1 DEPARTMENT OF ECONOMICS
Uppsala University Master Thesis Author: Sten Ström
Supervisor: Prof. Anders Forslund Spring semester 2011
Social business
– Value (f)or money?
A discussion about methods to evaluate enterprises
on the border between the private sector, the public sector and civil society.
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Table of contents
Table of contents ... 2
1. Abstract ... 3
2. Introduction ... 4
3. Background ... 5
4. Theory and practice ... 6
4.1 Widening traditional economic theory (the profit maximizing individual) ... 7
4.2 Definition of social business ... 8
4.3 Social business in Sweden ... 11
5. Financial evaluation ... 13
6. Evaluation of social impact ... 17
6.1 Evaluation theory ... 17
6.2 Cost-benefit: ascribing a monetary value ... 27
6.3 Descriptive methods ... 32
6.4 Comparison between the approaches ... 37
7. Discussion and conclusions ... 39
8. References ... 46
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1. Abstract
In this thesis, different ways to evaluate social business are compared and discussed.
The relatively new concept “social business” is used to describe a private sector enterprise, the purpose of which is not primarily to maximise profit but to achieve a social mission.
However, in doing so, it needs to be sustainable in financial terms, and this means that sufficient profitability is a necessary condition. (Environmental sustainability is another important prerequisite, which is not discussed in depth here).
Assessing the success of a social business, it is therefore necessary to evaluate both the social impact and the financial viability. This means, on one hand, using appropriate evaluation methods that have mainly been developed for the public sector and the civil society. Such methods are based on unequal power relations requiring accountability – a concept not
normally used in the private sector, where funding is based on a voluntary exchange of money for goods or services. On the other hand, not all traditional methods for assessing performance in a private sector company are suitable for determining financial sustainability in a social business. Nevertheless, existing methods should be used where appropriate.
Among the findings are:
- the importance of the local context and particular features, which makes comparisons between different social businesses difficult, and which necessitates adaptions of assessment methods
- that several financial indicators, used for for-profit business, may also be useful for social business (especially those related to revenue trends and liquidity). However such indicators are based on accounting (history) rather than a forward-looking analysis of the business environment, and may not be fully comparable.
- that the main purpose of impact evaluation is the need to improve operations, but also to enhance legitimacy among stake-holders and – to some extent – regulators and prospective investors. Stake-holder involvement is therefore normally an advantage.
- that methods that build on monetising outcomes and impacts (for example Social Return on Investment) are normally less appropriate than models that use non- monetary forms for publishing evaluation results, eg. anecdotal analyses
- that with the exception of evaluations done by the academia to increase knowledge, available resources will normally not be sufficient to carry out fully fledged external evaluations using methods to establish a counterfactual situation.
The development of social business also challenges traditional economic assumptions of the profit maximising individual through introducing such concepts as solidarity, social capital and citizenship. The fact that in several ways, social business crosses the borderline between on one hand the private sector and on the other hand public sector and civil society makes it necessary for representatives from many different academic fields to cooperate closely in future research: economics, business administration, political and social scientists etc.
Key words: Social business, impact assessment, financial sustainability, monetised indicators, anecdotal analyses.
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2. Introduction
Ordinary, for-profit business enterprises are evaluated through financial indicators such as profit in relation to equity, or to investment, as a basis for management decisions, as well as for potential investors’ decisions on whether to supply financial resources to a given
enterprise – or in their trading in the stock market. These indicators can always be expressed in monetary terms, or as ratios built on monetary terms, whereas the actual output or impact produced in a private for-profit company is of secondary or no interest. However, the purpose with starting a social business is to solve a social problem, not primarily to make profit.
Nevertheless, social businesses need to be sufficiently profitable in order for them to remain sustainable. Therefore, the basis for management as well as financing decisions must take both factors into account: how well the business contributes to solving the social problem, and its sustainability in financial and environmental terms. The objective with this master thesis is to contribute towards a better understanding of how social business can be evaluated.
Since social business is a relatively new concept, it appears that existing literature does not deal with the evaluation of social business in a structured way. In particular, comparisons between different methods as well as cultural and social contexts are very scarce. More specifically, the purpose with the thesis is, therefore, to compare different methods in use for making such assessments, as well as to contribute to the improvement of such methods1. Already from the onset it should, however, be stressed that whatever can be measured with existing methods in a for-profit enterprise should continue to be used, where relevant for social business. The issue is about characteristics and impacts that fail to be identified, measured or assessed in ordinary private sector operations, for example because they do not have a market value. The scope of a master degree thesis does not allow for environmental sustainability to be dealt with in depth in this context, but many of the issues that are brought up also have relevance for such evaluations. While theory-building is not a primary objective for the thesis, it can be expected that some of the results may contribute to theory in this rather new field2. One important issue to study is whether it is possible and appropriate to have a system in which different social businesses are compared, for example through a common denominator such as a monetary value on impacts, or whether each social business is so much dependent on its own, local context that such comparisons risk becoming misleading. In this thesis, the term “evaluation” is used in a wide sense. Rather than reserving it for fully-fledged exercises that meet all theoretical criteria, it should be taken to mean an assessment made in order to determine the value – not necessarily in monetary terms – of what an organisation achieves (and how the outcomes are produced and delivered).
Due to the traditional dichotomy described above, the focus on social mission has led to sources of information that deal with the public sector and civil society, rather than the traditional for-profit private sector. The reason for this is simple: little efforts have been spent in the private sector on impact reporting – one exception being CSR3. The theory on
evaluation has been taken from Vedung, who has specialized in the evaluation of public sector (mostly central government). Vedung is a political science scholar, and some of his views may be debated4. Nevertheless, his structure was chosen because it proved to be useful for the discussion about evaluations in this thesis. Part of the discussion is also taken from sources
1 Enarsson (2011) and Palmås (2003)
2 Gustavsson (1998)
3 Corporate Social Responsibility, see 3.2 and 5.3 below
4 For example how Vedung attempts to measure a counterfactual outcome
5 that deal with NGOs5, including church work. Therefore, the findings in these sources must be transformed to fit with private but non-profit organisations. Micro finance is an important source of funding for capital and current assets as well as for start-up costs in social business.
