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.

Why Social Entrepreneurs Should Pressure-test Their Ideas

Part One: Social entrepreneurs -- those who try to tackle major social problems such as poverty and disease while generating revenues -- are often well-meaning people. But in their desire to make a difference to society, they sometimes fail to subject their ideas to rigorous tests. Ian C. MacMillan, a professor of management at Wharton, and James D. Thompson, who leads the Wharton Social Enterprise Program, have just published an ebook titled, The Social Entrepreneur's Playbook, to help entrepreneurs do just that. In the first of a two-part interview, MacMillan and Thompson explain why it is important for social enterprises to subject their beloved notions to tough love.

An edited transcript of the conversation follows.

Knowledge@Wharton: To begin with, please talk a little bit about the work that both of you have been doing with social entrepreneurs for the past 13 years and how that led to the writing of this book.

Ian (Mac) MacMillan: We felt that there was so much need out there for people to be helped, and so much funding being used without really accomplishing too much in the way of impact. [It's] not because people weren't well meaning, but because we needed a more managerial way to look at how to provide those systems to people. Since we're in the entrepreneurship program, one of the things that came to mind as we were talking about this was, can we use entrepreneurship as a weapon to tackle social problems?

Both of us feel that there are practical things people [can] do. We decided that one of the ways to really come up with [what works] was to actually go out and try to do it ourselves and learn our way into what the methodologies would be to create sustainable organizations that don't create dependence, but rather create self-sufficiency. That was the basic theme. Jim was the first to go out there and actually begin to try to do it, working with an entrepreneur who wanted to develop a feeds program to raise chickens.

James D. Thompson: One of the key distinctions of the approach we took was the use of field research. Social entrepreneurship back then wasn't what it is today. When we startedout, there wasn't a lot to go on.... To Mac's point, one of the key outcomes of the research that we were looking for was a framework, a tool. How do you go and do this and do it in such a way that you increase your chances of success and minimize the resources used in attempting to do what you're trying to do? We used field research to learn our way into the space. The book is the fruit of the last decade-plus of field research.

Knowledge@Wharton: One of the ideas that you really emphasize in the book is the notion of "pressure testing" the core idea of the social enterprise. But why is it important for a social enterprise to subject itself to this kind of a pressure test?

MacMillan: The theme, if you think about it, is if there were an easy entrepreneurial solution to the problem, it would have been developed already. These are very, very tough, intractable problems. The characteristic feature of these types of enterprises is huge amounts of uncertainty. It's so easy to go charging down the road spending other people's resources only to find out that your idea wasn't well backed in the first place. The theme of the book is to give the would-be social entrepreneur a series of questions they need to ask themselves. If at the end of that particular due diligence phase you can't answer "yes" to most of those questions, you've failed the pressure test and you should abandon [the project]. Get out early and cheap and conserve those resources for something that might work.

Thompson: Adding to what Mac just said, the distinction we make by using the term "pressure test" is that we suggest in certain instances, particularly where there's really high uncertainty, or what we call "near-Knightian uncertainty," that rather than trying to prove you're right, it is sometimes smarter to try and prove you're wrong, provided you've structured your activity in the right manner. That's the pressure testing [concept].

It's doing the due diligence up front and not trying to force your case in a highly uncertain environment, but rather trying to find ways to show where you're wrong so that you can learn, adapt, redirect and build your enterprise.

Knowledge@Wharton: To go back, Mac, to the point that you raised a little earlier, all startups face risks. But you said that social enterprises face a much greater degree of uncertainty than normal startups. Why is that the case, and what can be done about it?

MacMillan: We use the term "uncertainty" in the terms of an economist named Frank Knight. Frank said that when you have a distribution of possible outcomes, that's risk. When you don't even know what the distribution is, that's uncertainty. This is one of the problems with a startup. You don't know whether there's going to be appropriate governance; you don't know whether there's a market; you don't know whether there are customers; you don't know the prices; you don't know what materials are going to cost and so on. There are just huge amounts of uncertainty.... You just don't know what's going to happen. That's why we coined the phrase, "near-Knightian uncertainty," where the levels of uncertainty are enormous.

... What we're trying to do here -- by putting would-be social entrepreneurs through their paces and giving them what we call these tough love questions to ask -- is [to drive] the risk out. The uncertainty doesn't go away. But if you're able to configure your enterprise in such a way that you have driven out the risk, then you can afford to take on uncertain projects.

Knowledge@Wharton: Jim, who was this book for? It sounds like you've written it for social entrepreneurs, but would it be relevant to other people, including conventional entrepreneurs?

Thompson: Absolutely. We're reticent to make very, very broad and general claims of applicability. But as we've put the drafts of the book out to various communities, we've received overwhelmingly positive responses.... For example, in Penn's School of Social Policy and Practice, the nonprofit students are finding ways to use this material. The nonprofit sector ... might find this very useful. So that's one: people in nonprofits trying to do more with less. This book will help them do that.

