Business Skills in the Social Sector

Creating a Social Enterprise Culture

By David J. Rendall, Principal of Rendall & Associates, Assistant Professor of Business at Mount Olive College

More and more nonprofits believe that social enterprise will help them to achieve their
objectives. Evidence of this trend can be seen in the rapidly growing membership of
Developing a
the Social Enterprise Alliance, a national association of social enterprise practitioners. social enterprise
However, developing a business venture within an existing nonprofit organization culture within an
creates significant challenges. One of the most serious is the need to develop a new existing nonprofit
organizational culture. A new culture is necessary because social enterprises attempt
organization is a
to blend the missions and methods of traditional businesses and nonprofits. Diane
Flannery and Kriss Deiglmeier, former CEO and COO of Juma Ventures, a social tremendous
enterprise in San Francisco, wrote that “one of the biggest challenges for the leader of challenge.
a social purpose enterprise is to create and manage one organizational culture that
brings together both the nonprofit and for-profit cultures.” In this article we’ll examine
how to create a social enterprise culture within your organization.

Defining Culture
One way to understand organizational culture is to think of it as similar to an individual’s personality. Some people
are shy, while others are outgoing. Some people are rational and objective, while others rely more heavily on
emotion. We all have patterns in the way we respond to the world around us. These patterns make up our
personality or “the way we are.”
Organizational culture is “the way we do things around here.” It is based largely on what has worked in the past as
the organization has met and overcome environmental obstacles. An organization’s founder usually has the most
profound impact on the kind of culture that an organization develops over time.

Edgar Schein is a professor at MIT’s Sloan School of Management and one of the most well-known experts on the
subject of organizational culture. He defines organizational culture as “a pattern of shared basic assumptions that
the group learned as it solved its problems of external adaptation and internal integration, that has worked well
enough to be considered valid and therefore, to be taught to new members as the correct way to perceive, think,
and feel in relation to those problems.” Schein believes that there are three levels of culture--artifact, espoused
values and basic assumptions. These levels range from obvious and tangible to invisible and intangible.
Additionally, each level presents a varying degree of ambiguity.

Artifacts Clearly Visible Vague Meaning

Espoused Values Less Visible  
Basic Assumptions Largely Invisible Clear Meaning

Artifacts are the first level of culture. They include physical spaces, dress code, written policies and other very
visible phenomenon. Things at this level of culture are easy to identify but difficult to understand or interpret. For
example, there are many different inferences that can be drawn from a company’s dress code. While the dress
code is relatively obvious, its cultural meaning is not.

The next level of culture is Espoused Values. These are conceptions of the way things should be that are clearly
communicated and consciously understood. They are the values that people say that they have. A company’s
mission statement is an example of an artifact that represents their espoused values. Espoused values are not seen
directly, but only through representation in artifacts and behaviors. Because of this they are less visible than but
also less ambiguous than artifacts.

Basic Assumptions represent the final level of culture. These ideas or beliefs are so ingrained in the culture that
they go largely unnoticed. They are essentially invisible. Unlike values, they are not directly communicated. They
are taken for granted. However, once uncovered, their meaning is very clear and they illuminate previously
discovered values and artifacts. This is because they are the basis for values and artifacts.
Conflicting Cultures
Flannery and Deiglmeier believe that nonprofits and for-profits have significantly different cultures. They compared
the cultures of each sector along ten different dimensions.

Comparison of nonprofit and business cultures

NONPROFIT FOR-PROFIT
Purpose Changed lives Product or service delivery
Goals Ambiguous Concrete
Customer Relationships Unclear boundaries Clear boundaries
Performance Measurement Unclear measurements Clear measurements
Risk Cautious, minimize risk Risk-taking
Flexibility Slow Quick, responsive
Management Frequency Yearly Daily, weekly
Reason for Existence Cause Profit-maximization
Cooperation vs. Competition Cooperation/collective Competition/individualistic
Value Creation Social/spiritual value Economic value

Note: Original summary of the work of Flannery & Deiglmeier (1999a).

Social enterprises attempt to blend these opposing cultures. According to Greg Dees, in his classic article on social
enterprise in the Harvard Business Review, this blending involves the combination of:

 Concern for others and self-interest

 Mission-driven and market-driven approaches

 Social and economic value creation

 Philanthropic and investment capital

 Volunteer and highly paid labor

 Free and full-cost products and services

The process of combining these two disparate cultures creates internal and external conflict. Internally, staff,
volunteers and board members commonly resist the new direction and feel angry and betrayed. Externally, clients,
communities, government, funders and businesses often criticize nonprofits for adopting earned income strategies.

