Category Archives: Entrepreneurship

Instruments of Sustainable Entrepreneurship

Legal and regulatory requirements pertaining to sustainability are proliferating and consumers and other stakeholders are demanding information about sustainability-related issues and problems that go beyond that which may be required by governments.  For larger companies with complex supply chains, this means that they must establish procedures with their suppliers to ensure that they receive consistent data and then integrate that data into performance measurement and reporting tools that meet the needs and expectations of all stakeholders.  For smaller companies, many of which are part of the aforementioned supply chains, the pressures associated with dealing with complex social and environmental issues, including the demands of their larger customers, can create great stress given their limited financial and human resources.[1]

There is a continuously growing array of techniques and procedures that are available to promote sustainable entrepreneurship and provide companies with standards and guidelines they can follow in developing, implementing and monitoring their sustainable entrepreneurship initiatives.[2]  Crais and Vereeck noted that production standards focusing on measuring product quality and performance have been around for a long time and that it is relatively easy to measure whether or not a particular product complies with a standard.  The more difficult task is assessing processes that are thought to be necessary in order for sustainable entrepreneurship to be successful.  For example, while guidelines for human resources management, eco-design and management systems are available they are often criticized for being either too complex or too general and thus difficult to put into practice.

Other faults with process-focused standards are that it is hard to interpret results and make comparisons among companies and that “international standards” do not take into account differences in management norms among industries. As a result, simplified and “unofficial” versions of standards have been developed to make them more accessible and/or more specialized (e.g., an unofficial version of ISO 14000 was created for auditing the “working environment”) and different industries have adopted their own versions.  In spite of these problems, the topics covered by standards and certification programs continues to expand and now includes not only the traditional areas of product quality, environment and management but also social accountability, information security, ethical trade, equality in the workplace and fire prevention.[3]

Sustainability reports

The rise of interest in sustainable entrepreneurship has included sharper focus on measurement and assessment of the sustainability initiatives of companies and reporting and communication of the results of those assessments to the stakeholders of those companies.  Sustainability measurement, assessment, reporting and communication have become a well-studied phenomenon and approaches vary significantly.[4]  Each company must confront and attempt to overcome several basic challenges: how to measure and assess of the degree of environmental or social responsibility orientation in the company; identifying and describing the company’s environmental and social goals and policies, describing how the company’s environmental and social programs are organized and managed; and effectively describing and communicating the environmental and social issues the company is seeking to address.[5]  In addition, measurement of results outside of the traditional economic “bottom line” (i.e., profits and losses) remains a difficult and heavily debated issue: how can companies reasonably measure how socially responsible it has been throughout its operations and how can they measure how environmentally responsible they have been in carrying out their operations?[6]

A number of larger companies have published annual sustainability reports to inform their shareholders and other stakeholders of progress that has been made with respect to pursuit of organizational goals relating to sustainability and corporate social responsibility (“CSR”).  One basic reason for reporting is to make sure that sustainability and CSR initiatives are properly managed and that persons involved understand they will be accountable for their actions.  Other good reasons for reporting include giving interested parties (i.e., stakeholders) the information they need in order to make decisions about purchasing the company’s products and/or investing in the company (the level of funding from investors focusing their interest on ethical businesses is continuously increasing) or otherwise supporting the company’s community activities; collecting information that can be used to make changes and improvements to the company’s sustainability strategies and CSR commitments; improving internal operations; managing and reducing risks; and strengthening relationships with stakeholders.  However, in order to achieve the greatest benefits from reporting companies need to carry out those activities in a rigorous and professional manner using tools and standards that are widely recognized and accepted among those interested in the results.

The scope of the company’s reporting efforts will depend on various factors including the size of the company, the focus of its sustainability activities and the financial and human resources available for investment in reporting.  When establishing plans for reporting it is useful to obtain and review copies of reports that have been done and published by comparable companies.  Reports of larger companies are generally available on their corporate websites and extensive archives of past CSR-focused reports can be accessed through various online platforms such as CorporateRegister.com, a widely recognized global online directory of corporate responsibility reports.  It is also important to have a good working understanding of well-known reporting and verification initiatives such as the Global Reporting Initiative, commonly referred to as the “GRI Guidelines”; the AccountAbility AA1000 series; the United Nations Global Compact; and the International Auditing and Assurance Standards Board ISAE 3000 standard.  Country-specific information is also available through professional organizations such as the Canadian Chartered Professional Accountants, which has published an extensive report on sustainability reporting in Canada.

Smaller businesses generally do not have the resources to engage a professional auditor to collect the information normally seen in reports published by larger companies or prepare elaborate reports on their sustainability and CSR activities; however, small businesses can post information regarding their activities on their websites, communicate information to customers, suppliers and other business partners and community members by adding new sections to the company’s brochures and pamphlets and posting pictures of activities that can be viewed by visitors to the company’s facilities, and placing information into local newspapers.[7]  In addition, staff briefings on sustainability and CSR activities should be held on a regular basis and small businesses should also invite business partners and community members to events at the company’s facilities which showcase some of the things that the company is doing with respect to sustainability.

Audits

Environmental audits evaluate the organization as a whole and environmental management practices in particular.  The focus of environmental audits is on the organization’s environmental controls systems and includes areas such as competences, responsibilities, communication and education. The purpose and goal of the audit process is to objectively obtain and evaluate audit evidence to determine whether the organization’s environmental management system conforms to the audit criteria and then communicate the results of the audit to senior management of the organization.  The International Standards Organization (“ISO”) first developed standards for environmental auditing (i.e., ISO 14010, ISO 14011 and ISO 14012) in 1996 and the current standards are set out in ISO 14001.

While standardization has been the trend with respect to environmental audits, there are few generally recognized and accepted standards for conducting a social audit.  One notable exception is AA 1000, which is a framework for assessing, designing, implementing and communicating stakeholder engagement.  Crals and Vereeck described a social audit as the process by which an organization reflects on, measures, evaluates and reports on its social impact and ethical behavior and adjusts them according to its goals and values and those of its stakeholders.[8]  According to Borgo et al. the four key elements of an effective social audit are dialogue with the stakeholders; use of quantitative and qualitative performance indicators and benchmarks; external verification; and reporting of and communication about goals, efforts and results.  A social audit process requires the implantation of a social bookkeeping system that can be used to track performance indicators and benchmarks on metrics such as absenteeism, dismissals and resignations, labor accidents and total earnings.[9]

Regardless of whether a generally-recognized audit standard is used, the recommended audit process begins with the selection of an audit team and determination of the goals and purposes of the audit by the organization.  The preferred approach is for the audit team to be independent and not related to the organization or the activities that are being audited so that the audit can be conducted in an objective manner and free of conflicts of interest.  Successful audits require cooperation from the organization, access to sufficient information about the activities that are being audited and a systematic work process.  The work process includes standard procedures for gathering information, questionnaires and checklists that can be used for collecting information and conducting interviews and a mutual understanding between the audit team and the organization as to schedule for the audit and content of final report.  Audits can be time consuming and expensive, especially when the organization does not have a previous history of working with ISO and comparable standards.

Codes

Many large and well-known global companies have adopted corporate codes of conduct, which Crals and Vereeck described as statements of principles by which a business agrees to abide voluntarily over the course of its operation and which creates and continuously evaluates benchmarks for the senior management of the business.[10]  The first codes of conduct were a reaction to criticisms and protests from activist regarding perceived problems in the way that companies related to consumers and treated the environment in which they operated.  Companies implemented principles and guidelines relating to sourcing and operational practices; however, initial efforts were often vague, a problem that eventually led to creation of uniform codes.

Management systems

Crals and Vereeck defined a management system as the organizational structure, responsibilities, procedures, processes and operational duties necessary to carry out certain goals.[11]  While well-run companies have general management systems that address overall operational, financial and strategic management, sustainable entrepreneurship requires specialized management systems for setting and pursuing goals in areas such as environmental care, quality assurance and safety.  ISO 9001, the best-known quality management standard, have been available since the early 1990s and, as mentioned above, environmental audits have been facilitated by ISO 14001 and other standards relating to environment management systems. Social Accountability International has promulgated SA 8000 to assess social management systems and measure social performance against a range of indicators including the United Declaration of Human Rights, conventions of the International Labor Organization, United Nations and national laws and industry and corporate codes.

Organizations interested in improving their practices with respect to social responsibility, including engagement with their stakeholders, may also refer to International Standard 26000 (“ISO 26000”), which was first released by the International Organization for Standardization (“ISO”) in November 2010; however, ISO 26000 is not a management system standard, does not contain requirements and thus does not facilitate certification in the manner that often occurs with other ISO standards.  Instead, ISO 26000 explains the core subjects and associated issues relating to social responsibility including organizational governance, human rights, labor practices, the environment, fair operating practices, consumer issues and community involvement and development. For each core subject, information is provided on its scope, including key issues; its relationship to social responsibility; related principles and considerations; and related actions and expectations.  For example, with respect to labor practices, one of the core subjects, organizations are reminded to integrate consideration of the following issues into their policies, organizational culture, strategies and operations: employment and employment relationships; conditions of work and social protection; social dialogue; health and safety at work; and human development and training in the workplace.

Measuring Sustainable Business Practice

Organizations must have a method for measuring the sustainability of its business practices.  Companies are used to measuring financial results; however, it is only recently that focus has turned toward the development of tools for non-financial measurement of sustainability.  Larger organizations with sufficient resources are able to apply the sophisticated and comprehensive Global Reporting Initiative (“GRI”) Standards for sustainability reporting developed by GRI; however, startups may find this to be too much trouble and instead may create their own systems that include the following common areas for measurement:

Environmental Results 

·         Energy use

·         Materials use

·         Energy efficiency results

·         Carbon emissions

·         Emissions and waste (e.g. carbon emissions, water discharged, waste by type and disposal methods)

·         Water use

·         Product improvements to minimize environmental impact

·         Results of initiatives to mitigate negative environmental impacts

 Economic Results 

·         Standard entry level wage compared to minimum wage

·         Spending on locally based suppliers

·         Financial implications for the organization’s activities due to climate change

 Social Results (including ethical and cultural) 

·         Employee time donated to voluntary causes

·         Donations and in-kind support to community groups

·         Breaches of ethical behavior

·         Breaches of regulatory and/or legal compliance

·         Customer labeling

·         Customer health and safety

·         Stakeholder trust

·         Staff perception of the organization as a good citizen (i.e., an organization that behaves ethically and acts in an environmentally and socially responsible manner)

·         Specific engagement with indigenous peoples about matters of cultural significance to them

·         Results of initiatives to mitigate negative social impacts

·         Partnerships within the organization’s supply chain that are designed to improve industry environmental and/or social outcomes

It is important for organizations to carefully assess their operations in order to identify activities that have potential sustainability impacts.  Obviously, courier drivers produce carbon emissions from their vehicles and cheap, poorly designed products are like to increase natural resource waste due to their short life cycle; however, these are rarely the only sustainability impacts for an organization.  Other prompts for identifying key impacts that can and should be the targets for the organization’s sustainability initiatives include the following:

·         Significance to key stakeholders, including representative of future generations such as children of employees living in the community in which the company operates

·         Technical information, including environmental reviews and social impact reports

·         Review of current and potential sustainable development issues and trends that are of importance or potential importance to civil society, both from a risk and opportunity perspective (e.g., changing attitudes toward climate change that have created both new costs, including taxes and expenses associated with regulatory requirements, and opportunities to commercialize new product solutions)

·         Review of international good practice and consideration of issues that are being addressed by industry leaders in sustainable development and the organization’s peers

·         Impacts and issues that are identified in standards such as the Global Reporting Initiative, SA8000 and the UN Global Compact

Source: Sustainable Business: A Handbook for Starting a Business (New Zealand Trade and Enterprise). 

