What’s Holding Back Social Enterprises

According to a 2024 report from the Schwab Foundation for Social Entrepreneurship and the World Economic Forum, “the world has entered a state and age of polycrisis,” defined by climate change, inequality, and conflict. Key to addressing these and other challenges, the authors write, are entrepreneurs who balance profit and purpose. “Although they are still underrecognized, social enterprises have emerged as pivotal actors able to develop highly innovative solutions to critical social and environmental challenges,” reads the report.

Indeed, there’s a rising interest in businesses that address social problems, and these enterprises hold significant potential, according to research by Chicago Booth’s Robert H. Gertner. But there are some governance, financing, and other hurdles to the sector’s growth, he explains in a paper that presents the concept of and issues related to social enterprises.

A social enterprise, Gertner writes, has elements of both a charitable nonprofit and a conventional profit-maximizing company. For an example, he cites LuminAID, which makes inflatable, solar-powered lanterns. It was founded by two architecture students (one of whom went on to earn an MBA from Booth) who wanted to help survivors of the 2010 earthquake that rocked Haiti. Upon hearing that tent cities became more dangerous at night, the students designed a light that was safer than candles or kerosene and could be easily packed and shipped to refugee camps around the world. After initially raising money through crowdfunding and competitions such as Booth’s Social New Venture Challenge, they landed investors including Mark Cuban—as well as paying customers who buy the product for camping and emergency prep.

In another example, Gertner highlights edtech founder Sal Khan, who set out in 2008 to make math and science tutoring available online, for free, anywhere in the world. Ultimately, he embraced a hybrid business model. Khan Academy, a nonprofit, relies mainly on donations to operate, but it also earns revenue by charging some schools for additional teaching tools.

These types of founders care about more than money and find value in doing work that has a social benefit, Gerner notes. The hybrid structure also has advantages for society, he writes. Think about school lunches: A company that prioritizes profits might serve students the cheapest food, even if it’s unhealthy and contributes to costly conditions such as diabetes. By contrast, a social enterprise might aim to deliver healthier lunches for all students and still earn a profit, just less of one.

Social enterprises can also capture efficiencies that for-profit companies can’t. For example, it might be effective for the school-lunch company to train and mentor restaurant and food-service workers. That could create an employee pipeline plus goodwill in the community.

Yet socially minded entrepreneurs face some particular obstacles too, according to Gertner. For starters, their enterprises do not fit easily into existing legal and financial structures. Nonprofits in the US are exempt from paying federal taxes, but any surplus profits must be invested back into the organization’s social mission. For-profit businesses must maximize profits, or their board members risk getting sued. Because social enterprises are hybrids that pursue both economic or financial success and social good, this that could lead to conflict between board management and investors about which goal is more important. “Having a social objective must translate into the organization’s decision making—that is, the organization needs to be willing to sacrifice profit for mission, at least to some extent,” Gertner writes.

However, legal frameworks are changing and options for entrepreneurs are increasing. In 2010, Maryland became the first US state to allow public benefit corporations, a structure that permits boards of directors to pursue a specified social goal and to consider stakeholders other than shareholders, including the environment. In most states, for-profit businesses can now organize as PBCs. By early 2022, there were 15 publicly traded PBCs in the country—up from one prior to 2020, according to Gertner’s study.

Critics have called PBCs unnecessary and expressed concern that companies will falsely claim positive social outcomes, Gertner acknowledges. “It is certainly too early to say which predictions will turn out to be correct,” he writes, but notes that greenwashing, as an example, could involve legal risk and costs.

An entrepreneur could instead set up a B Corp, which is not a legal status but a certification from a private nonprofit called B Lab. To become a B Corp, a for-profit or social enterprise must score above a certain threshold in an assessment of its impact on workers, customers, the community, and the environment. B Corps report these data and pay an annual fee to maintain the designation.

The laws are nascent, and social entrepreneurs need to be mindful of the trade-offs involved in the organizational options, Gertner concludes. But his argument makes clear that there is a path for people to make money and also do good.