What is the best way of innovating for social change?

There are many different ways – organisationally speaking – that you can save the world. In previous generations, idealists who dreamt of ending poverty, cleaning up the environment or righting injustices started non-profits, went into government or joined religious organisations. Today, an increasing number are attracted to the idea of saving the world through business. The swelling ranks of socially minded students in our MBA classrooms is testament to the increasing interest in social entrepreneurship.

As business educators, we naturally see this as a good thing. The social sector needs entrepreneurs equipped with the frameworks and ideas that will help them to navigate the many trade-offs and challenges that exist in turning innovative ideas into great organisations, starting with the basic choice of whether organising as a business or a non-profit – or something else entirely – is best suited to serving their chosen mission.

Better-managed organisations of all sorts achieve their objectives more effectively. In a for-profit context this has been compellingly illustrated by a Stanford-World Bank study where a “management makeover” was randomly assigned to a subgroup of Indian textile manufacturers – the cost of paying Accenture to improve management quality quickly paid for itself.

One of the study’s authors, Nick Bloom, has been collaborating with researchers at Harvard and the London School of Economics to examine – albeit through observation rather than direct intervention – whether management also improves the functioning of schools and hospitals. What’s good for business also seems to be good for social service organisations. Better managed hospitals have lower patient wait times and higher survival rates for heart attack victims and a school’s management quality is correlated with the test score improvements of its students. These findings line up with our casual observations on the value our graduates provide to what are often undermanaged non-profit and governmental organisations in need of their talent and expertise.

Aspiring social entrepreneurs face a deeper question than simply how to manage – that is, what’s the best way of innovating and organising for social change? These days, profit as the engine of social change seems all the rage. Many in the business community seem to engage in a kind of magical thinking about the profit motive as the best means of accomplishing an objective – social or otherwise – more efficiently and effectively. Or so it must have seemed to Google when it decided that google.org would fund only for-profit enterprises before retracting its stance a few years later. A similar swinging of the pendulum describes public views on microfinance where for-profit lenders have gone from being celebrated for providing financial access to the poor, to being widely vilified by many others for profiting from those living in poverty.

Not surprisingly, the truth lies somewhere in the middle; there are trade-offs involved in choosing how to organise, how big to grow and how to serve one’s chosen mission. Some innovations, such as rewarding households to recycle more and keep less trash out of landfill, are well suited to a profit motive. Others, such as filling in empty lots in poor neighbourhoods with playgrounds, are better served by donor-supported non-profits. These decisions become ever more complicated as entrepreneurs experiment with new ways of organising that try to straddle the non-profit and for-profit worlds in the form of B-corporations and other entities that have a financial bottom line but also need to show their investors a social return on their investments.

Unfortunately, the discussion of trade-offs has often been reduced to vacuous catchphrases and slogans that show little previous thought for the underlying principles behind them. We hear about companies claiming to do well by doing good, with the implication that for-profits don’t face trade-offs at all between social and profit objectives. This certainly sounds nice, but in reality it’s hard to improve social conditions and clean up the environment and addressing these needs will seldom earn attractive financial returns. Worse, this view is contradicted by the fortunes that many companies have made by bribing, cheating and polluting their way to billion-dollar profits. It’s rarely sufficient to invoke the value of taking the long view – while some companies suffer for their sins, many do not.

At the same time, there exist doing-well-and-doing-good opportunities. These will propel the business models of the future and indeed corporations of any stripe would do well to understand these cases better – to appreciate when providing health insurance or flexible work-life policies begets more productive employees; greener supply chains lead to savings on production costs; and where profits may be found selling useful products to low-income communities.

Understanding the difference between sloganeering and logical frameworks is critical to making the right set of trade-offs in business and management generally. And can help to prevent the veering from fad to fad that we hope to avoid for the emergent field of social enterprise. This is critical at a time when there are extremely high – some might say inflated – expectations for the profits of budding social entrepreneurs. A JPMorgan report on impact investing has estimated profits ranging from $183bn to $667bn over the coming decade. This has generated tremendous interest but risks disappointment if growth in the sector falls short.

In establishing the Columbia Business School in 1916 then-president Nicholas Butler argued that “in the study of business the university must see to it that the aim of service is always uppermost in the thought of its students.” Many business schools were founded with this explicit recognition that effective leadership and management combined with innovative business ideas can be a force for social good. In the wake of the financial crisis, it is critical that business educators get back to these founding principles in reflecting on their own missions. It’s a purpose that is well served by equipping the current crop of social entrepreneurs with the skills and insight they need to convert their good intentions into doing the greatest good for the world.

The authors are co-directors of the Social Enterprise Program at Columbia Business School.