5. THEORETICAL FRAMEWORK
5.6. Hybrid Companies
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Ideally, in the long term, social and environmental responsibility should lead to a better financial position; however, in the short term there are pressures to produce financial benefits and to continue operating. In these institutions, the incentive of the leaders may be contrary to the responsibility to society since in the vast majority of cases they are linked to economic returns that tend to be in tension with social benefits.
5.6. Hybrid Companies
In today’s world, business economic models have not responded to the problems that our societies face. Adding to the issue, the quality of our environment and social surroundings have worsened considerably and we must adapt to a global change. Resolving all these problems implies new ways of thinking and acting by citizens, which generate the need for new types of companies whose interest groups seek the long-term benefit of social, economic and ecological matters. In this context, in a network work carried out by the Aspen Institute and the W.K.
Kelogg foundation, a document called "The Fourth Sector" is created. It is a change that breaks with the traditional dynamics between the public sector, the private sector and the world of non-profit or non-non-profit organizations, as its limits are increasingly diluted and in such a way they give rise to a new type of company that has been called the “fourth sector” or social enterprise.
[18]
These institutions, although their ultimate goal is a social goal, are economically independent, competitive and lucrative within a socially responsible parameter and through the production of goods or services that create jobs, contribute to the economy and also improve the quality of life of communities and/or consumers.
This is how these types of companies have emerged, and in their logic of operation is that they
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can be classified as "hybrid". That is, they can travel from traditional for-profit to traditional non-for-profit companies.
In order to understand the concept of the B Corps, it is first necessary to frame them within the conception of “hybrid organizations”. This type of organization has business models that seek transformation and social change, taking advantage of the dynamics of the markets and appealing to business tools [19]. Kim Alter describes these types of organizations as hybrids between for-profit and non-for-profit organizations, in other words, they generate social and economic value simultaneously. Alter has classified these organizations according to the degree of which their activities relate to: 1) the purpose of their creation; 2) subject to whom the company’s accountability is directed; 3) Use of the income. Differentiating itself from those organizations in which there is no duality of objectives, Alter positions them in a scheme according to their classification: [20]
Table 5: The Spectrum of Hybrid Companies [20]
Hybrid Spectrum Income reinvested in social programs or operational costs
Profit-making Motive Shareholder Accountability
Profit redistributed to shareholders
In many countries, the legal framework for the constitution of companies is relatively rigid, having to opt for one of two extremes: for profit and non-for-profit, first or third sector (the second sector is governmental institutions only). Many institutions find that this dichotomy is
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restrictive for their operations and yet they are forced to adapt to one of the two ways.
The new hybrid models try to capture the best of both options, although they must be constituted in one of the two major categories. If they choose to be non-for-profit, then they are very limited when it comes to obtaining financing and must depend on donors and reinvestments, however, they can capture the tax benefits or tax-deductible donations that third sector institutions usually enjoy. This imposes severe limitations on the growth of their activities and often prevents them from achieving economies of scale that could lower their costs and improve their efficiency and impact, which results in many good ideas of social innovation failing to reach enough scale to have an impact.
On the other hand, by establishing themselves as for-profit institutions, they can finance growth but must adhere to the needs of investors and creditors (unless they are companies with few owners and self-financed, which in general tend to be small). This means that their ability to meet social needs that are not profitable, at least in the short term, is limited to relatively minor percentages of benefits. Some companies contribute to the solution of social problems by the type of products and services they commercialize and by the social and environmental responsibility with which they carry out their operations. However, these activities are in constant tension between financial sustainability and social / environmental sustainability, which are not always compatible.
These hybrid forms of social entrepreneurship can be useful while the company is in its early stages and has a relatively modest scale but can have complications when it grows and diversifies, when it is internationalized, when it has to obtain resources from the capital markets and/or when it enters into mergers and acquisitions with other companies that very likely will have traditional legal figures. [21]
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It’s fair to say that B Corps do fit the definition of hybrid companies, yet it is possible to go deeper in their categorization as the spectrum considers four types of organizations. On the other hand, although B Corps are generally recognized as being of the social type, in the next sections of this research, it will be possible to corroborate whether all of them are social enterprises or if any of them belong to another type within the hybrid spectrum.
