Not just for profit: corporate design for social purpose

When Muhammad Yunus and the Grameen Bank received the Nobel Peace Prize in October 2006, one endeavor lifted into the limelight was Grameen Danone Foods Ltd.

This was a pathbreaking collaborative enterprise, launched that year as a 50–50 joint venture between Groupe Danone — the US$16 billion multinational yogurt maker — and the Grameen companies Yunus had cofounded. Yunus called the joint venture a “social business,” which he said could be a pioneering model for a more humane form of capitalism.

As Yunus explained in his book Creating a World without Poverty: Social Business and the Future of Capitalism, a social business is a profit-making company driven by a larger mission. It carries the energy and entrepreneurship of the private sector, raises capital through the market economy, and deals with “products, services, customers, markets, expenses, and revenues — but with the profit-maximization principle replaced by the social-benefit principle.”

The mission of Grameen Danone Foods is to bring affordable nutrition to malnourished children in Bangladesh with a fortified yogurt, under the brand name Shokti Doi (which means “yogurt for power” in Bengali, the country’s language). (…)

Like a conventional business, Grameen Danone must recover its full costs from operations. Yet, like a nonprofit, it is driven by a cause rather than by profit. If all goes well, investors will receive only a token 1 percent annual dividend, with all other profits being plowed back into the business. The venture’s primary aim is to create social benefits for those whose lives the company touches.

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For years, critics of the corporation have argued that the prevailing design of publicly held corporations is innately flawed. That design involves a board that is elected by shareholders — with votes allocated proportionately to the number of shares held — whose members then appoint a semiautonomous CEO as the shareholders’ agent, who in turn delegates authority down through the ranks. In many ways, this has been a highly effective model. The “managerial hierarchy” structure, as corporate historian Alfred D. Chandler Jr. called it, has accomplished more in a short time than any other form the world has known.

But this shareholder-centric model has also contributed over the years to what former Citigroup CEO John Reed has called the “iron triangle of short-term pressures” — hedge funds, stock options, and stock analysts — that keeps companies narrowly focused on quarterly profits.

The financial meltdown of 2008 was a direct result of the pursuit of immediate profit by investment bankers and mortgage brokers who disregarded the impact of their actions on customers, on the larger economy, and indeed on stockholders and the company itself in the long term. Those who wanted to operate with integrity found it difficult. They were constrained by a corporate design that reinforced the need to “make the numbers” by any means possible

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One helpful way of thinking about these designs is as representing a hybrid between the traditional for-profit archetype, which has profit at its nucleus, and the traditional nonprofit archetype, which has social mission at its nucleus. This type of hybrid has been dubbed the “for-benefit enterprise”, (…) a new type of organization with a blended purpose at its core: serving a living mission and making a profit in the process.

The essential framework of such a company — its ownership, governance, capitalization, and compensation structures — are designed to support this dual mission. And it is this design that enables companies to escape the pressure to maximize short-term profits and instead to fulfill a more fundamental purpose of economic activity: to meet human needs and be of benefit to life.

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Today, at least three broad approaches to for-benefit architecture offer promising models:

Stakeholder-owned companies, which put ownership in the hands of nonfinancial stakeholders;

Mission-controlled companies, which separate ownership and profits from control and organizational direction; and

Public–private hybrids, where profit-driven and mission-driven design elements are combined to create unique structures.

Read on at Not Just for Profit.

When “a perfect storm” is actually a failure of leadership

A bit of unsolicited advice to business executives trying to explain why their company or their industry is suddenly in the soup:

Please spare us the “perfect storm” metaphor.

It’s hackneyed, for starters. It doesn’t square with the facts. And for people who fancy themselves leaders, it’s downright unbecoming.

The reason the perfect storm is such an appealing metaphor for these shipwrecked captains of industry is that it appears to let them off the hook. After all, who can blame you if the ship goes down in one of those freak, once-in-a-century storms that result when three weather systems collide? It’s an act of nature that nobody could have predicted — or so the story goes. (…)

The first thing to understand about the perfect-storm defense is that these guys actually buy into this nonsense. (…) The second thing to understand is that, fundamentally, they’re wrong. (…)

What capsized the economy was not a perfect storm but a widespread failure of business leadership — a failure that is only compounded when executives refuse to take responsibility for their misjudgments and apologize.

via Steven Pearlstein at The Washington Post.

French-American culture clash

A trans-Atlantic culture clash at Alcatel-Lucent, the French-American telecommunications equipment maker created in a $10.7 billion merger two years ago, hit home when the company’s top two executives said they would step down.

Patricia F. Russo, the American chief executive, and Serge Tchuruk, the French chairman, said they would leave this year. The departures of the two executives, who engineered the original deal, follow months of pressure from shareholders upset over billions of dollars in losses since the companies combined.

Analysts were skeptical from the start about the acquisition of Lucent Technologies, based in Murray Hill, N.J., by Alcatel, based in Paris. Initial talks broke down in 2001, four years before a deal was announced, because executives at the two companies could not agree on how to share control. (…) “[I]f you take two guys with broken legs and tie a rope around them, they aren’t going to walk better,” Mr. Kerravala said.

The appointment of Ms. Russo, the former Lucent chief, as the leader of the combined company struck many as a recipe for misunderstandings. Ms. Russo does not speak French comfortably, and the language barrier is one of several cultural challenges that have troubled the company.

Roger Entner, a senior vice president and telecommunications analyst for Nielsen IAG, a market research firm, said that Lucent executives had also struggled to understand the close interplay between French bureaucrats and private-sector executives.