In order to develop a successful social enterprise, leaders need to develop an organizational culture that is
conducive to nonprofit ventures. They may also need to influence the culture of the surrounding community, as has
been done in Seattle, Pittsburgh and St. Louis, areas in which government, businesses and nonprofits have created
and environment that fosters enterprise success.

To understand the nature of this conflict, just imagine trying to change your own personality. Think about how you
would respond to someone’s suggestion that your way of living, which has worked for you throughout your life,
was incorrect, inappropriate or irrelevant. Even if you believed them, which you probably wouldn’t, it would be
difficult, if not impossible, to change a lifetime of habits and beliefs. This is the task of the social enterprise leader,
to change the fundamental practices, values and beliefs of an organization. According to Flannery and Deiglmeier,
“leaders play a key role in the creation, management and at times dismantling of a culture.” In fact, a leader’s
primary responsibility is to lead cultural change.

Changing Culture
There are five basic steps to changing an organization’s culture: identify, validate, envision, communicate and
challenge. The first step of identification is so important because culture is often invisible to those that live within
it. Identification involves making the connection between the artifacts, espoused values and basic assumptions of
your organization. As with each of the other steps in the change process, this work should be done with significant
participation from organizational stakeholders.
It is often tempting to want to destroy the existing culture and replace it with something new, but this is not
usually the best approach. Because social enterprise is a combination of business and nonprofit culture, it is
probable that elements of the existing culture should be retained. Additionally, because of the resistance from
internal and external sources, it is very important to validate the value of current practices. This process reinforces
the worth of the organization’s staff and constituents as well as the organization’s history.

The third aspect of cultural change is to develop a vision of an ideal organizational culture. Involving all
stakeholders significantly should minimize resistance and maximize commitment to the new approach. Again, it is
important not to rush the process. Destroying the old culture before envisioning a realistic alternative can create
organizational chaos and derail the success of a potential venture.

Fourth, it is necessary to communicate a clear picture of the new culture. Effective communication requires both
educating and persuading the organization’s primary constituents. It is not enough simply to inform people of the
impending changes. Since people always resist change, communication needs to focus on the benefits of the
change for each group that will be affected.

The final step is to challenge the existing culture. Many people will maintain their current habits and beliefs
throughout the first four steps and deny the reality of impending changes. By challenging the culture, you show
people that you are serious about developing a new culture. This step is accomplished primarily by removing,
replacing and adding artifacts.

One common practice is to create a new name, brand or logo for the social enterprise or the entire organization.
This new image communicates a distinct identity and a change of direction. Changed artifacts can also include a
new mission statement, modified compensation systems, different policies and procedures and new staff or board
members. When deciding which artifacts to modify, it is important to choose those with the greatest meaning.
Certain elements of any organization are symbolic of its culture. Changing those symbols will clearly communicate
a new direction for the organization.

Alignment of Employees’ Skills and Values 

The most influential element of any culture is its people. Ultimately, a new culture will require at least some new
people. In the case of a nonprofit launching a social enterprise, these people may have business education and
experience or other necessary skills and values. Cultural change may also necessitate the removal of people who
cannot or will not adapt.

John Brauer and Michele Tatos were senior leaders at Community Vocational Enterprises (CVE, Inc.) a social
enterprise supported by the Roberts Enterprise Development Fund. They offered a four-part model, based on
values and skills, for determining which employees should remain and which should be removed.

 Category 1  - Right values, right skills

 Category 2  - Right values, wrong skills

 Category 3 - Wrong values, right skills

 Category 4 - Wrong values, wrong skills

It is relatively obvious that employees in category one should be retained and those in category four should be
removed. Employees in category two should remain and be trained in whatever new skills the venture requires.

The most problematic employees are those in category three. It is very tempting to keep them because of their
competence. However, their incongruent values will poison the culture and prevent necessary changes. Even
though they have the right skills, their values will prevent them from using them to further the organization’s new
purposes. Brauer and Tatos offer clear direction regarding this group. “If employees make their numbers but do
not have the right organizational values – they will never fit into the organization, and can do more harm than
good. These employees need to be let go.”