However, sources from the “normal” financial market as well as semi-philanthropic markets (for example the Swedish savings banks – sparbankerna) have also been included. In order to counterbalance the traditional academic focus on Anglo-Saxon sources of information,
additional material has deliberately been sought from a Latin environment. One particularly interesting source of information would have been Grameen Creative Lab, situated in
Wiesbaden (Germany)6, which works with developing methods for micro-finance and social business. Regrettably, and in spite of numerous attempts during seven months, it has not been possible to establish any useful contact with GCL.
The methods used for this thesis are document studies and interviews. The written sources include both theoretical and methodological documents, and reports from the assessment of existing, socially motivated interventions. Interviewees have been chosen with the aim to supplement the written sources. They include both persons who work actively with social business, and representatives of those who are not involved at all, but who are actively dealing with financing decisions. Not all interviews actually made have been included in the
references.
The outline of the main part of the thesis is as follows: it starts with a general background (section 3) and a discussion on the need to widen traditional economic theory to include other objectives than those that relate to profit maximisation – for example those relating to the middle area between the private sector and civil society (section 4.1). The concept of social business is then described (section 4.2), with examples from Swedish entrepreneurs and sources of finance (section 4.3). Next, for-profit companies and social businesses are discussed in terms of financial evaluation (section 5). In the following section (6.1), evaluation theory is described as a model for the discussion on how social business can be evaluated, in particular in terms of impact. Since this theory was designed mainly for public sector interventions, its applicability to social business is analysed in this section. Two different approaches are thereafter brought up in the form of examples of existing methods:
using the monetization of outcomes as a means to enhance comparability (section 6.2), versus more descriptive methods (section 6.3). In order to clarify how each method may be applied, they are all described separately, although this results in certain repetition. The findings in section 6.2 and 6.3 are discussed and compared in section 6.4, and conclusions are drawn for further development and research work in section 7.
3. Background
The world today is, to a large extent, characterised by inequality, both between countries and within any given country. Depending on measurement methods and points of reference it may be debated whether poverty is increasing or being reduced, but at any rate the fact is that a very large number of people are living far below acceptable standards. Poverty also exists in developed countries, especially if a multi-dimensional definition of poverty is used, taking into account factors such as social exclusion.
5 Non-Governmental Organisations
6 http://www.grameencreativelab.com/
6 Traditionally – and according to standard economic theory – markets in the private sector are supposed to ensure an efficient resource allocation through transactions between companies and individuals as well as within each of these groups. A public sector is only needed to adjust market conditions in order to solve problems associated with externalities, and the debate often focuses on the extent to which public sector intervention is needed and desirable.
Economic theory does not take a stand on issues such as a “just” distribution of resources – they are considered political and should be handled in the public sector and by civil society.
Therefore, to put it crudely, agents in the private sector have concentrated on their ultimate objective, profit maximisation. In the absence of externalities, market transactions are based on the exchange of resources – eg. goods or services for money – on the basis of a willing seller and a willing buyer at an agreed price. In such a situation of equality there is little need for accountability on how resources have been used by either of the parties. However, in order to enhance a company’s reputation as a quality aspect in the competition with similar
producers, issues of social or environmental responsibility have become increasingly
important lately. This has brought about an interest, also in the private sector, for reporting on the impact private business activities have on the world outside the participants in the market transaction.
In the public sector, resources are generally raised through levying taxes (although more or less voluntary fees may also account for a share of government revenue at various levels).
Since taxes are compulsory, in a democratic society the government needs to account for how these resources have been used. Civil society finances its activities mainly through donations or grants from the public sector, and therefore needs to account for the use of these funds as well as for the impact of activities compared with what has been intended. Both the public sector and civil society are involved in development cooperation, aiming at reducing poverty.
Resources are mostly channelled through recipient countries’ governments or civil society organisations – at times via multilateral organisations such as the World Bank or UNDP.
Legitimacy is needed in order to receive future contributions. This has led to the development of a number of methods and actors related to the evaluation of processes, results and impacts from activities in both the public sector and civil society, and covering in particular
development cooperation7. However, it has also led to a situation of inequality between the donor and the recipient in the various stages of the process, and to accountability requirements that do not correspond to any similar mechanisms in the private sector.
In recent years, social business (defined in section 4.2) has emerged as a middle-ground between the private sector way of doing business and civil society’s mission to solve social problems. Since social business is a relatively new phenomenon, methods and mechanisms still need to be developed in order for the model to be spread and implemented in a way that serves its purposes. Among the important elements are ways to measure and report on social and environmental impacts.
4. Theory and practice
Traditional economic theory is based on a number of assumptions, for example about the individual’s ability to make well informed and consistent choices. Often, a selfish utility maximisation is also explicitly or implicitly assumed as this individual’s preference, where
“utility” mostly equals immediate or delayed consumption of resources or leisure. One consequence of this is the focus on monetary yield in assessments of private for-profit
7 The author has worked with development cooperation for over 30 years, in both government and civil society
7 business as observed in the next section. However, observations from real life, as well as several more theoretical approaches – not least in other disciplines, such as social science – lead to the conclusion that the traditional theory needs to be widened. This has direct implications for the ways in which business is evaluated, and is therefore discussed in this section.
4.1 Widening traditional economic theory (the profit maximizing individual)
According to Yunus8, the creator of Grameen Bank9, traditional economic theory suffers from several fundamental errors about the human nature: “In the conventional theory of business, we have created a one-dimensional human being to play the role of business leader, the so- called entrepreneur. We’ve insulated him from the rest of life, the religious, emotional, political and social. He is dedicated to one mission only – to maximize profit. He is supported by other one-dimensional human beings who give him their investment money to achieve that mission. To quote Oscar Wilde, they know the price of everything and the value of
nothing.”10
Yunus’ assertion is illustrated by the following classical quotations:
Adam Smith wrote: “Every individual - - generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it - - he intends only his own gain, and he is - - led by an invisible hand to promote an end which was not part of his intention. - - By promoting his own interest he frequently promotes that of the society more effectually than when he really intends to promote it”11.
