Beyond Capitalism: How Not-for-Profit Entities Can be Successful Businesses
By changing the nature of incentive and ownership, the NFP World model empowers companies to make truly sustainable decisions.
Co-written with Jen Hinton
Beyond capitalism lies the more beautiful world our hearts know is possible. Beyond capitalism lies the Not-for-Profit World.
At the heart of the failing capitalist system is the ‘for-profit’ ethic. Based on the myth that humans are mostly selfish and competitive, the for-profit ethic says the best way to incentivize innovation and facilitate economic activity is to appeal to people’s self-interest. This manifests in the for-profit business model, central to the current economy, where owners and investors go into business expecting a portion of a company’s profits in the form of dividends, options or shares. In essence, capitalism ensures that we live in a for-profit world.
Yet, this for-profit ethic and way of conducting business has led to unbelievable socioeconomic inequality, with capital gains and company dividends the largest contributor to income divides. What else could we expect when private profit is seen as the driver of economic activity and profit maximization is the priority of most big businesses?
The most commonly suggested alternative to this dysfunction is greater market regulation. But while regulatory measures are critical in responding to social and ecological challenges, they can only do so much given that a heavily regulating state is politically divisive, disempowers citizens and can suppress real innovation. Furthermore, with politicians so commonly ‘in bed’ with big business, regulatory reform is often just window-dressing for ‘business as usual’.
Others argue for ‘ conscious capitalism’, and see avenues such as B Corp certification and ‘ shared value’ as the best ways to get there. But while these avenues bring attention to important questions of sustainability, such approaches fail to address a root problem. Although new forms of for-profit business seek to balance people and planet with profit, they continue to treat profit as an end in itself, rather than a means to an end, encouraging the destructive greed inherent in a system that relies on the privatization of profit. Nor can capitalism’s innovative potential come to the rescue. Not only are the levels of innovation required to avoid collapse totally unrealistic in a growth-based system; it’s the for-profit ethic that created the very problems we now face.
What, then, might be the alternative? Fortunately, the dominant story about human nature is changing. Research increasingly shows that, under the right conditions, human nature has a tendency towards co-operation. We’re witnessing the rise of a workforce increasingly motivated by purpose, and we’re realising the potential of an existing model of enterprise called not-for-profit (NFP) business, that encourages the best aspects of human nature.
There is a rising tide of entrepreneurial companies that have business plans, make profits and pay good wages, yet are legally incorporated as ‘not-for-profit’. They are a bold response to the common misunderstanding, compounded by use of the words ‘non-profit’ and ‘charity’, that not-for-profit entities cannot be successful businesses.
In the U.K., examples of prosperous NFP businesses include accommodation provider YHA, energy firm Ebico, upcycling company the London Re-use Network, the Big Issue magazine, the Breadshare Bakery, and the Cowheels car-club. Around the world, well-known NFP businesses include South Korea’s Hansalim, Bangladesh’s BRAC, and Mozilla Firefox in the U.S. Under law, 100% of any profits these businesses make must be reinvested into the business or community. So, not-for-profit really means not-for-individual-profit; no more incentivizing selfish behavior.
How then might a world look in which every business was operated not-for-individual-profit? A Not-for-Profit World would still involve a thriving market. Government, banks, money, loans and interest would remain. But, within a not-for-profit framework, these things would have vastly different consequences.
When banks can’t privatize profits they have no shareholders, owners, or partners that they need to keep happy with dividends and private returns. They have no reason to exist other than to provide high-quality financial services to their customers, and they have little to distract them from this mission. They are built to be more transparent and more efficient. Rather than siphoning wealth away from people and communities who take out loans, all profits are allocated according to the NFP’s social mission, enabling the generation of real community wealth. Now imagine the entire financial sector being not-for-profit. Imagine the entire retail sector being not-for-profit. Imagine all manufacturing being not-for-profit.
Across most sectors, the costs of doing business are falling dramatically, and large capital investments are proving less and less necessary to seed innovation, enabling the emergence of NFP businesses such as car manufacturer Wikispeed and solar power plant designer Zenman Energy. Furthermore, some new (and some less new) forms of capital raising are now available to emerging NFPs, such as crowdfunding, revenue-based finance and community bonds. When the market exists to meet human needs, government requirements for taxation diminish, making good wages and purposeful work all we need for the economics of enough.
By changing the nature of incentive and ownership in business, the NFP World model enables companies to make truly sustainable decisions, in turn promoting a less consumerist society. The NFP World also fosters a more equitable economy because it has an inbuilt redistribution of wealth, with companies required by law to reinvest, rather than privatize profits.
While the informal not-for-profit economy has kept human civilisation running since time immemorial, through care-giving and forms of non-monetary exchange, the emergence of the formal not-for-profit economy is now fully under way. To fund the work they do, NFP institutions are increasingly generating their own income, as opposed to the traditional ‘non-profit’ approach of depending on grants and philanthropy. More and more, entrepreneurs are seeing the benefits of establishing businesses as NFP, through structures such as the U.K.’s Community Interest Company Limited by Guarantee. And there is renewed focus on successful, age-old business structures that most commonly exist as ‘not-for-profit’, such as consumer cooperatives in the food, healthcare, insurance, housing, utility and finance sectors.
The rise of NFP enterprise is catalysed by the advantages NFP businesses hold in the marketplace, which have proven largely resilient to deregulation and recession. Not-for-profit businesses don’t have to pay dividends, and can often offer lower prices, primarily because they are not-for-profit. They may gain tax exemptions and have the ability to receive tax deductible donations. They more easily draw on the support of passionate volunteers. And their propensity for flatter organisational structures enables exciting prospects for productivity and innovation. Moreover, in a world with rising demand for ethical products and services, organisations that focus on fulfilling human and ecological needs are ahead of the game.
For example, required by law to be not-for-profit, credit unions in the U.S.offer their 100 million members consistently higher returns on savings, lower rates on loans and are increasingly recognized amongst consumers. Also in the U.S., job growth and average pay gains in the NFP field have outpaced gains in the for-profit sector since the 2008 downturn. In the U.K., not-for-profit leisure centres are significantly outperforming for-profit health and fitness chains.
Combined, NFP advantages are resulting in a greater market share. In real numbers, the NFP sector in the U.S. grew significantly faster than the for-profit sector between 2001–2011, from a base of 1,259,764 organisations.
For the first time in modern history we have the structures, capabilities and impetus to evolve to a Not-for-Profit World, in which the best energies and drivers of good business are harnessed for collective flourishing.