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Radicals for Responsibility

Social responsibility has captured the attention of a new generation of MBA students. At a time when trust and benevolence are scarce, these students aim higher. Here's how;

As Wall Street pored over a fresh batch of lackluster earnings statements last month, another group in Berkeley, California scrutinized some important bottom-line figures of its own: social return on investment.

Snicker if you must, but judging from trends at top B-schools, and even in many high-octane boardrooms, corporate responsibility is emerging as an increasingly important variable in the traditional profit-loss calculation.

"There is a dual bottom line," says Jerry Engel, a professor at the Haas School of Business at UC Berkeley. "Businesses not only have to look for a financial return on investment but also for a social return."

So how exactly does a CEO quantify a social return, or SROI? That, says Engel, is a question that Berkeley's National Social Venture Competition (NSVC) is helping to answer. It was that same question of measuring social impact that held the attention of high-profile judges as they evaluated entrants' business plans in Berkeley last month.

"The notion of corporate responsibility isn't new," says Engel, who also serves as director of the school's Lester Center for Entrepreneurship and Innovation, which sponsors the NSVC. "What's new is that we're asking applicants to quantify the social return."

Social-impact columns may not appear on corporate ledgers any time soon, but the idea of quantifying business responsibility is starting to take hold. Why? Partially because companies now face more pressure than ever -- from shareholders, employees, and beyond -- to come clean about the results they deliver and the impact of those results on society. (Enron anyone?)

Trade-Off? What Trade-Off?
The NSVC started in 1999 as a contest for student entrepreneurs who were seeking strong results along two bottom lines: the financial and the social. During three of the most tumultuous years in business history, the pool of contest applicants has soared 140%, while Columbia Business School and the Goldman Sachs Foundation have thrown their weight -- and money -- behind the competition as well.

Programs focused on social responsibility have cropped up at other top schools too. Harvard Business School, for example, offers the Initiative on Social Enterprise , which prepares students for leadership roles in nonprofit organizations. Stanford has launched its own Public Management Program , and Boston College hosts an annual contest called The Best MBA Paper on Corporate Citizenship .

When asked what challenges his company faces in balancing financial interests with social concerns, Bruce Anderson, CEO of Wilson TurboPower Inc. -- this year's $25,000 prize winner in the NSVC's high-growth category -- is quick to answer: "Huh?"

It's not that Anderson doesn't understand the question. It's just that his business sees a wide-open market opportunity, making a question about trade-offs largely unanswerable. No zero-sum game here. It turns out that profit and social responsibility are mutually inclusive after all.

Wilson TurboPower emerged from the labs of MIT -- specifically, from the shelf of long-time mechanical-engineering professor and environmental activist Peter Wilson. The company's first product, the regenerator, works with microturbines, units that resemble backup generators, except that they provide a source of primary, not secondary, power for a limited area like a small group of office buildings, alleviating many of the headaches associated with centralized utility grids. The Wilson TurboPower regenerator takes waste heat from microturbines and puts it to other uses, such as heating water, boosting efficiency from about 30% to 80%.

During the colossal California energy crisis of 2000, the dangers of utility grids became obvious. (The phrase "rolling blackout" still sends shivers down the spines of many Californians.) What makes Wilson TurboPower's business plan so intriguing is that it offers an energy-efficient product at little extra cost to consumers -- at least when compared to an expensive, arduous endeavor like solar energy.

The fact that Wilson TurboPower faces essentially no trade-off between its bottom line and its benefit to society hits upon a fundamental point about corporate responsibility: It doesn't have to be an either-or choice, like picking decaf over regular. And it's not just about philanthropy. Social responsibility is a principle that gets infused into a company's DNA, oftentimes manifesting itself in a series of seemingly trivial business decisions.

And that's where today's B-school students come in. "Big" and "powerful" may describe an MBA's ideal employer today, but "bad" is not sexy anymore. While the threat of consumer unhappiness carries its own weight, the prospect of losing top MBA talent can strike terror into the heart of any red-blooded CEO, even in lean times.

The Mercury Is Rising
"When I was looking for a job after business school, part of the appeal of Deloitte was that it played up its women and minority initiatives as well as its commitment to work-life balance," says Ben Klasky, a 1998 graduate of Stanford Business School. Today, Klasky serves as the executive director of Net Impact , a San Francisco-based organization that helps B-schools promote corporate responsibility.

This year, Net Impact began running ads for MBA summer internships at socially responsible companies. So far, 2,500 applicants have applied to fill 75 slots, Klasky says.