What if Cultural Change is Not Realistic?

In some cases, it is not realistic to attempt to change an organization’s culture. There are two alternatives to
wholesale cultural change. First, you can develop a social enterprise sub-culture by creating a distinct department
or division within the organization. Second, you can start new culture by developing a separately incorporated
nonprofit or for-profit organization. The decision to avoid widespread cultural change is usually based on the
organization’s age and size. Generally, the larger an organization is, the more difficult it will be to change the
culture. Similarly, it is difficult to change the culture of older organizations and somewhat easier for smaller ones.

Developing a social enterprise culture within an existing nonprofit organization is a tremendous challenge.
However, it is both possible and necessary for nonprofits that need new and diverse sources of revenue. The
resources below offer additional guidance for leading and changing organizational culture.

NOTE: David Rendall is principal of Rendall & Associates, a consulting firm that specializes in social enterprise and
leadership development for nonprofits. His clients include numerous nonprofits throughout North Carolina. His
seminar entitled, "Generating New Sources of Revenue," which offers an introduction to social enterprise, is part of
Duke University’s Certificate Program in Nonprofit Management. He is also assistant professor of business at Mount
Olive College in Mount Olive, North Carolina. For the last ten years, he has managed social enterprises, and in
1997 he founded SERVE Enterprises, a program in Wisconsin that provides employment to people with disabilities.
Prof. Rendall earned a doctor of management degree in organizational leadership; social enterprise was the focus
of his dissertation research. A summary of this research and other resources are available
at www.drendall.com. Prof. Rendall is also the author of the recently published book, "The Four Factors of Effective
Leadership." To order, please send an email to dave@drendall.com or call (919) 222-6295.

Recommended Readings:

"Reframing organizations: Artistry, choice, and leadership," (2nd ed.), by L. Bolman and T. Deal, Jossey-Bass,
1997.

The Challenges of Staffing and Leading a Social Purpose Enterprise, by J. Brauer and M. Tatos, in "Social Purpose
Enterprises and Venture Philanthropy in the New Millenium: The REDF box set," edited by J. Emerson, Roberts
Enterprise Development Fund (REDF), 1999.

"Enterprising Nonprofits," by J.G. Dees, Harvard Business Review, January-February 1998.

Managing the Social Purpose Enterprise, by D. Flannery and K. Deiglmeier, in "Social Purpose Enterprises and
Venture Philanthropy in the New Millenium: The REDF box set," edited by J. Emerson, Roberts Enterprise
Development Fund (REDF), 1999.

"Organizational Culture and Leadership," (2nd ed.), by E. Schein, Jossey-Bass, 1992.

This is essentially the question raised by Theo Vermaelen, professor of finance at INSEAD, in a recent postarguing that MBAs
should NOT sign the MBA Oath.
The MBA Oath, started at Harvard Business School, aspires to apply to business management a formal oath and code of ethics,
similar to the Hippocratic Oath taken by medical doctors. While Professor Vermaelen places little value in the ability of oaths to
change behavior, his primary objection is to the oath’s language, which asks MBAs to pledge, for example, to “contribute to the well-
being of society” and to “create sustainable economic, social and environmental prosperity worldwide.”
These elements of the Oath sit at the core of social enterprise. Vermaelen, however, argues that they constitute a clear violation of
fiduciary responsibility and ethical standards by asking future managers to potentially prioritize social and environmental concerns
above the maximization of shareholder value.

The Legal Obligations of Today’s Business Leaders

In a post on the Low-profit Limited Liability Corporation (L3C), Jonathan Stray mentions in passing that the L3C model can help for-
profit social enterprises avoid lawsuits resulting from not maximizing profit. But do such lawsuits actually occur? I can’t find evidence
of them.
Shareholders often file suits, seeking class-action status, that try to punish directors and managers for acting in their own self-
interest, misleading shareholders, failing to disclose important information, or otherwise behaving in ways that have clear and
tangible negative impacts on the corporation (i.e. Intel allegedly failing to avoid anti-trust problems that have cost $2.7 billion).
However, I don’t see where companies have been sued for not trying hard enough to maximize profit or not having profit
maximization as their primary objective or purpose.
Nor does the legislative or legal documentation I’ve found support the idea that companies could be sued for such things.

