Public, Private, Non-profit or the Fourth sector?
We are aware of the private sector, the public sector and the non-profit sector. To state the most important criticisms of the existing sectors: the private sector is believed to be only profit driven (no social aspects), the public sector inefficient, and non-profits are mostly unsustainable when it comes to financials (this is evident from the high mortality rate of NGOs). To address all these major flaws in the existing sectors we need a Fourth sector.
Two weeks back I attended the 12th World Business Dialogue at Cologne. It was an amazing conference where 300 business and economics students from across the globe were selected to interact with Europe’s top executives over several workshops. In one such workshop, we discussed the need to evolve a Fourth Sector.
The Fourth Sector comprises social businesses, examples of which I have been giving in my previous blogs and of which Maria spoke in detail in her recent blog. It is also called sustainable business or social enterprise. In the conference, I learned about a proposed concept that takes this nascent idea a step further.
The idea is that if such businesses have Real Return on Investment (RROI) which exceeds 5%, the excess amount should be spent on creating more such businesses. This is necessary to boost the Fourth sector. For example, if the rate of interest in a country is 10% and the return on investment on a social enterprise in that country comes to 25%, then its RROI is 15%.
So according to the proposed idea, if the RROI is above 5% (as in the example above), the entrepreneur should volunteer to spend the extra profit in setting up more such enterprises or donate the amount to a common fund that will invest in starting such enterprises. This will help to establish a chain of such enterprises in each and every industry and thus develop a Fourth Sector.
Great idea but a real challenge!
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Dear Nicholas,
Sorry for the late reply.
I completely agree with you. But as you know several large companies have their own Foundations and also run many activities under their CSR programs. If the shareholders can agree on that, where several million dollars are spend, I feel they will also agree on investing in projects (like these ones) in which they can also get a return on their investment. These are also a part of their image/brand building exercise!!
However, as you said, the idea is in a very nascent stage and a lot of research is going on. 20 years back people were not willingly to accept carbon tax or reduce pollution but now they understand. So I feel over the years, this idea will also become acceptable to many companies. Its very challenging!!
what about shareholders?
Keep in mind that our current form of capitalism is driven by shareholders, not benign executives. Even if we had "enlightened despots" in senior business roles, it would be difficult to provoke leaders to voluntarily donate or spend the excess money. Executives are responsible to their shareholders and if they did this, heads would roll.
Additonally, the sustainability of simply spending or donating the money instead of creating something sustainable that could exist after a business leaves is a dangerous proposition. Spurring development initiatives that are untenable often worsens situations.
As you say the idea may be good, but as always, the devil is in the details.
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