Of course, the characteristics that mark a socially responsible company vary wildly depending upon whom you ask. But David Eichberg, a spokesperson for Business for Social Responsibility , says it's difficult to apply a single metric, but he sees the "mercury rising" -- mainstream business is paying more attention to corporate social responsibility.

For example, Eichberg cites results from a global survey conducted by Environics International in cooperation with several other organizations, including The Conference Board . The study found that half the people surveyed in 23 countries pay attention to the social behavior of companies, while one consumer in five has punished or rewarded a company based on its social practices.

In fact, Eichberg says globalization plays a surprisingly large role in keeping companies on their best behavior. "There is certainly a role that globalization plays in getting businesses to adjust their practices," he says.

If you need proof, look no further than Nike, which cut off suppliers that exploited child labor after weathering a maelstrom of bad press and boycotted sales. Granted, Nike has a long way to go to catch up with Tom's of Maine or Ben & Jerry's. Eichberg says businesses that don't factor in the societal impact of their operations carry the potential of huge costs in the long term.

The Haas School's Jerry Engel agrees, saying some statements of corporate responsibility surely constitute little more than "window dressing." At some point, companies will have to make good on the promises they're making to the public.

"In the end, the cost they pay for violating their public statements may be their brand equity," Engel says. "And that's something no company can afford to squander."


Corporations, Social Venture Capitalists, and Incubators

Pure commercial entities have an important role to play and it is important to understand it in regard to projects with a socially responsible component. Companies and individuals that have created the new breed of foundations have different relationships with these institutions than most of their older East Coast foundation counterparts. In some cases the founding company and the foundation are closely linked in order to leverage the resources of both to achieve the social mission. A good example is AOL's helping.org site. Some of the new foundations are managed entirely by for-profit holding companies. In some there is a clear divide between the founder/founding company and the foundation. This may even go so far as mandating not focusing on technology issues at all. The older East Coast foundations do not, for the most part, have living donors to contend with, and in many cases, do not even have the donor's family still on the board.

The new foundations and their relationships with corporate entities have caused some concern and discussion in the foundation community. But does it obfuscate the real issue, which is, are the new entities sticking to the principles of social responsibility in their funding paradigms? If they are not, there is an issue, if they are then there is no issue. The Internet has spawned a whole new breed of projects, collaborations, and entities, and this needs to be accepted. If a foundation entity meets the IRS litmus tests and is doing socially responsible work, than how it structures itself to meet a socially responsible mission should not be the focus of concern.

There is one real concern: When approached by a socially responsible project with profit-making potential, does a foundation support the socially responsible elements by providing a grant or making a program related investment? Or is it kicked up to the investment folks at corporate who strip away its socially responsible elements to make it a purely profitable venture? Or do both things occur? Because of their mission-based orientation, Foundations must do what they can to preserve the socially responsible elements of a project even while investing in those projects with revenue generating and thus sustainable potential. Maintaining this critical balance is the real challenge facing foundations. It is where the conflict of interest potential is strongest for foundations with close links to their corporate parents or to living donors with both foundations and an eye towards investment. There are a number of solid, socially responsible projects with revenue generating potential circulating now. Many have been turned away by the public sector because their focus and the revenue potential is not well understood or does not fit neatly into this or that funding portfolio.

My organization, OSI, is still grappling with effectively dealing with these proposals in the appropriate strategic manner. Meanwhile, these "social ventures" are wooed by investors that recognize their income generating potential. They wish to buy into the project as long as some core socially responsible elements considered unprofitable are dropped. This is a terrible catch-22 causing many civil sector projects to either languish or abandon their civil society mission to go ".com The Internet has created a new class of ventures that must be evaluated for their social as well as their profit potential at the outset. If treated purely as business ventures by the foundation and business communities, a real opportunity will be lost to create and nurture sustainable, socially responsible projects. If you pull the wings off a butterfly it is still technically a butterfly but it looses a heck of a lot in the transformation. The difference between looking at these projects as pure business versus social ventures with sustainable development components lies in the project's successfully meeting a social mission in order to become profitable.

As pure business ventures defined by traditional business school metrics, many of these projects do not meet the appropriate criteria unless the clients they are trying to satisfy or their mission is refocused. As soon as that refocusing occurs, the social element is lost. However many initiatives that at first glance would not be considered commercially viable become so once they are successful at meeting their original mission. This is true because there is a natural tendency to coalesce around entrepreneurial success stories whether they be financially or socially focused. The Grameen micro-lending bank and cell phone project is a good example. Children's Television Workshop/Sesame Street, The Newshour/Macneil Lehrer Productions, National Geographic Magazine/National Geographic productions are all examples of traditional socially responsible projects with successful profit making components.

