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Ben & Jerry’s is just one example of a responsible business absorbed by a corporation. Can corporations find ways to integrate social enterprises?

2011-11-21

Co.Exist

The 4 Ways Big Corporations Flirt With Socially Responsible Business

Picture a responsible business and companies like Morgan Stanley, BP, L’Oréal, and Unilever don’t readily come to mind. But corporate giants may have more of a role in mainstreaming responsible business than we think.

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?

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4 Comments

  • Martin Herrndorf

    Sounds convincing, many challenges resonate with stuff that I've seen in large companies getting involved in social innovation. There's just been a whole series of failed or at least strongly under-performing projects in German Multinationals (many of these with one high-profile partner, who has provided high visibility, but not much juice in product development, or traction in the market). Those that succeed are normally grown from the bottom-up initiatives (rather then through top-management mandates), carefully nurtured over the time with tolerance for drawbacks and challenges etc., and smartly draw on external partners to complement their own resources and manage the internal politicality of BoP projects.

    On a slightly critical note: I fear, there's not rock-solid business case for most of these projects. Instead of trying to make up one, I'd advise business to build a case that rests on multiple motivations (learning, reputation, etc.) rather then "plain money" in terms of bottom-line... would be interesting to learn your opinion on that.

  • Alexa Clay

    totally agree Martin. I think the business case has to be piecemeal, touching a range of motives from reputation, employee engagement, market shaping / development, etc. in many ways, i think the next ten years will be less about bottom-line thinking and more about market shaping - working with NGOs, regulators, consumers, and competitors to build sustainable markets. those that are good "market shapers" will prosper over those that have a very laissez-faire stance. 

  • koann

    Thanks, Alexa and Jon. Great set up to an important conversation. How can we become better at creative self-destruction, part of the healthy cycle in nature that helps us adapt to changing conditions. The next 5-10 years will be quite interesting as we seek as a global society and ecomomy to adapt to some fairly significant and dynamic new 'design constraints'. My sense is that as more of us become adept at systems thinking, we'll be able to leverage our growing body of knowledge to more gracefully, and hopefully purposefully innovate. At least that's the vision and intention we're holding in our work and community. The main hurdle? Eliminating our bad habit of sticking our heads in the sand. Once we develop (perhaps regain?) a bit more confidence in our collective ability to see our way forward and solve tough problems, I believe we'll do great things. We're excited to collaborate w/ folks like Ashoka to envision and realize together a flourishing future!

  • NateBennett

    What is it about an industry, a company, or a leadership team that predicts which of the four strategies will be selected?  And which of the four is more likely to create buzz that improves employment brand - or customer perceptions?