2008: The Arrival of Ethical Business?

I'm not sure about the Body Shop take over being a sign of an ethical shift for L'Oreal. You could equally argue that this was simply the takeover of a successful business - and indeed that the Body Shop brand will be diminished as a result. Does the interest by huge companies in ethical business mean that they are interested in ethics or in business? What’s fundamentally different about a big company buying a smaller, conventional business or a smaller ethical business?

What’s the real impact of this acquisitive trend going to be? The watering down of ethical businesses as they are hovered into the business establishment? Or some kind of viral change to big business through some undefined tipping point where the big business is transformed by its ethical acquisition?

Jeremy

Thanks for your comment

I suspect part of L'Oreal's interest in The Body Shop was its ethical orientation. Activities like this have been described by some as "greenwash" but the point I am making is only that ethical business is coming onto the radar of the mainstream--I am not making any value judgements about this. It may be that the brand is diminished under L'Oreal ownership. Under certain circumstances you could even imagine it being enhanced. Without Anita on board, and she had been very involved, it will certainly be very different. I have written a blog post on our Social Business Blog (http://www.catfund.com/blog/?p=13#more-13) which addresses the acquisition in detail if you are interested.

The larger, more successful businesses will be acquired. That's simply the nature of our system. Their ethical aspect will almost definitely be watered down--but that need not be so depressing. I think anything big is more easily corrupted--its ethical basis destroyed--not just because some big corporate buys it! Maybe its the sort of development we ought to welcome, actually. Because on the other hand, the capital gets recycled into other new social enterprises and businesses. Gordon and Anita Roddick have been the founders and backers of dozens of businesses and enterprises. The Big Issue and Belu (recent winner of the Social Enterprise of the Year Award in the UK--see yesterday's Independent) and numerous others would not exist without the Roddick's money and other support--and this would not have happened without the income from The Body Shop.

Rod Schwartz

I guess this is the same debate which has bedevilled everyone from the Christian Church to the Green Movement. Whether purity of ideal is more important than popularity or whether to make a measurable difference you have to be prepared to engage with the mainstream even at a cost of compromise and dilution of ideals. Surely the ultimate goal of every ethical business is to be profitable. Is that not what distinguishes a business from a charity? Body Shop in its heyday was never entirely above criticism. L'Oreal's purchase of Body Shop is a recognition that there is an important customer base which is uncomfortable about the ethos and methods of the the big cosmetics companies. Personally I believe than only a minority of the population will ever be primarily be motivated by ethical considerations only and that most people want to be ethical but not at the expense of their materioal well-being or social status. Therefore in order to have real influence ethical business will have to find a way of translating ethics into tangible benefits. What do people feel about companies like Nitol Solar which is produces silicon for solar panels or IDB technologies which designs builds and operates desalination plants, both of which have recently sought London stock exchange listings? They both seem to have a clear social utility but neither I am sure would regard themselves as being part of the ethical sector?

andrew

Thank you for your comment

Each business will decide for itself how to make the choices you describe. But the choice is not black or white. Some companies might decide to be purists while others choose to focus on one or two social outcomes that are important and not try to do everything all at once. Having spent time with many social business. I would suggest that all will make some sacrifices--the question only concerns the extent of these.

You say that the "ultimate goal of every ethical business is profitable". I'm not sure I agree. And for me, the ultimate goal is for all business to be ethical. In one way or another I contend we are beginning to see this factor steadily become more important. I think the stakeholders that matter--shareholders, customers and employees--are demanding that this is the case. You are right that L'Oreal's purchase of The Body Shop is a recognition of how an important customer base is incorporating ethics into their decision-making on product purchasing. I think this supports my contention.

I completely disagree that it is only "a minority of the population" which will be "primarily" motivated by ethical considerations. The research suggests it is a becoming a majority. I can imagine that by using the word primarily you are making it clear that in your view, price and other factors will remain dominant. I only argue that on the margin ethical factors are becoming much more important, which is I guess unsurprising in a relatively wealthy economy. And for some consumers and in some product areas they will dominate. I mean let's face it--why would you ever buy another bottled water other than Belu?