Sustainability communication

Racelis explained that the chief concern of “sustainability communication” is contributing to critical awareness of, and social discourse regarding, the issues and problems that arise with respect to the relationship between humans and their environment and then relating those issues and problems to social values and norms.[12] Racelis explained that sustainability communication is a process of communication and mutual understanding that deals with both the causes of global ecological dangers that lead to severe economic, ecological, social and cultural distortions and with the potential solutions to those problems.  Accordingly to Racelis, sustainability communication is necessary in order for humans to be able to assume their responsibilities and effectively reshape their relationships with one another and with the natural world.[13]  Racelis mentioned several methods and instruments for sustainability measuring, assessment and communication including environmental management accounting, social marketing, empowerment, instruments of participation and planning, and education.[14]

Labels

According to Crals and Vereeck, labeling is a means for companies to distinguish their products from others in a specific category.[15]  In order for a product label to have value, however, the criteria must be well-defined and transparent and should be set by independent labeling authorities.  In the environmental area, companies follow ISO-type standards in order to be able to market products that have been labeled as “environmentally friendly”.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship and Sustainability and Entrepreneurship.

Notes

[1] A. Racelis, “Sustainable Entrepreneurship in Asia: A Proposed Theoretical Framework Based on Literature Review”, Journal of Management for Global Sustainability, 2 (2014), 6 ((for discussion of environmental management accounting and supply chain management, see R. Burritt, S. Schaltegger, M. Bennett, T. Pohjola and M. Csutora, (Eds.), Environmental management accounting and supply chain management (London: Springer, 2011)).

[2] E. Crals and L. Vereeck, “Sustainable entrepreneurship in SMEs—Theory and Practice”, http://www.inter-disciplinary.net/ptb/ejgc/ejgc3/cralsvereeck%20paper.pdf [accessed July 18, 2016], 7-8.  For further discussion of certain of the instruments described herein,, see “Governance: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).

[3] Id. at 8 (citing M. Martensson, “Management systems, certificates, labelling: how many can a small company manage?”, in European Foundation for the Improvement of Living and Working Conditions, Sustainable Development, SMEs and New Enterprises (Conference Report)  (Luxembourg: Office for Official Publications of the European Communities, 2001), 10-11).

[4] J. Godeman and G. Michelsen (Eds.), Sustainability communication: interdisciplinary perspectives and theoretical foundations (London: Springer, 2011).

[5] S. Schaltegger and M. Wagner, “Sustainable entrepreneurship and sustainability innovation: categories and interactions”, Business Strategy and the Environment, 20 (2011), 222.

[6] A. Racelis, “Sustainable Entrepreneurship in Asia: A Proposed Theoretical Framework Based on Literature Review”, Journal of Management for Global Sustainability, 2 (2014), 3.

[7] P. Hohnen (Author) and J. Potts (Editor), Corporate Social Responsibility: An Implementation Guide for Business (Winnipeg CAN: International Institute for Sustainable Development, 2007), 72.

[8] Id. at 9.

[9] Id. (citing E. Borgo, B. Mazijn and S. Spillemaeckers, “Een integrale benadering van de ketenanalyse ten behoeve van ketenbeheer door bedrijven”, Gent: Centrum Duurzame Ontwikkeling (CDO) (2000), 46)

[10] Id. at 9.

[11] Id. at 10.

[12] A. Racelis, “Sustainable Entrepreneurship in Asia: A Proposed Theoretical Framework Based on Literature Review”, Journal of Management for Global Sustainability, 2 (2014).

[13] Id. at 5-6 (citing J. Godeman and G. Michelsen (Eds.), Sustainability communication: interdisciplinary perspectives and theoretical foundations (London: Springer, 2011)).

[14] Id. at 7.

[15] Id. at 10.

Definitions and Conceptualizations of Sustainable Entrepreneurship

Bell and Stellingwerf compiled what they considered to be a representative list of definitions of “sustainable entrepreneurship” that were suggested from 2003 through 2011, all of which are presented below in chronological order[1]:

  • “Innovative behavior of single or organizations operating in the private business sector who are seeing environmental or social issues as a core objective and competitive advantage”.[2]
  • “The continuing commitment by business to behave ethically and contribute to economic development, while improving the quality of life of the workforce, their families, local communities, the society and the world at large, as well as future generations. Sustainable Entrepreneurs are for-profit entrepreneurs that commit business operations towards the objective goal of achieving sustainability”.[3]
  • “The process of discovering, evaluating, and exploiting economic opportunities that are present in market failures which detract from sustainability, including those that are environmentally relevant”.[4]
  • “The examination of how opportunities to bring into existence future goods and services are discovered, created, and exploited, by whom, and with what economic, psychological, social, and environmental consequences”.[5]
  • “Create profitable enterprises and achieve certain environmental and/or social objectives, pursue and achieve what is often referred to as the double bottom-line or triple bottom line”[6]
  • “The discovery and exploitation of economic opportunities through the generation of market disequilibria that initiate the transformation of a sector towards an environmentally and socially more sustainable state”.[7]
  • “An innovative, market-oriented and personality driven form of creating economic and societal value by means of break-through environmentally or socially beneficial market or institutional innovations”.[8]
  • “Sustainable Entrepreneurship is focused on the preservation of nature, life support, and community in the pursuit of perceived opportunities to bring into existence future products, processes, and services for gain, where gain is broadly construed to include economic and non-economic gains to individuals, the economy, and society”.[9]

From their perspective, Bell and Stellingwerf believed that the definitions collectively identified four defining attributes of sustainable entrepreneurship[10]:

  • Balancing environmental and social concerns: Bell and Stellingwerf observed that sustainable entrepreneurship was “a balancing act of strategically managing and orienting environmental and social objectives and considerations, with entity specific financial goals steering the business objective” and that sustainable entrepreneurship required finding the right balance with the disparate economic, social, cultural and ecological environments in which businesses must operate.  They also noted that in the course of their efforts to limit and minimize the environmental and social impact of their activities sustainable entrepreneurs focused on improving the quality of their processes.[11]
  • Economic gains: Entrepreneurship, sustainable or otherwise, has making a profit as an essential characteristic and objective and the concept of “gain” can be found throughout the definitions reproduced above.  However, sustainable entrepreneurship is a based on a broad construction of gain that includes economic and non-economic gains to individuals, the economy and society.  Profits are recognized as being essential to sustaining the livelihood of businesses and providing entrepreneurs with the resources that are need for reinvestment in the sustainable goals of their companies.  Bell and Stellingwerf argued that entrepreneurial activities can only be labelled sustainable, and therefore satisfy sustainable development, if there is an equal blending of, and equal consideration for, each of the 3 P’s of the triple bottom line described above.[12]
  • Market failures and disequilibria: Half of the definitions reproduced above explicitly mentioned recognition and exploitation of opportunities caused by environmental and/or social imperfections and identification of opportunities has been a long-standing tenant of disruptive entrepreneurship.  Cohen and Winn argued that there are four types of market imperfections (i.e., inefficient firms, externalities, flawed pricing mechanisms and information asymmetries) that contribute to environmental degradation and provide opportunities for sustainable entrepreneurs to create radical technologies and innovative business models that can achieve profitability while simultaneously improving local and global social and environmental conditions.[13]
  • Transforming sectors toward sustainability: A number of theorists have argued that startups launched by sustainable entrepreneurs can solve sustainability-related problems through the introduction of innovative products, process and services and that the commercial success of these solutions, and accompanying support of professional investors and other influential stakeholders, can and will eventually influence incumbents to adopt similar solutions and otherwise take steps that will lead to the transformation of the entire industry toward sustainability.[14]  Under these theories, sustainable entrepreneurs make their impact by targeting market niches defined by a particular sustainability-related problem, generally introducing the radical changes that are outside the comfort zone of incumbents that prefer change to be incremental; however, Bell and Stellingwerf cautioned that research “in the field” lacked support.[15]

From all of this, Bell and Stellingwerf proposed their own definition of sustainable entrepreneurship as “startups that introduce an innovation, with the aim to solve a sustainability-related market failure, which initiates the transformation of an industry toward sustainability”.[16]  The “innovation” could take the form of a product, process or service and the sustainability objectives behind these innovations were equally important as the economic objectives associated with them.  The use of the term “startups” is intentional and significant as it explicitly differentiates sustainable entrepreneurship from the activities of established organizations, such as corporations, to address sustainable development issues in their environment (i.e., corporate-sustainability/CSR initiatives).

Rey synthesized the results of his review of various definitions of sustainable entrepreneurship as follows: “conducting business which commits to ethical standards and behavior, contributing to economic development, all the while maintaining a progressive upkeep of the well-being of society—including the labor-force and their families, their communities and the world on a whole, for the present and future inhabitants”.[17]  According to Rey, a sustainable company is one that operates in accord with the philosophy of the Brundtland Report while recognizing and balancing the economic, social and environmental aspects and impacts of their businesses.[18] Rey noted that “sustainable entrepreneurship may seem odd as entrepreneurship is principally associated with accomplishing certain goals while maximizing profits in the most efficient way possible” and entrepreneurs who are focused on projecting a sustainable outlook for their business will likely stray from profit maximization due to the added costs of sustainable goods and practices that traditional entrepreneurs are able to avoid by simply going for the cheapest alternative.[19]

Rey noted that while CSR is often compared to sustainable entrepreneurship, he believed that there are significant differences between the two concepts.  Most importantly, according to Rey, CSR is primarily concerned with the actions of corporations that have been operating for a significant period of time and which have reached a certain size and determined that they have a responsibility, beyond the traditional profit-making objectives, to be more aware of their external environment and stakeholders and find ways to give back to their local communities beyond their mandatory legal obligations.  While these initiatives are generally welcomed, they typically lack certain core characteristics of sustainable entrepreneurship such as offering environmentally-friendly products and services and making changes to internal operations of the company to bring sustainability practices to personnel matters and production processes.[20]

Muñoz observed that the specific form of entrepreneurship engaged in by sustainability-driven enterprises is about simultaneously achieving three objectives (i.e., social, environmental and economic), while committing to securing the economic welfare and social well-being of future generations and ensuring a long-term sustainability of the environment.[21]  He then went on to propose that sustainable entrepreneurship should be defined and conceptualized as being “focused on pursuing business opportunities to bring into existence future products, processes and services, while contributing to sustain the development of society, the economy and the environment and consequently to enhance the well-being of future generations”.[22]  From this definition it is possible to identify certain central factors that sustainable entrepreneurs need to consider in developing and executing their business models: integrating environmental best practices and protection into all business activities; social justice; economic prosperity for investors, entrepreneurs and economies; improving the well-being of communities; and intra and intergenerational equity.[23]  Muñoz pointed out that his definition acknowledged and integrated constructs from both sustainable development and entrepreneurship literature, a path also taken by Shepherd and Patzelt’s opinion that the practice of sustainable entrepreneurship called for sustaining and developing three constructs informed by sustainable development literature (i.e., sustain nature, life support systems and communities) and three constructs informed by entrepreneurship literature (i.e., develop economic gains, non-economic gains to individuals and non-economic gains to society).[24]

Racelis used the term “authentic sustainable entrepreneurship” to describe the situation “when the economic, environmental, and social motives come together in the business action of the entrepreneur, along with the internalization of the fiduciary, stewardship, and moral responsibilities to future generations”.[25]  Racelis went on to suggest that the specific normative elements that should be found in the activities of the authentic sustainable entrepreneur should include “production of socially desirable products in a socially desirable manner, and advancement of the health and well-being of those affected by such, all within a values-driven framework”.[26]  Racelis pointed out that sustainable entrepreneurship is a model of entrepreneurship that enables founders to seize opportunities relating to environmental and social degradation which are created by market imperfections (e.g., inefficient firms, externalities, flawed pricing mechanisms, and information asymmetries) to obtain entrepreneurial rents while simultaneously improving social and environmental conditions both locally and globally.[27]  Racelis argued that the core motivation for sustainable entrepreneurs is to “contribute to solving societal and environmental problems through the realization of a successful business”, while their main goal “is to create sustainable development through entrepreneurial corporate activities”.[28]

Another important implicit condition for sustainable entrepreneurship is the capacity of the venture to survive, develop and grow.  Rey referred to this condition as “viability” and emphasized that a sustainable entrepreneurial company must, at a minimum, cover all costs, enjoy continuous growth in size and output, make a positive return on turnover and, fundamentally, “remain out of financial danger for years”.[29]  In other words, the company must seek and achieve long-term sustainability in order to successfully pursue and achieve its goals and purposes and provide prospective stakeholders, including employees, with security that their contributions to the enterprise will be product value over an extended period.

