From Blur to Precision

Last week more than 200 foundation leaders, policymakers, academics, entrepreneurs, and experts came together at George Washington University (GWU) for an invitation-only gathering to advance the development of what many call the “fourth sector”—for-benefit organizations that primarily pursue social or environmental aims, while raising a substantial proportion of their revenue through earned income or commercial activities. The Federal Reserve Board, the University’s Trachtenberg School of Public Policy, the Urban Institute, and The B Team convened the event.

Podium speakers and participants—facilitated expertly by Chris Meyer, author of Standing on the Sun—used discussions and social media to define, refine, and explore expansion of for-benefit organizations alongside the traditional three sectors of government, nonprofits, and for-profit businesses. Conference co-organizer Heerad Sabeti cited research suggesting that for-benefits are growing at almost twice the pace of traditional profit-only businesses. The day’s work continued efforts started at a 2013 summit at Harvard University to advance fourth-sector economic development strategies. There, the Urban Institute‘s Center on Nonprofits and Philanthropy on a prize to pursue a mapping effort to better understand, define, and categorize these organizations, which include social and municipal enterprises, community development corporations, and nonprofits that generate commercial returns. Director Elizabeth Boris explained that the Fourth Sector Mapping Initiative involves several work streams that cover taxonomy development (how to define and classify for-benefit organizations); survey design; data acquisition; and putting together an open source, publicly accessible data commons that will house profiles of for-benefit organizations and their supportive ecosystem. This comprehensive database and classification system will support moving to a more enabling policy and investment environment for the fourth sector. The results of the mapping initiative, which has enlisted 170 volunteers, will become public later this year. Rajiv Joshi, Managing Director of the B Team—founded by Richard Branson and Jochen Zeitz to push the private sector to redefine its responsibilities and terms of success toward social, environmental, and economic benefit—mentioned how this initiative strengthens the B Team’s movement-building, toward a world in which the purpose of business is to advance the well-being of people and the planet. He also referenced B Team leader Guilherme Leal’s company Natura, which is the first public (and now largest) company to become a B Corporation.

Here’s some bad news: Attendees raised cautionary points throughout the day—about outmoded legislation, misalignment between expectations of different players, and slow policy change. Jean Case, one of most vocal and influential proponents of the sector, entreated us to avoid getting bogged down with precise nomenclature, saying, “Nomenclature is no friend at all.” She urged the group to not be daunted by what we haven’t yet figured out.

Yet this pointed to what will be a delicate balance for the organizers and sector proponents to maintain in the months and years ahead. Even if the rest of us don’t expend energy on it, the sector “mappers” will need to spend time in the weeds and stay a bit pedantic to determine a taxonomy, identify the most salient characteristics, and sort information precisely so that they can create the data commons and system-level perspective required to draw more investors and public policy support. Detail also matters at the organization level, as Ross Baird of Village Capital reminded us: “We work with companies raising funds all the time ... all investors ask about data, and you have to be convincing.”

Indeed, most attendees came to the event with slightly different understandings, terminology, and perspectives. But here’s the good news: It was clear that there is an incredible appetite to tackle the challenges and build out the fourth sector. Bullish senior leadership from all sectors attended. GWU President Steven Knapp sees students dreaming of creating fourth-sector businesses. Several speakers cited the growing ranks of conscious consumers and investors, as well as employees and job-seekers who are “impact oriented.” Matt Bogoshian of the Environmental Protection Agency believes that “we are going to have to prove business models that can deliver triple-value outcomes.” An example is the enormous potential in fourth-sector, energy-efficient factory updates to transform US manufacturing.

G8 Social Impact Investment Taskforce chair Sir Ronald Cohen contributed a helicopter view of the field. While “governments stare at a yawning gap” in resources, he pointed to Chicago’s $17 million social impact financing for education, and 15 Social Impact Bonds underway in the United Kingdom. “Investors in the 19th century talked about return, in the 20th about risk and return, and in 21st century, it is risk, return and impact.” Meanwhile, a recent Accenture report identified 1200-plus for-benefit enterprises across 37 countries and many industries, which are setting up their own certification with or without government.

Examples of fourth-sector organizations weren’t limited to the usual suspects, such as Newman’s Own and Tom’s Shoes. Jean Case, for example, cited National Geographic, whose parent company is a nonprofit with a for-profit subsidiary that funds the work of the National Geographic Society. And lawyer Victoria Bjorklund pointed to Readers Digest, a company set up to promote literacy (but one that suffered from legal constraints), and Goodwill Industries, an enterprise-based nonprofit. At the same time she reminded us that in New York State, companies still can’t form an LLC to do social mission work because of legal restrictions.

Some politicians think the emergence of new legal structures for for-benefit organizations is something that both major parties in the United States can agree on. Democratic Congressman John Delaney from Delaware called this approach “bringing together the best ideas of progressives and conservatives, and not by mushy compromises.” He cited the bill he and Republican Representative Todd Young introduced with seven other co-sponsors, H.R. 4885, the Social Impact Bond Act. Former Senate Finance Committee Staff Director Russ Sullivan suggested skipping DC-based advocacy and instead demonstrating how for-benefit organizations in politicians’ home states can help solve challenges like job creation in their own backyards.

Delaware’s enlightened legislation, spurring the fastest growth of the sector nationally (more than 1,000 companies are registered as for-benefit corporations in the state), sped up when policymakers there met with B Lab and interested investors and learned that policies were indeed standing in the way of their income- and job-generating enterprises; they realized it was a good thing for all if benefactors got what they wanted. Maryland’s Chief Deputy Secretary of State Richard Geisenberger said he anticipates that every state will pass for-benefit legislation by the end of this decade.

Audience and speakers had important questions and concerns: What are the mechanisms for determining primacy of social purpose? What’s the balance between corporations pursuing general versus specific public benefits? What about the risks in companies assessing their own performance and impact? What’s an appropriate level of shareholder investment to allow a company to become a for-benefit organization? What about analyzing capital structure in addition to operations? And very important: How to apply all this outside the United States?

The day’s work went beyond a wall we hit in many impact investing events—a wall that doesn’t allow for significant emphasis on the enabling environment and ecosystem, or discussion beyond the question of capital needs to crucial policy, legal, and public perception dimensions. This event did, and one way to sum up next steps is this: Report the shift, support the shift, accelerate the shift, and grow the space.

Read more stories by Heather Grady.