Many socially responsible Internet sites have unique content to offer and loyal communities around them -- the basic ingredients for success on the Internet. If they are marketed correctly after fulfilling their core missions, leveraging their online presence to promote sustainability is possible. Because these organizations are used to doing more with less, often times their Internet presence is developed at a fraction of the cost of creating a pure ".com" site. While they may not end up generating as much money as an Ebay.com, they also have far less downside risk attached to them. If they are mission oriented, there are always people who volunteer time and energy to maintain the mission. A ".com" that fails goes bankrupt, while a ".corg" that fails most probably becomes a ".org" continuing to fulfill a socially responsible mission. Occasionally, one can score a Sesame Street type success story.

There is a unique opportunity to nurture a sector of the Internet that isn't strategically developed to satisfy both commercial and public sector interests. To deal with social sector projects that have revenue generating potential, the project should be analyzed with two different sets of metrics. Ideally, a third party incubator with unique characteristics is employed with business, legal, technology and development expertise attached to it. The socially responsible core of the project (that which offers the unique content that draws a community) is analyzed for its ability to meet its core social mission. This analysis is provided to a partnership of foundation funders giving them the level of comfort they need from a third party that due diligence on the viability of sustainable social mission has been done. The revenue generating aspects of the project are analyzed with the appropriate business metrics and then marketed to the business community, assuming as a prerequisite, that the project meets its social objectives. The resulting enterprise would be run like a news organization. The business division manages the entire operation, focusing on profitability, while the editorial staff (or program staff in this case) controls the socially responsible content and communities they develop to make the site unique, attractive and credible to people in the first place. Such an enterprise would generate revenue while at the same time meeting its social mission, or it might start out as a not-for-profit venture with a clear for-profit mandate once that mission was met. Or it might be a for-profit venture (like World2market) that had a socially responsible component clearly managed as such. Each project must be evaluated on its own merits.

As a real example, OSI funded a project called Probono.net. It is an online resource for lawyers who wish to do free legal work. This is a specialized area of law and if lawyers have to root around to find resources in addition to doing work for free, they are less likely to volunteer. No ".com" law site would have thought of doing this nor would they have had access to the legal aid community resources that the OSI Fellow who designed this project for the foundation did. After all, what potential profit is there in offering free legal resources to lawyers? However, once the resource was designed it became a rather large success with other states and sectors of pro bono law requesting it. The ".com" legal sites came to call as well, as they saw it as a very useful add-on to their offerings. The resources on the site were, unique, accessible and had real commercial value - once they were designed and successfully meeting their constituent's needs.

In another example, OSI created many ISP's in Central and Eastern Europe in the mid-90's when little infrastructure existed to connect civil society to the Internet. In many cases it was the first high speed connection the country. In other cases, it reduced exorbitant competitor pricing for the services thus spurring further development and creating competition. These ISP's were created to serve a social need, and Internet was provided free. However, when competition was spurred and a market developed, users began to be charged to lower funding subsidies. The ISP's became viable businesses in their own right, and are now being sold off to interested buyers. Some multi-laterals doing development work use a similar model for sustainable development. They fund projects for the first three years as not-for-profits and assume they will become profitable after that period.

For those skill skeptical that a social and business venture can ever be combined, the Cambridge Incubator provides another model. The incubator is a for-profit venture that decided to run a socially responsible competition and provide incubator funding and resources to the ".org" winner that had the most innovative project. If every incubator had a similar competition for just one ".org" winner, it would do much to spur a vibrant social sector on the Internet. Foundations might take that stamp of approval as a sign the .org in question was a viable bet. The onus in this scenario would be on the ".org" to find sustainable revenue over the long term. However it would be more adequately funded at the outset and in a better position to do so.

Regarding pure corporate contributions to the digital divide; AOL was already mentioned as an example of a corporation lending resources to its foundation to meet a social good. A different example is the Cisco corporation which is successfully engaged in an initiative throughout the world to stem local "brain drain" by providing network expertise to young technical professionals in-country. It is working with local trusted institutions to develop partnerships. If a corporation is not ready to assist to this degree by creating its own programs or working in partnership, one very important thing that it can still do is provide regional discount arrangements to grantees of funding consortiums working together to bridge the digital divide. On the local or International front, companies or individuals willing to share their technical expertise with local NGO's, foundations and multi-laterals, provide an exceptional benefit.

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