Five Ways a For-Profit Entrepreneur Can Be a Social Entrepreneur

At the Entrepreneur & Social Entrepreneur Meetup on Tuesday I was having a great discussion with a new friend named Phil. Phil asked me a question I’ve heard often recently, “Can I still be a social entrepreneur if I run a for-profit business and not a non-profit?” In my view, the answer is a resounding yes.

What is an Entrepreneur & What is a Social Entrepreneur?

To me an entrepreneur is “a problem solver who takes action.” To me a social entrepreneur is “a problem solver who takes action.” There is no difference. The line is wonderfully blurry. Let me explain.

An entrepreneur is someone who rearranges the resources of land, labor, capital, and entrepreneurial ability to create a product or service that provides value to others. Whether the entrepreneur is doing this within a for-profit corporation, in which the net profits are either reinvested in the corporation or distributed to the shareholders or a non-profit corporation in which the profits are fully reinvested into the corporation, he or she remains an entrepreneur.

Non-profit founders and directors have customers and products too. Traditionally the customers of a non-profit are its donors and grant makers and the product is the social value it produces. If the product is not valued, customers (donors) will stop giving and leave.

Today, the black and white world of non-profits and for-profits is graying. If you want to change the world for the better, it is an open question as to whether you can make a bigger impact in a for-profit or a not-for-profit company.

Profit’s Correlation With Social Value Provided,
As long as the for-profit entrepreneur a) competes within the laws of a competitive market system b) does not create short-term profit for the company by externalizing the costs of the off-balance sheet destruction of the environment and c) does not exploit its labor force, the only way for the entrepreneur to make a profit is by creating value for others.

The more the ethical entrepreneur helps others, the more profit he or she will make. Profit for an ethical entrepreneur who has not exploited the environment or labor force to gain that profit is not an ugly sign of exploitation but rather a laudable sign of value created. The successful and profitable entrepreneur has rearranged resources in such a manner that the value of the output created exceeds the sum value of the inputs.

For the ethical for-profit entrepreneur, as products are produced that help others, social value is created. The very act of building your business creates jobs, provides product and services that others value, and enables you to give back to your local and global community.

Your for-profit business can often be more sustainable than a non-profit business as you are not reliant on grants and donations to grow. While you have a disadvantage of not being able to receive tax-deductible donations, you have the big advantage in the labor market of being able to offer a wonderful thing called stock options to employees, which enables you to attract top talent and enable all to participate in the value-creation.

One of the most important things you can do as a for-profit entrepreneur to enable you to make a social impact is to be profitable. As Joel Makower argues in his book Beyond the Bottom Line, “One of the most socially responsible things most companies can do is to be profitable.” Without profits one cannot pay taxes, provide jobs that pay well, give back to a community, or invest in innovation.

Five Ways a For-Profit Entrepreneur Can be a Social Entrepreneur
So for a for-profit entrepreneur, if you really want to be a ’social entrepreneur’ here are some suggestions:

1. Give all your employees stock options. Requiring a team member to be there a minimum amount of time (like 6 months) before they earn the options is okay. Vest the options over a few year period (3 or 4) to help with retention.

2. Treat your employees well. Show that you care about them. Offer health insurance and good working conditions. While you have to manage to results and that requires being a professional firm that tracks performance, you can do many little things that create a good work environment and culture that actually help the firm reduce costs, retain great people, and attract a better team.

3. Ensure your net impact on the environment is at least neutral, if not positive. Don’t externalize the cost of environmental damage. In other words, don’t profit off of destroying the environment, even if it may still be legal to do so. Take into account the full cost of any environmental degradation or destruction in the production of your products and services. Look up the supply line and ensure your suppliers also neutralize their impact on the environment.

Quick Case Study: Last Month, Walmart introduced a Sustainability Product Index that asks each of its suppliers fifteen questions on energy, climate, resource use, and labor practices. It has asked its suppliers to respond by October 2009. It is using this data to understand the practices of its upstream supplier network (of over 100,000 suppliers) and provide a Sustainability Index for each of its suppliers. Walmart is also creating a “consortium of universities that will collaborate with suppliers, retailers, NGOs and government to develop a global database of information on the lifecycle of products – from raw materials to disposal.”

4. Have a formal corporate social responsibility policy. A particular CSR structure I’m fond of is called the 4-1s program, in which you set aside 1% of company profit (or 1 percent of payroll if you are venture-backed and not yet profitable), 1 percent of employee time, 1 percent of product, and 1 percent of equity to contribute back to your local and global community.

Quick Case Study: At iContact, we have been contributing 1 percent of payroll since 2007. In 2008 we contributed $55,000 to 37 different non-profit organizations. In 2009 we’ll reach $100,000. We are now expanding our CSR program based on the 4-1s model to include 1 percent of employee time (up to 2.5 days of paid time-off per year to be spent on community service products), 1 percent of product (we are providing iContact free to any non-profit organizations in the Triangle), and 1 percent of equity. Don’t wait until you’re 60 and wealthy to give back. Start from day one and create an integrated giving model. You can read about iContact’s Corporate Social Responsibility Program here.

5. As you succeed personally, give back. A great differentiator for the for-profit entrepreneur is that you and those working with you can become wealthy through the appreciation of the value of your stock ownership as you scale your ability to help others.

If you’re fortunate enough to have a liquidity event (go public or get acquired) use your personal resources to invest in other entrepreneurs and social entrepreneurs who are changing the world for the better, contribute personally to the organizations (and candidates) that you feel are making the biggest positive impact for humanity, and vote with your dollars as a consumer and doing your best to purchase from companies who have a similar view about corporate social and environmental responsibility.

There is a movement of socially responsible companies that is defining our generation. These socially-responsible for-profits, sometimes informally called B Corporations instead of C or S corporations, can make a huge positive impact on the world, up and down supply chains.

Networks springing up
There are networks springing up for socially responsible professionals such as the Social Venture Network and Net Impact.

Companies like Vestergaard Frandsen, Salesforce.com, Danone, Stonyfield Farms, and Whole Foods are leading the way in this integrated social business model. They are doing well not in spite of their social mission, but often partially because of it.

There is a new genre of books focused on how to use business to change the world. There are many, but my favorites are The Business of Changing the World, Creating a World Without Poverty: How Social Business Can Transform Our Lives, The Power of Unreasonable People: How Social Entrepreneurs Create Markets That Change the World, and The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits.

There are now publications that focus on the socially responsible business owner, including Stanford Social Innovation Review and Good Magazine (founded by the son of INC. Magazine). There is even a newswire just for social responsible news called CSRWire. There is even a stock index called the KLD400 for socially responsible companies!

There are venture capital firms that now focus on investing in socially responsible companies. These include Good Capital and SJF Ventures.

What Ben & Jerry’s and The Body Shop started is becoming wonderfully mainstream and necessary as a new generation that connects and collaborates globally like none before it becomes corporate leaders.

While I am generally a fiscal moderate who believes in the ideology of individual freedom and liberty, Milton’s Friedman’s 1970 assertion that ‘the business of business is just business’ was wrong. As Peter Drucker argued in 1942 in The Future of Industrial Man, companies must have a social dimension as well as an economic purpose.