The rise of social enterprises

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Saturday February 25, 2012

The rise of social

enterprises
By JOHN LOH and WONG WEI-SHEN
starbiz@thestar.com.my

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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 begin 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 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.

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The rise of social enterprises

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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, which refers to people, planet, profit.
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 this way.
One of its founders, Puah Sze Ning,
was volunteering with the orang asal in

I think paying taxes makes us

more powerful. We are on the
same footing as any other
business. - DR REZA AZMI

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, who
co-founded 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

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The rise of social enterprises

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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 to pay for materials.
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
They were really poor - some are single
mothers, some are elderly. And they
have no other source of income. - MIKE
TEE

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.
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

Social enterprises are still at a

very early stage, but they could
be very transformative for a lot of

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The rise of social enterprises

bonus, while the balance 10% is split

between Wild Asia's shareholders.

Page 4 of 6

the problems we face. - KAL

JOFFRES

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 concern for
the natural world is increasing among businesses. 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 of 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
Moving forward, the key questions for social enterprises will revolve
around how sustainable they can be, and what impact they can truly

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The rise of social enterprises

Page 5 of 6

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 biggest impact so far, 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 the 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 were interested in their products.
The impact is not just in terms of money, but also the pride that what
they're making has value.
Related Stories:
Creating an impact
Investing in the right causes
SEA says some local enterprises are ready for investors

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