It may have not been totally clear from the post, which I will edit in a minute, but the intended reading order would be
What do you think about orgs that donate a portion of their profits, like Ivory Ella or Endangered Species Chocolate?
Hi Dave,
I think businesses that donate a portion of profits should be commended. It's important to account for the effectiveness of the charities they support as well as the portion of profits donated.
The structure of donation as a portion of profits rather than a set quantity is also sensible because it enables businesses to meet their costs and for worthy causes to share in surpluses along with normal shareholders. However, in businesses with substantial normal shareholders (non-PFGs), shareholders may demand higher prices in light of the profit-sharing. Additionally, significant donations could impair a business’s ability to compete by reinvesting profits.
The Profit for Good (PFG) business structure addresses these challenges effectively. By having charities as the primary shareholders, PFG businesses align their profit motives directly with philanthropic goals. This means that instead of traditional shareholders expecting returns, the profits are directed towards charitable causes, integrating giving into the core business model.
This alignment allows PFG businesses to maintain competitive pricing. Since charities are the shareholders, there is no pressure to maximize dividends for traditional investors. This enables the business to reinvest profits for growth, just like any other company, ensuring sustainability and a competitive edge in the market. Reinvestment increases the equity value of the business, which can enable charities to borrow against this value to access funds for urgent opportunities. The reinvestment benefits both the business and the charitable causes, as increased business value translates into greater potential for charitable funding.
Moreover, PFG businesses can leverage consumer preference for ethical consumption without compromising on competitiveness. Consumers are likely to favor products from businesses that transparently support charitable causes, potentially driving higher sales and further increasing the funds available for donation.
In essence, while any business contributing to charitable causes is a step in the right direction, the PFG model maximizes the impact by structurally aligning business success with philanthropic goals.
If Tina were to advertise that 100% of the profits generated by her store were going to a specific charity, in the current economic arrangement, this would not be a real Profit for Good business.
How much does the ability of companies to muddle the water affect your analysis? It seems to me that even today, regular for-profit companies find ways to imply that they are social beneficial, even when the opposite is true.
I’ve recently launched a new blog, Profit for Good, where I aim to delve into the concept of Profit for Good (PFG) businesses. This blog is my attempt to organize and present my thoughts on how we can transform the way businesses operate to prioritize charitable giving. There are three substantive blog posts so far that build on each other (excluding one post that links to my TEDx Talk).
They are intended to be read in sequential order listed below, with the entirety of the first blog post included in this post.
The first post on the blog defines what Profit for Good means. In short, it refers to businesses that direct 100% of their profits to effective charities instead of traditional shareholders. Imagine buying everyday products, but instead of enriching random investors, your purchase funds life-saving bed nets or critical clean water projects.
You might be wondering, why is this the right time to introduce this blog? Well, I’ve just completed an important post that explains why Profit for Good can give businesses a significant edge. The crux of the argument is simple: people probably have at least some preference for charities over random shareholders. This seemingly small preference can be leveraged into a substantial business advantage in certain contexts.
Think about it. Given two identical products at the same price, wouldn’t you prefer the one where the profits go to fighting malaria or improving education? This preference, even if modest, can drive significant consumer behavior changes, giving PFG businesses a real competitive advantage.
I encourage you to check out the blog and engage with the content. Your feedback and insights would be incredibly valuable as we explore how Profit for Good can reshape both philanthropy and the business world. Below is the first Blog Post defining Profit for Good. If it interests you, I encourage you to continue reading.
Thank you for your time and interest!
First Blog Post
Hello everyone and welcome to my blog. I primarily intend for this blog to convey my thoughts regarding Profit for Good, although I may decide to wade into some other areas occasionally. Which brings us to the question: what is Profit for Good? This initial blog post will cover how I define Profit for Good. It will not argue why I believe that Profit for Good is a powerful tool for bettering the world, which I happen to believe, which I will do in subsequent posts. You can read an argument for it here and a set of reading materials that discuss why I and others think it is effective.
The gist of this argument is that firms with charities in the vast majority shareholder position would appeal to economic actors because the people like many kinds of charities more than they do random investors. All else being equal, people would rather buy from, work for, and work with businesses where the bottom line goes to saving lives, for instance, rather than enriching random investors. My theory is that this business structure gives philanthropists and those interested in investing their money for the purpose of future donations an opportunity to multiply the funds to charities by leveraging the fact that these economic actors care, at least to some extent. Later blog posts will expand on this argument.
What is Profit for Good?
