December 10, 2019

You’re the Boss Blog: The Role of Profit in a Social Business

Sustainable Profits

The challenges of a waste-recycling business.

As I reflected on the end of 2012, I decided to write a letter to our more than a hundred employees around the world to discuss the role profits play at TerraCycle.

TerraCycle is a social business, which means that we focus on the so-called triple bottom line: planet, people and profits. For us, this has meant creating a business model that involves capturing nonrecyclable waste — like chip bags or diaper packaging — before it goes to a landfill or incinerator and finding a way to recycle, upcycle or reuse it. Basically, we’re giving garbage a second life by creating a system for otherwise nonrecyclable waste to be recycled.

Through sponsorship from more than 50 brand partners (L’Oréal, Kimberly-Clark) we are able to offer free shipping and a small donation (typically 2 cents per piece of waste received) to a school or organization of the collector’s choice. Today, we engage more than 35 million people in collecting this waste in 22 countries around the world. While our sales have grown every year for the past nine years — we finished 2012 with slightly less than $15 million in revenue — we just became profitable in 2011. We earned a small profit in 2012 as well.

In my letter to the company, I wrote that our goal is to eliminate the very idea of waste: “This is a lofty goal that I believe is best executed via a for-profit platform. But I would like to underline that we do not exist for the sole purpose of profit.” Instead, I explained, profit is a tool we use to help us accomplish our purpose. But it can get complicated, and much depends on how a company is structured and financed.

One challenge of trying to balance profits with a socially minded business can be the law. Perhaps the best example is the sale of Ben Jerry’s to Unilever. Ben Cohen and Jerry Greenfield started the company in a renovated gas station in South Burlington, Vt. They were fair to their employees and their cows, they cared about the environment, and they used the business as a vehicle to raise awareness about social and environmental issues.

But by 2000, Ben Jerry’s had raised money by becoming a public company. When Unilever offered to buy it, according to a 2010 NPR interview with Mr. Cohen, “the laws required the board of directors of Ben Jerry’s to take an offer, to sell the company despite the fact that they did not want to sell the company,” Mr. Cohen said. “But the laws required them to sell the company to an entity that was offering an amount of money far in excess of what the stock was currently trading at.”

What the board could or should have done is still being debated, but there is no debating that maximizing profit ran counter to some of the socially and environmentally minded investments that the founders valued. And there is also no debating that some of those investments were eliminated after the sale.

This kind of discussion led to the creation of what are known as “benefit corporations” — or B Corps. Under this corporate structure, which is now available in several states, a board of directors can account for a range of considerations, because the board’s fiduciary duty must include nonfinancial interests like social and environmental benefit.

TerraCycle is not a B Corp — the company was formed as a Delaware C Corp before B Corps existed — but we try to run the company as if it were. We have long emphasized our focus on the triple bottom line, and the majority of our investors are socially minded, patient-capital investors who agree with our mission.

So what is our view on profits? In my letter I explained to our staff how we approach our triple bottom line:

Planet: The service we provide helps the planet by keeping non-recyclables out of landfills and incinerators.

People: Our secondary service is giving money and resources to members of society who help us recycle nonrecyclables. As part of their contract with TerraCycle, our sponsoring brands provide us with funds to incentivize collections — those 2-cent payments per unit of waste. In 2012, TerraCycle gave away more than $1.5 million to schools and charities in the United States alone, and to date, the company has given away more than $7 million globally.

Profit: Profits are important to us. In 2012, we earned almost $100,000 in profit on our almost $15 million in revenue. The next few years represent an important growth stage for our expanding company; as chief executive my goal is to maintain modest profitability and to reinvest as much capital as possible increasing compensation, hiring more employees,  and adding more tools and resources to deliver our services in better ways. That should allow us to grow faster, have more impact and ultimately increase our revenues and profits.

I went on to encourage everyone at the company to use our mission statement to increase our sales. If clients question our fees, I suggested, showing them that our profits are very low will help them see that we are not charging what we charge out of greed. That is what it really costs to solve the problem of waste.

Already this framing has generated substantial benefits for our organization and has helped accelerate our growth. Happily, minimizing our profits now to build the company will help us maximize our value to our shareholders over the long term. And that’s my fiduciary responsibility to my shareholders.

Tom Szaky is the chief executive of TerraCycle, which is based in Trenton.

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Economic Scene: Do-Nothing Congress as a Cure

A trick question: If Congress takes no action in coming years, what will happen to the budget deficit?