Build Lasting Visionary Companies—Habits of Sustainable Entrepreneurs

Writing in the early 1990s, a time when management books had become somewhat of a fad, Collins and Porras claimed that they were doing something different in their best-selling book Built to Last: Successful Habits of Visionary Companies.  They weren’t writing about charismatic visionary leaders, visionary product concepts or visionary market insights, and reminded readers that all leaders eventually die, all products become obsolete and all markets mature.  Instead, they believed that one of the most important economic challenges and issues was figuring out how to build enduring “visionary companies” that met the following criteria: a premier institution in their industry that was widely admired by knowledgeable businesspeople; a company that had made an indelible imprint on the world; and a company that had been in business for at least 50 years and gone through multiple generations of chief executives and multiple product (or service) life cycles. Collins and Porras tackled two fundamental and difficult questions: “What makes the truly exceptional companies different from the other companies?” and “Is it possible to discover the timeless management principles that have consistently distinguished outstanding companies and which apply over long stretches of time and across a wide range of industries?” Based on their extensive research, Collins and Porras argued that such timeless management principles did exist and can and should be applied by managers, CEOs and entrepreneurs all over the world to create their own visionary companies and effectively practice sustainability leadership.

In Built to Last and other articles regarding their research, Collins and Porras listed and described at least ten management principles they had identified from looking at both companies that they believed had achieved visionary status and at comparison companies which, while “born in the same era, with the same market opportunities, facing the same demographics, technology shifts, and socioeconomic trends”, had been less successful.  Of those principles the authors felt that four of them stood out—“be a clock builder—an architect—not a time teller; embrace the ‘Genius of the AND’; preserve the core/stimulate progress; and seek consistent alignment”—and most of the book was about explaining and illustrating each of these concepts.

For example, the authors explained that “[h]aving a great idea or being a charismatic visionary leader is ‘time telling’; building a company that can prosper far beyond the presence of any single leader and through multiple product life cycles is ‘clock building’”.  Embrace the “Genius of the And” meant that visionary companies had “the ability to embrace both extremes of a number of dimensions at the same time” such as having a purpose beyond profit while engaging in the pragmatic pursuit of profit.  Preserve the Core and Stimulate Progress meant that “[a] visionary company carefully preserves and protects its core ideology, yet all the specific manifestations of its core ideology must be open for change and evolution”.  Finally, visionary companies achieved alignment by making sure “that all the elements of a company work together in concert within the context of the company’s core ideology and the type of progress it aims to achieve”.  On a day-to-day basis, alignment met making sure companies didn’t adopt incentive systems that rewarded behaviors that were inconsistent with the company’s core values or policies and procedures that inhibited change and improvement.

As mentioned above, Collins and Porras identified and followed pairs of companies, 18 in all, over a long period of time in order to identify those capable of achieving enduring success and not get caught up celebrating a company that may have had just one or two moments of good fortune.  It was interesting that more often than not the comparison company had greater initial success during the entrepreneurial phase than the visionary company.  While all of the pairs were used to illustrate the four key concepts mentioned above, let’s look at just three examples starting with Hewlett-Packard (a visionary company founded in 1937) and Texas Instruments (the comparison company founded in 1930).  HP was consistently applauded by the researchers as an example of the clock-building orientation and the researchers noted that it was telling that when Dave Packard, one of the HP founders, was asked about which product decisions were most important to the growth of the company his response completely ignored specific products and focused on organizational decisions that are so much a part of clock-building: “developing an engineering team, a pay-as-you-go policy to impose fiscal discipline, a profit-sharing program, personnel and management policies [and] the ‘HP Way’ philosophy of management”.  The researchers also praised Packard as a strong example of understanding “Genius of the AND” in the way that he and his company simultaneously pursued “profit and purpose beyond profit”.  In order to illustrate their point the researchers provided a quote from a presentation that Packard made to HP personnel who would be responsible for management development training which included the following: “I want to discuss why a company exists in the first place.  In other words, why are we here?  I think many people assume, wrongly, that a company exists simply to make money.  While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being . . . The real reason for our existence is that we provide something which is unique [that makes a contribution].”  In contrast, the researchers “could find not one single statement that TI exists for reasons beyond making money”.  HP also received high marks with respect to the way it aligned its practices and policies with its “lofty values and aspirations” by finding ways to show respect for its employees, reinforce the importance of technological contribution, promote an entrepreneurial environment and “immerse employees in the tenets of what became known as the ‘HP Way’”.

A second pair of twins was Wal-Mart (a visionary company founded in 1945) and Ames (the comparison company founded in 1958).  The researchers complimented legendary Wal-Mart founder Sam Walton for implementing “concrete organizational mechanisms to stimulate change and improvement” and noted that he “concentrated on creating an organization that would evolve and change on its own”, each of which were consistent with clock building.  Walton also knew the importance of succession planning to make sure that the company philosophies survived.  In contrast, “Ames leaders dictated all change from above and detailed in a book the precise steps a store manager should take, leaving no room for initiative” and the researchers noted that Ames had no succession plan in place and eventually management control fell into the hands of outsiders with no ideas about the philosophies of the founders.

A third pair of twins was Walt Disney (a visionary company founded in 1923) and Columbia Pictures (the comparison company founded in 1920).  With respect to clock building the researchers judged Harry Cohn, one of the founders of Columbia to be a complete failure who “cared first and foremost about becoming a movie mogul and wielding immense personal power in Hollywood and cared little or not at all about the qualities and identify of the Columbia Pictures Company that might endure beyond his lifetime.”  On the other hand Walt Disney spent every moment from the day that he founded the company to the day that he died thinking about future ways that the company could make people happy.  Disney was also praised for its efforts to institutionalize its core technologies while simultaneously maintaining ongoing efforts to stimulate progress and the researchers took particular note of how Disney developed a cult-like culture through “intensive screening and indoctrination of employees”.  For its part, Columbia, like Ames, was criticized for its neglect of investments for long-term growth and failure to invest in employee recruiting, training and professional development.  Today Disney remains an important force in entertaining children and adults all around the world while Columbia, lacking a strong heritage or reasons to exist beyond its cash and assets, ceased to exist as an independent company.

As to how the research they conducted twenty years ago might relate to the future, such as today, Collins and Porras predicted that clock building would become even more important as ideas, products and markets became obsolete more quickly due to “accelerating rate of technological change, increasing global competition and dramatically shorter product life cycles”.  They also thought that preserving the core/stimulating progress would become more important as companies became “flatter, more decentralized, more geographically dispersed” and workers became more knowledgeable and seek more and more individual autonomy.  In other articles Collins talked about how the work done to write Built to Last might be helpful in understanding dramatic and seemingly sudden failures of high flying companies like we seen so often recently and mentioned the dangers of “hubris born of success” and undisciplined and reckless pursuit of more success—more money, larger size, more celebrity.  The stories collected, and lessons learning, in creating Built to Last should be useful for the current crop of celebrity companies such as Facebook, Google, Amazon and Apple that have been so successful in their start-up phase, but must now settle in for the long haul of decades of ups and downs before they are eligible for entering the visionary class.  The founders and other leaders of these companies have often spoken of their intent to achieve and sustain long-term greatness and impact.  Perhaps the trials and triumphs of the legendary sustainable entrepreneurs from the past, such as Packard, Walton and Disney, can be valuable teaching tools.

Sources: J. Collins and J. Porras, Built to Last: Successful Habits of Visionary Companies (New York: HarperBusiness, 1994); J. Collins, “Building Companies to Last”, INC. Special Issue—The State of Small Business (1995); and J. Collins, “How the Mighty Fall: A Primer on the Warning Signs”, Businessweek (May 2009). 

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on Entrepreneurship and Sustainability and Entrepreneurship.

Notes

[1] J. Bell and J. Stellingwerf, Sustainable Entrepreneurship: The Motivations & Challenges of Sustainable Entrepreneurs in the Renewable Energy Industry (Jonkoping, Sweden: Jonkoping International Business School Master Thesis in Business Administration, 2012), 13-14.

[2] A. Gerlach, “Sustainable Entrepreneurship and Innovation”, in: University of Leeds: The 2003 Corporate Social Responsibility and Environmental Management Conference (Leeds, UK: University of Leeds, 2003), 101, 103.

[3] E. Crals and L. Vereeck, “The affordability of sustainable entrepreneurship certification for SMEs”, International Journal of Sustainable Development and World Ecology, 12 (2005), 173.

[4] T. Dean and J. McMullen, “Towards a theory of Sustainable Entrepreneurship: Reducing environmental degradation through entrepreneurial action”, Journal of Business Venturing, 22 (2007), 50, 58.

[5] B. Cohen and M. Winn, “Market imperfections, opportunity and Sustainable Entrepreneurship”, Journal of Business Venturing, 22(1) (2007), 29, 35.

[6] D. Choi and E. Gray, “The venture development process of “sustainable” entrepreneurs”, Management Research News, 31(8) (2008), 558, 559.

[7] K. Hockerts and R. Wüstenhagen, “Greening Goliaths versus emerging Davids – Theorizing about the role of incumbents and new entrants in Sustainable Entrepreneurship”, Journal of Business Venturing, 25 (2010), 481, 482.

[8] S. Schaltegger and M. Wagner, “Sustainable Entrepreneurship and Sustainability Innovation: Categories and Interactions”, Business Strategy and the Environment, 20 (2011), 222, 224.

[9] D. Shepherd and H. Patzelt, “The New Field of Sustainable Entrepreneurship: Studying Entrepreneurial Action Linking “What is to be Sustained” with “What is to be Developed””, Entrepreneurship Theory and Practice, 35(1) (2011), 137, 142.

[10] J. Bell and J. Stellingwerf, Sustainable Entrepreneurship: The Motivations & Challenges of Sustainable Entrepreneurs in the Renewable Energy Industry (Jonkoping, Sweden: Jonkoping International Business School Master Thesis in Business Administration, 2012), 14-17.

[11] D. Choi and E. Gray, “The venture development process of “sustainable” entrepreneurs”, Management Research News, 31(8) (2008), 558.

[12] J. Bell and J. Stellingwerf, Sustainable Entrepreneurship: The Motivations & Challenges of Sustainable Entrepreneurs in the Renewable Energy Industry (Jonkoping, Sweden: Jonkoping International Business School Master Thesis in Business Administration, 2012), 15.

[13] B. Cohen and M. Winn, “Market imperfections, opportunity and Sustainable Entrepreneurship”, Journal of Business Venturing, 22(1) (2007), 29.  See also T. Dean and J. McMullen, “Towards a theory of Sustainable Entrepreneurship: Reducing environmental degradation through entrepreneurial action”, Journal of Business Venturing, 22 (2007), 50, 58 (“Environmentally relevant market failures represent opportunities for simultaneously achieving profitability while reducing environmentally degrading economic behaviors.”).

[14] See, e.g., K. Hockerts and R. Wüstenhagen, “Greening Goliaths versus emerging Davids – Theorizing about the role of incumbents and new entrants in Sustainable Entrepreneurship”, Journal of Business Venturing, 25 (2010), 481, 482.

[15] J. Bell and J. Stellingwerf, Sustainable Entrepreneurship: The Motivations & Challenges of Sustainable Entrepreneurs in the Renewable Energy Industry (Jonkoping, Sweden: Jonkoping International Business School Master Thesis in Business Administration, 2012), 17.

