All posts by Rod Schwartz

Social businesses cannot rely on good feeling alone

Social businesses have much to offer as a form of economic organisation.  In fact, I believe they are vital to our economy. Firstly, the cause-related nature of these firms gives them a certain dynamism often lacking in mainstream businesses.  Such dynamism, and the enthusiasm it elicits, benefits social businesses.

This is particularly true during the earlier entrepreneurial phase of development – resources are low and this energy may be the only “reserve” on which the company can draw.

Social businesses are also smaller than mainstream businesses.  Staff and the management are therefore more closely connected to the needs of the market in which they operate.  This is a concept I will explore in a later blog.  They are also more agile, partly as a result of their size, which enables them to respond more quickly to changing market circumstances.

In fact, social businesses, as a construct, are uniquely well-suited to today’s environment in the way they utilise the market-based/capitalist system to meet clients” needs.  Observers may criticize the system and the underlying moral assumptions, but as a mechanism to identify and then deliver against customer needs, the market is hard to beat.  We may one day live in a world where the imperatives of the marketplace do not dictate so much of our daily lives, but this day has not yet come.  Many have dedicated their lives to changing the system – I am too old to think about this and will work within this system to deliver the greatest potential social and financial returns.

An example of a social business which has responded to market needs is Divine (formerly Day) Chocolate Ltd., which has grown and prospered as a fair trade chocolate company.   In 1997, a cooperative of Ghanaian farmers decided to produce their own mainstream chocolate bar to compete with other major brands in the UK – this based on interest from some international customers.  Day Chocolate was formed with support from The Body Shop, Christian Aid, the NGO Twin Trading and Comic Relief.  However, consumer interest remained limited until management improved the product (in terms of taste) and adopted more traditional marketing techniques.  Now the firm has enjoyed rapid growth, is profitable and expanding.  The growing interest in fair trade by wealthier consumers in the “North” was undoubtedly a factor, but the response to the market’s other needs (good taste) was essential.

Becoming a board member of the Ethical Property Company

On Saturday, I travelled to Bristol for the AGM of the shareholders of the Ethical Property Company (EPC).  At the end of that meeting, the shareholders voted to add me as a Non-Executive Director of the Board. Unfortunately, I had to run off right after the meeting.  I was unable to have a drink with my new colleagues on the board and those shareholders who were good (foolish?) enough to vote for me.

Nevertheless, I took my train seat with a big smile on my face.  I felt privileged to have been invited to join the board of this remarkable company.  Jamie Hartzell, the CEO, aided by Sam Clarke as Chair and the rest of the board have built a truly unique firm – one that sets the pace for the UK ethical and social business sector.

At face value, EPC is just a landlord (what could possibly be ethical about that?!).  But, atypically, EPC restricts its prospective tenants to UK social change organizations.  Moreover, it offers these organizations discounts of 20% to 33% off market rents.  In addition, to adhere to its own stringent environmental criteria, the company makes investments in its buildings that will reduce its carbon footprint, even if these investments may not maximize its ROI.  Finally, to top it all off, shareholders know all this and yet still buy the shares.

Over time, they have been reasonably well rewarded with the shares rising from £1 to 1.25 since the first share issue in December 1999.  In addition, they have received dividend income.  Yet what makes this firm so delightfully bizarre is that the shareholders, many of whom I met in Bristol, knowingly forsake some of the financial upside that could come from investing in a property share in exchange for the social, ethical and environmental (SEE) returns that EPC generates.  In fact, if their passion in the session or the workshops was anything to judge by, their interest in the SEE returns is far greater than in the financial returns.  Mark my words, this investor segment will grow in years to come.

So what about this word “social”?

“Social enterprise”, “socially responsible investment”, “social business”, “social return on investment”, “corporate social responsibility” etc., etc..  These are all phrases that have been popping up in our daily lexicon to an increasing and, some would say, increasingly tedious extent.  In fact, the only usage of social which is distinctly taboo is “social-ist”!

New Labour in Britain has put an emphatic end to that usage, but nearly all political parties seemed to have embraced the other forms and phrases of this word.  I often wonder, what is actually going on here and should anybody care?

Since the early 80s (the Thatcher/Reagan era) the economies of the UK, the USA and the OECD overall have become increasingly liberalised and market-oriented.  This trend may have accelerated overall growth but only, many argue, at the expense of the social objectives of the welfare state.  I too think that the pendulum has swung too far; thus the emergence of a strong desire to reconcile capitalist markets and their key underlying concepts (e.g. investment, enterprise, business) with social objectives and thus the appearance of the “word blends” noted above.

Consumers, governments, investors, businesses and other stakeholders in society are each playing their part in making the concepts behind these phrases concrete.  Consumers and investors are demanding greater recognition of social criteria and business and government are, unsurprisingly, responding.  The ideas have been around for years, but their move out of the concept stage into reality has taken time.  Catalyst Fund Management & Research Limited, the business that I co-founded ten years ago, exists to facilitate and speed up this process.

