By JOHN LOH and WONG WEI-SHEN starbiz@thestar.com.my
Although still at an early stage, they can make a difference in addressing social issues
PROFIT
with a conscience - that could well be the mantra for a new kind of
business taking root here called the social enterprise.
Although
there is no one definition, social enterprises are generally understood
to be businesses that exist primarily to fulfil social goals, which
could be anything from reducing poverty, creating jobs for the
disadvantaged, to educating children in rural areas.
According to Leaderonomics
chief executive officer Roshan Thiran, a social enterprise bridges the gap between a traditional
non-profit organisation and for-profit corporation (
see chart).
In fact, he points out, all businesses start out with some kind of social mission in mind, like how
Google was premised on organising information on the Internet, and Ford on making cars that were affordable to the masses.
To
accomplish its social objectives, a social enterprise has to find ways
to generate income by providing a product or service, and the resulting
profits are funnelled back into a specific cause.
Unlike a
non-governmental organisation or charity, social enterprises do not rely
on donations, but they may seek grants, equity, or loans to support
their capital needs.
Kal Joffres, chief operating officer of the
Tandem Fund, says that in any case, “there isn't enough free or donor
money to go around to fix the problems we have today”. Tandem Fund is a
not-for-profit venture fund that invests in social enterprises in
Malaysia.
It can be hard to change the mindset of existing leaders, but what we can do is create leaders from the youth. - ROSHAN THIRAN
“
Social
enterprises are still at a very early stage, but they could be very
transformative for a lot of the problems we face,” he contends.
Due to their non-traditional structure, social enterprises tend to take innovative approaches around their business model.
In the case of Leaderonomics, which got its seed funding from
Star Publications (M) Bhd,
The Star's
parent shareholder, a part of the proceeds from its training and human
resources consultancy work done for corporates is reinvested into its
youth leadership-building activities.
For example, the company
organises regular leadership camps for young people where half of the
spots are reserved for orphans and
underprivileged children.
In
addition, it opened a youth community centre for “kids-at-risk” called
DropZone in
Petaling Jaya and is piloting a leadership club for
secondary schools.
Leaderonomics' main aim, Roshan says, is to
build leaders from the grassroots. “It can be hard to change the mindset
of existing leaders, but what we can do is create leaders from the
youth. If we are successful in changing their value system into one that
is authentic and based on integrity, we have a shot in 20 years to see
many leaders in the country emerge from this group,” he says.
To
supplement its core mission, it offers a range of consultancy services,
such as its talent accelerator programme for those identified as an
organisation's “top talent”, and it counts companies like Malakoff,
RHB Bank, and
Sime Darby among its blue-chip clients.
“Social” returns
In
the 1980s, General Electric boss and maverick management guru
Jack
Welch introduced the idea of “shareholder value” which dictated that a
company is duty-bound, above all else, to maximise returns on investment
(
ROI) for its shareholders, increase its share price, grow its market
capitalisation and so on.
Turning this concept on its head,
social enterprises measure themselves against a different set of
criteria, using terms like social ROI, and the triple bottomline,
referring to people, planet, profit.
I think paying taxes makes us more powerful. We are on the same footing as any other business. - DR REZA AZMI
“Things
like marketing and branding, they are not real. But if you can create
lasting social value, I think the community will (continue to) give
back,” Roshan quips.
Most social enterprises, it would seem, have one thing in common: they were motivated by a problem.
Online crafts retailer Elevyn - whose name was derived from the phrase “the eleventh hour” - started out this way.
One
of its founders, Puah Sze Ning, was volunteering with the orang asal in
Sabah as part of efforts to document land rights issues and the
displacement of local communities when she was asked by one of the women
if she could help them sell their handmade crafts in
Kuala Lumpur.
“They were really poor - some are single mothers, some are elderly. And they have no other source of income,” explains
Mike Tee, co-founder of Elevyn with Devan Singaram.
“Even
when they make it, they can't really sell it as Sabah has a very
limited market. Sze Ning was quite stumped, she had just finished
university at the time. So she came back and felt really helpless.
“During
one of our meet-ups, she told us this story. Since we're (Tee and
Devan) both software developers, we thought about setting up a website
that would connect producers to customers.”
The term “orang asal”
refers to all indigenous people throughout Malaysia, while “orang asli”
refers to those in the peninsula, Tee says. The website,
elevyn.com,
sells a variety of fair trade items, and it is worth noting that beside
each product display is a box that shows exactly what percentage of its
sales price goes to the maker, designer, reseller and for materials.
They were really poor - some are single mothers, some are elderly. And they have no other source of income. - MIKE TEE
“We
started with a group in Kudat, Sabah, then expanded to the peninsula
with a couple of orang asli groups. Recently, we started working with
Burmese refugees based in Kuala Lumpur. People have described us an ebay
for the poor,” Tee chuckles.
To get on their feet, the team applied for and won a RM150,000 grant from the
Multimedia Development Corp (MDEC) in 2008. At the time, MDEC gave out pre-seed funding to start-ups with technology businesses.
On
Elevyn's business model, Tee points out that some 70% to 80% of the
sales price goes back to the producers of the goods, and the team
receives a 5% cut after deducting PayPal transactions.
“We make
very little money from this. That's why for this model to work, we need
scale,” he says. A percentage of the profit is also apportioned for a
particular cause like school books, for instance.
