What is “Profit for Purpose”?
The term cropped up this week in a Senscot blog. Laurence Demarco writes:
‘Some of what we call ‘social investment’ is too often driven by the pressure on lenders to get money out the door; Social Investment Scotland (SIS) announced last week that it is to open products to ‘profit for purpose’ private businesses. The ‘third sector’ is a valuable brand which the general public associates with charities and asset-locked social enterprises — and which both eschew private profit. Simply widening eligibility to include unregulated private profit, may get more money out the door, but at the expense of third sector clarity. SIS can obviously lend the funds they hold to whoever they choose — but there is the question as to whether or not this activity should be supported by Scottish Govt’s Third Sector Division.’
The same term will be found on the P-CED website:
“P-CED is now based in UK as a profit-for-purpose company, since 2004. We conduct small business for profit in UK, and invest profits for social purpose under UK rules. This is somewhat similar to non-profit in the US, except we can conduct any business we see fit according to normal business rules without restrictions that bind non-profits or charities. We pay company and personal taxes according to usual business rules. Profits are not shielded in any way from normal taxation that any for-profit business has to pay. Whatever is left over is invested in the social purpose or purposes of our own choosing. That way we can do business in the normal, traditional way, changing only one thing: the output, what happens with profit.”
Profit-for-Purpose, as introduced to the UK means no dividend distribution with at least 50% of profit invested in community benefit and modification of company articles to reflect this as the primary purpose. It is not about private profit, as we’ve argued for 20 years.
In a 2004 interview, founder Terry Hallman described this model to a diaspora leader:
“The P-CED model is not a charity sort of operation. It is business. What we choose to do with profits is entirely up to us, and we choose before anything else happens to set most of our profits aside to assist poor people. In fact, our corporate charter requires us by law — UK law, where rule of law is very well established — to use our profits only for social benefit. We cannot do anything else with it.”
He was referring to our guarantee company status, while seeking to become a Community Benefit Society. Just over a year later, we’d witness the creation of the Community Interest Company model which bore a considerable likeness.
The 2004 business plan called for government support:
“Traditional capitalism is an insufficient economic model allowing monetary outcomes as the bottom line with little regard to social needs. Bottom line must be taken one step further by at least some companies, past profit, to people. How profits are used is equally as important as creation of profits. Where profits can be brought to bear by willing individuals and companies to social benefit, so much the better. Moreover, this activity must be recognized and supported at government policy level as a badly needed, essential, and entirely legitimate enterprise activity.”
“Profit for a Purpose” was the title of a Skoll World Forum discussion in 2006:
‘Provocative as it may sound, many nonprofits successfully leverage monies received from their revenue-generating initiatives to enhance mission impact, increase their organization’s performance and sustainability, and also create new opportunities to help their clients/beneficiaries become more self-reliant. This amounts to — as Elizabeth Isele, Senior Program Director at Great Bay Foundation is fond of saying — “profit for a purpose.” ‘
At that time there would seem to have been a common understanding.
For P-CED, it began with a 1996 white paper, which questioned the purpose of business. Clearly it should be for the benefit of people, but which people? It put forward the concept of business which operates for social benefit rather than shareholder returns.
“This business model entails doing exactly the same things by which any business is set up and conducted in the free-market system of economics. The only difference is this: that at least fifty percent of profits go to stimulate a given local economy, instead of going to private hands. In effect, the business would operate in much the same manner as a charitable, non-profit organization whose proceeds go to local, national, and international charities.”
I wrote a summary of how this evolved over the past 20 years, for the Mckinsey Long Term Capitalism challenge, which I called the “New Bottom Line” .
The new bottom line then takes a twist, as others begin to use it in the context of ‘profit with purpose’ and ‘doing well by doing good’
The original intepretation of ‘Profit for Purpose’ found allies in surprising places. In 2009 both the Vatican and UN spoke of people-centered business. Many missed what was said in Caritas in Veritate:
“This is not merely a matter of a “third sector”, but of a broad new composite reality embracing the private and public spheres, one which does not exclude profit, but instead considers it a means for achieving human and social ends. Whether such companies distribute dividends or not, whether their juridical structure corresponds to one or other of the established forms, becomes secondary in relation to their willingness to view profit as a means of achieving the goal of a more humane market and society. “
I found what Miguel D’Escoto Brockmann, the President of the United Nations General Assembly said, particularly eloquent:
“The anti-values of greed, individualism and exclusion should be replaced by solidarity, common good and inclusion. The objective of our economic and social activity should not be the limitless, endless, mindless accumulation of wealth in a profit-centred economy but rather a people-centred economy that guarantees human needs, human rights, and human security, as well as conserves life on earth. These should be universal values that underpin our ethical and moral responsibility.”
All this it seems is suffocated at birth when Harvard’s Michael Porter opines on ‘Creating Shared Value’ and the corporate world starts tripping over itself to promote their credentials.
So, WTF does ‘Profit for Purpose’ mean to SIS? What does it mean to you?
SIS say: ‘Almost nine in 10 (87%) of millennials believe that “the success of a business should be measured in terms of more than just its financial performance.” Deloitte Millennial Survey 2016.’
We say: ‘Economics, and indeed human civilization, can only be measured and calibrated in terms of human beings. Everything in economics has to be adjusted for people, first, and abandoning the illusory numerical analyses that inevitably put numbers ahead of people, capitalism ahead of democracy, and degradation ahead of compassion.’
As I speak, Oxfam argues that impact investment should be structured around the needs of social enterprise rather than investors. It’s what we argued repeatedly, not least in the ‘Marshall Plan’ where our primary purpose was to transition children from abuse within institutions to loving family homes.
Could we find investors? Of course not.