Finally, thank you very much for bringing IDB Tewchnolgies and Nitol Solar into this discussion. Whether they regard themselves as part of me, ethical sector or not is meaningless to me. Nitol benefits from the interest in solar energy and by growing as a firm, they increase our usage of renewable energy which is an important social benefit. The fact that investors may value the company at $1 billion is just another exciting events in the trend try to identify.

Rodney Schwartz

Hi Rod

• Do you agree, or do you think this is just a “flash in the pan”, a fad that will quickly pass? - Here to stay. No doubt.

• I have mentioned a few transactions and anecdotes—can you think of others which I have missed? As this is solely a UK-focused list, can you name some non-UK examples? - We raised significant funds 3 months ago (after more then 5 years of trying). Our business is based in the UK, the investors in the US.

• Which are likely to be the major social business transactions in 2008 and 2009? Do you agree with the sectors I have identified? More for SEE Potential...let's hope so! On a more serious note, see below..

• Will investors ever pay a premium for the “social return” these firms generate and will this ever be something that can be easily captured by existing stock exchanges? - This is one of the really crucial/interesting issues for me.

What we have done to raise money, what I expect to continue persuade investors of is this: because of the changing business landscape, because of the increased demand for what innovative social and environmental businesses have to offer, these businesses are set fair, set to grow. However, the rules are fundamentally the same. We must still produce excellent goods and services, superior to those of our competitors, and provide value and satisfaction to our customers. But when customers demand and value the social and environmental components/qualities of products in addition to the regular value/utility derived from normal products, the social and environmental producer has a great advantage.

I believe ALL business are now, at least to some extent, trying to establish social and environmental value in their operations and in their products to meet this new and growing demand, and create competitive advantage.

The investor paying a premium for some fluffy notion of “social return” is basically a philanthropist. Investors make investment decisions based on risk and return and very rarely pay a premium. The good news is that we have finally met some investors that understand that returns can be augmented when the end consumer is deriving social and environmental utility and thus will consume more or pay more. These people understand that social and environmental value is real and is an increasingly important part of the investment decision.

Michael, thanks for your comment

Your quick comments are self-explanatory. Delighted to hear the good news about SEE Companies and your successful fundraising. We would be happy to link to company on our social business blog (www.catfund.com/blog) if you send me any or drop me an e-mail (rod@catfund.com). And if you are willing to provide some details perhaps we can highlight your success in future pieces?

I absolutely agree with your longer point. Investors can get the social returns for free! I think that you, me and the rest of us need to shout about this an awful lot more than we do. Those who are willing to compromise financial return for social return are, I agree, basically engaging in some form of charity. There's nothing wrong with that but we should state plainly what it is. I do believe we are coming to the point where an investor class is emerging that will accept a lower return in exchange for meaningful and measurable social returns but we are only beginning to understand precisely how they are trading one off against the other.

Rodney Schwartz

I guess this is the same debate which has bedevilled everyone from the Christian Church to the Green Movement. Whether purity of ideal is more important than popularity or whether to make a measurable difference you have to be prepared to engage with the mainstream even at a cost of compromise and dilution of ideals. Surely the ultimate goal of every ethical business is to be profitable. Is that not what distinguishes a business from a charity? Body Shop in its heyday was never entirely above criticism. L'Oreal's purchase of Body Shop is a recognition that there is an important customer base which is uncomfortable about the ethos and methods of the the big cosmetics companies. Personally I believe than only a minority of the population will ever be primarily be motivated by ethical considerations only and that most people want to be ethical but not at the expense of their materioal well-being or social status. Therefore in order to have real influence ethical business will have to find a way of translating ethics into tangible benefits. What do people feel about companies like Nitol Solar which is produces silicon for solar panels or IDB technologies which designs builds and operates desalination plants, both of which have recently sought London stock exchange listings? They both seem to have a clear social utility but neither I am sure would regard themselves as being part of the ethical sector?

Rod

I think this is absolutely very relevant at the moment and not just a flash in the pan. I have been tracking the consumer ethical market for the past 5 years or so and I think the biggest change is that the addressable consumer segments are expanding to the mainstream as product quality increases and any tradeoffs between ethics and other drivers of value such as quality diminish.