[16] Id.

[17] L. Rey, Sustainable Entrepreneurship and its Viability (Rotterdam: Master Thesis for MS in Entrepreneurship, Strategy and Organizations Economics from Erasmus School of Economics, December 2011), 12.

[18] Id.

[19] Id. at 9.

[20] Id.

[21] P. Muñoz, “The Distinctive Importance of Sustainable Entrepreneurship”, Creativity, Innovation and Entrepreneurship, 2(1) (November 2013) (citing W. Young and F. Tilley, “Can businesses move beyond efficiency? The shift towards effectiveness and equity in the corporate sustainability debate”, Business Strategy and the Environment, 15(6) (2006), 402).

[22] Id.

[23] Id. (citing S. Dresner, The Principles of Sustainability (2nd Edition), (London: Earthscan, 2008); and W. Beckerman, “Sustainable Development and Our Obligations to Future Generations”, in A. Dobson (Ed.) Fairness and Futurity: Essays on Environmental Sustainability and Social Justice (Oxford: Oxford University Press, 1999), 71.

[24] D. Shepherd and H. Patzelt, “The new field of sustainable entrepreneurship: studying entrepreneurial action linking ‘what is to be sustained’ with ‘what is to be developed’”, Entrepreneurship Theory and Practice, 35(1) (2011), 137.

[25] A. Racelis, “Sustainable Entrepreneurship in Asia: A Proposed Theoretical Framework Based on Literature Review”, Journal of Management for Global Sustainability, 2 (2014), 4.

[26] Id. (citing S. Hodgkin, Business social entrepreneurs: working towards sustainable communities through socially responsible business practices (Master’s thesis, University of Calgary, Calgary, Alberta, Canada, 2002)).

[27] Id. (citing T. Dean and J. McMullen, “Toward a theory of sustainable entrepreneurship: reducing environmental degradation through entrepreneurial action”, Journal of Business Venturing, 22 (2007), 50).

[28] Id.

[29] L. Rey, Sustainable Entrepreneurship and its Viability (Rotterdam: Master Thesis for MS in Entrepreneurship, Strategy and Organizations Economics from Erasmus School of Economics, December 2011), 14.

Differentiating Between Commercial and Social Entrepreneurship

Austin et al. surveyed various definitions of social entrepreneurship and observed that they ranged from broad to narrow.[1]  Among the broader definitions are those see social entrepreneurship as an “innovative activity with a social objective in either the for-profit sector, such as in social-purpose commercial ventures[2] or in corporate social entrepreneurship[3]; or in the nonprofit sector, or across sectors, such as hybrid structural forms which mix for-profit and nonprofit approaches[4]”.  A much narrower definition focuses on “applying business expertise and market-based skills in the nonprofit sector such as when nonprofit organizations develop innovative approaches to earn income”.[5]  Austin et al. noted that the common factor across all the definitions of social entrepreneurship appears to an underlying drive “to create social value, rather than personal and shareholder wealth”[6], and that the activities of the social entrepreneur could be characterized as innovative (i.e., the creation of something new rather than simply the replication of existing enterprises or practices).  For themselves, Austin et al. defined social entrepreneurship as “innovative, social value creating activity that can occur within or across the nonprofit, business, or government sectors”.[7]

As noted above, Austin et al., as well as others, acknowledge that social entrepreneurship can be practiced in multiple sectors using different organizational forms and the decision as to form depends, among other things, on the objective of the activity and the optimal strategy for mobilizing the required resources.  Austin et al. focused their interest on the nonprofit and business sectors and on differentiating between “commercial entrepreneurs” and “social entrepreneurs” through the examination of four fundamental theoretical propositions: 

  • Market failure: Market failure creates different opportunities for commercial and social entrepreneurs. For example, commercial entrepreneurship may not be a viable option when commercial market forces do not meet a social need (e.g., public goods or situations where the customers needing a product or service are not able to pay).  In these situations, social entrepreneurs may see an opportunity where commercial entrepreneurs only see problems in achieving their economic objectives.
  • Mission. Differences in mission are a fundamental distinguishing factor: “the fundamental purpose of social entrepreneurship is creating social value for the public good, whereas commercial entrepreneurship aims at creating profitable operations resulting in private gain”. This is not to say that social entrepreneurs do not seek, or cannot obtain, profits, nor does it mean that products and services created by commercial entrepreneurs do not have some social value.  The key point is that differences in mission will likely manifest itself in multiple areas of enterprise management and personnel motivation.
  • Resource mobilization. Commercial and social entrepreneurs face different challenges with respect to financial and human resource mobilization that causes them to take fundamentally different approaches to managing their financial and human resources. For example, social entrepreneurs are largely restricted in their ability to tap into the same capital markets as commercial entrepreneurs due to the non-distributive restriction on surpluses generated by nonprofit organizations and the social purposes that are deeply embedded in social enterprises.  Social entrepreneurs may also find that their inability to compensate staff as competitively as in commercial markets makes it more difficult to recruit the talent needed in order for the venture to be successful and they must often rely on nonpecuniary compensation that is valued by people interested in working on social causes.
  • Performance measurement. Difficulties in measuring a social entrepreneur’s performance with respect to social impact are a distinguishing factor from commercial entrepreneurship and create complications for social entrepreneurs with respect to accountability and relations with stakeholders. Commercial entrepreneurs, and the stakeholders of such entrepreneurs interested in measuring their performance, have been able to rely on relatively tangible and quantifiable measures of performance such as financial indicators, market share, customer satisfaction, and quality. However, there is far from any consensus on measuring social change due to non-quantifiability, multi-causality, temporal dimensions, and perceptive differences of the social impact created.  Moreover, social entrepreneurs have a higher number and wider range of stakeholder relationships, thus increasing the time and effort that must be invested in managing those relationships.[8]

Austin et al. cautioned that the propositions were presently primarily to facilitate comparisons and that in reality one can find many social purpose enterprises that are quite similar to their commercial counterparts, particularly when the social purpose enterprise is engaged in operational activities that include development and sale of products and services that both meet a social need and generate revenues needed in order for the enterprise to remain viable and sustainable and attract financial and human resources.  In turn, many commercial enterprises have recognized that there are opportunities for enhancing their economic value by incorporate social purpose into their products, services and business practices, even if they have not wholly embraced “triple-bottom-line” accounting and reporting.

In order to test their propositions, Austin et al. compared commercial and social entrepreneurship using the “PCDO” analytical framework proposed by Sahlman based on four interrelated elements that are crucial for the management of entrepreneurial activity[9]:

  • People: This element  is defined as those who activity participate in the venture or who bring resources to the venture and includes both those within the organization and those outside the organization who must be involved in order for the venture to be successful.
  • Context: This element includes relevant factors that are generally outside of the control of the entrepreneur but which be expected to have an impact on his or her activities (e.g., the general economy, taxes and other regulations and the socio-political institutions in the areas in which the entrepreneur intends to operate).
  • Deal: The term “deal” to refer to the substance of the bargaining among participants in the venture that defines who among the participants in a venture gives what, who among the participants in the venture gets what, and how and when those deliveries and receipts will take place.
  • Opportunity: Austin et al. defined the term “opportunity” as “any activity requiring the investment of scarce resources in hopes of a future return”.[10]  The entrepreneur must have a vision of a future that is better for him or her and must also be able to develop and implement a credible path to change the current situation to that desired future state.

People and financial resources

Austin et al. observed that, in many ways, the human and financial capital inputs essential to the entrepreneurial venture are quite comparable between social and commercial entrepreneurship.[11] The “people” element of the PCDO model includes those actively participate in the venture or who bring resources to the venture and includes both those within the organization and those outside the organization who must be involved in order for the venture to be successful. This element includes not only the personal characteristics of the entrepreneur such as his or her skills, attitudes, contacts, goals and values, but also the cumulative skills, attitudes, knowledge, contacts, goals and values of all participants that provide the mix of resources that contribute to the success of the venture.  According to Austin et al., “both commercial and social entrepreneurs must consider the managers, employees, funders, and other organizations critical to their success, and how to capture this human talent for their ventures”.[12]  For social ventures there will be a need for board members, managers and staff who believe in the mission and who have the unique skills and talents to help the entrepreneur bring the mission alive.  To attract these human resources, social entrepreneurs must have a strong reputation that engenders trust among those who might be willing to work with them, a factor that is all the more important given that the social entrepreneur is asking contributor to invest their time in a cause rather than a commercial business that can be assessed using objective performance measures.

While social entrepreneurs have needs with respect to human resources that are similar to those of commercial entrepreneurs, social entrepreneurs are often unable to offer market rates to potential key hires and are generally not able to offer other incentives such as stock options unless they have elected to organize and operate their ventures using a for-profit organizational form.[13]  Because of these limitations, social entrepreneurs must develop different tools for motivating potential participants in the venture.  Social entrepreneurs also rely heavily on volunteers to serve in key positions, such as serving on the board of directors, and to carry out important activities such as fundraising, and working with volunteers creates special management issues that need to be understood and addressed by social entrepreneurs.  Issues relating to limited financial resources extend outside the organization also and many social entrepreneurs depend on the willingness of professional service providers such as lawyers and accountants to provide their service for free or at heavily reduced rates.

Austin et al. noted that while commercial entrepreneurs, once they have achieved a minimum level of economic success, will generally have access to capital from a range of investors and financial institutions offering a wide array of financing instruments and terms, social entrepreneurs have fewer channels for accessing unrestricted sources of capital and must also rely heavily on a range of funding sources such as individual contributions, foundation grants, member dues, user fees, and government payments.  Other unique issues that social entrepreneurs must confront is the need to be continuously engaged in some sort of fundraising activity given that revenues from operations rarely cover all of the costs associated with carrying out the organization mission and the lack of flexibility to shift the organization’s products or services quickly, as commercial entrepreneurs often do, to take advantage of new funding opportunities since such a transition will typically face opposition from participants who have become emotionally and psychologically invested in focusing on the current need or problem using the existing products and services.

Austin et al. concluded that while commercial and social entrepreneurs have similar needs with respect to human and financial resources, “social entrepreneurs are often faced with more constraints: limited access to the best talent; fewer financial institutions, instruments, and resources; and scarce unrestricted funding and inherent strategic rigidities, which hinder their ability to mobilize and deploy resources to achieve the organization’s ambitious goals”.[14]  While social entrepreneurship can be pursued using for-profit organizational forms, such a path creates challenges for social entrepreneurs with respect to maintaining a focus on the social mission while meeting the expectations of investors for economic returns.  Austin et al. advised that the constraints on their actions made it imperative for social entrepreneurs “to develop a large network of strong supporters, and an ability to communicate the impact of the venture’s work to leverage resources outside organizational boundaries that can enable them to achieve their goals”.[15]

Austin et al. also highlighted a specific managerial challenge for social entrepreneurs, namely the need to be able to manage “a wider diversity of relationships with funders, managers, and staff from a range of backgrounds, volunteers, board members, and other partners, with fewer management levers, as financial incentives are less readily available, and management authority over supporters, volunteer staff, and trustees is rather limited”.[16] In addition, social entrepreneurs must become adept at working collaboratively with other social entrepreneurs, for-profit businesses and governmental units to gain access to critical resources that the social entrepreneur cannot build and maintain on his or her own.  For example, social entrepreneurs will need to be able to work with outside for-profit vendors to develop information systems for communicating with members, volunteers and funders, and will need to have skills required to forge and maintain successful strategic alliances with corporate and governmental partners.[17]  Finally, Austin et al. suggested that it was important for social entrepreneurs to proactively participate in professional and sector-wide knowledge sharing networks in order to broaden their own skills and remained connected to ideas and talent available through other sector participants.