This statement was further enhanced by Milton Friedman, who stated that increasing profits is the social responsibility of business12. In traditional private business, profit is thus the
criterion of merit, and maximizing profit is the standard of success.13
“[The] famous formulation ‘Private Vices, Public Benefits’ refers to the market mechanism’s capability of transferring individual evil egoism into collective welfare. The beneficial social results ensue unplanned, as side effects of the egoistic, self-serving behaviour of
individuals.”14
The polarity between, on one hand, nature consisting of non-human objects and obeying natural laws, and on the other hand culture, consisting of human subjects with a free will has been important for the emergence of modern economic theory. Just as science is related to nature and its laws, it must not be influenced by politics, and the economy is seen as an object ruled by natural laws and decoupled from societal processes. One example of this is the legal form of limited companies, where management and owners are separated, and the latter do not
8 Professor and former chair of the department of economics at Chittagong University in Bangladesh, laureate of the Nobel Peace Prize in 2006
9 A large micro-credit bank in Bangladesh, and part of a conglomerate of social enterprises that have also spread to other countries.
10 Yunus (2007) p. 18
11 Adam Smith ”Wealth of Nations” (1776, 1937: 423) quoted in Vedung (2005) p. 53
12 Friedman (1970) quoted in Enarsson (2011)
13 Vedung (2005) p. 83
14 Vedung (2005) p. 53
8 interfere with operations as long as the ultimate objective (profit maximization) is achieved15. This view of the market functioning as a natural law that must not be subjected to government regulations – except for severe cases of externalities – in order to ensure optimal resource allocation is especially ascribed to the “Chicago School” by critical scholars16.
It should be noted that the sources quoted above speak about “individuals”; however, these individuals are also “persons” in relation to other persons in a social context. In many of the cultures in the “South”, the interest of individuals is clearly subjected to that of the extended family, clan or tribe, and some cultures take a different perspective on time and the
responsibility towards environment and future generations than the one where traditional economic theory has been developed, mainly in Anglo-Saxon environments in the northern hemisphere. Traditional economic theory, taken in isolation, also fails to acknowledge such important driving factors as solidarity, dignity and hope – features that are obviously crucial for the development of real life communities and entrepreneurs.
Such a widened concept is signalled through the inclusion of new characteristics, created in the value chain of social (or inclusive) business, that is: in the process itself. Rather than limiting the outcome of the process to outputs in the form of products or services, these characteristics could be grouped under the concept of “citizenship building” or “the construction of social capital”. They include such aspects as the visibility and recapture of dignity, the affirmation of identity, environmental consciousness, a capacity to influence politics and the recognition of basic human rights.17
According to Palmås, something similar to social businesses has existed in pre-modern European societies, for example in the form of artisan guilds. However, more modern
thinking – starting with Adam Smith and increasingly during the 20th century – has based the emergent institutions in society on the concept of homo economicus, promoting purely profit maximizing business. Social objectives have increasingly been seen as a hindrance for attracting capital, creating suitable forms for association etc18.
The concept of social business can be seen as one way to regain more social characteristics for the “profit maximising individual” in a widened economic theory. In the following, social business is defined, with a special section on the Swedish context, as a basis for the discussion about evaluation needs and methods.
4.2 Definition of social business
In this thesis, “social business” is defined according to the presentation in two of his books19 by Yunus, who has invented and spread the concept. In very general terms, social business can be said to have two objectives: solving social problems and achieving financial
sustainability. These goals take the same priority, although financial sustainability and independence may be seen as a prerequisite for the sustainability of the social goal. A third goal is environmental friendliness, which can also be seen as a prerequisite for
sustainability20. However, Environmental Impact Assessments form a whole, separate area of
15 Latour, quoted in Palmås (2008)
16 Klein (2008)
17 Martin et al (2007) quoted in Vernis et al (2011)
18 Palmås (2008)
19 Yunus (2007, 2010)
20 Enarsson (2011)
9 research, and will not be treated further in this thesis.21 Social business has created a market where the three objectives – social, financial and environmental – both cross and enhance one another. According to some proponents, “[the] belief in a complicated and multi-facet purpose is the source to the organization’s creativity and success”22
This definition draws a clear border between social business – which belongs to the private sector – on one hand, and on the other hand governments (including multilateral development agencies) in the public sector, and non-governmental organizations (NGO’s) in civil society.
Nevertheless, the social objectives may be shared with actors from both these sectors. One main difference is that while actors in the public sector are dependent on political decisions that may shift over time, and actors in civil society depend financially on either donations or government grants, the private sector generates its own funding on a transactional basis23. Currently24, Yunus identifies two different types of social business:
1. “Companies that focus on providing a social benefit rather than on maximizing profit for the owners, and that are owned by investors who seek social benefits such as poverty reduction, health care for the poor, social justice, global sustainability, and so on, seeking psychological, emotional and spiritual satisfactions rather than financial reward
2. - - profit maximizing business that are owned by the poor or disadvantaged. In this case, the social benefit is derived from the fact that the dividends and equity growth produced by the PMB [Profit Maximizing Business] will go to benefit the poor, thereby helping them to reduce their poverty - -.”25
These two types are, however, only the beginning of the development of other types of social business, according to Yunus. This is illustrated by the fact that several business enterprises that fit into the general description have been started with somewhat different characteristics in developed countries. In these countries, “poverty” mostly takes a different shape than in Bangladesh, where Yunus originally led the design of both the micro-finance system of Grameen Bank and the ideas about social business. For example, unemployment in a country with a functioning welfare system probably does not lead to a situation where the person affected has to survive on USD 2 (general poverty) or USD 1 (extreme poverty) per day26. Instead, unemployment often leads to social exclusion and an inability to make good use of the person’s competence and potential. Poverty is also a relative concept, which can be measured in comparison with the average or median income, or by using the Gini
coefficient27. Immigrants, physically or mentally handicapped, elderly persons, drug addicts
21 For further reading, see for example http://ec.europa.eu/environment/pubs/home.htm
22 Bamburg (2008) quoted in Enarsson (2011) p. 45
23 This means that funds are received in return for something, whereas transfers – grants and donations – are paid without corresponding to any equivalent good or service (Gustavsson 1995)
24 The social business concept is constantly being developed
25 Yunus (2007) p.28. For the purpose of this thesis, the second type may be treated as a normal for-profit company, and it will not be discussed further.