Catalyst is a business, so it will surprise nobody that it seeks to benefit from this process, by providing the services described elsewhere on this website.  This blog is its contribution to the ideological debate over the issues which impact this broad area-?most particularly social businesses but also social enterprises.  Tell me what you think about these issues, the sector or us!

Profit without honour in social enterprise country?

‘Absolutely not!’ ‘No, I certainly would not include them.’ These are typical of the surprisingly forceful and unambiguous replies to the question, ‘is Justgiving a social enterprise?’ For those of you who have not heard of it, Justgiving is a privately held company that has become Europe’s largest online giving website. I was involved with the business from 2003 until this March (when I stepped down as Chairman), and in this capacity have put the question to several well-known experts from the social enterprise sector.

But consider. Justgiving will enable well over £70 million to find its way from donors to charitable causes this year. A substantial portion of this flow of money to charities would not have happened otherwise. This financial impact places the company on a par with the UK’s largest charities, some of which are decades old, in contrast with Justgiving, which began in 2000. The firm employs an ethnically diverse staff, is run by two women (still unusual among businesses) and formally considers the broad spectrum of stakeholders (not only shareholders) in its actions. Beyond the cash it raises for charities, Justgiving helps them by promoting their message, reducing back-office costs, and boosting their online fundraising efforts.

The ownership question

There is, of course, a lack of agreement on what exactly constitutes a social enterprise. Is it what an enterprise does or does not do, where it does it, how it does it, why it does it, or who does it? Justgiving, according to the experts, stumbles on a different hurdle – how the company is owned. The disqualifying factor is that its investors may profit handsomely from its success. This, they believe, trumps any other consideration and is the quintessence of all that is wrong with our economic system.

In my own view, Justgiving is very much a social enterprise. More importantly, its capital structure allows substantial wealth accumulation, and it may well be this that has led it to be more successful than it would have been otherwise, and so to generate that much more in social benefits.

The saga of The Body Shop may be instructive in this regard. Commentators were outraged by their sell-out to L’Oreal. Yet, as I argued elsewhere (see Guardian Unlimited, 30 June 2006), this event is in fact likely to be a substantial boost to social businesses. The sector is in need of commercial success stories which encourage other investors. And, given the history of the Roddicks, much of the £100 million plus heading into their hands is likely to wind up in social enterprises.

The growth of Justgiving

Justgiving has similarly been very successful. Since 2003 the charitable flow has increased from approximately £2 million to an expected level of over £70 million in 2006. This astonishing growth rate has been matched in revenues and a seven-digit loss is budgeted to become a seven-digit profit. In addition to becoming the dominant UK provider, Justgiving has expanded into the USA (a too-rare example of innovative business models moving westward), enjoying extraordinary growth there as well.

Close observers attribute Justgiving’s success to very easy use of the website. I have yet to meet a person who has not made this comment (and I have asked many), and Justgiving’s own research documents a high rate of customer satisfaction with its core product offering (an easy, quick and simple way to donate to charity over the internet). The company also benefits from a deep understanding of the customer experience and a clear knowledge of exactly who the customers actually are (the latter taking many years to refine). This high customer satisfaction and related ease of use is the result of ruthless examination and testing of every minute aspect of its offering. I have found this at Justgiving and other profit-seeking companies but rarely in enterprises where the wealth accumulation motive is absent.

As with all start-ups, effective cost control has been very much in evidence. Furthermore, compared with other dotcoms, Justgiving frittered away little of its resources on wasteful mass marketing. The CEO is also an astute judge of which new initiatives represent fantastic opportunities and which will just eat up valuable time. This heightened sensitivity to waste and aggressive resource management is also typical of profit-seeking entrepreneurs I have observed. By contrast, I have found others in the charitable or social sector to be at times more relaxed about expenditure. Lastly, but perhaps most importantly, the CEO has selected an excellent team which complements her own considerable strengths very well.

Why for-profits might have an edge

Justgiving’s remarkable growth has not gone unnoticed by competitors in the UK and overseas. CAFonline, which is part of the Charities Aid Foundation (CAF), operates in the same marketplace but has enjoyed far less growth. While detailed figures are not available, we have been told that since its inception when was this?, £29 million has been transacted through CAFonline accounts, in contrast with Justgiving’s total of £35 million in 2005 alone. Given the divergent growth rates, this gap is likely to increase.

Few would deny that CAFonline is a social enterprise and many would also agree it has been successful. Yet the gap in performance between it and Justgiving is too great to ignore. Close observers of social enterprise thus need to address a fundamental question: is there something which profit-oriented models bring to the social enterprise sphere which may, in certain cases, create incremental social value? In raising this question I am assuming that more donations to charitable causes equal more social value. This is admittedly only one dimension of social value, but few would deny that more money to charity is better than less.

This is not to say that CAFonline does not make an important contribution as a social enterprise. Its goal is not to earn profits (CAF itself seeks to break even) but to enable and increase funds going to the charitable sector and bring donors and charities together. In doing so, it works with more charities than Justgiving does (permitting access to approximately 220,000). CAFonline perhaps does so because of the social impact of such a service, which is consistent with its mission, and its ‘paid for’ services enable it to reinvest in free services for charities. Justgiving, with its different objectives, would not take on any clients that would be unlikely to enhance profitability overall.

