‘Not for profits’ come in just two forms: charities and bankrupts. So why do people insist on using the term ‘not for profit’ to describe organisations using the tools of business to create public good?
It seems wrong to define anything by what it’s not, especially when the label’s patently untrue! Social enterprises, often described as ‘not for profits’ (NFP) are trading organisations which need to demonstrate solvency. They aren’t, technically, NFP. Can we please stop using the phrase? It’s not helpful.
Charities are principally funded by grants and donations, they’re genuinely NFP. Some larger charities include, within their organisations, a trading arm. For what reason? To make a profit, of course, to provide a reliable and ongoing income for the charity. Already we look to be on shaky grounds if we describe such a hybrid as NFP.
Increasingly, businesses are finding a purpose beyond profit around which to develop a business model. Thousands, globally, in the B Corp movement are committed to serving social and environmental causes through their business activities. They are undeniably ‘for profit’ – but is it fair to lump them into the same category as rapacious hedge funds? Of course not. Others, like Unilever, have reduced the emphasis on shareholder return (the primacy of which was the basis of the old ‘for profit’ world) and adopted a stakeholder approach based on sustainable and responsible practices. The British Government has recognised this in identifying the concept of the ‘mission-led business’ and France has a legal status of ‘société à mission’.
The B Corp movement arose in the US where, twenty years ago, the profit motive was enshrined in corporate law as the sole purpose of business. They changed that, achieving legal recognition for an alternative constitution: the Benefit Corporation. UK law has never been as dogmatic, having always allowed a purpose beyond profit (although critics of the 2006 Companies Act correctly claim that it falls short of encouraging such a status).
In the US ‘NFP’ and ‘non-profit’ are defined (separately) in law and for tax purposes. This range of organisations is not allowed to distribute any profit to members. A UK social enterprise such as a CIC (Community Interest Company, which can distribute up to 40 percent of its profits) wouldn’t qualify as NFP under US law.
So, if we really want to make the arbitrary distinction between NFPs and ‘for profits’, we should distinguish between those that aim to maximise short term profit (typically the more anarchic elements of the finance industry) and those that use their surpluses to serve a higher purpose. The problem with this is the massive grey area between those two poles. How should we classify Novo Nordisk, the world’s largest insulin manufacturer? It’s owned by a charity which gives $400M each year to causes in health and life science. Is it a NFP? Patently not, but it is purpose-led.
Our terminology needs to be useful, assisting dialogue, debate, collaboration. Surely ‘purpose-led’ organisations, whether charities, social enterprises, B Corps, even some in mainstream business, have more in common with each other than with those dedicated to profit maximisation or private shareholder value alone?
Let’s pay those who do good the compliment of recognising them for what they are, ‘purpose-led’, not ‘profit-led’, rather than defining them by what they’re not.