26 Generally accepted definitions of poverty lines, but national poverty lines vary between USD 1 and USD 40 per day in Purchasing Power Parity, source: World Bank
http://econ.worldbank.org/external/default/main?pagePK=64165259&piPK=64165421&theSitePK=469382&m enuPK=64216926&entityID=000158349_20100427143536 accessed on 2011-09-09
27 Common inequality index, source: World Bank
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/EXTPA/0,,contentMDK:20238991~isCURL:
Y~menuPK:435055~pagePK:148956~piPK:216618~theSitePK:430367,00.html accessed 2011-09-09
10 and ex-convicts are examples of groups that face social exclusion, many times in combination with economic poverty, in developed countries.28 To overcome such social exclusion may be one of the purposes for social business in countries that are not economically poor.
Poverty should not be interpreted as meaning just an individual’s insufficient or inappropriate access to income and/or assets, although for practical reasons the Purchasing Power Parity (PPP) has become widely used. The Government bill “Shared responsibility: Sweden’s policy for global development”, which was based on the report from a multiparty commission, states that poverty is multi-dimensional. It is expressed in several different ways: lack of
opportunities, power and security, and looks different for different persons. In order to fight poverty, many different kinds of contributions are needed, not only related to resource growth and distribution but also to social equity, the democratization of society, conflict resolution and human rights – to mention but a few areas. These contributions should be designed and implemented so as to handle the specific causes of poverty for different persons in their different local contexts, and they must empower people’s capacity to change their situation29. This means that “poverty” does not only exist in developing countries, but it may look
different in developed countries. Therefore, this thesis is based on the view that social
business is an appropriate tool for combating poverty in Bangladesh and Sweden alike, except that the social mission will mostly have different foci.
Other definitions/varieties
Martin and Osberg have developed another definition of social enterprise, which can help making the distinction to traditional business. This definition is made up of three components:
1) The identification of an equilibrium that is stable but unjust due to the exclusion, marginalisation or suffering of a group of persons who do not have any means to achieve a transformation by themselves
2) The identification of an opportunity to intervene in this unjust equilibrium through the development of a value proposal, which puts the equilibrium into question through creativity and direct action
3) The creation of a new equilibrium which alleviates the shortcomings of the chosen group of persons, and which, moreover, ensures a better future for the society as a whole through scaling up the solution.30
Looking at the issue from a value chain angle, persons who live in poverty or social exclusion can contribute to the creation of wealth for themselves and their community in the following ways through social business:
- As providers of inputs, for example raw material
- As employed or self-employed in the production of goods and services
- As clients, making use of goods and services, thereby becoming part of the markets.
Making the value chain more environmentally sustainable, or cutting unnecessary “middle- men costs” in order to make the output accessible to low income groups are examples of other important angles of social business. 31 The social values may, on one hand, imply certain challenges – such as the adaption of production to employees with special capacities or needs On the other hand, the quality of the products must be at least as high as that of traditional
28 Vernis et al (2011)
29 Prop. 2002/03:122 bil
30 Martin et al (2007) quoted in Vernis et al (2011)
31 Vernis et al (2011)
11 enterprises (given that customers sometimes believe that “the social aspect” means inferior quality), but at the same time social business also adds extra quality to the products – such as being Fair Trade. The marketing of such products may be turned into ways to propagate these social values32.
A variant of social business is a social enterprise that receives funding through some kind of loans (micro credits, bonds etc.) rather than through investors supporting as shareholders. For any investment to be recognised as a “social investment” in this context, no interest or
dividend should be paid to the investor. Although it might be argued that a certain interest or dividend could be reasonable, for example to cover for inflation, Yunus maintains that such discussions will inevitably lead back to a focus on financial reward instead of the social mission of the enterprise. Ideally, social business should be financed by investors that share the same values, time horizon, risk profile and expectations about return on their investment as the social enterprise they are financing33.
In the private sector, much attention has been given, in recent years, to Corporate Social Responsibility (CSR) whereby private corporations are actively working for a social objective through funding, lobbying or charitable activities. This, however, does not change the
fundamental rule of the game according to which the ultimate objective of these corporations – and their investors – remains profit maximization.
Another phenomenon that should be defined in relation to social business is social entrepreneurship. According to a general definition, it is an innovative initiative to help people through economic or non-economic means, and within the framework of for-profit or not-for-profit organizations. Social business may therefore be considered as a subset of social entrepreneurship.34 It bridges the division between the public sector, the private sector and civil society, but should not be seen as a distinct pole in a dichotomy between “social” and
“commercial”. Instead, there is a scale from selfish profit maximization to unselfish social mission35 where CSR and social business appear towards the centre.
One should also be aware of the scale from individualism – typically an ideal promoted in modern Western developed countries – and social cohesion – which dominates many other cultures, where the family, the clan or the tribe may be the entity that matters rather than the individual. This is not a dichotomy either, since the individual and human relations constitute the fundamental basis for the organisation and purpose of a business enterprise, while
organising business is part of the human organisation that forms the basis for a society36. 4.3 Social business in Sweden
In a Swedish context, a certain distinction needs to be made between social business and civil society due to Sweden’s historic development and problems of translation. The concept of social business originates from an Anglo-American tradition, where ideally the world should be changed through entrepreneurs in financially sustainable companies. Their social objective is normally either to decrease social exclusion, or to deliver equitable and efficient public services, often in a set-up without dividends. A correct translation of this phenomenon should be samhälleligt företagande (societal business). Another tradition stems from continental
32 Stjern (interview)
33 Bamburg (2008) quoted in Enarsson
34 Yunus (2007)
35 Enarsson (2011)
36 Follett/Simms (2009) quoted in Enarsson (2011)
12 European concepts of “social economy”, made up of associations, cooperatives, foundations or similar entities with the aim of creating public goods or benefits for their members, not profit maximization. This relates to civil society, which has a strong presence in Sweden since the late 19th century37.
