5th in a series from the HBR article by Alfred Rappaport reprising his earlier work on shareholder value. I am adapting each principle (10 in all) to the realm of social enterprise.
Principle 5: Return cash to shareholders when there are no credible value-creating opportunities to invest in the business.
Hmmm. How does principle #5 relate to social enterprise? Isn’t it already true that a social enterprise returns cash to its mission or stakeholders or benefitors?
The value creating social enterprise will find itself facing decisions on use of surpluses. How to spend the extra cash. We can only re-invest a finite amount, right? Right. But, putting that cash to work in peripheral businesses and projects may be destroying value. I can hear you saying, "But, Todd, the projects I would shift my surpluses to will be worthy. They are good ideas."
That might be true. However, stick to your core competency and drive value in all that you do.
If your social enterprise delivers ICT services to the 3rd sector and you provide such a good service that your profits are greater than expected….don’t casually invest them into a new project. I suggest following these steps for maintaining value creation:
1. Increase your re-investment in the business to lower prices for some customers, drive more value, or improve some products/services.
2. With what is left over, do one or more of the following:
a. if you cannot dream up a core competency related project, then remove the cash from the business and invest it elsewhere to increase your returns. Use these funds to expand the business in the future or distribute as a charitable arm of your enterprise (see below).
b. if you have a related project. invest in it. but, check to see that this project fits within your core competency. I go on about core competency because many social enteprises are not familiar with the concept-in fact, they disregard it altogether.
c. if you don’t have a related project, expansion, or are unable to re-investment: set up a charitable arm of your operation with the sole mission to invest in other firms or causes. Sounds simple? It’s not. To keep the standard as high as your original organisation and value creation paramount, you will need to focus the efforts of this charitable arm in a particular direction, determine screening criteria, etc. In other words, you worked hard to produce the cash–don’t fret it away with feel good jestures. expect more. do more.
In the end, social enterprises with extra cash are in an enviable position. But, the value driven management teams will seek to extend their principles to the use of this cash in or outside the company.
Links:
Harvard Business Review
Core Competency
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