Austin et al. argued that social entrepreneurs needed to develop and remain intensely focused on their specific social value principal derived from scanning the context for opportunities and the availability of the human and financial resources necessary to achieve the greatest social impact.[18]  They cautioned social entrepreneurs about the dangers of becoming too obsessed on organizational aspects of their mission.  Austin et al. noted that it social entrepreneurs will naturally assume that the bigger the organization becomes, and the more resources it has at its disposal, the more effective it will be at creating social impact; however, many social entrepreneurs veer off track when furthering the organization becomes an end in and of itself.  Similar problems arise when social entrepreneurs are tempted to expand their mission beyond available resources.  Austin et al. pointed out that societal demand for social-value creation is enormous and social entrepreneurs will have more opportunities than they can possible handle.  As such, they need to pay careful attention to the scope of the opportunity that they can pursue effectively given the constraints on human and financial resources applicable to them.  Austin et al. also admonished social entrepreneurs to be open to working with complementary organizations outside of their own venture’s organizational boundaries to create social value and engage in networking activities with stakeholders in the relevant context to identify methods for collaborating with others in order to leverage resources that are outside of the social entrepreneur’s own organizational boundaries.

Context

The external context for entrepreneurship includes factors that are relevant to the conduct and outcome of the entrepreneurial activities but which are generally outside of the control of the entrepreneur.  Examples include the general economy, taxes and other regulations and the socio-political institutions in the areas in which the entrepreneur intends to operate. Specific contextual factors identified by Austin et al. included economic environment, tax policies, employment levels, technological advances, and social movements such as those involving labor, religion and politics.  All of these factors are important to both commercial and social entrepreneurs and all of them need to understand that context frames the opportunities and risks for every new venture and that they need to determine which factors must be consciously addressed from a strategic perspective and which are best left to play out as they will since the entrepreneur has limited time and ability to attend to everything that might have an impact on the venture.

A substantial amount of research has been conducted on the relationship between context and entrepreneurship generally and context and social entrepreneurship specifically.  For example, Meek et al. and Kerlin have argued that the incidence of environmental and social entrepreneurship in a given region or country is influenced by the broader institutional context (i.e., social norms and government incentives) and dominant socio-economic factors.[19]  Schick et al. contend that the most crucial factors relating to the success of ecopreneurial start-ups are the entrepreneur and the local culture.[20]  In their model for sustainability entrepreneurship, O’Neill et al. argued that various contextual factors materially influence the sustainability entrepreneurship process including regulatory, socio-cultural, place, macroeconomic, political, demographics, tax and environment[21].

Austin et al. explained the particular influence of various contextual factors on social entrepreneurs.[22]  For example, the philanthropic market that provides capital to social entrepreneurs is highly affected by economic activity: the philanthropic activities of for-profit organizations depend on the commercial success of their products and services, many non-profit endowment funds are invested in stock markets and the peaks and valleys of those market impact the amounts that funds are comfortable donating to social entrepreneurs and charitable contributions by individuals depend on their feelings about their level of discretionary income.  As for laws and regulations, Austin et al. stressed that social entrepreneurship will be impacted by laws regulating the tax-exempt status or operations of non-profits, tax policies that influence the amount of giving to the sector in which the social entrepreneur is operating, and specific political and social policies that affect the needs or resources available for certain types of issues most commonly addressed by social entrepreneurs (i.e., education, environment, health, and housing).  In addition, social entrepreneurs must be able to compete with other organizations in their own “industry” contexts for scarce resources needed in order to their ventures to be viable (e.g., philanthropic dollars, government grants and contracts, managerial talent, volunteers, community mindshare, political attention and clients or customers).

Austin et al. argued that while the critical contextual factors are analogous in many ways, the impact of the context on a social entrepreneur differs from that of a commercial entrepreneur because of the way the interaction of a social venture’s mission and performance measurement systems influences entrepreneurial behavior.  One difference cited by Austin et al. was the social entrepreneurs can, in many instances, achieve some degree of success with respect to their primary goal of social impact even in circumstances where the context would otherwise be inhospitable for commercial entrepreneurs.  For example, an economic downturn will generally make it difficult for commercial entrepreneurs to accumulate resources and identify viable economic markets; however, tough economic times intensify social needs and create opportunities for social entrepreneurs to take steps to meet those needs.  Social entrepreneurs can also make an impact with relatively small constituencies initially and then build on those successes to change the overall context by raising awareness and attention to a social issue and messaging about how they have been able to develop solutions that can be scaled with greater participation from others willing to join the movement.  Another factor mentioned by Austin et al. was that while the social marketplace does not reward entrepreneurs for superior performance as readily as commercial entrepreneurs are recognized in their marketplace, the marketplace for social entrepreneurship is more patient and is slow to punish inferior performance, perhaps because supporters of social entrepreneurs are most focused on their social mission and not as interested in emphasizing the same level of accountability and performance that is rigorously measured for commercial ventures.[23]

Austin et al. cautioned, however, that while the impact of contextual factors on social entrepreneurship is often ambiguous, perhaps causing social entrepreneurs to pay less attention to their operating context, they nonetheless should be doing appropriate monitoring of their context for opportunities and threats in order to develop an adaptive strategy that takes into account various contingencies.[24]   One obvious illustration of how monitoring can be important to a social entrepreneur is when it provide information about changes in direction and focus of philanthropic capital markets that can be used to identify useful new programs, fundraising strategies and potential alliances.

“Deal”

Austin et al. used the term “deal” to refer to the substance of the bargain that define who among the participants in a venture gives what, who among the participants in the venture gets what, and how and when those deliveries and receipts will take place.[25]  The deal emerges from a bargaining process that normally addresses topics such as economic benefits, social recognition, autonomy and decisions rights, satisfaction of deep personal needs, social interactions, fulfillment of generative and legacy desires, and delivery on altruistic goals.[26] Both commercial and social entrepreneurs need to engage in negotiations to create mutually beneficial contractual relationships (i.e., “deals”) with investors to gain access to financial resources and with potential participants with the skills and talent required in order for the venture to achieve its goals, whether economic or social.  However, according to Austin et al. the terms of these deals are fundamentally different for commercial and social entrepreneurs due to the way in which resources must be mobilized and because of the ambiguities associated with performance measurement.  Austin et al. explained specific differences with respect to so-called “value transactions” in the following areas[27]: 

  • Given the relative dearth of financial awards and incentives available to social entrepreneurs, they must rely more heavily on creative strategies that emphasize non-financial incentives in order to recruit, retain, and motivate staff, volunteers, members, and funders.
  • While commercial entrepreneurs are used to dealing with consumers with bargaining power, including the ability to switch their buying activities to competitors of the entrepreneur, social entrepreneurs are generally working with consumer with little or no economic capability and few alternatives for obtaining and consuming the products and services available from the social entrepreneur. While this certainly impacts the nature of the “deal” with consumers for social entrepreneurs, it does not mean that they operate without a market since they often must bargain with third-party payers and other sources of subsidy working on behalf of the ultimate consumers.
  • While commercial entrepreneurs have a wider range of financial deals to consider and generally can strike bargains with investors and other sources of financing that provide them with more flexibility and time to put the funds to good use, social entrepreneurs work with investors that provide capital that covers only a small portion of the needs of the venture and which will typically be exhausted with a short period of time.[28] As a result, according to Austin et al., “social entrepreneurs are thus required to spend a significant portion of their time, on an ongoing basis, cobbling together numerous grants, many of which come with spending restrictions and varied expectations of accountability, just to meet day-to-day operating costs”.
  • Striking a bargain with investors is complicated by the absence of an objective measure of performance similar to the economic returns and valuation metrics used in structuring deals for commercial ventures. Since the goal of social entrepreneurship is to have social impact, and the quantification or precise measurement of social impact is complicated, Austin et al. counseled social entrepreneurs to focus on, and be able to explain, their mission, theory of change and the process by which their social innovations will eventually have a social impact and generate superior social returns.

Austin et al. commented that social entrepreneurs face different challenge from their counterparts in the commercial sector when negotiating the terms of the deal with social investors and other looking to participate in the mission of the social entrepreneur.  Philanthropic funders and volunteers are less interested in the economic returns and incentives offered by commercial entrepreneurs and instead bring a different set of personal motivations and requirements that must be acknowledged and satisfied by social entrepreneurs.  For example, a donor may want a position on the board of directors, impose restriction on the use of the funds provided by the donor and/or require that the social entrepreneur provide reports on the use of the funds and the progress of the organization toward achieving the projected social impact.  The goals and requirements of various donors may sometimes be conflicting, add obligations to an already full agenda for the social entrepreneur and limit the social entrepreneur’s flexibility in allocating resources to reach organizational goals.  All this led Austin et al. to observe that “negotiating deals between the social entrepreneur and various resource providers that create alignment between goals and incentives is considerably more complex and challenging in social than in commercial entrepreneurship”.[29]

Opportunity

An entrepreneur sees an opportunity as a desired future state that is different from the present and which he or she believes is possible to achieve.  In order to exploit an opportunity in either the commercial or social sector, there must be an investment of scarce resources in hopes of a future return.  In general, both commercial and social entrepreneurs are concerned about customers, suppliers, entry barriers, substitutes, rivalry, and the economics of the venture; however, Austin et al. emphasized that a key difference between them is that commercial entrepreneurship focuses on economic returns while social entrepreneurship focuses on social returns.[30]  Austin et al. observed that “change” is generally difficult and it is challenging for both commercial and social entrepreneurs to bring followers together to agree on a common definition of opportunity and change that can be shared and used as motivation for joint action by the multiple constituencies that must work together in order to create change.  For example, change usually impacts power relationships, economic interests, personal networks, and even the self-image of participants.

In addition, the opportunities pursued by the two types of entrepreneurs vary due to fundamental difference in missions and response to market failure.  According to Austin et al., commercial entrepreneurship tends to focus on breakthroughs and new needs, whereas social entrepreneurship often focuses on serving basic, long-standing needs more effectively through innovative approaches, often when there has been some type of market failure that has caused commercial entrepreneurs to abandon attempts to service the need.  Austin et al. explained that commercial entrepreneurs are only interested in opportunities that involve a large, or growing total market size and the industry must be structurally attractive; however, social entrepreneurs are less concerned about market size so long as there is a recognized social need, demand or market failure.

Austin et al. observed that while commercial entrepreneurs often find it challenging to identify and capture opportunities that are unexploited, profitable and high-growth, social entrepreneurs usually have little problem finding unmet social needs or demands, particularly since they can either finance their activities through revenues generated from operations or, if necessary, turn to donors to provide capital in the event that the activity is not financial sustainable on its own (e.g., if the ultimate consumers are not able to cover enough of the costs of the goods or services for the social entrepreneur to “break even”).  While have so many opportunities would seem to be an advantage for a social entrepreneur, Austin et al. cautioned that the breadth and intensity of the needs among the consumers often propels social entrepreneurs into unexpected and rapid growth caused by pressures from funders, demand for their products or services, and the social entrepreneurs’ own conviction that growth is necessary in order for the organization to achieve the desired social impact.[31]

While growth due to acceptance in the marketplace fulfills the personal needs of social entrepreneurs and builds upon their values, such situations may lead to a crisis for the social entrepreneur if expansion comes before he or she has had a change to make plans on how to manage the pace of growth.  Austin et al. advised that social entrepreneurs need to realize that they have great latitude in the paths that they can choose to pursue their chosen opportunities and that there may be times when growth is not the best approach to take in order to achieve the goals of the organization or have greatest social impact.  Lack of financial resources is obviously one reason for not pursuing rapid growth; however, social entrepreneurs must also make a candid assessment of their organizational capacities with respect to human resources and the impact that growth might have on the quality of products and services the organization offers.