The Articles of Incorporation of a company outline, among many other things, the purpose of the corporation. In most cases, though,
these purpose statements are more or less limited to the language you find in Article III of Google’s Articles of Incorporation (posted
online!), which states that the company can engage in any lawful activity for which corporations are authorized in that state.
The laws in my own backyard, the State of Minnesota, point in a similar direction. Statutes here addressing “Business Corporations”
(C-corporations) cite no requirement that companies maximize profits. Rather they speak only to the Standards of Conduct for
directors and officers. For directors, these standards read as follows:
“A director shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in
the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under
similar circumstances.”

In Minnesota, the statute even goes on to explicitly state:

“…a director may, in considering the best interests of the corporation, consider the interests of the corporation’s employees,
customers, suppliers, and creditors, the economy of the state and nation, community and societal considerations, and the long-
term as well as short-term interests of the corporation and its shareholders including the possibility that these interests may be
best served by the continued independence of the corporation.”

What’s remarkable about this verbiage is that it very closely approximates the recommended legal language to use when
establishing a B Corporation, a “corporation which uses the power of business to solve social and environmental problems.” In
effect, in states like Minnesota all companies seem to have, by default, the explicit right to pursue ends other than profit
maximization as narrowly defined.
Profit Maximization: Undefined
The absence of profit maximization language that my legal search yielded seems to tie back to the fact that it is perhaps impossible
to judge whether behavior qualifies as profit maximizing. A great post by Daniel Davies at Crooked Timber very elegantly outlines
how not only personal subjectivity but also uncertainty regarding the future and one’s time horizons make judging profit
maximization impossible.
For example, it may be great for this quarter’s revenues to take advantage of customers and degrade the environment, but a CEO
with a longer-term perspective is likely going to recognize the eventual financial consequences of such behavior. Likewise, donating
a portion of profits to local charities might be considered profit-killing in the short term, but the resulting goodwill the company
establishes can have positive long-term financial impacts.

Indeed, because what constitutes “profit maximizing” is so impossible to define, American case law has developed concepts such as
the Business Judgment Rule to help prevent courts from questioning ex post the wisdom of well-intentioned business decisions
made by managers and directors.
It’s fairly safe to say that, at least in the United States, there is absolutely nothing legally forcing managers to maximize profits (for
more see this paper on Dodge v Ford).
Business Ethics and the Social Contract
That means that the only thing compelling managers to put profits first is us. It’s not legal obligation but the social contract – the
expectations created as result of push-pull dynamics between shareholders and managers – that dictates whether social enterprise
is ethically acceptable. A company can be profit-maximizing or social impact-maximizing. What matters is that they’re transparent
about what they choose.

To his credit, Professor Vermaelen ultimately says the same thing. However, he assumes that shareholders will be profit-maximizing
in their orientations and run as far away as possible from social enterprises as we know them. Of course, if this has ever been true,
we know it is increasingly changing.

One remarkable test of the power of the implicit social contract relative to the profit-maximization assumption will be the recently-
filed lawsuit against Cadbury.
Cadbury has been sued by shareholders who are upset that the company did not accept a sizable takeover bid by Kraft. As part of
his defense, Cadbury CEO Stitzer will be emphasizing the value of the company’s unique culture and Quaker heritage and ethos.
Pointing to evidence like the success of Cadbury’s fair trade Dairy Milk chocolate bars, he will defend the right of the corporation to
stay independent or accept a lower offer from a culturally similar firm like Hershey’s.

Keep an eye on this one. It will say a lot about the long-term future of social enterprise.

Social Intrapreneurship and Taking the Oath

All in all, it seems there is only one level at which Professor Vermaelen’s warnings really make sense; that is, at the individual and
intrapreneurial level. If I take the MBA Oath but later take on a management role at a company that asks me to show little regard for
social or environmental impact, then, yes, I’m behaving in ethically questionable ways. Likewise, a hiring manager at a socially or
environmentally careless company might want to think twice about hiring me if I have taken the MBA Oath.

For some reason, though, I expect that these violations of ethics will be few and far between. Those inclined to take the MBA Oath
will be running as far away as possible from these unsustainable companies, in search of greener pastures – not the other way
around.
About the Author

Mike is a graduate of St. Olaf College in Minnesota and a former Fulbright Scholar at the Universidad de los Andes in Bogota,
Colombia. Mike currently manages strategic alliances for a global consulting firm, is a volunteer and advisor to The Ayllu Initiative,
and blogs at Human Ventures.