The last decade has given rise to many experiments by companies to incubate socially responsible business models. Large financial institutions have become hosts to microfinance divisions (Citi, Morgan Stanley). Energy companies have experimented with base-of-the-pyramid business models for emerging markets, aligning social utility (access to energy) with business strategy (long term growth). And social enterprises like The Body Shop and Ben & Jerry’s have been acquired by major multinationals. L’Oréal bought the Body Shop in 2006 and Ben & Jerry’s became part of Unilever in 2000.
On the whole, however, many of these experiments have failed. Morgan Stanley had to abandon its microfinance unit. The Body Shop and Ben & Jerry’s have both been accused of “mission drift” since being acquired. BP sold much of its alternative energy business, while other energy companies have had to dissolve their access to energy programs.
So what can we learn from this period of experimentation? Is corporate flirtation with social enterprise just a passing trend? What models for incubating social enterprise are out there and at what point does socially responsible business start to become the lifeblood of a company?
Recently, we spoke with a social intrapreneur heading up a renewables business within a large energy company. His ambition is to transform the oil and gas industry. He admitted, however, that most days he feels quite marginalized. “We aren’t perceived as core business. We’re sort of this ugly stepchild,” he said.
The challenge social enterprises face within corporate multinationals is immense. Many social enterprise often don’t conform to traditional ROI criteria. Most of the time socially responsible businesses are betting on long-term strategies or “market shaping” opportunities, or they may simply tradeoff profit in some instances to enhance social impact. Moreover, outsider investors often penalize companies who are too innovative in this space. For one, BP’s renewables portfolio was heavily discounted. So what’s the best strategy?
There are a number of pathways companies have pursued to develop social enterprise credentials: absorb, venture, spark, and spinout. To absorb social enterprises aligns nicely with corporate instincts around mergers and acquisitions. The challenge is that many social enterprises don’t offer the kind of financial performance that is attractive for these sorts of deals. And moreover, many feel the vision of socially responsible businesses can be deeply compromised when forced to conform to the norms of a parent company.
More promising is perhaps the venture landscape, which consists of typical debt and equity plays in socially responsible businesses. The challenge here is that most socially responsible businesses capitalize on more nascent markets where definitive market valuation has yet to emerge. As a result, many corporate venture funds have gotten burned on socially responsible business bubbles, from clean-tech to fair trade.
A third strategy for companies is to grow social enterprises inside a larger business: to spark from within. Socially responsible businesses that can navigate and survive a corporate environment from the beginning are well trained in triple bottom line credentials. The business case has to be clear from the beginning, and the threat of fallout from greenwashing means that the social enterprise value proposition also has to be rock solid.
After a social enterprise has developed some legs within a company, its growth might require more freedom for the business or model to reach its full market potential. On such occasions, companies have opted to spin out these ventures into their own company. GlaxoSmithKline, for one, did this with the creation of a patent pool for neglected tropical disease that it then handed over to a third party (Bio Ventures for Global Health) to administer and run.
Ultimately, multinational companies aren’t forever. The average lifespan of a multinational corporation in the Fortune 500 is only 40 years. While that’s an indicator of a more disruptive capitalist system than many seem to come to terms with in everyday life, it also points to an evolutionary question: How do we ensure that the resources of multinational companies are best leveraged to facilitate our transition to a world where socially responsible business is the norm?