How do social entrepreneurs know they are doing good?

Jonathan Greenblatt is a serial social entrepreneur with a string of successes. He has helped to build several brands, including Ethos Water, which was bought by Starbucks in 2005. He also worked with Google and was, until last month, the director of the Office of Social Innovation and Civic Participation at the White House. From July 1 he became the national director of the Anti-Defamation League. Greenblatt was named a senior fellow at the Wharton School in December 2014.

Throughout his career, Greenblatt has helped to evolve what the idea of social entrepreneurship means. In a recent interview with Katherine Klein, vice dean of Wharton’s Social Impact Initiative, Greenblatt talked about the business of social impact: Where it has been, where it is headed, and how we can tell if a company is doing the good it aspires to do.

An edited transcript appears below.

Katherine Klein: What is a social entrepreneur?

Jonathan Greenblatt: I [use] a definition that was laid out many years ago by Sally Osberg of the Skoll Foundation, and Roger Martin, who’s the dean of the Rotman School of Management in Toronto, Canada. I think about a social entrepreneur as someone who tries to create change through a market-based approach. That is while taking direct action. Not necessarily lobbying or doing advocacy, but literally going in and creating something — that is, trying to do so in order to create, or let’s say, fix a broken disequilibrium.

It’s not someone who is trying to do something on the outside that is causal, but instead trying to create systemic change and repair a difficult societal ill. The social entrepreneur creates direct action to fix a broken system.

“The social entrepreneur creates direct action to fix a broken system.”

Katherine Klein: For profit, necessarily?

Greenblatt: I think it can be both. I think you see social entrepreneurs in the non-profit space who use that sort of model to attack a particular issue in a field. It could be health care. It could be housing. It could be finance. I, personally, am more interested in what we have seen in terms of social entrepreneurship in the business community.

Katherine Klein: Let us talk about that — social entrepreneurship in the business community. And let us start with Ethos Water. You were relatively early in this space. What did you try to do at Ethos Water?

Greenblatt: Ethos Water was started with my business partner, Peter Thum. We were roommates in business school at Kellogg for two years, which is a lesson for all the young Wharton students out there as they think about their classmates. Peter had this idea of creating a bottled water that would use part of its profits to fund humanitarian water projects. Over time, we then started the company. And over time, our model evolved.

Katherine Klein: When did you start the company?

Greenblatt: Pete started working on it in 2002 and we came together in mid-2002.

Katherine Klein: And when did you sell the company to Starbucks?

Greenblatt: We sold it in April of 2005.

Katherine Klein: So, fast?

Greenblatt: Yeah, pretty fast. It’s funny. You see this pattern of starting, scaling and selling on a pretty rapid time frame in Silicon Valley all the time. In CPG [consumer packaged goods] or in other kinds of categories, it’s a little less common. Nonetheless, the model was predicated on this notion that we could connect consumption to the cause. So, consider the first generation of social enterprises in the business world — businesses like Ben & Jerry’s or Body Shop or Stonyfield Farms. Here you had products and brands that were about ice cream or about yogurt or about personal-care products that were not necessarily tied to the causes they sought to address.

Katherine Klein: They were organic, healthier, [and had a] better supply chain.

Greenblatt: That is right. I think Ben & Jerry’s didn’t use Recombinant Bovine Growth Hormone. But consumers didn’t understand that. And the Body Shop aspired to do things with better-sourced inputs from the Amazon. But then consumers didn’t understand that. We thought consumers would understand this basic idea of bottled water, which is kind of an irrational category to begin with, connecting its consumption to clean water issues. It’s a huge global problem.

Katherine Klein: People may have heard of a one-for-one model. We see that in TOMS Shoes perhaps most famously. I know they’ve evolved their model, but it was: “Hey, consumers, buy a cool pair of these shoes and we will donate a pair of shoes.”

Greenblatt: Right.

Katherine Klein: But Ethos Water is a little bit different.

Greenblatt: Completely.

Katherine Klein: It wasn’t, “Hey, buy a bottle of water, and we will donate a bottle of water elsewhere.” What was it?

Greenblatt: Our notion was if you bought this bottle of water, we initially aspired to donate up to 50% of our profits to fund humanitarian water programs around the world. And I say programs because it wasn’t just a project with a kind of hardware like a new latrine or a new well. And that matters. But the hardware is no good without the software. So, we also sought to do hygiene education and to create sort of economic schemes that would make the water system sustainable.

That approach is really different than saying, I’m going to invest in a community here in order to create an ecosystem around water — is very different than saying, we’ll give somebody a pair of shoes.

Katherine Klein: It seems like it’s different in at least two ways. One is it’s a commitment around the plan to donate 50% of your profits. It’s not tied to each one of your products. And it’s not tied to a particular solution. You had more flexibility, more ability to change an ecosystem.