Currently there are several types of social business in Sweden: companies that fit Yunus’
definition with a social, humanitarian or ecological purpose; cooperatives managed by and for persons with mental disabilities, former drug addicts or prisoners; and business branches of NGO’s with the aim to finance the social work of the association; and hybrids of these. 38 During recent years, the Swedish Government has made attempts to engage cooperatives to create employment for individuals that have difficulties in finding jobs in the ordinary markets. The current centre-right Government has also outsourced the delivery of public services to private schools, nursery homes, hospitals etc. – however these have mostly been for-profit companies, triggering a debate on the appropriateness of the model39. A new legal form was created in 2006, companies with limited responsibility for owners but also limited distribution of dividends to owners40 to cater for the problem of specifying the public services to be delivered by a private actor in procurement documents and contracts. The limited
dividends were intended to keep owners’ and managers’ focus on the social objectives rather than the profitability. Whereas a similar legal form in Great Britain (Community Interest Companies) has led to a large number of actors there, very few companies have been created according to the new model in Sweden. This may have been caused by the lack of a regulating body in Sweden – corresponding to the British Regulator of Community Interest Companies – but also by the public procurement process, too complicated for new and still small
companies, and by the difficulty to find sources of funding.
While a whole sector of independent social banks and Community Development Financial Institutions in Great Britain offers different forms of low-cost loans, normal Swedish commercial banks have a problem with the uncertainty associated with the fact that social business does not exist to generate profit and often lacks proper securities. However, the Savings Banks (sparbanker), which were formalized in 1923 through the Savings Banks Act41, have been mandated to promote savings through banking activities in a certain geographical area without paying dividends to anyone42. Another vehicle for obtaining
funding for social business are the Credit Guarantee Associations, which are cooperatives that provide guarantees for their members – not-for-profit associations or other cooperatives that wish to open or expand their business – in order for these to obtain loans in commercial banks43. The main target groups are, thus, civil society actors, although employment creating social businesses also appear to be able to access guarantees.
37 Palmås (2008)
38 Gawell in Yunus (2008) quoted in Enarsson (2011)
39 Ibid.
40 Aktiebolag med begränsad vinstutdelning, Aktiebolagslagen (ABL/Limited Companies Act 2005:551, ändr./amended 2005:812)
41 Last amended in 1969, Mårtensson (2009)
42 ”En sparbank har till ändamål att, utan rätt för dess stiftare eller andra att få del av den vinst som kan uppkomma i rörelsen, främja sparsamhet genom att driva bankverksamhet i - - ett visst verksamhetsområde.”
Act 1987:619, chapter 1, article 1 (as amended 2004:304)
43 http://www.coompanion.se/gbg/kgf/ accessed on 2011-07-08
13 Finding ways to assess whether social businesses achieve what they purport to achieve – a social impact objective under the restriction of financial, and preferably environmental, sustainability is crucial. Such information is needed for persons or groups intending to invest not only funds and physical resources but also their time, creativity and commitment into social business (ex ante). Persons or institutions looking for opportunities to make social investments in such enterprises also need this information, especially if they have declined dividends from their ownership or loans. However, the need for accountability checks is not as important in social business as in projects and programmes that are completely funded with donations or grants, in which case the funders will need to be reassured that all their money has been correctly and well spent. Social business works with resources that it has generated through its own value chain, or through credits on more or less market conditions. It goes without saying that similar information is needed for an assessment ex post of what has actually been achieved, in order to inform owners, managers and lenders about needs to maintain or change their course of actions. In the following sections, this information need will be analysed.
5. Financial evaluation
As was stated in section 4.2, social businesses have two objectives: achieving a social
objective, and becoming sustainable. The sustainability issue can, in turn, be divided into two parts: financial and environmental sustainability. However, the environmental friendliness may also be considered a social, or indirect objective, and only the financial sustainability is discussed here. Financial sustainability should be taken as the company’s ability to stay in business in the medium to long term with resources generated through market transactions, plus possibly social investment, certain volunteer time etc. Normally, no special grant, donation or subsidy should be needed, other than what any similar for-profit business could receive in similar circumstances.
The issue of economic value creation for business initiatives with lower income sectors has been investigated in several Latin American countries44. The study includes such initiatives performed by private business firms or cooperatives (the whole organization), and socially inclusive business as part of the entire business of a private company or a civil society organization (“a project”). In the latter case, it may be enough if revenue contributes towards meeting fixed or general costs, or towards an organization’s social mission. However, making profit may easily become an end in itself, and it may thereby overshadow the social mission.
On the other hand, it may be difficult to stick to efficiency in a business that only forms part of an organization with a strong social mission and a corresponding leadership.
According to this study, in traditional private companies economic value equals profitability.
Revenues must be sufficient to pay for both production and opportunity costs, since the latter represent the value of the best option available to investors. This is because shareholders could withdraw their capital to invest in a more profitable business. Social enterprises, however, create economic value when revenues from marked-based initiatives ensure their sustainability – or, in the case of civil society organizations, contribute towards sustainability together with grants and donations. For cooperatives, operational surplus should cover the maintenance of the value of revolving funds and productive assets after compensation has been paid to associates.
44 Márquez et al (2010)
14 Useful indicators – accounting based and other
Indicators that can be used to measure economic value are - For companies:
o return on assets (ROA): net profit divided by total assets. This gives a measure of “asset utilisation efficiency”: how the funds invested in different kinds of assets – physical, financial and immaterial as well as fixed or current –
translate into a net surplus or deficit for the period. Over time, the ratio should be positive and sufficient for the firm to stay in the market
o return on equity (ROE): net profit divided by equity (total net assets less short- and long-term debts). This measures “shareholder returns” or how profit relates to the net substance value of the firm – including the amount invested in
shares, but also accumulated results to-date. It shows the view of the financing parties; whether or not it has been worthwhile to keep investing in the firm.45 Another indicator, which is widely used by professional investors in for-profit companies, is P/E – market price of shares in the stock-market divided by the number of shares.46 However, normally this indicator can only be used for limited companies with shares that are bought and sold in a Stock Exchange. Asked to name the three principal indicators he would choose to evaluate the economic sustainability of a social business, such an investor opted for:
- growth of sales (or at least not diminishing figures), given that the social business is likely to want to expand in order to increase the social value of its work
- a stable profit, not necessarily big, but sufficient and not fluctuating too much - solvency with respect to cash and cash equivalents, since this is often a major
stumbling block for companies which may otherwise be profitable.47
- For projects (that is: social initiatives as part of a for-profit business enterprise):
o Internal rate of return (IRR), which is a measure of net surplus in relation to the funds invested in the project (assuming a project “internal balance sheet”), often compared with a percentage that has been decided by management or the board as an estimate of how much the project should contribute with, and o net present value (NPV): the net surplus of the project estimated over its entire
expected life-span. In order to calculate NPV, information about invested amounts and cash flows throughout the project’s life cycle is necessary, as well as the opportunity costs for investors (which may, or may not, include a
devaluation interest rate to cater for the preferences with respect to time).