I think that the consumer market segments you have identified are spot on. They are at different stages of development/adoption with food/drink being the most advanced and apparel much more nascent. You didn't mention personal care which has also seen significant growth. The company I helped to set up, nude skincare (www.nudeskincare.com) is at the forefront of the latest "premiumisation" of this trend.

In some ways I don't think investors need to pay a premium for the social return that is created because consumers and employees are already happily contributing to companies/brands they resonate with the ethics of with their purchases/employment choices. There may be some investors who are willing to do this but I think the best way for the sector to mainstream further is for it to demonstrate that it can make commercial levels of return, and I think it will.

On the point made about an ethical exit / strategic investment from a larger firm - I do think this is an issue as it has a brand and consumer impact. Howies have managed it successfully in their partnership with Timberland but there are plenty of examples of companies not managing perception quite so well. Green and Blacks, Ben and Jerry's, the Body Shop to name a few. Another potential issue driven by success is when the company itself becomes big and may be seen as not so "nice" by consumers ref: Whole Foods Market. It begs the question, what is an ethical exit / endgame??

I'd love to discuss this at greater length with you as I am currently writing a book about this very topic!

All the best Laura

Laura

Thanks for your comment.

Normally, as you can see from the above, i make comments which nit-pick on some aspect of the person's argument. Sadly, I find that is almost impossible with your submission--we agree about 100%.

I think the "ethical exit" question is well-put. But it further begs the question of what is ethical. To me that is a highly personal question--a function of the entrepreneur's beliefs, values, life circumstances and, yes, market conditions!

It would be a pleasure to continue this debate with you, off-line. Your book idea sounds exciting!

Best wishes, rod

I think we might go back to the Quakers here to find the beginnings of social business, business that is with an ethical purpose, then the cooperative movement. Later, in the 20th century we find John Spedan Lewis, whose thoughts on the perversion of capitalism were recorded by the BBC in 1957 and features on their website today. Wotth a listen, if only to hear how different we sounded 50 years ago.

http://tinyurl.com/yrrnz9

Arriving in 2008 and most exciting for me is the concept of Social Business Enterprise, with the release of Muhammad Yunus' new book on creating a world without poverty.

I've been developing or should I say migrating a business toward this kind of social paradigm since getting involved in the world of international development. We use revenue from the sale and support of software to develop strategic plans and advocate for social enterprise on the international stage. we are very much off-radar as yet.

What we've been doing with our profit is to develop a proposal aimed at encouraging the government of Ukraine to collaborate with the US in a social business approach that will render profit to provide family type homes for all of their orphaned children, who are by and large economic orphans being victims of the socially corrosive form of capitalism.

To speak plainly, we have few if any ethical businesses in the UK. ethical that is in both promoting a social.environmental cause and at the same time treating their suppliers, social purpose or otherwise, to the privilege of being paid. This kind of ethics, could reasonably be described as shrieking hypocrisy.

I must visit the Catfund blog, as I notice an interest in the Balkans where we did a preliminary study for a Serbian mining community several years ago. There is a desperate need for sustainable business and access to healthcare outside the scope of our current efforts in Ukraine, which are here as a micreoconomic 'Marshall Plan':

http://www.p-ced.com/Projects/Ukraine/AMarshallPlanforUkraine/tabid/69/Default.aspx

Rod, I tried registering on the catfund site with no response. Also tried responding to a blog post by Julia a couple of times.

What I wanted to say is that we'd done some preliminary work in Serbia drafting a brief proposal for the town of Madjanpek during a short visit in 2004. We've also been in contact with a group in Macedonia with similar needs. There are precious little funds being deployed in this area.

What I wanted to say to Julia was that we'd started with a model, developed by my colleague and pitched at a former US President, which advocated abandoning the nonprofit model in favour of a new kind of capitalism which substituted greed with compassion. We called it a People-Centered Business, a model in which at least 50 percent of profit would be rendered to social purpose.

http://www.p-ced.com/History/tabid/57/Default.aspx

I had the chance to apply this and migrate a for-profit software business to this model in 2004. It provides us with core operations funding for our childcare reform activism in Eestern Europe.

