Social Enterprise And Increasing The Overall Well-being - Research Paper Example

Social Enterprise And Increasing The Overall Well-being Introduction Social enterprise is a new and emerging concept which outlines the need of the application of commercial strategies to maximize the impact of organizations in increasing the overall well-being and also sustain the environment. A social enterprise therefore is not focused upon maximizing the wealth of the shareholders but rather is focused upon an increase in the overall environmental well-being of the stakeholders. (Lyons, 2012) It is critical to note that a social enterprise is not necessarily a non-profit organization which is focused upon generating wealth however, for profit organizations engaged in the environmental well-being of the stakeholders can also be considered as social enterprises. From the point of view of asset management, a social enterprise can increase the overall diversification of the portfolio while at the same time add more ethical trading and investing philosophy into the overall portfolio management also. It is generally believed that portfolio managers may have to only invest into the commercial entities to generate more value for their clients. Overall risk diversification and return strategies are therefore often tailored according to the dynamics of how a for-profit business actually operates and generate more value for the portfolio managers. Non-Profit wealth creation through social enterprise is viable and sustainable activity and can increase the overall well-being of the society while at the same time allowing asset managers to actually diversify their risks and also add more ethical investing and portfolio management orientation to the whole process of asset management. (Field, 2014) This paper will be focusing upon understanding the impact of non-profit wealth creation on the overall portfolio risk and return. This paper will further add on to whether the non-profit wealth creation will actually add more ethical orientation to the portfolio management or not. Social Enterprise Before discussing further, it is critical to actually develop comprehensive understanding of what a social enterprise is and how it operates and create value for all stakeholders. The overall concept and idea of a social enterprise existed for long however, it has recently gained more momentum with large organizations such as Dannon entering into joint ventures to form social enterprises. A social enterprise’s focus is on the use of commercial strategies and tactics to achieve more value and improvement in the human and environmental well-being. A social enterprise’s main objective therefore is not the maximization of the shareholders’ value or wealth but to help improve the environment and the human life. It is critical to understand that a social enterprise can either be for profit and non-profit therefore it is not necessary that a social enterprise should be a non-profit entity. Considering this flexibility, it is clear that a commercial and for-profit entity can also be operating as a social enterprise. The overall notion and the meanings developed out of the social enterprises differ from country to country. In United States, a social enterprise is mostly related with the concept of charity through trade i.e. social enterprise becomes an instrument through which the charity can be done. The overall cultural context of social enterprises therefore is essential in understanding as to how the social enterprises actually operate and are being managed across different cultures. Social enterprises often are either considered as part of the subgroup of organizations or a separate group itself. (Chowdhury) Over the period of time, social enterprises have been mostly modeled on the basis of the non-profit and charitable work. Their survival has been dependent upon social community as it from there they attracted the human as well as the social capital. Later emphasis however, has shifted towards the self-sustaining of such organizations and making them self-sustaining in a manner which can help them to evolve and develop in longer run. Over the period of time, social enterprises have also been considered as part of the third sector which existed alongside other systems of capitalism. Along with planned economy and private and profit oriented economy, there existed another system also which is called social economy. This social economy actually was based upon social businesses and social firms and community enterprises which attempted to produce social good and achieve the required degree of well-being in human life and the environment within which they live. It is also critical to understand that social enterprises are just one part of the social economy as social economy comprises of other organizations and entities also which are not directly related with the trade linked activities or which are not directly linked with the generation of profits for the wealth building or value creation. (Doherty, et al., 2009) Social enterprises traditionally operated to highlight deep societal issues such as hunger, environmental pollution or homelessness. Social enterprises traditionally have also provided other social goods such as education, basic medical services and other social care. However, recently, there has been a shift in the overall orientation of the social enterprises making them more of for-profit entities engaged into commercial activities also. The traditional streams of revenue of the social enterprises have been fees as well as government and public grants. Since the services delivered were mostly of social nature therefore the reliance was mostly on the revenues generated from different sources. However, later one, social enterprises have started to develop alternative revenue streams also and now are engaged into commercial activities. Organizations such as Save the Children are using auxiliary commercial activities to actually develop more