Presumably, this would have been taken care of in a well functioning market, but in the absence of such mechanisms, it may be challenging to calculate these indicators adequately – see section 6.2 below.
- For a civil society organization:
o net income o + depreciation,
and the capacity to maintain a revolving fund:
o cash and cash equivalents
o + the net of accounts receivable minus accounts payable, o + inventory of productive assets. 48
45 Ibid.
46 Jakobson (2009)
47 Kinnunen (interview)
15 Indicators – in particular showing economic ratios – have been in use since the 19th century, and their use is not restricted to private companies. Even civil society organisations may use such indicators as a means to facilitate a diagnosis of a situation, to assess performance and to enhance planning – both internally and externally. In recent years, indicators have been developed according to the characteristics of different organisations; relating to not just income statement and balance sheet headings, but sometimes also to eg. staff in knowledge- based organizations. Civil society organizations may develop three types of indicators:
traditional (mainly financial), purpose related and activity related49. To some extent, the latter types of indicators may be dealt with in the context of impact evaluation and Balanced
Scorecards. Financial indicators suggested in the study for a fund-raising NGO included yield/financial assets, solvency (equity/total capital) and net income.50
Comparability and costs
The use of standard indicators is widespread, and together with generally accepted accounting practices – including International Accounting Standards and International Financial
Reporting Standards – it seems reasonable to suppose that these indicators would be comparable (which appears to be the very purpose with them). However, in a study51 of literature and several Swedish cases it was shown that many financial indicators are neither uniform nor comparable between different for-profit companies even in the same country.
This must be remembered in the discussion.
Another problem is that unlike businesses that operate in narrow and well-defined commercial spaces structured around markets, social sector organisations operate across all areas of
society and, as a consequence, engage with a wide diversity of resource inputs (actual and in kind, e.g. volunteer time), function in different institutional settings (market and non-market) and generate multiple, distinctive, non-comparable outputs52. Therefore, financial indicators may not reflect all inputs used or give a useful picture of sustainability.
Sometimes, economic value may also consist in increased consumer loyalty or market volume, or in operating cost savings such as when electricity consumers are willing to start paying for their energy consumption (instead of connecting illegally to wires) in return for adequate and stable supply. These factors are not always easily measurable. In other cases, economic value may consist in making use of price premiums, excess capacity or trade margins.
Creating credible economic indicators is often expensive, and the evaluation of these
indicators requires knowledge about the underlying conditions for value creation. Apart from an appropriate leadership, measuring economic value creation requires accounting and similar systems, costly audits and working capital (sometimes acquired through micro finance
mechanisms). Social business is more challenging – and costly – when targeting “the poorest of the poor” since this low income group is more vulnerable. According to the study,
engaging low income persons as suppliers – thereby raising their income – is a less
demanding way to fight poverty than trying to incorporate the same groups into the consumer
48 Márquez et al (2010)
49 Traditionella, ideella och verksamhetsspecifika
50 Hurtig et al (2003)
51 Moradi et al (2008), and Nilsson (interview)
52 Nicholls (2009)
16 market, although adjusting the volume of the goods or services as well as payment
mechanisms does facilitate. However, in both cases exchange with low income groups is more costly due to information asymmetry and transaction costs. Technological and institutional innovations, as well as innovation in the design of products and services, distribution
channels, transportation and consumer education, are needed to overcome these challenges.
Use of indicators for financing decisions
It is very common to safeguard a financial contribution, given in the form of a loan or a credit, through demanding some sort of security for the invested amount (including accrued interest).
This is normally a legal requisite for banks and credit institutions, and it often entails a major problem for emerging or small social businesses, which do not have any valuable assets to pledge in security of a loan. According to the Guidelines of the Finance Inspection, the Swedish savings banks should not give loans to persons that are not deemed to be credit worthy, but should always require a security. This places heavy demands on certified financial reporting that can be translated into indicators.53
However, an assessment of financial sustainability for financing decisions does not necessarily imply credible financial indicators. Credits without security have been widely accepted, for example in the case of so-called sms-loans54, and the savings banks have found a way to evaluate a candidate for micro credits, even if he/she is not a Swedish citizen and has a default in the records. If the business idea is sufficiently convincing, and thereby the ability of the entrepreneur to repay the credit is deemed appropriate, an informal security may be provided by a local not-for-profit organization. This security does not imply that the NGO assumes the financial risk, but instead, performs the screening and choice of suitable
candidates, trains them and guides them through the right formalities with authorities. Once the credit has been approved, the NGO then coaches the entrepreneur for the duration of the credit. The interest charged by the bank should cover administrative costs, and the cost of capital and credit risks – which means it does not fit Yunus’ definition of social investment, although the savings banks are not-for-profit organizations that reinvest any profit made. This method is built on trust between on one hand the bank and the NGO, and on the other hand between the NGO and the entrepreneur, but in the longer term, a two-way trust is also built directly between the entrepreneur and the bank55. In this way, the bank may combine economy of scale with detailed knowledge about the business and the entrepreneur through the NGO. It is also a way to avoid the social exclusion from financial services that often results from the small scale and uniqueness of entrepreneurial business ideas56. In addition, intermediary NGO’s may help prospective consumers to overcome their prejudice and habits, such as accepting services that are provided by persons with a handicap. This is because NGO’s value the social component, and may help propagating these views57. The importance of trust for economic development has been demonstrated by Rothstein and others.58
Increased trust decreases the investor’s dependence on financial indicators.
