Social Business

The recent Business Week contains Steve Hamm’s review of “Creating a World Without Poverty: Social Business and the Future of Capitalism”, the latest book authored by Nobel Prize winner Muhammad Yunus.

Two interesting concepts emerge. The first is that of social business—the review goes:

“So what exactly is a social business? One designed mainly to accomplish a social goal. In most ways, social businesses operate just like any other well-run enterprise. They’re supposed to be smoothly managed, efficient, and profitable. But in their case, profits are invested back into operations rather than being returned to investors or shareholders. So it’s a form of capitalism that does not reward the capitalist in the traditional way. Yunus hopes that rich people, nonprofits, and corporations will back social businesses for the good they do. Corporations or other “investors” might eventually get back their original stake, but their reward mainly would come through brand-building and identifying new markets.”

This follows the principle of social entrepreneurship where social causes are achieved through business-like management and execution. It is meant to be a superior alternative to government intervention or pure charitable activity. However, Yunus’ idea seems to have come in for some criticism as well. For one, it may arguably militate against the basic premise in corporate law that the board of directors as well as the managers should act in the interest of the company (which is represented by the shareholders as a constituency). This would imply that companies should always strive to maximise returns to shareholders. But, the theory that companies should benefit shareholders is being subjected to gradual dilution by the stakeholder theory where companies are to be managed for the general benefit of not only their shareholders, but also all other parties they come into contact with, being creditors, employees, customers and even the community they operate in. In this context, companies that operate for the benefit of society should not be an alien concept altogether.

Further, shareholders’ priorities themselves are undergoing metamorphosis. Gone are the days when investors expect pure financial returns. The concept of socially responsible investing (SRI) is rapidly gathering steam, where investors put in money only in socially responsible companies even if it means compromising hard financial gains. Seen in this context, Yunus’ idea does not seem all that remote, as companies and investors have already begun moving towards greater social responsibility on the part of the corporate sector.

The second concept to emerge is that of a “social stock market” that would list only socially responsible businesses. Although such a market itself, might be still some distance away, small steps have been taken in that direction by creation of specific stock market indices that operate with socially responsible businesses only. For instance, we had carried an earlier post on this blog about the Dharma Indexes where stocks must pass a set of industry, environmental, corporate governance and qualitative screens for Dharmic compliance.

In sum, Yunus’ approach towards social businesses and social stock markets is commendable. I find the concept of corporatising social activity highly appealing, whereby corporate management principles are applied to areas of social activity (such as poverty alleviation) so as to achieve optimal results in comparison with governmental or charitable activity. Although it is still early days, there has been sufficient momentum in that direction evidenced by the fact that themes of corporate social responsibility and socially responsible investing have gained a fair amount of traction.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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