I also wanted to say that yes we have to be more resilient because a conventional entrepreneur would see little benefit in the risk and small yield. Yet, we can deliver very efficiently. Leveraging $6m funding for a microcredit bank in Tomsk Siberia, cost our founder £4000 in developing his proposal. His own money, all he had in the world at the time.

Likewise, a Marshall Plan which seems to be on the lips of most US presidential candidates these days could be developed at a fraction of that which a conventional agency would budget for. Over 3 years, no more than £30k approx.

Unfortunately social business doesn't exist in the perception of most, I presume you didn't go looking for one to develop your website for instance. We have many corporate customers, but I suspect none of them know what we do, possibly because they've been told we don't exist.

Certainly we've never experienced any advocacy inviting us to tender for developing a website, in spite of my ubiquitous presence on social enterprise forums.

Rod,

Today, I've just faxed a customer, an NHS Trust, with a reminder that not paying us for 2 years doesn't help our social efforts. I point out that includes persuading a foreign government to open 400 rehab centres for disabled children. Until now I believed that it wasn't necessary to declare the social purpose in doing good business.

I'm reminded that when introducing both our social business model and the difficulties we had in establishing it in a letter to Baroness Thornton, then chair of the SEC, it was never answered. I remember approaching my MP (not only a member of a party which embraced social enterprise, but the secretary of the APPG for the country we were working in) about these difficulties and being told in a testy response "I don't know what kind of business you're involved in but you can't expect me....."

I've registered and described the model and our services on about every social enterprise directory I can find over 4 years. I wrote to countless organisations, representatives of government and advocacies, funding competitions, mostly to be ignored.

After all this effort, I discover today from your site that you've been running a conference for social business for 2 years, and that there are more than 50 in the UK. As one small organisation which arguably could be considered a pioneer in this area, I ask - how can it be given a web presence on social enterprise networking as ubiquitous as mine, that we aren't listed or included among such organisations?

Jeff You will definitely be included and responded to I have just been at the Schwab Forum in Zurich, been on board an airplane back to London for 4 hours which was then cancelled, wandered the streets of Zurich and have only just (midnight) found a place to sleep Not looking for or deserving pity--but can I have a day or so to answer all your excellent posts? Internet access has also been "problematic" And by the way, our next SB Conference is on 6th November--book early if you are the CEO of a social business or social enterprise you are definitely invited best, rod

Dear Jeff

As my previous brief reply noted I wound up getting stuck in Zurich. In the end I decided that the most sensible, most secure, and greenest response was to take the train back from Zürich to London. I got there, door to door, in 8 hours!

It would be impossible for me to do justice to your lengthy and thorough comments. First of all let me thank you. It is only through debate and dialogue that we will move this cause forward. Secondly, you are correct, many social businesses get ignored and few of us think of them when we set out to undertake a task. In time, this will change, but it will take a lot of time. Furthermore, I cannot explain why it is that the range of people you mentioned has not been as responsive as any customer would have a right to expect. This is just good business practice and applies to all businesses, social or otherwise.

Finally, on a personal note, I am delighted that you and Julia got to the bottom of your problem with our website. Please forgive my delay in replying to you!

Rodney Schwartz

Thanks Rod, I've always enjoyed a train journey too, glad you made it back ok.

There seem to be two (maybe more) groups advocating social business in the UK, one more prominent of Facebook led by economist Chris Mcrae and I've let him know about Catfund and you. Another like minded other in the US is Mark Lewis of the Strategic Business Initiatives Group.

Just been looking at the WEF site on Davos and note the new presence of BAACH - Business Alliance Against Hunger.

All of these things could hopefully be forming a critical mass.

