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The line between non-profit and for-profit has become increasingly blurry

Reuters/Michael Fiala
Toms Shoes founder Blake Mycoskie.
Published Last updated This article is more than 2 years old.

As we are reminded by the release of Bernie’s Yearning, the flavor from Ben & Jerry’s co-founder Ben Cohen announced earlier this year, the boundaries between profits and purpose are increasingly blurred. While many have debated whether this mixing of profits and purpose is good or bad for business and society, it is time to move on. Organizations and leaders that use businesses to address social issues are here to stay. We should focus, therefore, on how they can do so most effectively.

In the for-profit sector, corporations increasingly engage in corporate social responsibility, while on the non-profit side, traditional charities face growing pressure to demonstrate a measurable return to donors who are no longer satisfied with inspiring stories about changed lives or communities revitalized.

But perhaps the trend that most epitomizes the blurring of profits and purpose is the rise of hybrid social enterprises whose raison d’etre is to pursue a social mission through a commercial venture. Think Toms Shoes, think Warby Parker, and even King Arthur Flour. From 2006 to 2011, the number of social entrepreneurs pursuing hybrid ventures as opposed to purely for-profit or purely non-profit ventures increased from 37% to almost 50%.

From 2006 to 2011, the number of social entrepreneurs pursuing hybrid ventures increased from 37% to almost 50%.

Such hybrid organizations are increasingly supported by new forms of investment. The “impact investment” market, in which investors seek a social as well as financial return, was estimated at $60 billion in 2014, and some predict it could grow as large as $500 billion in assets over the next decade.

Legal structures are also changing. Thirty US states and Washington D.C. now have Benefit Corporation legislation, which requires a firm to pursue social and environmental goals, not just profits. There are roughly 1,000 benefit corporations in the US, up from just a handful in 2011. Another 1,000 companies are registered as low profit limited liability corporations, a hybrid structure that enables for-profit, mission-driven firms to accept philanthropic funds.

Many have lauded these trends, arguing that they bring resources, fresh ideas, and innovative solutions to social problems, offering a much-needed corrective to years of inefficient management and lack of results in the nonprofit sector. Certainly, the Gates Foundation and other philanthropies launched by business leaders of the new economy have put previously unimaginable levels of resources toward experimental solutions in the areas of health and education, among others. And nonprofits or hybrid ventures that are challenged to be more accountable and efficient may ultimately develop better programs for their beneficiaries.

For each success story, there are countless other organizations in which combining profits and purpose has been much more problematic.

Take the social enterprise Digital Divide Data, which I have studied for the past eight years in my research at Cornell University. DDD’s mission is to provide economic opportunities to the disadvantaged young people by training and employing them in an operationally sustainable IT outsourcing business. By hiring them to work on actual client projects with real deadlines, DDD provides their intended beneficiaries—high school graduates who are physically disabled due to landmines or polio—with more realistic work experience. DDD “graduates” get an estimated $110,000 increase in lifetime earnings.

Yet for each success story, there are countless other organizations in which combining profits and purpose has been much more problematic, even detrimental to the very constituencies that are supposed to benefit. In the field of microfinance, which aims to address global poverty by providing loans to people who would otherwise not have access to financial institutions, some of the most prominent organizations have been accused of prioritizing their own financial gain over helping people in need.

Mixing profits and purpose can create significant tension and conflict between employees as well. In my own research in the natural foods retailer Whole Foods Market, I found that “capitalist” employees who wanted to help the company increase profits often clashed with “idealists” who valued the company’s commitment to organic foods and environmental sustainability. Absent effective leadership, such clashes can increase turnover and lead to declining performance or even failure.

Certainly, the blurring of profits and purpose, and the challenges it creates, is not entirely new. Business leaders have long engaged in philanthropic efforts. Nonprofits in health and higher education have faced competitive pressures and for-profit competition for several decades now. Worker cooperatives, perhaps the oldest form of hybrid venture, have existed for centuries. But something is different now. The blurring of profits and purpose is not just limited to a few corporations or leaders, nor to a few sectors. It is a central and enduring fact of organizational life.

What is needed, therefore, is not more encouragement or celebration, but rather greater attention from leaders to the challenges that the blurring of profits and purpose creates, and the strategies and practices by which these challenges can be overcome. We need leaders who can unite capitalists and idealists, leaders who can build guardrails that prevent hybrids from drifting too far toward one extreme or the other. Only then will the full potential of hybrids be realized.

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