Profit for Good can refer to a movement that we would like to develop, in which philanthropists, consumers and other economic actors collaborate, such that more of the fruits of our economy benefit charities that cost-effectively solve world problems. But it is probably best to start with defining what a Profit for Good Business is, because such businesses are the means by this collaboration between economic actors can happen.
Profit for Good Business– businesses that works for charities like other businesses work for stockholders
A very simple way of thinking about Profit for Good Businesses is that it is like a normal business, except charities are in the position that shareholders are in normal businesses. This is to say, profits, or the money a business makes minus its costs, benefit charities.
My longer and more technical definition of a Profit for Good Business (“PFG” or “PFGB”, where necessary to contrast), is a business in which charities are effectively in the vast majority shareholder position, at least as concerns the right to profits, operated in good faith for the benefit of those charities, and the firm at least attempts to use this fact to gain a business advantage. As I currently define PFG, a business needs at least 90% of the shareholder position to be held for the benefit of charities. A good example of a Profit for Good Business is Newman’s Own, in the United States.
Newman’s Own, started by actor Paul Newman, sells a variety of food products. The company is wholly owned by the Newman’s Own Foundation, which does grants to a variety of different charitable organizations that benefit children who face various adversities. In the case of Newman’s Own, the charitable foundation owns the voting stock, meaning that it has the ultimate right to control the business decisions of the company. However, as I define Profit for Good, the right to control the company by the charity is not essential. For instance, Patagonia, a business that sells outdoor clothing and wear, put the vast majority of the stocks with rights to profit with the Holdfast Collective but retains control of the business with the Patagonia Purpose Trust. Much smaller and simpler businesses also can be Profit for Good businesses. A small online store with sole proprietor who commits to, and advertises the fact, that all the profit generated by the platform would go to a designated charity similarly would be a PFG.
In Good Faith
The reason that I add the “in good faith” qualifier is that some business arrangements involve circumstances in which costs or revenues are not at competitive rates. For instance, imagine that there was a supermarket in which Tina was the sole shareholder and the business generated a million dollars of revenue, $800,000 in salary to Tina for working there, and $200,000 in other costs. On paper, Tina’s supermarket is generating $0 in profit, but this is a function of the fact that the shareholder is fine with paying herself a higher than normal compensation rate. If Tina were to advertise that 100% of the profits generated by her store were going to a specific charity, in the current economic arrangement, this would not be a real Profit for Good business. On the other hand, if Tina were to pay herself and her employees a market rate salary (unless there was a business case for much higher compensation), such an arrangement could constitute a PFG.
What About Reinvestment?
When I first discuss the idea of Profit for Good Businesses with people, I often get the following reply: “if a business donates all of its profits, how will it compete with businesses that reinvest in their business for growth?” However, the key thing to being a PFG is that charities are effectively in the shareholder position, and shareholders do not automatically get all of the profits sent to them as dividends. In fact, often the best business decision is the reinvestment of profits back into the business. Fortunately for shareholders, this reinvestment, if prudent, is no less in their interests than a dividend, because it will increase the value of their shares. Consequently, just like normal firms, PFGs can reinvest profits in their businesses, increasing the stock or equity value of the business. A charity or charitable foundation could borrow against the increased value of their stock price to simulate the effect of a dividend.
Profit for Good is about the Profits
Although there are a number of other ways in which businesses can behave more ethically or otherwise do better for the world through their activity, as I define PFG, such other business activities are not essential to the definition of Profit for Good. Of course, many PFGs are interested in other aspects of ethical capitalism, for instance BOAS and Thrift for Good sell used clothing, helping save the environment by providing a sustainable substitute for new clothes. For both conceptual clarity and also to leave open a wide variety of areas that could potentially be PFG, such other aspects of ethically superior business practice are not essential to a business being a PFG, as I define it. I will elaborate in later posts on why I believe this particular form of social enterprise could be revolutionary.
Next Blog Post Preview
Central to the reason for advancing Profit for Good is the positive effect that money has when going to extremely cost-effective charities. My next blog post will briefly explore the good that money can do when it goes to effective charities. The goal is to make clear the degree of good that could be achieved if profit went to charities.
I’m a fan of this concept. Would love to see your analysis of https://good.store by the vlog brothers
They seem like an excellent example of a Profit for Good business succeeding in part due to their charitable commitment. Selling coffee, socks, and soap online seems very scalable and we are very excited to see the Good Store's progress.
We link to each of their product lines on our "Find a Profit for Good" page
https://profit4good.org/find-a-profit-for-good/