5.6.1. Non-profit with Income Generating Activities
As its name suggests, these are non-for-profit organizations that integrate some form of income generation to finance their operations or part of them (usually not a very significant amount of the organization's budget compared to the traditional contributions of non-for-profit entities).
These activities are not carried out outside the organization, instead, they are integrated within the actions that it carries out.
Alter's work mentions two main forms of financing: The first one is associated with cost recovery, a rather discreet strategy, which seeks to offset part or all of the expenses in activities linked to specific programs. With the end of the program, these activities also come to an end (conferences, payment for admission to events, among others). The second form of financing is the generation of income through a commercial activity, a continuous method of generating resources for the organization.
The lines between each category of the hybrid spectrum are very thin. In this sense, an organization in this group can advance to be a Social Enterprise if their strategy and way of working becomes more like a business plan and it is institutionalized as a natural part of the organization. The understanding of its economic activity as a Business, having specialized personnel for its development, must be escalated with a long-term vision and under a view of
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continuous improvement.
5.6.2. Social Enterprise
A social enterprise is defined as any company created with a social purpose, which mitigates / reduces a social problem or a failure of the market, to generate social value by operating with the financial discipline, the innovation and the determination of a company of the private sector.
It can be said that a non-for-profit organization becomes a Social Enterprise if the aforementioned economic activity, which generates resources continuously, is strategically established to create social and / or economic value for the organization. It also has a long-term vision in terms of growth and development. The objectives and expectations of growth are part of some formal operating plan and qualified personnel with experience in the business or market.
Social enterprises use the entrepreneurship, innovation, market approach, strategic guidance, discipline and determination of a for-profit company to create social value and generate change.
This social enterprise can be structured as a department within a larger organization, or autonomously, as a separate legal entity, whether with or without profit. In other words, its purpose may be to generate an additional income stream of resources for an organization, or just be self-sustained program to support the mission of the organization.
Internally, two forms of social enterprises are proposed, one linked to the orientation of their mission and the other according to the level of integration between social programs and commercial activities.
5.6.3. Socially Responsible Business
In this case, we are dealing with for-profit companies that operate with dual objectives: generate
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profits for their shareholders and contribute to a broader social good. Socially responsible companies are willing to forego benefits or make substantial financial contributions rather than distribute profits privately, and often include social goals in their corporate mission statements.
In some cases, a socially responsible company can be considered as a social enterprise when it is part of a non-profit organization, created in order to obtain income for the "parent organization", and be the financial support of the social cause. [20]
5.6.4. Corporation Practicing Social Responsibility
The fourth and last type of company within the hybrid spectrum proposed by Alter, corresponds to for-profit companies whose motives are financially driven, but are dedicated to philanthropy.
This "strategic philanthropy" helps companies achieve the objectives of maximizing profits and market share while contributing to the public good. A private company or corporation engages in social benefit activities such as granting sponsorships, community participation or personnel volunteering, as a means to improve public image, employee satisfaction, sales and customer loyalty.
Corporate social responsibility is not classified as a social enterprise even though the philanthropic activities support social enterprises, achieve a positive social impact, or contribute significantly to a public good.
Table 6: Spectrum of Practitioners according to Alter [20]
Purely Philanthropic Hybrid Purely commercial
Motives Appeal to goodwill Mixed motives Appeal to self-interest Methods Mission-driven Balance of mission and
market Market-driven
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Goals Social value creation Social and economic value creation (required by law or organizational policy)
The hybridity of companies with purpose is an increasingly important feature for the large private and social corporations of the contemporary world. The rigid frontiers that placed social movements on one side of the arena and the business world on the other were erased over the last twenty years. That does not mean a loss of purpose, but rather an extension of the very horizon in which large organizations act. One of the central premises of this movement is based exactly on the increasingly clear trend that private companies relate and try to incorporate social demands and not only for what they do in the markets, but through the renewal of their license to operate.