Health care and cheesecake (factory)
The New Where and How of Innovation

Hybrid Organizations

I wrote in March about the rise of a new type of business, which combines aspects of for-profit companies and of nonprofits to reflect an increased sense of corporate social responsibility among companies. For today’s post, I thought I’d mention articles I read on the topic not too long ago, all from the Stanford Social Innovation Review.

The first one, “In search of the hybrid ideal” (Summer 2012), describes the results of a Harvard Business School study (done in partnership with Echoing Green), whose purpose was to better understand these new models, in recognition of the “trend among social innovators toward creating hybrid organizations that primarily pursue a social mission but rely significantly on commercial revenue to sustain operations.” Because such a structure is so novel, hybrid companies face distinct challenges due to the lack of a supporting ecosystem and the risk of mission drift.

The article lists four broad types of issues:

  1. Legal structure (New legal structures in the US include the L3C – low-profit limited liability company – the Benefit Corporation and the Flexible Purpose Corporation, but they are not available in all states.)
  2. Financing (hybrids don’t have a clear path to funding and often experience difficulties in raising capital, but an increase in impact investing would certainly help them)
  3. Customers and beneficiaries (both need to be differentiated in the hybrid model, since the beneficiaries usually cannot afford to pay for the full price of the product transacted.)
  4. Organizational culture and talent development (hybrids must foster a specific culture to thrive, and “because hybrid organizations are not widespread, job candidates with extensive experience or training in hybrid working environments typically do not exist”, so the authors recommend to hire young people right out of school and train them.)

In the Fall 2012 issue, “The truth about Ben and Jerry’s” claims that, “contrary to myth, the sale of Ben and Jerry’s to corporate giant Unilever wasn’t legally required.” While proponents of the new legal structures such as the B-Corporation claim that they would have prevented the sale if they had existed back then,

  • the author of the article points out that “the best and arguable support for this view [that corporate directors must always act to maximize shareholder value] is from Dodge v Ford, a 1919 decision from the Michigan Supreme Court… [but] other courts have not followed its view of shareholder primacy.” (Background information on the case can be found here.)
  • he quotes a Cornell Law professor, Lynn Stout, as saying that “shareholder maximization is not a modern legal principle” (you can read her essay on the topic on the SSRN website),
  • the New Jersey Supreme Court has stated, according to the author, that “modern conditions require that corporations acknowledge and discharge social as well as private responsibilities as members of the community within which they operate.”
  • the author also mentions that some state legislatures have enacted statutes that “expressly authorize corporate directors to look beyond shareholder wealth maximization” (they are called “other constituency” statute in Vermont, for instance).

The author’s point is that the much-touted new forms for social entreprises are not actually necessary, although he concedes that they may help reinforce perception that a company will not pursue profit maximization above all.

Finally, “Bettering the Used Book Business” provides a real-life example of a successful hybrid company, Better World Books (BWB), which “has found a way to make a profit and donate more than $11 million for literacy programs and libraries worldwide.” From its inception in 2003 by two University of Notre-Dame graduates, the company was set up as “a for-profit company with a social purpose – to sell books to finance literacy programs.” BWB now employs 350 people and has been profitable for the past 3 years; it has also partnered with 5 literacy programs. It receives 100,000 books at its Indiana warehouse every week (mainly from book drives) and “donates 7 to 10 percent of its sales proceeds to its nonprofit literacy partners.” (If a library donates a book, it receives 15 percent of the book’s net sale.)

I was impressed by the sophistication of its analytics software which, when an ISBN is scanned, makes a decision based on past historical data, of “whether to put the book into its for-sale inventory, donate it, or recycle it.” Because of its B-Corp status, the company is required to “provide documentation every two years on how its operations aid all its stakeholders, not just its shareholders.” Such hybrid models are important to attract talented employees who might be reluctant to step into the nonprofit world but want to feel the work they do serves a good cause. You can find more info on Better World Books here. I know where I'll be sending my books!

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