Week 2 - Definitions

Overview:

Social entrepreneurship is a new and rapidly changing field. Much of understanding what social entrepreneurship is lies in defining the context and situation around social entrepreneurship. For example, this class will talk about different organizational structures and how a social enterprise fits within each of these categories. We will also explore many of the different terms that have been used to describe theories, methodologies, and practices currently being used. A lot of examples will be used, so a background in the top 20 social enterprises is useful, plus a general background of different businesses and non profits to provide as contrast is helpful.

The objective of this class session is to provide a working language to describe different things we see in the realm of social entrepreneurship as well as provide the tools necessary to compare and contrast organizations. By having a working knowledge, we can evaluate best practices and decide what works and won't work for one organization that might work for another organization. This is an introductory class to an ongoing process that requires continual refinement and an open mind. As a disclaimer, we are not claiming to know everything in this field and what is true as an example today may not be true tomorrow. This field is rapidly changing, and even though we could be wrong tomorrow, the potential and aspirations of this field keep us excited and wanting to learn more to refine our thought process.

Logistics:

1. Introductions - Go around the class introducing each other again. This time say your name and one interesting thing that happened to you this week. (10 min)
2. Definition Discussion - The six main topics are For Profit, Nonprofit, Organizational Structures, Foundations, Sustainability, Corporate Social Responsibility, and finally Social Entrepreneurship. Below are the key points to draw out for each and the reference sites used to provide background information. (60 min)
   • For Profit: Most of the organizations we interact with day to day are for profit enterprises. From Walmart and Best Buy to CNN and Microsoft, we are surrounded by organizations that are structured as for profits. The signature characteristic of a for profit enterprise, regardless of it's structure, is to maximize shareholder value of whoever owns the organization. The distinction of structure comes into play when determining who are the shareholders and how profits as well as liabilities lie. In a traditional C corporation (like Walmart), the corporation itself is responsible for all liabilities (not the shareholders) and pays taxes as a single entity. In contrast, a limited liability corporation (LLC) is responsible for all liabilities but can elect for all taxes to flow through to the shareholders. Further discussion can be made regarding the structures and contrasts.
   • Nonprofit: The goal of a nonprofit is to maximize the impact of the organization to fulfill its mission. The key distinction from a for profit enterprise, though, is that there is a non-distribution constraint. What this means is that if the nonprofit makes a profit, it cannot distribute those profits; they must be used within the nonprofit to further the mission. Nonprofits are also unique in that they don't coerce participation and they exist without simple and clear lines of ownership and accountability. Further discussion into examples of nonprofits, from health care and education to think tanks and politics, would be useful.
   • Organizational Structures: For profits and nonprofits are two examples of organizational structures, and to introduce the area of social entrepreneurship, we must dive a little deeper into the different organizational structures that exist for 'nonprofit' status (the 501(c) status). The distinction 501(c) generally means that the institution is tax exempt. To maintain tax exemption, they must 1) disclose all tax filings and 2) follow the nondistribution constraint. There are 28 different 501(c) distinctions, and the one we will discuss in most detail is the 501(c)3 distinction - traditional nonprofits. An example of one of the distinctions is 501(c)4 versus 501(c)3. The 501(c)4 can lobby congress, but as such can't claim tax deductible. The 501(c)3 cannot lobby congress but can claim tax deductibility. To add some interactivity to the discussion, one can ask questions regarding how much money is given to nonprofits and what is the breakdown for that giving, with the answers shown below:
     • Total Giving: $ 300 billion
     • Religion, $102.32 billion, 33.4%
     • Education, $43.32 billion, 12.1%
     • Human services, $29.64 billion, 9.7%
     • Health, $23.15 billion, 7.6%
     • Public-Society benefit (United Way etc), $22.65 billion, 7.4%
     • Arts, culture and humanities, $13.67 billion, 4.5%
     • International affairs, $13.22 billion, 4.3%
     • Environment and animals, $6.96 billion, 2.3%
     • Foundations, $27.73 billion, 9.1%
     • Unallocated giving, $23.67, 7.7%
   • Sustainability: This is a hot topic in more than one academic circle, so it is important to clarify definitions and discuss which one's apply to social entrepreneurship. The different types of sustainability are environmental, organizational, financial, and structural. The ones pertaining to nonprofits are organizational and financial. Organizational sustainability entails being able to maintain the organization through turnover and changes in leadership. Financial sustainability is especially important to social enterprises because the traditional nonprofit has mostly used donations and foundations as sources of revenue while new developments have been demanding that these enterprises start developing internal revenue models that allow an organization to continue even if they lose a particular grant or foundation donation. Much of the innovation in financial sustainability comes from thinking up innovative revenue models. For example:
     • Tiered pricing - Aravind Eye Care has 70% of its surgeries performed for free or below cost and 30% above. The 30% above cost pays for the rest of the surgeries.
     • Dual Model - Zoos are sometimes set up as nonprofits with their gift shop providing much of the revenue needed to cover operating costs.
     • Diversification - Upwardly global receives government funding, program revenue, and donations to support its mission.
   • Foundations: Foundations are divided into two types - private foundations and community foundations. Private foundations are the types that one normally encounters with the Ford Foundation and the Bill and Melinda Gates Foundation. Community foundations focus on the needs of a given community and examples include the Cleveland Foundation and the Silicon Valley Community Foundation. Private foundations are usually set up to fulfill the mission of the founder, and are set up so that their operating budget consists of what the endowment makes in interest a year (usually 5%). The result is that private foundations usually exist in perpetuity. This contrasts with community foundations because they must collect at least 10% of their annual expenses in donations each year to remain tax exempt (private foundations do not). This results in the community being much more involved with the foundation, determining which issues it focuses on and how it allocates the funds to serve the community. As a final point of interest, there are also two types of private foundations - "operating" foundations and "grand-making" foundations. Operating foundations, like the Wikimedia Foundation, use their endowment to achieve their goals directly. Grant-making foundations, like the Rockefeller Foundation, use their endowment to make grants to other organizations, which indirectly carry out the goals of the foundation. Operating foundations have preferential tax treatment in a few areas, including allowing individual donors to contribute more of their income and allowing grant-making foundation contributions to count towards the 5% minimum distribution requirement.
   • Corporate Social Responsibility: Corporate social responsibility is the idea that corporations have to maximize value not only for their shareholders (those who own stock, for example), but for all stakeholders (employees, customers, communities, and shareholders). Proponents say this is good for business because it takes a long term approach to maximizing value and generating goodwill instead of only short-term profits. Opponents say that it is nothing more than publicity stunts and that their only responsibility is to maximize shareholder value. There are quite a few different areas of study occurring within this sector, which include ways of measuring environmental social impact (triple bottom line economics) to how a corporation should determine its socially responsible initiatives. For example, some corporations only do "sustainability" initiatives when they reduce their internal costs (such as switching to fluorescent from incandescent lights) while others take the step a bit further. Others, who are using it as a publicity stunt, will sell a bottle of water and provide a donation to a nonprofit in a developing nation; the problem occurs when they charge 20 cents more for the bottle of water and donate only 5 cents to the nonprofit (which is an example of greenwashing).
   • Social Entrepreneurship: Social entrepreneurship, in its highest aspirations, tries to combine the best of all these terms. Creating an organization that has a nonprofit organizational structure but sells products for a fee to support it's mission can be considered socially entrepreneurial. Being a for profit organization that has a non profit arm to sustainably fulfill a social good is an example of social entrepreneurship. Bring up examples of Kiva, Ashoka, Benetech, and the Kaiser Family Foundation are great.
3. Organization Presentations - After the discussion of terms and examples, each student is now asked to give their presentation on a social enterprise. After the presentation, ask the class to discuss which aspects of the previous discussion were incorporated into the presentation. (20 min)
4. Need Finding - Bring the discussion full circle and discuss how need finding is very important to developing a social enterprise. Having a vision for the future depends on finding something you don't like about the status quo and being willing to work hard to change the situation so that you can create a new status quo. (10 min).
5. Motivation - If you are going to decide on a specific need, you need to be passionate and be willing to work day and night to fill that need. Starting with the trip leaders, discuss why you are interested in social entrepreneurship and what motivated you to take this class. What's your story? (10 min).
6. Conclusion - Wrap up with the in class assignment as well as the out of class assignment (10 min).

Exercises:

• What do you want out of this class? Before leaving class, write down on a piece of paper your goals for this class. What you want to get out of it and how we can tailor the class to fit your particular needs.
• Find 7 needs. Keep an eye out on the world around you. Find 7 'problems' in your day to day life that you would like to change. Can be anything as simple as poor food choice to homelessness.