It will shrink — and shrink a lot. This simple fact may offer the best hope for deficit reduction.

As federal law currently stands, some significant tax increases are set to take effect in coming years. The most important is the scheduled expiration of the Bush tax cuts at the end of 2012.

Of course, both parties favor the permanent extension of most of those tax cuts — the ones applying to income below $250,000. Both parties also oppose big cuts to the military, Social Security and Medicare, at least in the short term. Unfortunately, the deficit is likely to remain frighteningly large over the next decade without either cuts to those programs or tax increases.

Democratic and Republican leaders alike dance around this point. President Obama may call for “tax reform” in his deficit speech on Wednesday. He may even suggest that tax reform can reduce the deficit. He is very unlikely to explain which taxes will go up in his vision of reform, aside from some of those on the affluent. And while those increases will certainly help, they’re not enough.

The Republicans’ numbers are even fuzzier. The recent plan from Paul Ryan, chairman of the House Budget Committee, includes highly specific tax cuts for the affluent and still claims to reduce the deficit long before his proposed overhaul of Medicare begins. How? Partly by eliminating tax breaks — that is, raising taxes — although Mr. Ryan doesn’t say which ones. The savings simply appear under the heading “Tax reform.”

It’s as if tax increases were a mere technicality in any deficit-reduction plan. In reality, finding a way to raise taxes may well be the central political problem facing the United States.

As countries become richer, their citizens tend to want more public services, be it a strong military or a decent safety net in retirement. This country is no exception. Yet our political culture is an exception. It has made most tax increases, even to pay for benefits people want, unthinkable.

This is where the Bush tax cuts come in. They have created a way for inertia to be fiscally responsible.

They are scheduled to expire on Dec. 31 of next year, not long after the 2012 election. If Republicans win the White House and both houses of Congress, they will probably extend all the tax cuts, come what may for the deficit. If Mr. Obama wins re-election and Democrats control Congress, they are likely to extend the cuts on income below $250,000.

But if Mr. Obama wins and Republicans control the House, the Senate or both — an outcome that many analysts, at least for now, consider the most likely one — things could get interesting.

Republicans have said that they will not extend only part of the Bush cuts. Late last year, when the cuts first expired, Mr. Obama yielded to Republican demands to extend all the cuts (while insisting that they expire again after 2012). He was right to do so, in my view, given the fragility of the economic recovery.

Next year, however, the economy should be stronger. When the economy is in good shape, modest tax changes often have little effect on growth. Look at the 1993 Clinton tax increase, which didn’t prevent the 1990s boom. Or consider the Bush tax cuts, which were followed by the slowest decade of economic growth since World War II.

If Mr. Obama wins re-election, he could simply refuse to sign any budget-busting tax cut for the rich — who, after all, have received much larger pretax raises than any other income group in recent years and have also had their tax rates fall more. Republicans, for their part, could again refuse to pass any partial extension.

And just like that, on Jan. 1, 2013, the Clinton-era tax rates would return.

This change, by itself, would solve about 75 percent of the deficit problem over the next five years. The rest could come from spending cuts, both for social programs and the military.

Over the longer term — 20 years — letting all of the Bush cuts lapse would close only about 40 percent of the budget gap. But 40 percent is a great start. No one is seriously suggesting that all deficit reduction should come from higher taxes. Much of it will have to come from slowing the growth rate of medical spending, which is the main cause of the long-term deficit.

To be clear, the end of the Bush cuts is not the ideal way to raise taxes. A better approach would be to close some tax loopholes while possibly even reducing rates. The tax code would then become simpler. Businesses and households would have to waste less effort trying to qualify for tax breaks.

Economists from the right and the left — from President Bush’s tax commission and Mr. Obama’s deficit commission — favor this idea. Politicians, including Mr. Obama and Mr. Ryan, say they do, too.

The problem is that many of the biggest loopholes are politically popular. Saying you favor the vague principle of tax reform is easy. Coming out in favor of cutting the mortgage-interest deduction — or the tax exclusion for employer-provided health insurance or the corporate tax break for new machinery — is not so easy.

A small, bipartisan group of senators, known as the Gang of Six, is now working to do exactly that: devise a credible, specific deficit proposal. White House aides say Mr. Obama supports their overall effort. But they still face a tough task.

Ultimately, deficit reduction will have to involve cutting programs or raising taxes, if not both. Voters don’t particularly like either. So keep your eye on Jan. 1, 2013. The best hope for a solution may be the possibility that the two parties can’t agree to a solution.


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