If growth is the preferred approach, the social entrepreneur must plan for a long-term growth strategy and avoid actions that needlessly squander the limited resources of the organization.  Social entrepreneurs also need to recognize that while they might be intrigued by scaling the organization directly, the more prudent approach is often partnering with other organizations to work together to disseminate social innovation.  While commercial entrepreneurs do partner with others in alliances to tap into needed resources, they are often reluctant to do so out of concern for losing control over their innovations and/or diluting their profits and market share.  These concerns are not relevant to social entrepreneurs who should be primarily interested in bring their innovations to the largest consumer group possible.  For example, a social entrepreneur may consciously limit the scope of products and services that his or her organization offers directly while partnering with other organizations that offer complimentary products and services and working with those partners to make it easy for the ultimate consumers to have all of their needs addressed seamlessly and efficiently.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship and Sustainability and Entrepreneurship.

Notes

[1] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[2] J. Dees and B. Anderson, “For-profit social ventures”, International Journal of Entrepreneurship Education (special issue on social entrepreneurship), 2 (2003), 1; and. J. Emerson and F. Twersky (Eds), New social entrepreneurs: The success, challenge and lessons of non-profit enterprise creation (San Francisco: Roberts Foundation, Homeless Economic Development Fund, 1996).

[3] J. Austin, H. Leonard, E. Reficco and J. Wei-Skillern, Corporate social entrepreneurship: A new vision of CSR. Harvard Business School Working Paper No. 05-021 (Boston: Harvard Business School, 2004).

[4] J. Dees, “The meaning of “social entrepreneurship”, Comments and suggestions contributed from the Social Entrepreneurship Founders Working Group. Durham, NC: Center for the Advancement of Social Entrepreneurship, Fuqua School of Business, Duke University (1998).

[5] T. Reis, Unleashing the new resources and entrepreneurship for the common good: A scan, synthesis and scenario for action (Battle Creek, MI: W.K. Kellogg Foundation, 1999); and J. Thompson, “The world of the social entrepreneur”, International Journal of Public Sector Management, 15(5) (2002), 412.

[6] S. Zadek and S. Thake, “Send in the social entrepreneurs”, New Statesman, 26 (1997), 31.

[7] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[8] See also R. Kanter and D. Summers, “Doing well while doing good: Dilemmas of performance measurement in nonprofit organizations and the need for a multiple-constituency approach” in W. Powell (Ed.), The nonprofit sector: A research handbook (New Haven: Yale University Press, 1997), 154.

[9] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1 (citing W. Sahlman, “Some thoughts on business plans”, in W. Sahlman, H. Stevenson, M. Roberts and A. Bhide (Eds), The entrepreneurial venture (Boston: Harvard Business School Press, 1996), 138); and P. van Eijck, Sustainable Entrepreneurship: Institutional profile and cross-country comparison Denmark & US and its Viability (Rotterdam: Bachelor Thesis in Entrepreneurship, Strategy and Organizations Economics from Erasmus School of Economics, January 2012).  For further discussion of the “PCDO” analytical framework, see “Research on Entrepreneurship” in “Entrepreneurship: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).

[10] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1,5 (citing W. Sahlman, “Some thoughts on business plans”, in W. Sahlman, H. Stevenson, M. Roberts and A. Bhide (Eds), The entrepreneurial venture (Boston: Harvard Business School Press, 1996), 138, 140).

[11] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[12] Id.

[13] S. Oster, Strategic management for nonprofit organizations: Theory and cases (New York: Oxford University Press, 1995).

[14] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[15] Id.

[16] Id.

[17] J. Austin, The collaboration challenge: How nonprofits and business succeed through strategic alliances (San Francisco: Jossey-Bass Publishers, 2000).

[18] Id.

[19] W. Meek, D. Pacheco and J. York, “The impact of social norms on entrepreneurial action: Evidence from the environmental entrepreneurship context”, Journal of Business Venturing [e-journal] 25(5) (2010), 493; and J. Kerlin, “A comparative analysis of the global emergence of social enterprise”, VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations [e-journal], 21(2) (2010), 162.

[20] H. Schick, S. Marxen and J. Freimann, “Sustainability issues for start-up entrepreneurs”, Greener Management International [e-journal] (38) (2002), 56.

[21] G. O’Neill, J. Hershauer and J. Golden, “The Cultural Context of Sustainability Entrepreneurship”, Greener Management International [e-journal] 55 (2009), 33.

[22] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[23] C. Letts, A. Grossman and W. Ryan, High performance nonprofit organizations: Managing upstream for greater impact (New York: Wiley, 1999).

[24] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[25] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[26] R Martin and S. Osberg, “Social entrepreneurship: The case for definition.” Stanford Social Innovation Review, Spring 2007, 28.

[27] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[28] C. Letts, A. Grossman and W. Ryan, High performance nonprofit organizations: Managing upstream for greater impact (New York: Wiley, 1999).

[29] J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[30] Adapted from J. Austin, H. Stevenson and J. Wei-Skillern, “Social and Commercial Entrepreneurship: Same, different, or both?”, Entrepreneurship Theory and Practice, 30(1) (2006), 1.

[31] Id. (citing J. Bradach, “Going to scale”, Stanford Social Innovation Review, 1 (2003), 18; S. Colby, N. Stone and P. Carttar, “Zeroing in on impact”, Stanford Social Innovation Review, 2 (2004), 24; and J. Dees, B. Anderson and J. Wei-Skillern, “Scaling social impact”, Stanford Social Innovation Review, 1 (2004), 24).

Founders’ Dilemmas

Even when armed with the most promising business idea, founders inevitably face a number of challenges from the moment they begin to consider whether or not to form a new company. Wasserman argued that founders must confront a number of “founders’ dilemmas” (see table below) that require difficult decisions with respect to relationships, roles and rewards and must also honestly assess their own goals and motivations for launching the company and make sure that the choices they make along the way remain aligned with those goals.[1]  Based on extensive research into decisions made by founders at the earliest stages of their new ventures Wasserman came up with the following observations and recommendations to guide founders through the process of deciding whether to launch a startup, forming a founding group, allocating duties and responsibilities, establishing reward systems and bringing on the human resources and investors necessary to stabilize and grow the business:

  • The first question for a prospective founder is whether or not it’s the right time in his or her career to launch a startup. The founder needs to be sure that he or she has the necessary passion and experience and that the market is ready to be receptive to the proposed product or service.
  • In addition to passion the founder needs to critically evaluate whether he or she has the requisite human, social and financial capital to successfully launch the business without the help of others. In order to “go it alone” a founder must be confident that he or she has expertise in multiple business and technical areas, sufficient capital to get through the start-up stage and strong connections in the relevant marketplace.  If any of these elements are lacking it may be necessary to seek out co-founders who can fill in the gaps.
  • When looking for additional founders make a conscious effort to achieve diversity in terms of background, age, experience and network connections. This not only broadens the collective skills set of the founding group it reduces the risk that the founders will run into conflicts when setting their roles and responsibilities.  Wasserman cautioned against turning to family and close friends, even if they have the right skills and share the same passion for the ideas and business model, and noted that research confirmed that mixing business with family and friendship too often led to conflict, tension and bad outcomes for both the company and the relationships.
  • Make sure that each of the members of the founding team are clear about expectations with regard to their roles, responsibilities and contributions and make sure there is an “exit plan” in place that clearly lays out the process for the departure of any of the founders before a problems arises. It is difficult to talk about “breaking up” before a relationship has really begun; however, the founders need to do it, preferably with input from experienced and independent outside advisors who can raise all the questions that the founders may be reluctant to ask.
  • Once the founding team has been formed the next step is to assign roles and responsibilities. While the founders may have roughly equivalent equity stakes in the new company and share similar passions about the projected products and services one of them will need to take on the role of chief executive officer, or “CEO”.  Wasserman recommended that the best candidate is the founder who is most invested in the start-up and notes that this may not necessarily be the founder who came up with the original idea upon which the start-up is based.
  • An effort should be made to create a clear division of labor among the members of the founding group so that all required activities are managed and overlap is reduced. Proper and clear differentiation of tasks facilitates accountability; however, Wasserman warned about inflexibility in assigning and changing roles and counseled that the founders need to strike the proper balance between division of labor on the one hand and tapping into the creativity that comes from collective work and collaboration.  Wasserman also cautioned about handing out titles among members of the founding group and it is important for all titles to be accompanied by a clear statement of duties and authority and expectations about how the holder of that title will interact and collaborate with the holders of other titles.
  • Selecting a CEO and assigning each of the founders one or more primary areas of responsibility are part of a larger process of developing a decision-making process among the founding team and the founders need to decide which issues will require debate among all of the founders and how those debates will ultimately be resolved. Wasserman noted that founding teams take a variety of approaches: some choose egalitarian systems in which each of the founders has an equal say and a unanimous vote is required and others prefer a more hierarchical approach.  Regardless of which method is used it is important for everyone to understand it in advance and to make sure that managers and employees outside of the founding group are aware of how the founders make their decisions.  Even if egalitarianism is not the rule the founders are well advised to communicate closely about decisions, seek inputs from all of the founders and make sure that all of the founders are aware of the substance of important decisions.
  • Even though a decision-making process is in place the founders need to anticipate the possibility of conflicts which if not addressed may ultimately threaten the viability of the entire venture. For example, even though the founders have agreed that all of them will be heard on every key issue one of the founders may begin to feel frustrated and alienated if decisions continue to go against him or her.  Similarly, a founder given a title that implies primacy in a particular functional area, such as marketing, may feel that the other founders are encroaching into his or her domain.  The founders need to have a plan for settling these fundamental disputes, often seeking support and guidance on substance and process from trusted outside advisors who are independent of the founders, and should also continuously assess responsibilities in key areas such as product development, sales, marketing and finance.
  • Wasserman recommended that the founders should address the touchy subject of rewards, including the allocation of equity, after they have thoroughly discussed the various issues described above with regard to relationships and roles and everyone has a better idea of how committed each founder will be to the venture and the relative value of each founder’s projected contribution to the new business. Wasserman noted that one of the most common problems among founder teams is an initial allocation of equal equity shares among all the members only to find out later that one or more of the founders is unable or unwilling to carry his or her weight or that his or her contribution is simply not as valuable as what is being provided by the other founders.
  • Founders have different appetites and expectations regarding the rewards associated with their involvement with a start-up and those need to be considered. Some founders are more interested in money and seeing the value of their equity stake increased as quickly as possible while others are more concerned about retaining control over the direction of the business and making sure that their voices are heard when decisions are being made.  All of this should be taken into account when allocating equity and assigning rights to the equity interests.
  • Founders were encouraged to include vesting provisions in the agreements covering the allocation of equity interests and Wasserman noted that vesting should not be construed as an indication of mistrust but simply as a convenient and realistic tool for making sure that expectations are met and that the founders have an objective means for dealing with unanticipated events such as an egregious failure to perform, a good faith dispute among the founders, the unexpected departure of one of the founders due to illness or death or the demands of outside investors for changes in the leadership group.
  • When establishing the reward systems and equity allocations among the founders consideration also needs to be given to what may be needed in the future to fill in gaps in skills of the members of the founding team and build out the business. If the founders know that large blocks of stock will be needed to bring in a more experienced CEO and/or build out a product development team this should be taken into account from the very beginning.  In addition, the founders should anticipate dilution by equity that will be sold to outside investors.

The observations and recommendations above pertain mostly to the pre-founding stage and the process of building and organizing a founding team; however, Wasserman noted that founders need to consider the steps that will have to be taken to find and attract skills and resources that the founding group does not have and which will be needed to grow the business.  The first set of dilemmas beyond the founding group were referred to as “hiring dilemmas” and included questions about what types of people should be recruited and hired to assist the founders and how those persons should be managed during the challenging and turbulent immediately following the launch of a new business.  Specific issues include establishing the duties and responsibilities of new hires and selecting the most effective way to compensate them in light of the risks involved.  A second set of dilemmas will become relevant when the founders need to approach investors to provide capital beyond the financial resources that the founders are themselves able and willing to contribute to the new venture.  Different types of investors will be available at various stages of the development of the company and each of them will have their own demands regarding their equity stake in the company and their ability to exert control over the actions of the founders.