streams of revenue. By selling shirts and other items of smaller value, these organizations focus upon generating more revenue to support their activities to become self-sustaining entities. These activities make social enterprises a new player in the commercial market wherein they compete at relatively lower level with the mainstream commercial entities also. The overall purpose of such activities is to actually reduce the dependencies of the social enterprises on their traditional sources of funding. Most of such organizations operate in areas where there is a direct link between the people, environment and the overall activities of the social enterprise. As such the nature of activities of such non-profit organizations restricts their abilities to develop a model of revenue which can help such organizations to surpass their traditional sources of funding and revenue. Some of the examples of activities performed by social enterprises include helping children with disabilities, providing vision glasses, fulfilling nutrition requirements of the children etc. (Bloom, & Skloot, 2010) More importantly, social enterprises are even commercializing their core programs to accomplish their overall objectives. The commercialization of the core activities of social enterprises makes it possible for the social enterprises to actually rely less on traditional form of revenues i.e. fees and grants but rather generate their revenue through contracts and fees obtained through sale of their core services and products. (Solomon, 2011) This gradual acceptance of the commercialization of the non-profit social enterprises has been made possible due to the global acceptance of capitalism as the dominating form of economic activity. There has been a widespread celebration of market-forces and how they can actually help to sustain the creation of wealth and generate more value for all stakeholders. The wealth creation of social enterprises is also attributed towards the notion of bringing in more efficiency within such enterprises and how such efficiency can actually transform into more wealth creation for such enterprises. The notion of efficiency is also critical from the perspective that the performance of social enterprises may not be up to the mark if there is a lack of commercial wealth creation in such organizations. For their long term survival and self-sustainability, it is more important to actually help social enterprises to become commercial oriented while at the same time maintaining their non-profit status. Another critical reason as to why social enterprises are engaging into non-profit wealth creation is the reduction in the overall dependencies of the people on the social enterprises. It is argued that offering free products and services may result into low self-esteem of the people receiving such products and services. As such offering them at low prices i.e. no loss no profit basis, it may not only boost the self-esteem of the people but will also result into increase in the revenue and profitability of social enterprises. Such increase in value will ultimately transform into more value for all stakeholders. Non-Profit Wealth Creation Non-profit organizations also require strategic management practices which can help them to remain as healthy and vibrant organizations. In order to remain healthy and vibrant, they require consistent streams of income while at the same time paying attention to the accounting standards implementation and the implementation of other financial management principals. The traditional portfolio management theory was introduced by Harry Markowitz who discussed the notion of risk and return and linked it with the overall portfolio diversification principles. The first principle that the average return of a portfolio is the average return of all the assets held under the portfolio emphasized that the expected returns can have a range of uncertainty and each security has a different range of uncertainty associated with it. Another important principle of portfolio management was that of the returns of the securities actually don’t move together. This reflects the overall risk of the portfolio and also indicates that the overall risk of the portfolio can be reduced through diversification. Though the principles of the portfolio management are being used in the modern investment practices however, the overall orientation of the portfolio managers in managing the non-profit organizations and earning returns on the assets held by these organizations differ from each other. The overall asset allocation strategies of the fund managers dealing with normal common assets and the assets of the non-profit organizations differ. Not only capital preservation is one of the main objectives of the portfolio managers but they also seek consistent returns on such investments also. (Field, 2014). One of the key differences between the non-profit social enterprises and other organizations is that of emphasis on the diversification. Fund managers maintaining the non-profit social enterprises funds tend to focus more on reducing the diversification rather than having well-defined liabilities. The endowment model, which is being used and followed by the non-profit social enterprises therefore focus more on generating returns from wider sources of assets including both the liquid as well as the illiquid sources of assets. The use of more illiquid investments and the alternative investments dominates the overall investment philosophy and value creation approaches of the non-profit social enterprises. It is also critical to note that the overall asset allocation decisions for the large as well as small social enterprises differ from each other. Fund managers often take different approaches when dealing with the decision of making asset allocation decisions for the large as well as small non-profit organizations. Further, the overall risk and return criteria are relatively same large as well as smaller