Hard choices for social enterprises

A recent takeover of an ethical business presents a crucial challenge to the evolving sustainability sector, write John Elkington and Jodie Thorpe.

A recent letter speaks volumes about mainstream capitalism’s taste for buying socially and environmentally innovative enterprises. “Over the next few days,” it begins, “you may read in the press about Coca-Cola making a minority investment in Innocent, and we wanted to tell our [customers] about the deal and why it’s a great opportunity.” The letter, signed by the founders of Innocent—a highly successful UK health drink company that will be 10 years old this year—goes on to say, “The funds raised allow us to do more of what Innocent is here to do—get natural, healthy stuff out to as many people as possible. And the money raised is going into the business to fund our European expansion, so we can get Innocent out to more places.” 

They stress that “none of the cash is being paid out to the shareholders,” noting in typical Innocent style that any idea of the founders making off to a “desert island will just have to wait”. Next, they emphasise that “the three of us who set up the business will continue to run and manage Innocent. We will be the same people making the same products in the same way. Everything that Innocent stands for remains in place—to only produce natural, healthy stuff; to push hard for better quality, more socially and environmentally conscious ingredients; to find more efficient and environmentally-friendly ways of producing and packaging our drinks; to support charities in the countries where our fruit comes from; to have a point of view on the world, and to not take ourselves too seriously in the process.”

Innocent’s success owes much to the brand’s ability to connect with consumers by projecting values like purity, openness and fun. A typical drink label lists ingredients such as “19 pressed grapes”, “10 crushed strawberries” and “Nothing else.” It states that the bottle is made from 50% recycled plastic, noting “We’re still working on the rest”.

But why would Innocent link up with Coke, of all companies? “They have a small stake of between 10-20%, which they paid £30 million (US$45.4 million) for,” we were told. “We chose Coca-Cola as our minority investor because as well as providing the funds, they can help us get our products out to more people in more places. Plus, they have been in business for over 120 years, so there will be things we can learn from them. And in some small ways we may be able to influence their thinking too.” However, the outside reactions, which ranged from doubtful to outraged, spotlighted the continuing difficulty big business has in making a success of buying into much smaller businesses with a reputation for ethics and sustainability.

We have watched a number of ethically-minded companies being taken over, and several of the founders involved have made exactly such optimistic noises about changing the company they were being absorbed into. Some years back, for example, one of us was involved in the process by which Unilever took over Ben & Jerry’s, the ice-cream firm business that had been one of the most respected pioneers of social capitalism. We were even written into the first draft of the bill of sale as a guarantor of Ben & Jerry’s ethical principles, until the US stock exchange authorities deleted that clause.

In the case of Ben & Jerry’s, Unilever even put up a budget of some US$5 million as part of the deal to help co-founder Ben Cohen cross-fertilise Unilever with new thinking. In retrospect, however, there were hiccups along the way, although Unilever handled things better than many of its competitors would have done. Evidence of Unilever’s frustration—feelings were shared by many on the Ben & Jerry’s side—is that the giant company later decided to contract out much of its new venture investment to a San Francisco-based firm in which we have also been involved, Physic Ventures. The idea here has been to invest in innovative new businesses in areas like health, wellbeing and sustainable lifestyles, but to keep them independent until the time comes for the investors to sell, at which point Unilever may buy a larger stake—or the new firm could even go to a competitor.

Another small company we watched being swallowed—and then spat out—by a large client company, Ford, has been the electric car company TH!NK, based in Norway. At a time when Ford was buying up all sorts of car companies, including Jaguar, Land-Rover and Volvo, TH!NK was just another item on the shopping list. Ford invested something like US$100 million in the business, but in the end felt this was a step too far—and span out the company to a group of Norwegian venture investors. Now that electric cars are back in the spotlight, with the US government tying bail-out money to investment in green cars, it will be interesting see whether one of the auto giants reverses the clock and buys TH!NK all over again.

Whatever the outcome, we have seen mergers and acquisitions in other areas of the economy, too. Socially responsible investment houses have been bought by larger companies, like Switzerland’s Sustainable Asset Management (SAM), which runs the Dow Jones Sustainability Indexes, becoming part of Robeco. And in the consultancy sector we have seen takeovers like that of Adam Werbach’s Act Now, that had been helping US retail giant Wal-Mart to “go green”, by public relations giant Saatchi & Saatchi.

If capitalism is to evolve, there are many ways in which it can draw on the best people, thinking and business models in the sustainability sector. While takeovers will often be favoured, the challenge is to ensure that the culture of the acquiring company does not blunt the edge of the much smaller, entrepreneurial company. In the interest of protecting that precious edge, more major companies will try to keep innovative acquisitions at arm’s length, to ensure that they are not suffocated. Coke’s embrace of Innocent will be an important test case of the ability of giants to dance with infinitely smaller partners without trampling them underfoot.

John Elkington is co-founder of SustainAbility and of Volans. Jodie Thorpe is the director of SustainAbility’s Emerging Economies Program.

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