Greenblatt: Let us take those two things, starting with the latter. I think our approach was more strategic, and the one-for-one model is often more tactical, right? We were investing strategically versus tactically giving someone something. It’s not teaching a man to fish. It’s creating a fishery ecosystem, rather than giving someone a fish.

But on the flip side, look, I will say that I think TOMS and Warby Parker and these other businesses that are endeavoring to do this model — I think it’s admirable. I think we should encourage them. I would simply say I think the model can continue to evolve in ways that create more enduring change, and connect the consumers to the issue more effectively.

Katherine Klein: Sometimes the simplicity of “Hey buy a pair of shoes and we’ll give a pair of shoes away” may not be the right solution. And I know TOMS has been criticized and has evolved its model — but from a consumer perspective, it’s very concrete, very clear.

Greenblatt: [Simplicity] isn’t really key. The consumer wants to understand: “Hey, I do this, what happens?” So our slogan was “Every bottle makes a difference.” Helping children get clean water, simple. “I buy this water, someone gets water.” But the facile, “I buy this water, we give someone a bottle of water” — that’s crazy.

We thought it would be more respectful of the consumer’s intelligence to have a model that was honestly more intelligent and smarter. With that said, I do believe that TOMS and Warby are evolving their approaches to accommodate for the complexity of the issues. And as consumers’ awareness has increased, their expectations have increased. And they demand more from these brands than just “I buy it, you give it away.”

“When there are questions in the annual meeting, shareholders or stakeholders — who wins?”

By the way, TOMS didn’t start it. You know who started this model? Nick Negroponte started this model. Remember the one laptop per child?

That was the way he went to market out of the MIT Media Lab. And he had a great partnership with companies who helped. You buy a laptop — initially, he was going to give them away, and then he realized, you buy a laptop here, we’ll give one away over there.

Katherine Klein: What are you seeing as you look at the new ways that businesses are engaging in social impact — whether in social enterprise or corporate social responsibility or the places they’re blending? What are you seeing that has potential?

Greenblatt: Well, what’s interesting, I think, is you certainly are seeing lots of innovation in the supply chain or the value chain.

More and more businesses are using more sustainable supply chains. So, think about a business like Tesla: It’s [building] a better battery, and it’s produced in a way that makes the car more efficient.

Katherine Klein: Right, right, we hear this a lot about Nike, for example.

Greenblatt: Exactly. They’re interesting models where it could be the inputs, if you will, or the materials. It could be the labor force. There are businesses that are trying to use labor forces overseas and give their workers better opportunities. Even here at home. There’s a company in Detroit — a watch company in Detroit is doing this, whose name I can’t seem to remember [at the moment] … But you’re starting to see some interesting models like that. So, it could be the labor force. It could be the materials. It could be the way you go to market, right? Like using climate-friendly vehicles to deliver your product. So, the supply chain work is interesting. And of course, there are businesses that are doing interesting things on the back end, vis a vis how they give away part of their profits. I think the interesting things are happening not in the value chain and in the profit distribution, but on the front end and how these businesses are getting created. And how these businesses are measuring their impact. So let’s talk about both those things.

So, the first side: We’re here in Philadelphia, which is the headquarters of B Lab, an organization that has developed this interesting model of certifying companies. You take their audit and you get that certification, and you get this B corporation status.

Katherine Klein: Right. There’s actually a distinction between the legal status of being a B corporation, a benefit corporation, and a certification process of being B Lab certified.

Greenblatt: Exactly.

Katherine Klein: Just to clarify, the B Lab certification assesses multiple aspects of the company — its work force, its mission, its environmental impact and so on — in all the ways that this could be a mission-driven company.

Greenblatt: That’s exactly right. Their certification process is what’s interesting to me, because we’re seeing all kinds of businesses start to adopt this — businesses you might not expect; consulting firms would be an example. Or, different companies that really don’t fit the Ben & Jerry’s/TOMS Shoes/Ethos Water model.

As you were saying, we’re now starting to see policy catch up with this as different states are accommodating for and allowing businesses to incorporate as for-benefit companies, using in many cases some of the stuff of the B Corp certification process. That’s very interesting, because as we see more and more businesses take those principles and put them into their charter, make it an explicit part of their value proposition to serve stakeholders as well as shareholders, that’s really different. That flips Milton Friedman on its head.

Then, related to this, is the way that we measure value.

“We were investing strategically versus tactically giving someone something. It’s not teaching a man to fish. It’s creating a fishery ecosystem, rather than giving someone a fish.”

Katherine Klein: The vast majority of companies getting B certification are private companies. A few of them have gone public or been acquired. But what happens when they go public? Will people look at this melding of a social mission and an economic mission and want to invest? Or will they be concerned that the economic mission will take a backseat to the social one? What are the assumptions that investors may have in their heads about a company that’s mission driven and B certified, and whether it’s worth investing in?

