What is a “social business”?

Refresher for Global Social Business Summit Participants

4 November 2010 Autostadt in Wolfsburg, Germany

based on selflessness that is in all of us.Muhammad Yunus’ vision Market-based solutions to social problems “I am proposing to create another kind of business. I am calling it social business.” Prof. Muhammad Yunus Nobel Peace Prize Laureate Inventor of Microfinance Founder of the Grameen Bank Initiator of the idea of social business 2 .

Prof. non-dividend” company providing a solution to a social problem NGOs/Public Sector Social Business Traditional Business Ends Social & environmental solutions Profit maximization Means Donations or taxes Selfsustainable "Social business unites the dynamism of traditional business with the social conscience of charity" . Yunus 3 .What is a social business? “Non-loss.

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

Key idea is that the products or services offered by the business must provide a real social benefit 5 ..Social goals In principle.. these social businesses can be initiated or operated by: o Individual entrepreneurs o Private companies o NGOs o Foundations o Governments • Existing entities can also be converted into social businesses • • • • • • • • • • • • • Example sectors Healthcare Nutrition Microfinance & insurance Housing Water & sanitation Access to IT and telecoms Renewable energy Education & training Environment Empowerment of women Children’s welfare Welfare of the elderly . social businesses can help address all or most social issues Types of organization • Social businesses are typically incorporated as limited companies or another legal form with well-defined ownership rights • However.

Financial and economic sustainability A social business should cover all its costs Could be a social business Is not a social business  Price ≥ cost • Price is fixed and set at a level that allows all costs. price ≥ cost • Pricing based on the ability to pay of the customer. price < cost • Average price does not cover the full costs of offering the product or service  Organization depends on outside subsidies or donations  Price = 0 • Free at the point of delivery • Costs are covered by donations  Charitable provision of products or services But please note that as with all businesses. to be covered  Standard pricing  Avg. social businesses: • may need some time to grow before break-even is achieved • may occasionally make a loss 6 . including salaries and administrative expenses. but overall all costs are covered  Differentiated pricing with cross-subsidization  Avg.

000 Step 2 • As social business grows and begins to generate an operational surplus. developing new products/services for social goals 7 .000 $ 500.g. scaling up. replication in other locations. lowering prices.000 Step 3 • All additional/future operational surplus is recycled for social purpose • e. capital is returned to investor • No upwards adjustment for inflation. risk or opportunity cost • Example from Step 1 = $ 500.000 Additional surplus recycled Social Business Social Business Social Business Step 1 • Investor injects capital into the social business • Example: $ 500.Investment is returned to investors Investor should recover his capital – but no more Investor Investor $ 500. improving product/service.

g. to be clearly reflected in its decision-making • Allowing dividends creates pressures on management to dilute social benefits for financial gain • No-dividends rule is a response to abuse of “social business” concept by profit-seeking opportunists e.g. unjustified claims of social benefits for marketing purposes and to deceive customers 8 .No dividends beyond investment amount A pragmatic response to previous misuse of the idea of social business No dividends does not mean loss-making: • Social business activities should produce a surplus (all costs should be covered) • This includes costs such as central administration costs: an appropriate management fee is allowed for the investing/ managing partners • Surplus is also used to repay original investment amount back to the investors Pursuing dividends can distract from social objectives: • Maximizing social objectives must remain the business’s over-arching goal. in microfinance by companies charging very high interest rates and lending irresponsibly e.

e. but no financial dividends beyond investment are paid to owners • Grameen Danone. Case examples • Grameen Otto.g. using beggars as distribution channel… Type II – Ownership structure socially beneficial Social benefit • Business owned by the poor themselves (or by Trust acting in their interest): social benefit generated by paying out dividends to owners & local community • Can be profit-oriented business. education. food. since providing income to the poor is a social benefit • Once investors have recovered their initial investment amount (but no interest on it). surplus is distributed to poor owners & community Type I – Socially beneficial products & services • Generated by product. but focus is on providing a social benefit • Operations cover the company’s costs. Grameen Veolia. service. etc. housing.Two types of social business In “Type II” social businesses. healthcare. or operating system of the company itself. all financial gains are distributed to owners (poor) Profit orientation Financial dividend • Should cover costs/ may generate surplus. shareholder structure of Grameen Bank 9 .

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