Without going into the relative quality of the work the two organizations do, it is clear that the differences in their objectives result in different behaviour. The two organizations have different goals, perform different roles and generate different results. Both increase social value. Given the explicit objective of generating maximal growth in online charity giving, a worthy goal by most yardsticks, the Justgiving model appears to work better. Professionals with an interest in fostering social enterprise are doing the sector a disservice by excluding it from consideration.

Conclusion

Profit-seeking companies, of course, do not always grow faster or perform better. Bmycharity, another UK-based private company active in the sector, is substantially smaller, with £7 million in donations since its inception, although it was profitable before Justgiving. The far larger US-based Kintera has lost money consistently (in the first quarter of 2006 it reported a net loss of $9.3 million on revenues of $10.7 million). But none of this undermines the argument that the for-profit model should be considered a potential producer of social benefit.

We in the UK social enterprise sector need to explore varied models to achieve our social objectives. By eliminating those that seek a profit we disadvantage the sector and discourage badly needed capital from entering. I think we should applaud successful fast-growth businesses like Justgiving, which also generate social value.

First Published in Alliance Magazine in July 2006.

C’mon…………….lay off the Roddicks!

Earlier this year The Body Shop, the campaigning heath and beauty company, announced it was to be acquired by French luxury goods manufacturer, L’Oreal.  To many, this represented a sell-out of tragic proportions.  The Body Shop had been a trailblazer among UK ethical brands, and Anita Roddick, its co-founder (with husband Gordon), was one of few visible and well-known advocates of the notion that business could and should be socially responsible.  It was of this version of the capitalist model, often referred to as “social enterprise” that Anita was “poster child”.

Tragedy turned to disaster, as it emerged that L’Oreal was itself 26% owned by Nestle.  In the food industry, Nestle has been a lightning rod for criticism by “socially responsible” investors due to a range of practices, particularly in the less developed countries.  Anita’s protests that she would change L’Oreal from within sounded optimistic at best—if not naïve or even cynical.  The Guardian newspaper reported that since the announcement of the acquisition The Body Shop’s ethical rating has fallen from X to Y since the announcement.

Knocking the rich is good sport, the question is whether those of us with a strong interest in the growth of social enterprise should mourn or rejoice at the cashing in of the Roddick chips.  There seems a strong for celebration for supporters of social and ethical enterprises willing to take a dispassionate view of events, based on several factors.

First, there is a very strong and unmet demand for capital amongst UK social enterprises.  One reason for this is the simple absence of big success stories.  Apart from the Body Shop, where is there another example of a UK social enterprise that has been a big win for investors?  There have been innovative models, which result in much social good (e. g. The Big Issue)—but few have made people rich.  One possible exception has been Green & Black’s, which, like the Body Shop, has suffered much criticism since its sale in 2XXX to Cadbury’s.  And the Body Shop has been immensely successful…just ask the garage owner/family friend who lent Gordon and Anita £8,000 (after many banks had turned them down) and is now sitting with 21% of the proceeds of this £xxx million sale.

Such stories fire the imagination (and fuel the greed) of potential angel investors into social enterprises in the same way the astonishing returns to early backers of Ebay, Amazon, Google and others encouraged the massive growth in US venture capital investing.  There may yet come a day when investors are willing to part with meaningful sums of cash for social purposes alone, and this pool of capital is growing.  But it is still meagre in comparison with the need.

The second cause to be jubilant at the enrichment of Gordon, Anita and their early “angel” is that most of their cash is likely to be recycled into social enterprise and the charitable sector.  They are on record as saying they will give most of their money away.  If we consider what they have done to date with their salary and dividend income there are further grounds for encouragement.

Over the course of the past two decades the Roddicks have backed social enterprises, charities or campaigns in such diverse fields as organic food, third world development, conflict resolution, environmental protection, ethical sourcing, human rights, etc.  They have also been backers of many of the best-known UK social enterprises including Freeplay, the manufacturer of windup and solar radios, sold predominantly in the third world, and the aforementioned Big Issue, a pioneer in helping the homeless.  While Anita has been the public face of the duo, Gordon has provided not only cash, but also valuable time and expertise to many budding British social entrepreneurs.  The idea of this wealthy couple, slipping off to a quiet and comfortable retirement on the back of their millions is laughable.  More importantly, the sale of their stake in the Body Shop represents a windfall to the social sector.

Taking shots at the successful is a great pastime.  Finding inconsistencies in those we perceive to be a bit sanctimonious can be a source of great delight.  By identifying the flaws in “the great and the good” we can feel better about our own shortcomings (hey, these guys are really no better than me!).  But while engaging in this sport those of us who care genuinely about the growth of ethical business need to put forward the positive arguments as well when our most successful social entrepreneurs cash out.

First Published in The Guardian in June 2006.