What To Do With Surplus in a Social Business?

Words create worlds. That’s why definitions are so important. Spending time on defining terms with precision, then selecting a word family to shape your culture, and as a result its tone, character and direction is a powerful and sometimes frustrating exercise. Such is life and work in a knowledge economy.

We recently spent time storying how social business is being defined by those leading and thinking about social businesses.

A key premise of social business is sustainability. That sustainability is brought about by the application of business practices to serving a market: finding a customer who is willing to pay for the social value added through social business activity.

A result of this activity is a profit, or a surplus. That there must be a surplus, or at least a non-loss, has the agreement of everyone we interviewed on the subject.

What to do with that surplus is really the only point of difference. And even on this point it is more a debate on the mechanisms for allocating that surplus than the purpose of allocating it.

In a social business profit is intended for social good. That can mean reinvestment, work conditions, training, opportunities, enhanced service etc., are the beneficiaries of profit.

The question of dividends seems to create the most discomfort.

Dividends are merely one way to distribute the excess surplus after reinvestment and taxes. When dividends are spoken of it is usually in the context of returns to capital — that is dividing the surplus amongst those who invested money in a firm according to the degree and risk involved in their investment.

When surplus is divided among employees we do not call it a dividend, but the excess is still being divided and distributed. In this case the surplus is divided by some system of ascertaining each employee’s due, as a return to labour.

Point is: the surplus is still being divided amongst individuals with some interest in the firm.

Where the struggle seems to arise is in the fear of exploitation. There is a proper aversion to participating in a system that could make some richer, inappropriately, on the backs of the poor. There is a desire to avoid doing business with those investors who expect people in a firm to become employees of the money, and do its bidding for its own sake.

Avoiding dividends does not necessarily avoid the problem.

What of an employee-owned business, where the employees are the shareholders? There are no absentee-investors. We’ve storied dozens of these firms. Each shareholder works at the business in question and has a great deal of one’s social and economic life tied to the workplace. In this case dividends are simply another, and as perfectly ideal, surplus-allocating mechanism – in such cases a dividend enables a return to labour.

While structure is important, it's the intent and actions of those who participate in the structure that's critical. A greedy employee is no less a challenge than a greedy investor. An organization full of conscientious people will be a conscientious organization.

What we’re all really getting at is that we need to optimize the use of the resources we create for social purposes.

It is entirely possible that regional and organizational cultures need to define social business in terms that suit their specific functions, legal and operating environments.

It may be that in some cases a very hard line must be drawn in order to ensure a social business does not fall prey to absentee-shareholders with neither social tie, nor practiced commitment to the business’ social purpose.

In other cases the barrier between shareholders' interest and the business' social interests is a completely artificial construct. It is an intellectual barrier that actually stifles the social good we could achieving through our business activities.

The structures each social business uses to make good on its intent will depend on culture, circumstance, and even the function a firm performs.

What everyone we spoke to seems to have in common is a belief that it is entirely desirable, and possible, and holding of huge potential for business to evolve beyond the mere making of money into an organ by which we can intentionally achieve the greatest social results.

The definitions of a previous stage of business evolution are creating mental blocks that prevent the mass of business from moving forward.

The very same definitions that provided action-enabling clarity in the past must now be reformed. Social business is being entrepreneurial with the language and concepts of business, and therefore the business world it might create.

For a long time the coal miner’s cart, which rode on two rails, and the steam engine co-existed but were not combined. When these two tools, previously separate, were put together a revolution was sparked. In a knowledge economy, concepts and practices can be put together in new ways to open up new vistas for human development. Why not put business and social purpose together?

There will surely be a period of tinkering, adjustment, and a couple different ways of getting the mechanisms to work.

If successful, a transformative social invention will be the result.