgage market for low-income housing in Pakistan; a company that produces low-cost drip irrigation systems for sale in India; another Indian firm that produces high-quality but low-cost hearing aids; a company that is developing a technology to use solar energy to desalinate drinking water; and another company that produces low-cost lamps that use light emitting diodes (LEDs) to replace dangerous kerosene lamps.

Acumen’s investments typically take the form of loans and loan guarantees ranging from $300,000 to $2 million, repayable in five to seven years. In a few cases, Acumen has also taken minority equity positions. Grants constitute only about 3% of Acumen’s financial transactions.

Acumen is now funded by 130 “partners” ” individuals, foundations, and corporations ” that each invest from $10,000 to $1 million plus. These investment partners include Google, Omidyar, the Skoll Foundation, Cisco Systems, and other major corporations. Acumen investors do not receive a financial return on their investments, but they are consulted regularly and receive quarterly financial and social impact reports on their investments. Since 2001, Acumen has invested some $27 million in 17 projects serving more than 10 million people. Loan repayments now produce over $650,000 a year in recycled capital. Its goal is to reach $100 million in investments by 2011.

My purpose is not to argue against the value of traditional corporate donations to community organizations or NGOs. Instead, I have cited three examples to suggest that both nonprofit organizations and for-profit firms can create social value, and that corporations do not have to set aside their business skills or their business interests when they engage in good corporate citizenship.

More specifically, the emerging field of social enterprise offers the promise of using both nonprofit and for-profit approaches to create sustainable social value. Investing in for-profit social enterprises as a component of corporate social responsibility or corporate citizenship is becoming increasingly attractive and logical to a growing number of multinational corporations.

Like any other human endeavor, corporate engagement, or corporate social responsibility, or corporate citizenship, whatever you choose to call it, has its cycles, its fads, and its flavors of the day. Today’s exciting new approach may be history tomorrow. But it seems to me that the boundaries between the nonprofit and for-profit sectors will continue to blur, and that the methods of business and organized philanthropy will continue to converge in the years ahead.

Barnett Baron is the Executive Vice President of The Asia Foundation. The below is from a presentation originally delivered to a luncheon of Korean corporate executives on February 14th in Seoul, Korea.

Related locations: Bangladesh
Related topics: International Development


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