Wasserman argued that it is extremely important for each founder to come to grips with what motivates him or her in taking on the rigors of starting up a new business and investing all the time and effort that will be needed in order to make it successful.  According to Wasserman, the two main types of motivation for founders are “control” and “wealth”.  Founders who are primarily motivated by control can be expected to proceed more slowly and cautiously in allowing outsiders to become involved with the company as co-founders, investors or employees and will seek to guard their ability to maintain control at each stage of the process of developing new products and services, expanding human resources and tapping into outside capital.  On the other hand, wealth-motivated founders are more open to any reasonable strategy for increasing the value of their ownership stake in the company and thus are more likely to aggressively pursue venture capital even at the risk of losing control of the board of directors and support bringing on experienced talent from outside of the original founder group who can accelerate the growth of the company even if that means that the founder’s own equity stake will be diluted.

Wasserman’s Founder’s Dilemmas

·         At what point in my career should I consider launching a startup?

·         Do I have requisite passion for my idea and the necessary career experience to effectively launch and guide a new business?

·         Are there any issues with my personal situation that may prevent me from fearlessly pursuing the new opportunity such as a lack of support from family or insufficient personal financing resources?

·         Is the market ready for and receptive to my business idea?

·         Should I launch the new business on my own or should I recruit co-founders?

·         If co-founders are needed how can I go about identifying appropriate candidates (e.g., friends, family, acquaintances, current or former co-workers, former classmates or strangers)?

·         What positions and responsibilities should each of the co-founders assumes with the start-up?

·         How should decisions be made among the members of the founding group (i.e., what decisions can be made along by one of the founders and which require consultation and how should the consultation and voting be conducted)?

·         How should equity and other financial rewards be allocated among the members of the founding group and what provisions should be made for vesting and repurchase of equity upon departure?

·         What types of human resources will be required at different stages of the company’s growth?

·         What special challenges will need to be taken into account for early hires and should they be treated differently than managers and employees hired later in the development of the company?

·         What types of investors should be approached at different stages in the development of the company and what challenges will be created for the founder group by introducing outside investors?

·         If I am to be the CEO of the company how do I feel about the possibility of being replaced as CEO by a “professional CEO” at some point in the future if required by investors or other stakeholders?

Note:  The questions above are adapted from N. Wasserman, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (Princeton, NJ: Princeton University Press, 2012), 8.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship.

[1] The discussion of Wasserman’s observations and recommendations in this section is based on material appearing in N. Wasserman, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup (Princeton, NJ: Princeton University Press, 2012).

Fundamental Questions Regarding Founders’ Relations

One of issues that the founders need to consider is the form of legal entity for operation of their new business venture (e.g., corporation, partnership or limited liability company); however, regardless of the form of entity selected the founders need to sit down and carefully discuss the relationship that will exist among the founders with respect to ownership and management of the business before outside investors are brought into the picture.  When properly done, the ownership structure will protect the rights of each founder while creating incentives to make the business grow well into the future.  The structure should always be flexible enough to adapt to future changes, including new employees and capital-raising from outside investors.  Among the questions that need to be asked are the following:

  • What percentage of the company will be owned by each founder?
  • What rights will each of the founders have with respect to the management and control of the company?
  • What tangible contributions (e.g., money, property, contract rights, etc.) will each founder make to the company and how will they be valued?
  • How much time will each founder be expected to devote to the business?
  • What incentives will be used to motivate each of the founders to remain actively involved with the business of the company?
  • What procedures should be followed when a founder dies, becomes disabled, reaches retirement age, or voluntarily leaves the company prior to retirement age?
  • What procedures should be followed to expel a founder from the company?
  • Are there other persons outside the founding group who are likely to become actively involved in the business of the company?

The founders may be more interested in spending time on developing their new products and services than on dealing with what can often be very difficult and divisive issues.  However, if these questions are not addressed at the beginning of the venture, it is likely that trouble will erupt down the road.

Allocation of ownership interests

In general, ownership determines how profits from the business will be shared and management rights will be exercised. Each form of business entity can be adapted so that certain founders enjoy greater economic rights as opposed to voting rights and vice-versa.  In dividing ownership, consideration should be given to all of the actual and potential contributions of the founders to the business.  For example, the founders may ascribe value to any or all of the following: cash and property contributed by the founders at the time that the new business is launched, including the costs to the founders of acquiring or developing the property; the value of anticipated future contributions by the founders, including cash, property, services, business development assistance, and introductions to business partners; and the opportunity costs to the founders of launching the new business.  Obviously, it is difficult to value several of these factors, particularly those which are speculative and depend on performance in the future.  However, it is important for each founder to believe that his or her contributions have been fairly recognized.  Professional advisors working with the founders of an emerging company will likely recommend that weight or credit should be given to discovery or conception of the ideas underlying the business; the time and effort expended in leading and managing efforts to promote those ideas; the level of financial and personal risk assumed in forming and launching the business; the amount of income foregone by forming the company and accepting a nominal or modest salary during the initial development period; the amount of effort spent in writing a formal business plan for the company; the specialized expertise contributed toward the development of new technology and/or products; and the background, training and experience that the founder expects to bring to crucial post-formation activities associated with the actual commercialization of the company’s technology or products.

In some cases, one of the founders of a new business may contribute intangible property and services while the other founders are providing the cash necessary to fund the development and marketing of the products based on the intangibles.  Since the founders may reasonably differ as to the value to be placed on the contributions of the non-cash participant, counsel must proceed carefully to make sure that the assets are fairly valued.  In that situation, counsel is faced with reconciling the following issues:

  • What method(s) should be used to value the intangible property and services be valued for purposes of determining the relative equity ownership of the business?
  • What obligations, if any, will be imposed on the parties to make additional capital contributions?
  • Who will own the rights to trade secrets, patentable, or copyrightable information? Will the founder retain ownership and license them to the entity, or will the entity own all the rights?
  • What obligations will be imposed on the “inventor” with respect to continued development of the intangible property?
  • Who will own the rights to the intangible property in the event the company merges or dissolves?

Another issue to keep in mind is the possibility that the relative ownership interests of the founders will be diluted by future events, such as the need to grant an ownership interest to new managers, key employees, and one or more groups of outside investors.  For example, a founding group looking for venture capital funding may discover that they will need to set aside 5%-10% of the equity for filling out the management team, 10%-20% of the equity for a pool of incentives for new employees, and 40%-60% of the equity for sale to the venture capitalists.

Transfer restrictions

It is typical for the founders to enter into various agreements that impose restrictions on their ability to free transfer ownership interests in the business.  First of all, vesting restrictions may be used to ensure that the founders remain with the company long enough to provide the anticipated value that was implicit in their ownership interest.  If an owner should leave the company before an interest has vested, the company and/or the other owners would have the right to acquire the ownership interest on favorable terms (e.g., at cost payable in installments over a period of time).  Once a founder’s rights in his or her ownership interest have vested, other restrictions would apply that limit the disbursement of control outside the original founder group while at the same time providing the founders with some opportunity to gain liquidity for their interests in the event they become dissociated with the company.

  • A right of first refusal provides the company and/or the owners with the first opportunity to purchase ownership interests that the founder wishes to sell to a third party. Such a provision can prevent the sale of ownership interests to outsiders and generally will substantially limit the transferability of the interests.
  • A buy-sell agreement restricts transfers of ownership interests by granting the company and/or the other owners the right to purchase the interest of an owner upon the occurrence of certain events, such as a proposed sale of the ownership interest to a third party, death or disability of the owner, termination of employment, bankruptcy, or divorce. Buy-sell agreements may also provide liquidity by requiring that the company and/or the other owners purchase the interest of the deceased or disabled owner.  Procedures for determining the value of an interest upon any required purchase and sale will be included in the agreement.
  • Co-sale agreements, which are often used when venture capitalists invest in the company, allow outside investors to sell their ownership interests at the same time that the founders sell their interests. A co-sale right often is coupled with a right of first refusal and thus allows the investors to choose between purchasing the founders’ interests or selling out on the same terms and conditions.

Management of the new business

Regardless of the consideration they provide for their ownership interests, the founders must consider potentially contentious matters relating to control of the business.  For example, decisions must be made regarding the voting rights of each of the founders and their power to control membership of the board of directors or other management body.  The key issues to be considered include the following:

  • What voice will each founder have in the election of the members of the managing body, such as the board of directors?
  • Who will be responsible for the day-to-day operations of the business (e.g., officers of the corporation)?
  • What level of consensus among the founding group will be required for major transaction, such as sale or merger of the company, major debt financings, and issuances of securities?
  • What are to be the terms of any employment agreements between the company and the founders, including the amount of salary and other benefits to be paid to owners who are to be active in the business?
  • What procedures should be used to resolve any disputes among the members of the founding group?
  • How are the members of the founding group going to participate in the profits generated by the business?
  • What restrictions should be placed on the outside activities of the founder, as well as their ability to transfer their ownership interests in the company?

The founders will often turn to an attorney to assist them in considering these issues and documenting their decisions.  Counsel needs to be aware that the negotiation and drafting of an owners’ agreement will often lead to conflicts of interest such that the attorney cannot represent the founders concurrently.  Even if all sides are properly informed of potential conflicts and grant the appropriate waivers, counsel still walks a fine line since it may be impossible to anticipate all the conflicts that might ultimately arise in the future.  Accordingly, the attorney should be ready to prepare some form of disclosure letter and obtain a waiver of potential conflicts from each of the founders.  If the founders are unwilling to waive the conflicts, separate counsel should be retained.

The members of the founding group should enter into an agreement among themselves as to how the company will be operated.  In the corporate context, such an agreement is generally referred to as a pre-incorporation or shareholders’ agreement.  In the case of a partnership or an LLC, the matters are typically covered in a separate part of the partnership agreement or operating agreement, respectively.  In some cases, the founders will address these issues before the entity is formed in some type of pre-formation agreement.  This can be a useful exercise since it can give the founders a good idea of whether they will be able to live and work with each other before they incur the additional expense of actually forming the entity. Voting agreements are often used to establish procedures for making decisions regarding important matters relating to the business.  In the case of a corporation, voting procedures may be laid out in a separate shareholders’ or voting agreement.  Voting provisions for partnership and limited liability companies are set out in the partnership or operating agreement, respectively.  The founders may elect to cover a variety of matters in the voting agreement, including the vote required to elect the managers of the company and approve fundamental changes in the business, including a sale of the company or its assets, significant borrowings, and admission of new owners.  Transactions between the company and one of the owners may also be subject to special approval procedures.  Whenever an owners’ agreement is implemented, an evidence of an ownership interest (e.g., a share certificate) should include a legend that notifies third parties of the existence of a restriction on the rights of the owners with respect to transfers or exercise of economic or control rights.

Employment agreements

Some or all of the members of the founding group may also enter into employment agreements with the company that describe their duties and responsibilities with the company, the terms of compensation for their services and, perhaps most importantly, the rights and obligations of the company and the founder upon termination of the founder’s employment relationship with the company.  Employment agreements are often valuable to founders who hold a minority ownership interest in the equity of the company who seek protection against the possibility that they will be discharged by some concerted action of the majority owners.  In addition, however, employment agreements can serve a number of purposes beyond merely providing protection to minority owners and setting forth the terms of compensation.  Employment agreements that contain noncompetition provisions serve to protect the other founder in the event that the employee-founder leaves the enterprise and attempts to start a competing business.  The employment agreement also settles issues regarding the ownership and use of intellectual property rights acquired by the entity.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship.