Greenblatt: It’s an interesting question. I don’t think we know the answer yet. Etsy just filed for its public offering 90 days ago [on March 4]. And there’s another firm — there’s an email marketing firm in North Carolina that I think is out. But Etsy will be the most prominent public equity with a B status. So, that will be fascinating, to see how it plays out when there are questions in the boardroom, shareholders versus stakeholders. When there are questions in the annual meeting, shareholders or stakeholders — who wins? It’s hard to say.

I think we’re going to work those things out. On the other hand, we do have lots of big companies that aspire to be better for the world and don’t even have that status. Think about Google, for example.

Google has been very explicit with their “don’t be evil” mantra. They don’t have B certification. And they are trying to maintain their line. The way they’ve done it is with the different classes of stock. The controlling stock is owned by the founders, Sergei and Larry, and I think maybe Eric Schmidt. The common shareholders don’t have the controlling stuff that they do. So, they continue to make the strategic decisions for the company because of these two classes of equity.

Katherine Klein: We were recently speaking with Whole Foods’ co-CEO, Walter Robb, and he was very explicit: Our purpose comes first, and our profits follow. He very much seized the mission-driven elements of Whole Foods.

Greenblatt: Howard Schultz would say the same thing at Starbucks. And we see other corporate leaders beginning to adopt a similar mantra. Richard Branson has started this thing called the B Team with corporate CEOs who are trying to aspire to similar dual missions, where purpose theoretically comes before profit. Now, on the other hand if you don’t have any profit —

Katherine Klein: You’ve got to be afraid …

Greenblatt: So it’ll be interesting to see how this plays out.

Katherine Klein: In an ideal world, what we hope we’re seeing in this space is a virtuous cycle: Purpose drives profit drives purpose?

Greenblatt: Right. But we come back to this question that you raised earlier, which is, as we see companies go public and there are shareholders getting involved, how does that actually play out day to day? What are the pressures upon those businesses?

Katherine Klein: Yes. And then you wanted to talk about the other end of the spectrum.

“As we see more and more businesses take those principles and put them into their charter, make it an explicit part of their value proposition to serve stakeholders as well as shareholders, that’s really different. That flips Milton Friedman on its head.”

Greenblatt: Measurement. I think ultimately — and this may answer the first question — firms are beginning to develop integrated models to actually measure not just their financial performance, but also their social, environmental, etc., performance. Out of that B certification process has come something called GIIRS, which is a measurement system that is quite interesting.

It stands for Global Impact Investing Rating System. And that is being applied right now to funds to evaluate their portfolios. What’s meaningful about that is that it is creating the conditions in which these fund managers are looking at their portfolio of investments and saying, “How do we perform?”

That may be one of the most interesting things about B Lab. It’s not the thousand-plus companies who now have the certification. Far more businesses have taken the self-audit. The fact that they have created the conditions in which entrepreneurs and executives, managers at all levels, are thinking about these issues — that alone is a contribution, I think, to the national conversation.

Katherine Klein: I’ve heard one founder describe it like a check list that tells you whether you’re eating enough vegetables.

Greenblatt: Yeah, it’s like a food plate of a firm’s performance, isn’t it?

Katherine Klein: Right. And the impact measurement piece, I think, is really important. There’s so much that is inspiring in this space, but there are parts that are worrisome: That companies may come on board without a genuine commitment to social impact, without a careful evaluation of what they’re doing, and without accountability to create an impact. And there’s potential for abuse as these kinds of businesses become more common. So, the commitment to impact assessment, accountability and transparency would seem to be a really important safeguard.

Greenblatt: It’s absolutely crucial, for a couple of reasons. Number one, brands that aren’t really true to this are often exposed. I think millennials, in particular — maybe in part because of social media — can sniff out what isn’t authentic. That is a bit qualitative. But on the quantitative side, if we ever really hope to bring capital into this field at scale, if we hope to do the kind of comparative analysis that gives us the ability to analyze those public equities like we were just talking about — so you can compare Whole Foods’ performance to Supervalu or Krueger’s or Albertsons — we need a set of common measures by which we can judge their performance at something other than EPS [earnings per share]. I think it’s important for that reason.

Then thirdly, because if we really hope to create change at scale, we need a discipline and a rigor around measuring quarter on quarter, year on year, how we’re making progress on key metrics. You manage what you measure, so the advent of measurement systems I think augurs well if we want managers to be focusing on this.

This article is republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.” Publication does not imply endorsement of views by the World Economic Forum.

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Author: Jonathan Greenblatt is a serial social entrepreneur with a string of successes.

Image: Co workers brainstorm in the office of the HowDo, a “how-to-do-it-yourself” app. REUTERS/Thomas Peter.