The Time for Social Innovation is Now — Three Strategic Alternatives
Many refer to the current situation as one of problems increasing at exponential rates, reflecting alarming concern for environmental sustainability, wealth inequality or both. Both the U.S. Business Roundtable[1] and the World Economic Forum (WEF) have sounded the alarm. The WEF puts it well in calling for more corporate social innovation[2]:
“Social innovation — innovative, practical, sustainable, market-based approaches that benefit society, with special focus on the vulnerable…”
Both organizations imply that the problems have reached a stage where government alone cannot be expected to take the necessary action and that multinational and smaller corporations must take action. These corporations clearly have the resources to address the problems. In 2018 just the 3,000 largest public companies (excluding financial institutions) had $2.7 trillion in cash and short term investments. However, do they have appropriate strategies to venture into the new territory of social innovation. How big a change are we talking about?
Simply put, we are talking about redefining capitalism. Nobel Laureate Milton Friedman taught the world that capitalism is about maximizing shareholder return. To change that fundamental concept of capitalism to prioritize social innovation, we would need to benefit three additional groups in addition to the shareholders — 1) employees, 2) suppliers and partners and 3) the community where we physically and commercially operate. To better understand this priority, we should focus on the seventeen Sustainable Development Goals (SDGs) of the UN (shown in the image below). These are the most serious problems that humanity faces according to the 193 member countries of the UN. Lastly, we cannot ignore the feedback loops between natural and manmade systems and the fact that emerging technologies may exacerbate that interaction. How should a company deal with such a complex set of variables, many of them new for corporations?
In order to address the problems to avoid environmental apocalypse and warring social factions, I think that corporations have three alternatives:
1. Corporate Social Responsibility (CSR)
2. Social Impact
3. Social Entrepreneurship
Corporate Social Responsibility I always want to define with the French phrase noblesse oblige, or in English “the privileged should show generosity to the less fortunate”. The tradition of corporate type charitable donations dates back to the 1600s. In 2017 total U.S. charitable donations totaled $410 billion, of which $18.55 billion or 4.5 percent came from corporations[3]. As an immediate and quick fix, we could look to multinationals and other corporations to double or triple their contributions. This influx of cash alone would help. Concerned about how the money would be spent, follow Warren Buffet’s approach and give the money to the Gates Foundation, or to the Ford Foundation or the Rockefeller Foundation. They all have good reputations and bring much-needed focus to the social innovation space. The big advantage is that CSR can have an immediate impact because the funding supports outsourced programming hopefully to knowledgeable professionals. No need for the corporation to build up internal capabilities and expertise in social innovation.
Social Impact is more challenging to explain. The noted HBS professor Michael Porter developed the concept of value chain in 1979. This concept advanced to provide the popular framework for the “business model” in the first decade of this century. A business model describes how a business creates, delivers and captures economic value. Every part of the business model can be modified to positively impact environmental sustainability and/or economic equality, thereby achieving positive social impact. A focus on reducing CO2 emissions in the supply chain or training farmers to earn more by producing more valuable crops as raw material would be examples of environmental and economic improvement respectively. Obviously, no corporation could immediately revamp its entire business model, but a five-year plan could have significant impact on the environment and employees, suppliers and partners in the community. Some research published in Harvard Business Review[4] shows that when corporations demonstrate greater social responsibility, their return on investment improves because employees are more motivated. A possible win-win.
Social Entrepreneurship is the use of entrepreneurship to directly solve a social problem. The act of selling the product or service solves the problem. Manufacturing and selling an affordable water purification system for poor people in the Andes might be an example. The water system improves their health. Designing an affordable effective system, organizing the distribution to the remote Andes and building an effective sales force would be the entrepreneurship. Toms Shoes, “buy one give one”, is another classic example of social entrepreneurship. The sale of shoes in developed markets permits the company to give a free pair of shoes to the needy in South America, reducing the likelihood of contracting a disease through foot cuts and abrasions. Mohammed Yunus’ Nobel Prize for introducing micro-finance in Bangladesh is a noteworthy example of social entrepreneurship. Yunus made small loans to needy women, that was the entrepreneurship. These monies provided the sorely needed capital for the women to start small businesses to support their families better, that was the positive social outcome. In both cases, Toms and Yunus, we see the special nature of social entrepreneurship as a solution. The solution is both self-sustaining and scaleable, where market forces are solving the social problem. Hurrah!!
The question for the corporate CEO is how does one combine the three strategies in social innovation. CSR is easiest and fastest but the leverage is limited. The entire productive capacity and resources of the corporation, except for cash, are not part of a solution. Social entrepreneurship is the hardest because one is seeking to identify an opportunity and scale a solution probably to a totally new group of customers — the most vulnerable. Learning this new customer is difficult, takes much time and probably should be undertaken only by consumer goods companies or B2B companies that have a long time horizon. Social impact is probably the area where any corporation can immediately start to focus, see results and begin a corporate culture change. Over time the corporation could revamp its business model to improve environmental and social outcomes.
For the large multinationals, I think they could simultaneously try to do all three alternatives if they were consumer goods companies. If the multinational’s business model is B2B or for smaller companies they can do the first two alternatives — CSR and Social Impact. If I were a student looking to improve the world, I would study entrepreneurship, intern at a social entrepreneurship company, work at a similar company and then start my own social entrepreneurship venture. Along the way, cultivate relationships with social innovation investors and venture capital firms. What to do if you operate a small or medium size non-profit foundation is a challenging question. Typically you lack scale and financial resources. My recommendation for the last few years is that these smaller non-profits should merge to achieve scale, reduce overhead expense and more effectively create impact.
What the Business Roundtable, the WEF and the UN are telling us is:
1. The time to address the problems is now, before it is too late
2. The scale of the problems is too large for the government alone to address
3. Only the corporates have the resources and capital to effectively address environmental sustainability and wealth inequality
Whichever of the three strategies for social innovation that you pick, now is the time to act.
“Societies have been adapting to the changing climate, but the pace and scale of adaptation will likely need to increase significantly.” McKinsey
Footnotes:
[1] https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans
[2] http://reports.weforum.org/social-innovation/introduction/?doing_wp_cron=1579953051.7595329284667968750000
[3] https://nonprofitssource.com/online-giving-statistics/
[4] https://hbswk.hbs.edu/item/corporate-sustainability-first-evidence-on-materiality