Determinants of Sustainable Entrepreneurship

Lawai et al. provided a summary of research that was relevant to identifying the key determinants of successful sustainable entrepreneurship[1]:

  • According to Koe et al., attitudinal factors (i.e. sustainable attitude) and perceptual factors (i.e. perceived desirability and perceived feasibility) were important in influencing a person’s level of propensity to sustainable entrepreneurship.[2]
  • Cambra-Fierro et al. argued that variables relevant to sustainable entrepreneurship included legal context, management’s personal values, socio-cultural context, market forces, ownership management structure, and industry-sector characteristics.[3]
  • Uhlaner et al. found evidence that indicated that larger firms, firms from more tangible products, family owned firms, and firms with a more innovative orientation have more inclination towards manifesting sustainable entrepreneurship behaviors.[4] Larger firms are able to bring more resources (financial and human) to bear on sustainability initiatives and have more to lose in terms of reputational damage due to irresponsible behavior.  The responsiveness of family firms is consistent with their stronger ties to the local communities in which they operate.[5]
  • Fedderke and Garlic opined that sustainable entrepreneurship was dependent on the adequacy and sufficiency of both the economic infrastructure (i.e., transport, communications, power generation, water supply and sanitation facilities) and the social infrastructure (i.e., educational and health-care facilities). They observed that improvements to infrastructure can contribute to reduction of income inequality, alleviation of poverty and improved economic growth.[6]

Lawai et al. noted that sustainable entrepreneurs are also subject to many of the same factors that influence commercial entrepreneurs and that the success of both types of entrepreneurs will be influenced by motivating factors, personality characteristics, family support, friend circle/peer group support, management skills and abilities, level of education and environmental forces.[7] Market conditions are also obviously very important and Rahman and Singh observed that the chances of entrepreneurial success increase substantially with competitive pricing, power supply, access to latest technology, access to market channels, and access to business associations.[8]  Researchers also frequently mentioned government support which can come in many forms: financing, infrastructure development, subsidies for accessing raw materials, and assistance with research and development and access to technology.  The government can also serve a valuable role as a customer, not only as a source of revenues for the venture but also as a means for the new venture to test and improve the quality of its products before broader commercial launch.

Ground Rules for Becoming a Sustainable Entrepreneur

In order to effectively pursue sustainable entrepreneurship and achieve some of the benefits associated with sustainable entrepreneurship policies and practices companies must continuously engage in dialogues with all interested stakeholders.  Shareholders must be educated on, and convinced of, the benefits of aspiring for social and environmental responsibility, even though pursuit and achievement of goals in those areas may have an impact on the financial bottom line.  For their part, stakeholders that are more focused on social and environmental performance must also acknowledge that the company needs to be financially sustainable in order to survive and thrive.

Groesbeek and Bos collectively offered the following list of ground rules for becoming a sustainable entrepreneur:

1.             The corporation should start reducing the environmental damage, respecting human rights and treating its employees with great care;

2.             Sustainable entrepreneurship has to be a self-initiated process and should not simply be a response to external pressure;

3.             If a corporation wants to practice sustainable entrepreneurship, it should identify clear aims and targets;

4.             The aims should be closely related to the corporation’s practice and should match the corporate values and its primary activities;

5.             The aims have to be closely related to the consumers’ needs;

6.             The corporation has to be capable of explaining the relationship between sustainability and its activities and production process;

7.             The corporation should adhere to these aims on a long term basis;

8.             Consumers and pressure groups should have a transparent overview of investments made by the corporation related to sustainable entrepreneurship;

9.             Sustainable entrepreneurship practiced by the corporation should not be shifted to the consumers via a price increase;

10.          A corporation should not attempt to overemphasize its efforts; and

11.          A corporation should make sure that its practices are shared by the corporation as a whole, and that they are not solely efforts of the management.

Sources: The first ten rules on the list were offered by Janssen Groesbeek in 2001 and the final rule was added by Bos a year later in another publication.  See M. Janssen Groesbeek, Sustainable Entrepreneurship–Theory, Practice, Instruments (Amsterdam: Business Contact: 2001); and A. Bos, “Sustainable Entrepreneurship in a Changing Europe: Pedagogy of Ethics for Corporate Organizations in Transformation”, in G.F. Simons, D. Min et al. (eds.), EuroDiversity: A Business Guide to Managing Differences (Oxford: UK and Woburn, USA: Butterworth-Heinemann, 2002), 16. 

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship and Sustainability and Entrepreneurship.

Notes

[1] F. Lawai, R. Worlu and O. Ayoade, “Critical Success Factors for Sustainable Entrepreneurship in SMEs: Nigerian Perspective”, Mediterranean Journal of Social Sciences, 7(3) (May 2016), 338, 342-343.

[2] W. Koe, R. Omar and J. Sa’ari, “Factors Influencing Propensity to Sustainable Entrepreneurship of SMEs in Malaysia”, Procedia Social and Behavioral Sciences, (2015), 172.

[3] J. Cambra-Fierro, S. Hart and Y. Polo-Redondo, “Environmental Respect: Ethics or Simply Business? A Study in the Small and Medium (SME) Context”, Journal of Business Ethics, 82 (2008), 645.  For discussion of sustainable entrepreneurship in Asia, see A. Racelis, “Sustainable Entrepreneurship in Asia: A Proposed Theoretical Framework Based on Literature Review”, Journal of Management for Global Sustainability, 2 (2014), 8-10.

[4] L. Uhlanar, M. Berent and R. Jeurissen, Family Ownership, Innovation and other context variables as determinants of sustainable Entrepreneurship in SMEs: An empirical research study (2010).

[5] L. Uhlaner, H. Goor-Balk and E. Masurel, “Family Business and Corporate Social Responsibility in a Sample of Dutch Firms”, Journal of Small Business and Enterprise Development, 11 (2004), 186; and W. Dyer and D. Whetten, “Family Firms and Social responsibility: Preliminary Evidence from the S&P 500”, Entrepreneurship: Theory & Practice, 30 (2006), 785.

[6] J. Fedderke and R. Garlic, Infrastructural development and Economic growth In South Africa: A review of accumulated evidences (2008).

[7] E. Dionco-Adetayo, Determinants of Small firms’ Entrepreneurial success In a developing economy (2004); and H. Rahman and H. Singh, “Entrepreneurial Support and its levels of Success”, Global Journal for Research Analysis, 3(11) (2014).

[8] H. Rahman and H. Singh, “Economic and Environmental factors leading to Entrepreneurial success”, Indian Journal of Applied Research, 4(12 (2014)).

Qualities of Social and Sustainable Enterprises

Berge discussed the concept of a “social enterprise” including the following description: “A social enterprise’s primary objective is to ameliorate social problems through a financially sustainable business model, where surpluses (if any) are principally reinvested for that purpose”.[1]  According to Fury, the elements of a “social enterprise” include a primary social purpose, a financially sustainable business model, and a mechanism for ensuring accountability and transparency.[2]  Berge further explained that social enterprises balance “mission” and “market” and their goals include the creation of not only economic value but also social and/or environmental value.  Social enterprises are looking to perpetuate resources rather than accumulating excess profits and any profits that are derived from the activities of the enterprise are to be reinvested in the business as operational expenses or used for mission activities and/or retained for business growth and development.[3]

Qualities of Sustainable Enterprises

Wirtenberg et al. analyzed the sustainability initiatives at nine large, public, multinational companies that had been recognized as being among the world leaders in “sustainability”, a process which included assessing how those companies handled environmental, governance, social responsibility, stakeholder management and work environment issues.  Their research allowed them to identify seven distinguishing qualities that they believed were associated with achieving “triple-bottom-line corporate sustainability” and which were also amenable to managerial intervention.  These qualities included deeply ingrained values relating to sustainability, strategic positioning, senior management support, systems alignment (i.e., structures and processes around sustainability), metrics, holistic integration across functions, and stakeholder engagement.  They then organized these qualities into a three level “pyramid” that they used as a representation of an organization’s sustainability journey.

The bottom level of the pyramid, referred to as the “foundation”, included three fundamental drivers of a successful journey to sustainable management.  The first driver was corporate values consistent with sustainability which were deeply ingrained in the organizational “DNA”, typically embedded by the founders.  The second driver was visible support for sustainability from top management, which often took the form of members of the executive team asserting their personal and positional influence about the importance of sustainability and their personal involvement in setting the priorities as well as making important strategic decisions that affected the sustainability of the company.  Top management support was important to creating an organizational culture in which extensive inquiry and self-examination was encouraged and welcome at all levels of the organizational hierarchy. Top management should evoke a long-term perspective for the company and seek to take steps that ensure the success and strength of the company for future generations.  The third driver at the foundational level was placing sustainability as central to the company’s business strategy, which an executive from one of the companies explained as: “For us sustainability is business. This is business stuff, it’s not something that sits outside.”  The companies recognized that that performance was inextricably linked to caring for communities, environment and society and developed business strategies that simultaneously took into account all stakeholders, as well as the short- and long-term view.

The second level of the pyramid, referred to as “traction”, focused on executing top management decisions regarding sustainability values and strategy and included the development of sustainability metrics (“we manage what we measure”) and alignment of formal and informal organization systems around sustainability.  Metrics should be included in the business plans that are created during the planning stage for sustainability initiatives so that they are embedded from the very beginning, not imposed at some later date, and can be referenced when aligning the company’s structures and systems to its sustainability goals.  The measurement of key performance indicators relating to sustainability should be accompanied by disclosure and reporting to the company’s stakeholders.  Reporting obligations add rigor to the assessment and allows companies to transparently demonstrate the values and initiatives driving its sustainability program.  Reporting also makes companies more accountable.

The third and top level of the pyramid, referred to as “integration”, called for broad stakeholder engagement and holistic integration, which was explained as an elusive state in which all “the many facets and functional domains of sustainability were conceptualized and coordinated in an integrative fashion”.  Wirtenberg et al. noted that even the companies they had studied, all of which had demonstrated exemplary progress with respect to implementing sustainability strategies, “seemed to be struggling with reaching this cross-boundary, multi-stakeholder, integrative pinnacle”.  They explained that holistic integration occurs when companies are able to bring multi-faceted activities under a clearly understood, unified umbrella of sustainability, which means aligning a variety of key enterprise functions around sustainability such as supply chain management, marketing and sales, accounting and finance, public relations, environment, and health and safety.  An executive at one of the companies suggested that holistic integration extended beyond internal activities to include connectivity with the broader industrial ecosystem in which a firm resides.

Sources: The discussion in this section is adapted from J. Wirtenberg, J. Harmon, W. Russell and K. Fairfield, “HR’s role in building a sustainable enterprise: insights from some of the world’s best companies”, Human Resource Planning, 30(1) (2007), 10.  The companies included Alcoa, Bank of America, BASF, The Coca Cola Company, Eastman Kodak, Intel, Novartis AG, Royal Philips and Unilever.  For discussion of the roles of HR leaders and the contributions of the HR functions, see “Human Resources: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).  Wittenberg et al. recommended several books on sustainability and the triple bottom line including A. Savitz and K. Weber, The Triple Bottom Line (San Francisco: Jossey-Bass, 2006); D. Esty and A. Winston, Green to Gold (New Haven, CT: Press by Esty Winston, 2006); and D. Hitchcock and M. Willard, The Business Guide to Sustainability (London: Earthscan, 2006).

 

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship and Sustainability and Entrepreneurship.

Notes

[1] L. Bergh, Sustainability-Driven Entrepreneurship: Perceptions of Challenges and Obstacles in a South African Context (Cambridge UK: Master Thesis for MS in Sustainability Leadership, July 2013), 6 (citing S. Steinman, “An exploratory study into factors influencing an enabling environment for social enterprises in South Africa”, International Labour Organisation (2010)).

[2] B. Fury, Social enterprise development in South Africa – creating a virtuous circle, Tshikululu Social Investments (2010).

[3] L. Bergh, Sustainability-Driven Entrepreneurship: Perceptions of Challenges and Obstacles in a South African Context (Cambridge UK: Master Thesis for MS in Sustainability Leadership, July 2013), 6 (citing B. Parrish, “Sustainability-driven entrepreneurship: Principles of organization design”, Journal of Business Venturing [e-journal] 25(5) (2010), 510).