Gates and Jobs: the interview

In a rare appearance together on the same stage at the same time, Bill Gates and Steve Jobs discussed each other’s contributions to the technology industry.Bill Gates and Steve Jobs discussed each other’s contributions to the technology industry.

All Things Digital hosted the event and its website provides a transcript of the event. Here is the highlight reel:

Besides allowing viewers to get to know both individuals and what they think of each other, the interview covers a lot of history of the personal computer, software development, standard adoption, and other subjects with which students might not be familiar.

Nobel Prize: Money not the whole story

When he was awarded the Nobel Peace Prize last year, Yunus said that Grameen Bank had lent nearly $6 billion over the last 30 years in loans that average $130 each. A key stipulation of the program is that its loans must be for income-producing activities, not consumption. But, perhaps more important, Grameen’s borrowers also must commit to the program’s “16 decisions,” which include family planning, educating their children, not accepting or giving dowries, and embracing “discipline, unity, courage and hard work” in all walks of life. (…)

The most important lesson from Grameen is that cultural values, even those long entrenched, can be successfully modified. Bangladesh is a Muslim country, where concepts such as charging interest or using contraception are considered “un-Islamic.” Yet, by using micro-loans as a cultural stimulus as well as an economic instrument, Yunus changes the attitudes of his fellow citizens at the grass-roots level. (…)

The operational details of Grameen are equally noteworthy. By requiring weekly payments, borrowers are constantly reminded of their obligations. The close relationship between borrowers and lenders means that they know exactly the consequences of non-repayments: other potential borrowers — often fellow villagers — will be deprived of their opportunities. Grameen’s emphasis on behavioral changes alone may indeed be more of a help in easing people out of poverty than the money itself. (…)

The Grameen Bank miracle is in using those micro-loans as a social stimulus to effect needed changes in personal behavior and cultural values. This key point is often missed by those enthusiastic in replicating the bank’s success. (International Herald Tribune)

Microcredit

As founder of the Grameen Bank receives Nobel Peace Prize, the profile of microcredit lending grows

Bangladeshi Economist Claims Nobel Peace Prize [Real Player] http://www.npr.org/templates/story/story.php?storyId=6605060

Nobel Peace Prize Award Ceremony 2006 [Windows Media Player]
http://nobelprize.org/award_ceremonies/ceremony_oslo/video/2006/index.html

Grameen [pdf, Windows Media Player
http://www.grameen-info.org/

The Microcredit Summit Campaign [pdf]
http://www.microcreditsummit.org/

Kiva.org: Loans that change lives
http://kiva.org/

(thanks)

Henry Mintzberg on heroic managers

The notion that “change comes from the top,” Mintzberg declares, is a fallacy “driven by ego,” the “cult of heroic management,” and the peculiarly American overemphasis on taking action. If companies in fact depended on dramatic, top-down change, few would survive. Instead, most organizations succeed because of the small change efforts that begin at the middle or bottom of the company and are only belatedly recognized as successful by senior management.

[missing paragraph is copied below]

Mintzberg argues that the best kind of leader doesn’t try to effect much change. Rather, she functions like a queen bee, which “does nothing but make babies and exude a chemical that keeps everything together.” It is the other bees that busy themselves in going out to sense the environment, find sources of sustenance for the hive, and make the changes necessary to keep the hive alive in the face of an evolving environment. [via HBS Working Knowledge]

In his book “Managers, not MBAs” Mintzberg suggests that

business schools should produce not heroic managers but “engaging managers.” These are leaders who assist those under them, seek input from everyone when forming strategy, and reward everyone when the organization succeeds. [via]

From an interview with Mintzberg:

We’ve long been dominated by calculating managers, right back to Robert McNamara, ex-Ford president and Secretary of Defense during the Vietnam war, and his obsession with numbers. Then there was ITT and Harold Geneen with all his numbers. Now it’s in the form of shareholder value. Everybody is looking at the stock price every few hours. It is like playing tennis and watching the scoreboard instead of the ball. That is the calculating manager.

Heroic managers are ultimately not much different but they think they are artists, they think they are very creative. So they come out with these strategies like at Vivendi, AOL Time Warner, or AT&T. They come out with all these lovely looking strategies, which ultimately are not that interesting. I call them pretend artists. These are the heroic managers, engaging in the great massive mergers, with all the drama that entails.

Finally we have the style I prefer, which I call engaging. This is where managers and chief executives first go about engaging themselves. They know the industry. They know the people. They are committed to the company. They are not there for a few years just to drive up stock prices and run off with their bonuses. And by engaging themselves, they engage other people.

So how do you recognize a heroic manager?

Mintzberg says that they tend to:

Ignore the existing business because anything established takes time to fix.
Be dramatic, striking deals and merging like mad.
Focus on the present, and do the dramatic deal now!
Favour outsiders over insiders; rely on consultants as they appreciate heroic leaders.
Use numbers to assess insiders. That way you do not have to manage performance so much as deem it.
Promote the changing of everything all the time.
Re-organise constantly.
Be a risk taker.
Get the stock price up.
Cash in and run — heroes are in great demand.

For a long while, the embodiment of the heroic manager was Jack Welch and I documented elsewhere in this blog how his management rules are no longer followed in industry.

And just to show that management gurus do not know it all, here is (in Mintzberg’s own words) the missing paragraph that I announced at the top of this post:

Enron, with its “loose-tight” management policy, is an example of an organization that has figured out how to effect change without the usual pitfalls, says Mintzberg. The Houston-based energy company manages only two corporate processes very tightly: performance evaluation and risk management. Everything else is managed loosely, and local leaders get an enormous amount of discretion in figuring out how to get things done.

Henry Mintzberg’s website is here.