In a talk I attended on March 7, 2012 entitled “How Big Business is Empowering Women and Girls,” I identified three kinds of social enterprises that are not exclusive to women-empowering businesses: (1) investment funds; (2) businesses that embark on separate social projects; and (3) businesses that integrate social purposes into their business models.
As for the first kind, the impact investor and investment fund at the event were Ikatu International and Women Effect Investments, an initiative out of Criterion Ventures. Ikatu invests in businesses that would create employment opportunities for the youth. Women Effect Investments empower a community of women investors to place their assets in a diverse group of vehicles and create new investment opportunities with a gender lens. Social investment funds, like other investment funds, pool capital from various investors and invest them in businesses and financial vehicles. However, unlike traditional funds, social investment funds invest only in those that have social impacts. Grassroots Business Fund, which organization I wrote about a few weeks ago, is also an example of such a fund. These types of investments typically attract impact investors, but they have become increasingly appealing to ordinary market investors who are looking to make good money out of their investments.
For the second kind of enterprise―businesses that embark on separate social projects―the Coca Cola Company was one such example at the event. Large corporations nowadays typically have a corporate social responsibility (CSR) division or funds dedicated to conducting extra-curricular activities, such as Starbucks Coffee, Citibank, and Home Depot. Charlotte Oades, the global director of women’s economic empowerment at Coca Cola, spoke about their recent projects in helping female small business owners in countries like Brazil. Many have argued that the CSR model makes alternative forms of organizations, such as L3Cs and benefit corporations, unnecessary because companies could pursue social projects through a CSR division using allocated funds.
The last kind of enterprise―businesses that integrate social purposes into their business models as opposed to spinning it off into a separate entity―was represented by Vestergaard Frandsen (VF), a Switzerland-based, family-owned company that specializes in complex emergency response and disease control products, such as a mosquito net impregnated with insecticides and a water filter worn around the neck that makes filthy water safe to drink. VF did not start out as a socially driven company. For 40 years, VF was a textile company that made uniforms for hotel workers and retailers. When VF's founder’s grandson Mikkel Vestergaard-Frandsen took over the company, he transformed VF into a company that is “in the business of saving lives” and creates a business model that he calls humanitarian entrepreneurship―one that turns corporate social responsibility into its core business. One of VF’s projects is LifeStraw Carbon for Water that uses the carbon credit market to both fulfill a social mission and generate profit.
All of the speakers agree that one of the most important and challenging issues for social enterprises is to align the values of the management and investors. Jackie Vanderbrug of Criterion Ventures states that there are two kinds of investors: (1) the social impact first investors and (2) financial first investors. To make things more complicated, each investor usually brings in different theories of change and interests. The challenge for social enterprises is to accommodate all of the interests and priorities of the investors and channel their combined funds to investments that meet their needs and demands.
Now, what should people in the legal field take away from all of this? First, I believe that a market-based or business approach to solving humanitarian problems is proving to be more and more popular and effective. But because such approach is still at an embryonic stage, this field needs creative lawyers who can come up with structured transactions, legal structures, and financial products that would facilitate the convergence between business and social impact. For example, L3Cs and benefit corporations are legal structures that many argue could play a very fundamental role in shaping the course of social enterprises. Second, with new structures come new legal questions. Can investments in L3Cs constitute charitable contributions and therefore qualify for a tax deduction? Should social enterprises only be allowed to consider stakeholder interests or should they be required to? In light of these issues, some organizations have found ways to accommodate their needs using existing tools provided by current laws. For example, the Paradigm Project L3C has a sister foundation that obtains donations from people, presumably to allow for tax deductions. Such tandem structure permits fundraising from different pools of individuals with different legal rights as to the legal entities, use of funds, and accountability mechanism. As the field of social enterprises is growing rapidly, so should the number of lawyers working in it.