The second is the funding community: foundations, philanthropists. One of the big cries out there today is for transparency. How do we know when these activities are doing what they claim they're doing? How do we compare them one against another? Let's face it: nonprofits face the equivalent levels of competition for funding that a regular firm does. We think that this book will give them tools to communicate to their funding communities fairly strongly how it is they are doing what they are doing, and how they're measuring the social impact that they are having.

The third is corporations. Many, many companies around the world today are looking at social impact indices and are getting measured on corporate social responsibility programs. A lot of the folks we've spoken with in these companies say, "Look, this is not what we've typically done. How do we do it responsibly?" They have stockholders. They have stakeholders in the firm, out of the firm. We think this will give them a set of tools to begin to think about what they're doing, and do it in a manner that gives them greater impact with the resources that they dedicate to these programs.

Knowledge@Wharton: Mac, how does your model help social entrepreneurs move from uncertainty to risk, or in other words, from what is plausible to what is plannable?

MacMillan: The basic idea is to give them a series of exercises to go through. You start off really subtly identifying what the real problem is and how it's dispersed. For instance, is this problem something that's unique to a small territory, or is it something that [exists] across a whole continent? Make some decisions about who the initial target segment would be that's going to benefit. You go for the segment that will benefit the most, but will also adopt your offering the easiest. Then, the next step is to start to think pragmatically about what is the competition today for the solution to the problem, and oftentimes [the competitive alternative is] simply doing nothing.

People have existed in many cases for dozens, if not hundreds, of years suffering from malnutrition or hunger or lack of education. It's something that they're used to. [That is what you are] competing against. Unless you can come up with something from the beneficiary's point of view that is better than the nearest alternative, you're wasting your time. We have a look at the market characteristics, and we look at the competition and we have a look at finding the segment where you'll get the most traction as soon as possible. Then, begin to think a little bit about the politics of going into the space and what you need to do to make sure that you don't fall foul of the politics. What you have is a systematic unfolding of more and more insight into what it's going to take to really do this and make this happen.

Knowledge@Wharton: Great. Jim, since you mentioned fieldwork -- it was a big part of the way in which you worked on this book -- could you tell me a little bit about what are some of the most common mistakes that you found social entrepreneurs make by not following the process that Mac just outlined?

Thompson: That's a good question. Possibly at the top of that list is the formulation of a plan by a group of individuals with the best of intentions to go somewhere else in the world that they don't know a lot about. They may know a lot about the subject that they are attending to in the part of the world they come from. But conceiving this plan on another continent, for example, [is not the same]. They raise resources, sometimes significant amounts of resources, to go do what they believe to be a wonderful activity. They get there and realize that the way they envisioned it to work was never going to work. Yet they have committed themselves to this unilateral course of action -- a business plan, if you will. They have spent two, three, four, five years floundering and learning why it's not going to work the way they envisioned it would. That would be the top.

Another that comes to mind is cash flow management.... What we find is that there's even greater uncertainty with respect to cash flow in these types of environments. This is not new to anybody in entrepreneurship, but in these environments, it can be even tougher to manage cash flows for all sorts of reasons: regulatory, availability of foreign exchange, etcetera.

The third one to mention is the idea of redirection. How does one think about redirecting as the reality of being on the ground unfolds? What we've tried to do in this book is attend to that, because we know it happens. We've seen it in every single case we've been involved with: this realization that your plan needs to change if you want to keep doing what you're doing. But now you've got to redirect. That means getting all your stakeholders on board to redirect, reconfiguring your operations model, sometimes reconfiguring your funding model.

MacMillan: One of the big tragedies is that people assemble a wonderful solution to a problem that they have not really studied hard enough for the context where it's going to be implemented. Then they will go over with all of that money and all of that energy and all of that excitement and find that the so-called beneficiaries -- the recipients of this largess that they've put together -- they could care less or they are very, very resistant. All of that money, which is desperately needed to help people who are in need, just goes to waste because people have been thoughtless.

Another big problem is that people set in motion a program and then find that they can't sustain it. Then they have to walk away from what they set up in the first place. A specific example here was a case that was identified by [Paul Theroux in his book, Dark Star Safari]. He went to east Africa, and while he was there, he ran into a group of people who were feeding children. And what had happened was that mothers had stopped nursing their children and fed these children with what they called wet feeding. And they ran out of funds. And so what they did now is they just packed up their tents and went on. All those women who would have been able to continue feeding their children by breastfeeding now could no longer do it; they were no longer lactating.... Nobody really thought through what the outcome would be in the event of failure. So, you create dependence and then you fail.

One of the big learnings that we got out of this program in observing what was happening over in Africa and other countries is the whole idea to think about having to leave the project before you even start it. Think about how, if you have to leave, you leave behind what we call a light footprint. If you do have to go, you have had minimal damage on the people who were supposed to be the beneficiaries of what you were doing.

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