Currently,
Elevyn either sells individual products to visitors at its website or
bulk orders directly to corporate clients. They have yet to sell to gift
retailers, but Tee says this might be a possibility in the future.
However,
several operational hurdles stand in its way. First, the products must
address market needs. “Sometimes we tell our producers to make a product
this way or that to suit the market, but what they are making could
have been passed down from their ancestors, and we certainly don't want
to disrupt that,” Tee explains.
Second, constant supply is
difficult to ensure, since most of the orang asal depend on the rattan
and other raw materials that grow near their homes, which, in turn, may
be determined by the seasons.
Profitable venture?
A
rented home in Sri Hartamas serves as an office for Wild Asia, a social
enterprise that advises clients on environmental and social policies
and practices.
“We have been profitable since we started,” exclaims
Dr Reza Azmi,
Wild Asia founder and director.
“We are service-based, and so did not
require a lot of capital,” he says of the enterprise that started out as
an online platform for information exchange on nature-related issues.
Some
of Wild Asia's services include sustainability assessments to help
plantation companies comply with standards set by the Roundtable on
Sustainable Palm Oil, as well as developing their environmental and
social management systems.
Social
enterprises are still at a very early stage, but they could be very
transformative for a lot of the problems we face. - KAL JOFFRES
This
social enterprise got off the ground some 10 years ago with RM10,000 in
seed capital from a few individuals, including Reza. Wild Asia, which
he says has close to RM1mil in paid-up capital now, is based on a model
whereby 65% of its profit goes to its cash reserves as well as to invest
in responsible tourism initiatives, such as the Okologie dive and study
centre at the Batu-Batu Resort in Mersing, Johor.
A further 25%
of its profit is shared among staff and associates as a bonus, while the
balance 10% is split between Wild Asia's shareholders.
Reza, who
studied biology in the United Kingdom, says he found his calling in
conservation work during a gap year from university. “I wanted to be a
professional beach bum,” he jokes.
Having done this for a number
of years, he observes that there has been growing concern among
businesses to preserve the natural world. “Banks and investment houses
are starting to take notice. They might refrain, for example, from
putting their money in or lending money to companies that deal with
converted forests.
“We are one of the groups they hire to verify
these things. But its the foreign banks that have specific policies on
this,” Reza explains.
Even so, profitability remains a key
concern for social enterprises. According to Tandem Fund's Joffres,
start-ups break even in about three to five years, but social
enterprises can take up to eight years.
“It takes them (social
enterprises) longer to grow the market, and they often take smaller
margins and do community-building activities at the same time,” he
quips. Compounding this is the issue of funding, which can be hard to
come by for social enterprises.
The tax question
Another
issue that could curtail the growth of social enterprises is the lack
incentives and tax breaks. They can currently only register as private
limited companies and are taxed as such, since they derive an income
from business activities.
Tee says Elevyn is taxed on a
percentage of its profits, though not if the company is loss-making. To
make things easier for social enterprises, the Social Enterprise
Alliance, where Joffres is a committee member, is pushing for more
policy recognition for the sector.
For starters, it is hoping to
make amendments to the tax policies to make it legal for charitable
trusts or foundations to give money to social enterprises.
Foundations
cannot provide monetary support to social enterprises under the present
tax regime as it would be viewed as an investment by the Inland Revenue
Board (IRB), Joffres stresses.
Deloitte Malaysia country tax leader Yee Wing Peng tells
StarBizWeek
via email that while the Government does provide for tax exemptions on
income received under the Income Tax Act 1967, this is for approved
charitable organisations.
“A limited liability company or Sdn Bhd
is not included because it is formed with a profit-seeking motive and
the profits generated can be returned to shareholders in the form of
dividends. There is no restriction to prevent the company from
distributing profits to the shareholders instead of using the profits
solely for charitable purposes.
“I advise the social enterprises
to use a legal form that is acceptable to the IRB as this would
encourage more donors to contribute due to the availability of tax
deduction and with the income exempt from tax, more funds can be
channelled for charitable causes.
“If the initiator has to use a
Sdn Bhd set-up due to compelling business needs, attempts may be made to
the higher authority i.e. the Finance Minister to consider exemptions.
Putting in place covenants to ensure that the profits made by the Sdn
Bhd can only be used for the intended charitable purposes may help,” Yee
explains.
Nonetheless, Wild Asia's Reza argues that social
enterprises “don't need handouts to survive”. “I think paying taxes
makes us more powerful. We are on the same footing as any other
business. You are a business entity just like any other,” he says.
More than money
A
key question moving forward for social enterprises will be how
sustainable they can be, and what kind of impact they can deliver. That
will depend on, among others, how quickly they can adjust their business
models to respond to market forces.
Asked about Wild Asia's
impact, Reza says it has been the cultural shift within organisations in
their treatment of the environment. He cites the example of a major
government-linked corporation they had consulted that now has its own
20-man team to do the job internally.
He also notes that Wild
Asia is beginning to attract interest from disillusioned corporate
dropouts wanting to join his team and do something with a purpose other
than financial gain.
According to Tee of Elevyn, the impact of a
social enterprise need not be purely financial either. “You can't fix a
problem just by putting money into it,” he says.
“There was
recently an order that came in from Japan and Spain. We told them (the
producers) to ship it to these addresses and the women were very
surprised, because to them these countries are a world apart, and yet
they had an interest in their products.
“The impact is not just in terms of money, but also the pride that what they're making has value.”
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