Are so-called hybrid organizations such as B Corporations and Low-Profit Limited Liability Companies (or L3Cs) good models for social entrepreneurs?
Members of the African Children's Choir perform at the partnership launch of Ben & Jerry's and The ONE campaign's fight against global poverty at a Ben & Jerry's store
Social entrepreneurs are quite excited about this new trend of mixing mission and money within the organizations they run. You can often hear many of them proclaiming their intention to "do well by doing good," implying that they will not only save the world but they will make money doing it. Behind the slogan, these entrepreneurs are experimenting with what we call "hybrid" organizations. In the for-profit world, new organizational creatures with descriptions like "social business" are now prioritizing social and environmental goals equally with financial performance. Among non-profits, social entrepreneurs are launching what are usually called "social enterprises" or income-generating businesses, like coffee shops, thrift stores, and bakeries, within non-profit organizations.
One the surface these hybrid organizations look very promising—an opportunity to have your cake and eat it too. The reality, however, is that these hybrid organizations come with substantial risks and consequences that are rarely discussed and that need to be carefully taken into consideration from the start.
Last week I participated in a research symposium on "Exploring Social Enterprises" at the UCLA School of Public Affairs; much of the discussion centered on organizational hybrids. Several researchers presented truly cutting-edge findings about the consequences of choosing the hybrid organizational type. Cumulatively, this research identified four key risks associated with hybrid organizations.
The first, overarching risk is that people just don't know what hybrids are. Is it a for-profit? Is it a non-profit? Is this about mission or money? This ambiguity doesn't just affect potential investors who, for a start, are often not sure whether these organizations are a fit for venture capital or venture philanthropy. The ambiguity also affects board members who are not clear on whether their primary responsibility is to uphold mission or financial performance. Internally managers and staff face similar confusion and their decision-making often wavers or stagnates as a result.
Risk No. 2 is that these hybrids often have no clear systems of accountability. In traditional for-profits, everyone knows that profit maximization is the ultimate goal. In traditional non-profits, everyone knows that social impact is the ultimate goal. In hybrid organizations, these two goals are purportedly equal and yet they are often at odds.
The magnitude of this risk is easily understood by looking at funding flows to hybrid organizations—they are virtually non-existent. Capital flows require transparency and certainty, particularly with regard to the organization's priorities. For hybrids with two equal priorities and no transparent system to uphold them, the risk of misalignment and failure is extremely high. Consequently, capital avoids these investments.
Over the past few years innovations such as B Corporations and Low-Profit Limited Liability Companies (L3Cs) have attempted to provide mechanisms to create this transparent accountability. But without formal, widespread legal infrastructure to codify decision-making authority, the risk of weak accountability is too high.
Risk No. 3 is that hybrids often have difficulty maximizing either social impact or financial sustainability. As the dichotomy between these two forces pulls social entrepreneurs in different directions, hybrid organizations often experience both internal and external pressures to lean more in one direction or the other. Non-profit social enterprises often ultimately choose social mission as their priority and find their enterprise running at a loss. For example, the leaders of one non-profit operating a Ben & Jerry's Partnershop decided that their commitment to employ disadvantaged youth with serious social and emotional challenges outweighed the gains in customer service that could be had from hiring more "polished" employees. The non-profit also determined that it was necessary to employ a social worker as full-time support staff for the youth in the ice-cream shop. Unsurprisingly, the Partnershop operated at a net loss.
For-profit hybrids often ultimately prioritize profit over mission and thus compromise their social and environmental impact. The social entrepreneurs who founded Blue Avocado, makers of a line of hip reusable shopping bags, found early on that they had to make difficult choices about the level of environmental sustainability they could achieve for a competitive price. Their original hope was to create a locally sourced, fully organic cotton bag, but with a resulting unsustainable price they realized that some sacrifices on sustainability would be required to keep their social business viable.
Finally, Risk No. 4 is that as hybrids face pressures to maintain financial sustainability it will come at the price of a long-term erosion of moral legitimacy. One research study presented at UCLA investigated social service non-profits that employ their clients through jobs-training programs at social enterprises such as coffee shops and janitorial services companies. In these organizations, moral legitimacy was often questioned as clients were increasingly treated like regular employees and were "commoditized" by the business. A second study looked at the particular case of NPower, a non-profit technology provider that received substantial cash and in-kind support from Microsoft. As NPower was perceived to become more "business-like" in its operations, peer organizations questioned their non-profit integrity and social focus.
The net result is that hybrid organizations are not exactly the panacea they appear to be. Mixing mission and money is tricky business, requiring strong leadership to articulate and maintain clear priorities and accountability. The attraction to this type of organization is rooted in our hopes of find more financially sustainable ways of creating social and environmental impact. But as social entrepreneurs explore this intriguing territory, we must also beware of serious and substantial risks.