Historically, businesses have donated billions of dollars to nonprofits to help address social problems by approaching the social contract of “giving back” to society in two primary ways. First, with traditional corporate philanthropy, businesses have benefited customers, employees and communities by making donations to, and volunteering for, worthy causes. Second, “corporate social responsibility” emerged to help strategically align charitable initiatives with business objectives, assure compliance with legal and ethical obligations, and achieve important environmental and sustainability goals. In 2011 alone, it is estimated that U.S. business giving exceeded $15 billion.

Both philanthropic approaches remain important, necessary and effective not only for their nonprofit beneficiaries and society at large but for the businesses that implement them, and have been discussed in prior columns (see “Businesses Have Big Stake in Improving their Communities” from The Denver Post on March 20, 2011).

Increasingly, however, businesses are implementing a third approach to addressing social problems by adding social innovation to their community investment portfolio.

In “Social Innovation, Inc: 5 Strategies for Driving Business Growth Through Social Change,“ (2011), author Jason Saul argues:

To link social change and business outcomes, companies must rethink their approach to social change. This isn’t a matter of retrofitting your existing social contract strategies with better business justifications; it’s about coming up with fresh, innovative strategies that are specifically designed to create business value through social change.”

Social innovation is not traditional corporate philanthropy, or social responsibility, or giving back, or putting values first and profits second. Rather, it is about “innovating creative, market-based solutions that result in high growth, profitable business opportunities.” To accomplish this, Saul explains how businesses can:

• Create revenues through submarket products and services.
• Enter new markets through backdoor channels.
• Build emotional bonds with customers.
• Develop new pipelines for talent.
• Influence policy through reverse lobbying.

To develop strategies to solve social problems, business leaders must first determine in what ways their business might impact, or be impacted by, social issues. Health care, education, hunger, environmental degradation, food deserts, depletion of nonrenewable natural resources, the uninsured and homelessness are just a few of the social problems that businesses impact and that impact businesses, and can be addressed with profitable business innovation.

Then ask where the company’s core competencies can make the biggest difference. In what areas of expertise is the company a market or thought leader? The answers to these preliminary questions will begin to shape the discussion of how to generate profits while making a difference in the world.

Examples of social innovation abound. Coca-Cola Recycling LLC is a for-profit subsidiary seeking to recycle 100 percent of Coke’s beverage packaging and containers in the U.S., lowering its costs of production, reusing nonrenewable resources and reducing litter. Walmart’s $4 prescriptions helped it become one of the largest pharmacies in the country, while saving consumers billions of dollars, and making access to medicine easier and more affordable for the uninsured and patients on Medicaid. Office Max’s “A Day Made Better” campaign provides free school supplies to thousands of classrooms, while boosting market share, revenues and employee engagement. Encana Oil & Gas converts nonprofit and government vehicles to cleaner, less expensive and domestically produced natural gas and partners with community colleges to train mechanics to work on those vehicles.

Encana community investment adviser Joyce Witte observes: “Everyone wins when companies generate business value through social change.”

Architect and sustainability expert William McDonough said, “There are three ways to change the world: change China, change California, or change Walmart.”

Business has unprecedented power, reach, resources and impact on the lives of nearly everyone on the planet. Letting business do what it does best — generating profits through innovation — may be our best hope for creating solutions to the challenges of our time.

This post originally appeared in the Denver Post on Sunday, January 22, 2012 and is posted here with permission by the author.