In a working paper titled ‘Profit or Purpose: The Dilemna of Social Enterprises’ by Professor MS Sriram from IIMA, Sriram questions the balance between profit and purpose in social enterprises. The paper seems to suggest that cooperatives may present the best opportunity to balance these two elements and that good governance structures must be put in place to prevent mission drift. Sriram highlights the case of Amul, a dairy cooperative, and explains that its set up has allowed it to grow and become more commercialized while continuing to benefit the small and marginal actors within its value chain.
At a time when social enterprises are sprouting in India, should a ‘for-profit’ social enterprise be designed for ‘purpose’, or for ‘profit’?
A working paper by Indian Institute of Management, Ahmedabad answers this question of balancing purpose and profits in a social enterprise. It can be inferred from the paper that cooperative form might be the best form of incorporation for a social enterprise, subject to certain caveats.
The working paper — ‘Profit or Purpose: The Dilemma of Social Enterprises’ by Professor MS Sriram, adjunct faculty at IIMA, emphasises on the importance of cooperative model for social enterprise. Three forms of social enterprises are dealt with in the paper viz. not for profit, cooperative and for profit.
“In a cooperative there is little dilemma between profit and purpose. Pay-offs of profits is fully aligned with purpose. We therefore argue that cooperatives are the most elegant form of social enterprise. In case of cooperatives like in not for profits, there are issues of growth and drift but not dilemma. However cooperatives may be unsuitable to run certain activities which do not have a regularity of aggregation,” states the paper.
Talking about the Amul model, Sriram says that the milk cooperative movement did not attract drift between beneficiaries and growth pay-offs. As Amul gets more commercialised, it will benefit the small and marginal players involved in the set-up.
“What this indicates is that, while there can be alignment of pay-offs, there is an underlying question of ‘fair’ distribution that a social enterprise will be called to address. Growth is a goal in all these three models but the question is how the benefits of the growth are distributed in the alternative structures.”
The paper also enumerates distribution in all these methods. “In case of cooperatives it (distribution) is codified. In ‘for-profit’, it is left to the discretion of owners of capital. A cooperative cannot grow without its members unless it drifts, while a ‘for-profit’ can grow irrespective of the beneficiary. Therefore growth in ‘for-profit’ needs to be scrutinised carefully,” states the paper.
According to the paper, good governance matters (in social enterprise) as it negates advantages and disadvantages of organisational forms.
In the concluding words, the paper mentions that some issues might help in understanding space between purpose and profit. “Enterprises articulating double bottom line invite scrutiny and while the profits can be measured, measuring the purpose becomes subjective and contentious.”