There’s an age old debate of whether business is a force for good and whether businesses have a responsibility to be more socially responsible. Look no further than the competing essays of Shark Tank’s Kevin O’Leary and Method Founder Adam Lowry in Inc. Magazine this month, Why Evil Is Better In Business (or is it?).
On Shark Tank, Kevin O’Leary (Mr. Wonderful) often asks on his show: “Is this a business or charity?” Instead, we should ask: Does it matter? We can and should embrace the opportunity to use the profit motive to address social needs and add value to customers’ lives.
Idealists on the political left have always been a little bit uncomfortable with business and profit. Often treating businesses as necessary evils that need to embrace social responsibility to mitigate or atone for exploiting workers and pillaging the environment. Conversely, crotchety conservatives on the right have long dismissed corporate social responsibility as anti-capitalist, citing Milton Friedman’s view that, ““There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits.”
But what if we could find a third way to harness the power of business to help people improve their lives? What if we were to embrace the notion that business is a force for good?
Faced with increasingly difficult challenges in the forgotten corners and communities plagued with poverty, crime, and violence, it’s a natural progression that mission-driven organizations are increasingly recognizing the power of markets to drive innovation in order to solve social issues.
This emerging field is called impact investing — companies that aim to generate a measurable, beneficial social impact alongside a financial return. And these companies have the potential to drive social outcomes that are, in many cases, far greater than charity.
Revenue-generating ventures designed for social impact can often produce greater efficiency and more accountability than charity. The profit model is an extremely effective mechanism to drive results. Incentives matter, and profitability helps to gauge effectiveness and attract and retain capital.
These hybrid charitable-profit models are powered by free enterprise and market demand. They work while no one is watching and their success is self-perpetuating. Like the old adage says, instead of handing someone a fish, teach them to fish. Instead of giving people bread, build bakeries and train them to bake. And perhaps even more importantly — help them to start a bakery.
Take for example the criminal justice system. In 2010, the United States spent more than $80 billion on corrections expenditures at the federal, state, and local levels. And those that re-enter society after serving their time have a 50% chance of winding back up in jail. The system is broken.
Seat King is a for-profit company that manufactures seats for lawnmowers and agriculture equipment. But the catch? Their facility is rented from maximum and minimum security prisons in Hutchison, Kansas. They employ 200 inmates, and their average employee works 50 hours of week making $8-$15/hour—four times as much as the average job within a jail.
The inmates use their income to pay child support, to pay for the 17 cent/minute calls home, and even to take care of their victims’ families. Often, they are paying off legal debts or saving for their release. But more importantly, these inmates gain discipline, self-worth, hope, and a vision for their future.
The recidivism rates in Kansas plummeted from 50% to 35% over the past ten years, while private investment from companies like Seat King went up 40%. The company is helping Kansas reduce recidivism and is profitable, growing, and looking for space to expand.
Some call this double bottom-line investing. So be it. Seat King has a profitable business that adds value to their customers. If we’re trying to reduce recidivism and the choice is between government programs or philanthropy and the approach of Seat King, we should choose Seat King.
Which begs the question — what about all of the manufacturing plants out there with a single-bottom line (profit), who hire ex-offenders? Why shouldn’t we celebrate them alongside the work of Seat King?
As AEI President Arthur Brooks recently noted at an event on impact investing, “The least fortunate don’t need our help. They need to be needed.” Learning the skills and values necessary to succeed — and doing it on the job — is what the least fortunate need.
We gain, we grow, and we profit by leveraging each other and becoming better through the combined sum of our contributions. The profit model has lifted more people out of poverty than any other mechanism in our history. We trade services and knowledge across the globe, innovating and spurring on the creation of life-saving and ever-improving products and services.
Now, not all profit is good. Profits achieved through value creation for customers and addressing social needs are indeed good. Profit made through cronyism, which allows some to benefit at the expense of others, is bad.
To our right-leaning friends: let’s embrace businesses with a social purpose. They aren’t anti-capitalism. And to our left-leaning friends: let’s embrace businesses that refuse the path of cronyism and pursue good profit. These are the most effective mechanisms we have to help people to improve their lives.
Evan Feinberg and Lauren McCann are the Executive Director and Executive Vice President of Stand Together Foundation, an organization that seeks to unleash the power of community to solve our country’s toughest problems and help people to improve their lives.