organizations attempt to take different levels of risks according to the overall size of the funds. The overall return generated by these organizations is however, viewed from two different perspectives i.e. the social return on investments and the financial return. The financial returns on investment, historically, have been dominated by the prudence and hence more conservative approaches have been adapted however, with more risks taken, it is expected that the overall returns on investment would greatly increase. As the overall range of investments and the support received by the non-profit social enterprises differ from each other therefore the overall nature of the returns is relatively different too. When investments are made by the capital markets through equity investments in non-profit social enterprises, the overall focus is on generating more financial returns. However, the grants and other fees given to the non-profit social enterprises are largely focused upon generating more social returns. As such, non-profit organizations face a dilemma in terms of how to maintain the overall expectations of different stakeholders. (Yale, 2014) From the perspective of a portfolio manager, the overall focus is on generating more value through the investment rather than increasing the overall returns. By adapting a different strategy of achieving the diversification while earning relatively modest returns, portfolio managers attempt to achieve more value proposition through their investments in not for profit social enterprises. One of the best success stories of social enterprises delivering more value to all stakeholders while at the same time generating sufficient returns is that of the Grameen DANONE Foods Ltd which is operating in Bangladesh. The overall aim of this social enterprise is to fulfill nutritional deficiencies of many rural children in Bangladesh. This enterprise was based upon offering 1% dividend return to the stakeholders which it continued to provide till 2009 when the Board of Directors of Grameen DANONE waived all the monetary benefits to any stakeholder. As of now this enterprise works on the no loss, no dividend basis and is offering no returns to the stakeholders. (Yunus, 2007) Grameen Bank itself is the biggest example of how social enterprises can actually fulfill their objectives while at the same time earning reasonably well to generate returns and deliver more value. Though the overall size of profit of Grameen Bank is relatively low i.e. less than $1 Million however, it has been to achieve phenomenal growth in its overall asset size while its recovery rate of debts is one of the highest as it focuses on women while making any lending decisions. (GDRC) Since social enterprises are relatively low in numbers and most do not publish their annual financial statements therefore it may be relatively difficult to scrutinize the returns they offer however, considering their overall success in delivering social good, it is clear that most of such organizations are successful in achieving their overall objective. Conclusion Social enterprises are not a new phenomenon as they existed in one form or another since long. Their overall objective has been to serve the social good and improve the human and environmental well-being. By focusing on improving human life and help sustain the environment, social enterprises play important role which mainstream for profit organizations often fail to achieve. Most of the social enterprises operate on non-profit basis however; it does not mean that they do not engage into activities which generate more profit and revenue for them. Except few, most of the social enterprises actually engage into commercial activities in order to expand their sources of revenue and reduce their dependencies on the traditional sources of funding. The overall revenue generating activities therefore have been focused upon generating more resources to supplement the existing sources of funding. It is clear that social enterprises can generate profits and add more value for their stakeholders however; the traditional principles of asset management and portfolio risk may not be applicable on them. Traditionally such investments are held to diversify the risk and generate more value rather than expect higher rates of returns. Having investments in social enterprises also adds more ethical connotation to the overall investment philosophy of the fund managers also. Since the overall purpose of social enterprises is to improve human life therefore the overall wealth creation by such organizations invariably add more value for their shareholders in terms of the overall social returns achieved on such investments. Bibliography Bloom, P. N., & Skloot, E. (2010). Scaling Social Impact: New Thinking. Washington: Palgrave Macmillan. Chowdhury, F. L. (n.d.). The Business of 'Social Busines'. Dhaka: New AAGE. Doherty, B., Foster, G., Mason, C., Meehan, J., Meehan, K., Rotheroe, N., et al. (2009). Management for Social Enterprise. London: SAGE. Field, A. (2014, November 2). Investment Fund For Social Enterprises In Asia Targets Growth Capital Gap. Retrieved Feb 9, 2015, from Forbes: http://www.forbes.com/sites/annefield/2014/11/02/investment-fund-for-social-enterprises-in-asia-targets-growth-capital-gap/ GDRC. (n.d.). Summary Paper from the Grameen Support Group, Australia. Retrieved Feb 21, 2015, from GDRC: http://www.gdrc.org/icm/grameen-supportgrp.html Lyons, T. S. (2012). Social Entrepreneurship: How Businesses Can Transform Society [3 volumes]: How Businesses Can Transform Society. New York: ABC-CLIO. Solomon, L. D. (2011). Tech Billionaires: Reshaping Philanthropy in a Quest for a Better World. New York: Transaction Publishers. Yale. (2014). CAN PROFITS AND A SOCIAL MISSION CO-EXIST? Retrieved Feb 22, 2015, from Yale Insights: http://insights.som.yale.edu/insights/can-profits-and-social-mission-co-exist Yunus, M. (2007). Creating a World Without Poverty. New York: Public Affairs. Read More