Jeff Mowatt

Thanks--yes, a greener trip as well--and much less stressful and thanks for all these great names regards, rod

Bill Gates called for a commitment to the overall nees of the World Community at Davos this year. Can it happen? Yes and it must happen. HOW? All people speak languages and so do industries. Gradually since WWII, the World Economy has focused more and more attention on short term financial gains - quarterly. Thinking of business in terms of money or capital alone is short sighted. As a result we have failed to make the important long term investments to sustain our planet and add real quality to life. All we need to do is return to the fundamentals of business - solve a problem. What has now developed is that someone decides to make something arbitrarily and then they advertise it as if we can not live without it. The world has become addicted to buying whatever they see advertised. Example is the cell phone. We will actually save money by looking at the long term. In the USA we need to tell the CEO's to take a hike. No one person is worth $300 million USD per year. This is a white collar crime. It again comes from looking only at short term financial gains.

• Do you agree, or do you think this is just a “flash in the pan”, a fad that will quickly pass?

It is not a flash in the pan for the following reasons below:

(1) The ethical consumer is here to stay because the green movement ia about a shift in people's attitudes. LOHAS consumers (LOHAS is an acronym for Lifestyles of Health and Sustainability) now represent about 23% of the U.S. population (about 50 million adults) of the U.S. adult population, who tend to make their purchasing decisions in keeping with their values of social and environmental responsibility. It is a $230 billion market segment in the United States alone and a $546 billion market worldwide. The leading countries spearheading this green movement is Japan and Taiwan.

(2) Furthermore, so-called socially responsible investments (SRI) now represent USD $3 trillion worldwide in assets.

(3) Furthermore, the Green Stock Exchange (GREENSX) will provide over 1,000,000 charitable organizations in the United States (with $1.76-Trillion in assets) with an opportunity to get involved in social investments.

(4) Furthermore, the Kyoto pact has spurred a carbon trading market was around $30 billion in 2006 as per the estimates of the International Emissions Trading Association. Some analysts estimate that it could grow into a $3 trillion market over the next 20 years.

• Which are likely to be the major social business transactions in 2008 and 2009? Do you agree with the sectors I have identified?

I agree with Jeremy Condor that the Body Shop takeover is not a sign of an ethical shift for L'Oreal.

There will be a surge in acquisitions in the social sector by large corporations. We have worked with Pepsi-Cola as a franchisor and let me tell you that they are obsessed with shelf space and market share, the same as any other large corporations.

Any product that takes away the shelf space of large coporations or market share will be acquired, not because for ethical reasons, but solely for revenue and profits. Some major acquistions that come to mind includes Ben & Jerrys's by Unilever for $326 million US, Yves Veggie Cuisine by Hain Celestial Group for $ 34 million US, Tom's of Maine by Colgate-Palmolive for $100 million US, The Body Shop by L"oreal for 652 million pounds, and Burt's Bees by Clorox for $925 million.

It is the DNA of large corporations to increase profits and market share, as well as to satisfy shareholders ROI. There is nothing ethical about that, just pure profits and as a competitive advantage of looking green.

• Will investors ever pay a premium for the “social return” these firms generate and will this ever be something that can be easily captured by existing stock exchanges?

No, investors on traditional stock exchanges will not pay a premium for “social returns” because they are not allowed to by corporate law anyways.

We are setting up North America's first social stock exchange connected to a green social network, called the Green Stock Exchange (GREENSX) at: http://greensx.com, which will be launched in the Summer of 2008 to begin trading. It will trade shares in social businesses. A social business is a business that makes a profit, but benefits society as well. We have a triple bottom line (economic + social + environmental). On the Green Stock Exchange investors will pay a premium for the “social return”.

It will be the world's first social stock exchange, fully integrated with a green social network ("like FACEBOOK, but for green revolutionaries"). It allows millions of members and organizations take a pro-active approach to the investment, creation, sales, manufacturing, promotion and distribution of more earth friendly and more humanity friendly products.

The most important aspect of the Green Stock Exchange system is that it includes a reward system for investors, companies and consumers producing/purchasing greener products. Imagine an army of millions of people supporting more earth friendly, people friendly, and health friendly - this is why investors will pay a premium for the social returns on the Green Stock Exchange.

The GREENSX provides opportunities for small green Issuers to access public equity capital efficiently, while providing early stage investors, angel investors, and venture capitalists with greater liquidity. This includes a eBAY.com trading system for carbon credits.

It is now in the beta stage testing. Check it out at: http://greensx.com.

David Kam E=MC2 Company Inc. for the Green Stock Exchange