Evaluating the financial sustainability of an existing or proposed social business is important for both owners and other sources of finance, as well as for managers and employees who
53 Gustafsson (2009)
54 Sms-loans are quick loans applied for and awarded through an exchange of instant messages on the mobile phone
55 Gustafsson (2009)
56 Brytting and Hellgren (2007)
57 Márquez et al (2010)
58 Rothstein (2003)
17 invest their time and efforts in the enterprise. However, what is actually assessed is often the viability of the business plan, especially before the company has been launched and is searching for financing, but also when more financing is need in existing firms. Such an assessment mainly focuses on products and prices, market strategies and potential customers as well as production costs and cash management.59 Making this kind of an individual
assessment requires very good knowledge of both the local context and the entrepreneur. Vital factors may not be possible to reflect in indicators even in terms of financial sustainability.
In this section, it has been demonstrated that the evaluation of financial sustainability through indicators based on the income statement and/or balance sheet is not as straight forward as one might suppose, even for a profit maximising firm. For social business, additional challenges arise from special features in their markets. The following section will deal with the evaluation of the social mission.
6. Evaluation of social impact
An evaluation analyses the causes and effects of the results on the development of a situation.
Effects may pertain to individuals (micro-economic evaluations), to groups, or to the society or the economy as a whole (macro-economic evaluations). 60 However, ascribing a value of such effects depend on the preferences, knowledge and objectives of each person who uses the evaluation results: “Like beauty, the perception of value lies in the eyes of the beholder”61. If financial sustainability is considered rather easy to measure – although the previous section shows that this is often not the case for social business – the social impact that is the very objective of social business is a more complicated issue. This will be discussed in the current section, starting with evaluation theory as a model for the assessment.
6.1 Evaluation theory
As has been shown, the objective for most private enterprises is to create economic value for the owner, including the owner of financial institutions that contribute with investment. This value may be defined in different ways: net profit over a certain period (measured in one or several income sheets) or increased monetary value of assets (measured in balance sheets or in the stock market); it may apply to historic development or expected future development (eg. Net Present Value). Therefore, evaluation efforts are focused on financial indicators, and possibly the production process in order to influence financial indicators. There is little need for evaluation of the effects of the enterprise (however: see CSR and similar issues below).
By contrast, evaluations of impacts are needed in the public sector and civil society in order to assess whether these institutions and organisations meet objectives that are often political by nature. One field, where impact evaluations are particularly common is official development assistance. Here, the results of evaluations are used to improve the efficiency and
effectiveness of interventions, as well as for accountability purposes, both towards tax-payers in the donor country and (to some extent) towards intended beneficiaries and their political representatives. This is one reason why it is likely to find useful methods for impact evaluations in this context, rather than in the private sector.
59 Edström (interview)
60 Hemström-Martinsson (2002)
61 Márquez et al (2010) p 315
18 In 1991, OECD/DAC 62 issued Principles for the evaluation of development assistance, focussing mainly on the management and institutional set-up of evaluation systems. Based on these principles, DAC issued quality standards for development evaluation in 2009 63. The purpose with these standards is, among other, to inform evaluation processes and products, and also to facilitate the comparison of evaluations across countries. At the same time the standards should be applied with consideration for the local and national contexts. Apart from impartiality, independence and credibility they also stress the need for usefulness of
evaluations to policy makers and stakeholders. Objectives should be validated according to generally accepted criteria such as SMART (Specific, Measurable, Attainable and Realistic).
In this thesis, the main theoretical point of departure is Vedung’s system model, which may be illustrated as follows:64
R E S U L T S Input -> Conversion -> Output -> Immediate
outcome ->
Intermediate impact ->
Ultimate impact I M P L E M E N T A T I O N
According to Vedung, this system model has been adapted to Government intervention evaluation. Outcomes are what happens to the addressees (immediate impact), including the actions of the addressees. On quality aspects, Vedung asserts: “Evaluations themselves must meet some minimum standards of quality, such as systematic data collection, and the
conscientious application of criteria of merit and standards of performance - - [They are]
intended to play a role in future practical action - - or decision making - - or for accountability reasons”.65
Vedung is a political science researcher. Economists also use the term evaluation for ex ante cost-benefit and cost-effectiveness analyses of potential, future options. According to normal practice among economists, a distinction is made between a follow-up and an evaluation. A follow-up is the documentation and description of a process to determine what actually happened and/or the output of the process. It may be simple – collecting data and producing statistics – or more qualified, including also an analysis of the implementation of a
programme. The simple follow-up aims at answering the question whether the quantitative and qualitative goals of the programme have been achieved, and whether budgetary and time constraints have been respected. The qualified follow-up focuses on the process and the results. It may use document studies, interviews/questionnaires and observation methods.
Follow-ups are facilitated if data needs are defined before the programme starts, and if registration problems are handled currently.66
62 The Development Assistance Committee (or Development Co-operation Directorate) of the Organisation for Economic Cooperation and Development
63 OECD/DAC (2009)
64 Vedung (2005) p. 5, slightly modified
65 Vedung (2005) p. 11-13
66 Ibid.
19 Vedung discusses eight issues relating to evaluations67:
1. The purpose and
2. The organization of the evaluation,
3. The characteristics of the programme or institution 4. The production process to be evaluated
5. The assessment of results and 6. Impacts of the intervention
7. The definition of criteria (indicators) and performance standards 8. How the evaluation results will be used.
The issues within the frame are explanatory, in the sense that they analyse a causal
relationship between the means and the ends. The other issues are non-explanatory, but on the other hand they are necessarily treated in every kind of evaluation. These issues will now be briefly discussed, and then used as the structure for a more lengthy discussion on different practical approaches to evaluations.
1. The purpose of evaluations
According to Vedung68, all evaluations are performed for either accountability, intervention (programme) improvement or basic knowledge purposes. He also adds political,
administrative or personal power games. In the case of social business another purpose should be added: to create a basis for a decision about whether to start the business and how to organise it, or whether to support the enterprise in the short, medium or longer term. In the latter case, stakeholders may include both target groups, sources of finance and other
resources, and authorities. In accordance with how economists use the term, such evaluations are used ex ante to assess the intended social impacts of a programme yet to be started, and naturally, the outcomes then need to be assessed ex post.
Discussion
The accountability purpose, while important in the public sector, is likely to be restricted to large social businesses, with layers of principals and agents. However, evaluations could also be used in order to demonstrate results and impacts to participants, target groups and stake- holders in social business – especially if such outcomes have been given as a reason for the intervention to take place. In the case of intervention improvement, evaluations may be used as a more elaborate supplement to monitoring systems, because these systems normally take an internal perspective rather than examine outcomes.
As for basic knowledge purposes, this could be important for the academia, given that social business is a relatively new field, which furthermore challenges traditional theory. Such knowledge cold also be used by political and regulatory agents as a basis for decisions about creating a supportive environment for social business (or not).
2. The organization of an evaluation
Vedung69 mentions three categories of actors involved in the evaluations: arrangers
(designers, decision-makers and funders), producers, and users (who are often identical with the arrangers). Depending on the need for in-depth knowledge versus independence,
producers can be internal or external. Credibility and legitimacy may depend on this choice –
67 Ibid.
68 Ibid.
69 Ibid.
20 however, which alternative is more credible or legitimate may depend on the respective user.
Vedung states that with a programme improvement purpose, evaluations should be produced internally, whereas if performed in order to improve accountability or basic knowledge, external evaluations are preferred.
It is important that the evaluators state explicitly their choice of model and methods, and give reasons for their choice70.
A Clients oriented evaluation is based on the expressed desires and needs of the clients, their values, assumptions and objectives. This is a descriptive method unless it involves an
assessment and valuation of the clients’ needs (stated or not), in which case it turns into a prescriptive method. Here, it is important to define whether “clients” are the clients of the programme or of the evaluation in case these groups are not identical. A difference may also have to be made between target population and the actually impacted population. According to Vedung, the clients oriented evaluations model is justified by political ideologies based on the superiority of the market place over public-sector provision (consumer pressures or actual purchase choice leads to improvement of service delivery). It is also justified by the
participation of clients, who can thereby influence and take responsibility for service content.
This implies that value pluralism needs to be accepted.
The stakeholder approach takes into consideration others who are interested in or affected by the intervention:
- Initiators and funders, - Implementers,
- Target groups, interested groups (knowingly or unknowingly), programme competitors
The evaluation design may be gradually determined through an interactive procedure
(including the definition of stakeholders). Often, results are reported in an anecdotal form. A descriptive theory is used, and overall valuation is often left to the stakeholders.
Discussion
Naturally the purpose with the evaluation will decide how it will be organised. In the particular case of social business, entrepreneurs/owners, managers and funders may be expected to need less ambitious evaluations as a basis for their decisions. Involving target groups and other affected groups (including authorities and lobby groups) may be an effective way to promote the social mission of the enterprise, both locally and in a wider context.
However, resources for making a fully-fledged evaluation may often not be sufficient in a small social business, and will probably have to be left to academia.
3. Characteristics of the programme
Since Vedung’s point of departure is public policy and programme evaluation, he mentions71 several types of interventions that are not relevant to social business, such as policy
instruments (regulations, economic means and labelled information). Another distinction of less relevance in this context is between programme oriented and system oriented evaluations, for the simple reason that social businesses are not likely to include whole systems in society.
This does not mean, however, that two social business programmes cannot interrelate and mutually reinforce – or diminish – the impact of one another, in which case these interrelated impacts may also be evaluated.
70 Hemström-Martinson (2002)
71 Vedung (2005)
21 4. The production process and 5. The assessment of results
In Vedung’s system model above, the production process is called “conversion” (of inputs to outputs). Here he describes how “monitoring implies empirical checks of the actual linkages in the chain of implementation, but particularly of the point where the intervention providers encounter the clients.”72 The evaluations should be made in five steps, starting with the intervention logic, that is how the intervention is supposed to achieve its objectives. Relevant checkpoints should then be selected – preferably starting from the end of the chain, where the output is delivered to the addressee. Three methods for the following step, the collection and analysis of data about these checkpoints, are mentioned: document analyses, interviews and observations. It is important to avoid influencing the data through the way in which they are collected; the mere fact that a question is asked may, for example, make a respondent change the views expressed. In the fourth step, criteria and standards of worth are applied to the empirical findings; that is indicators and targets or benchmarks for measurable data (see below). Scoring may be done analytically (per component) or globally on overall
performance, but in the latter case a system for weighing the different component scores against one another is needed – or else the global judgement should be left to the users of the evaluation results. The fifth step is an addition by Vedung: to add a general governance perspective, not directly linked to the production process.
Outputs: goods and services
An output may consist of a physical product [vara], a service, a semi-finished product [halvfabrikat] a programme [programvara] or a combination of these. A service may be described as an activity performed or made available by an organization [or a person] to someone else and which creates extra value but which is not primarily the production of a physical product [vara]. A service may also consist of personal or physical resources put at the disposal of the addressee or the transfer of information/knowledge. A service is defined as supplier activities at the interface with a customer and the results of all supplier activities to meet the customer needs”73
Services are characterised by their immaterality, the chain of activities, consumption and production taking place simultaneously. The consumer is a co-producer (which sometimes requires the physical presence of both), and services are perishable and heterogeneous and closely related to persons’ interaction.
Discussion
In the case of social business, the way in which the outputs – products or services – are produced, may be at least as important as the output itself. The reason is that the production process is often designed so as to enhance such social aspects as inclusion, dignity, and conflict resolution. Therefore, this aspect should be in focus in an evaluation of “conversion”
and output.
6. Impact assessment
A distinction can be made between impact and effectiveness assessments. In the latter, both outputs and effects may be studied with a focus on planned, positive effects in the short or medium term. Impact assessments, on the other hand, are limited to effects but include both planned and unforeseen, positive and negative effects – also those that occur in the longer
72 Ibid. p. 137
73 ISO 9004-2, 1991:5, quoted in Pettersson (2000)
