The Great Hanshin Earthquake of 1995 was highly destructive owing to its direct impact on Kobe, a major urban center. It was also an important wake-up call for Japanese society, highlighting both serious problems and untapped potential in a number of areas. Prominent among these was the role of government and civil society in the public domain.

The Broadening Role of Citizen Engagement

The post-quake surge in volunteerism and action by nonprofit groups highlighted deficiencies in Japan’s status quo, notably the fragility of a social system dependent on government at every stage and the resulting tendency for citizens to become passive consumers of public services, as well as the physical and functional limitations of the government in responding to society’s needs.

At the same time, the image of ordinary citizens coming together in the face of great hardship to create their own public sphere demonstrated that civil society existed in Japan as a reality, not simply an abstract concept. The impact on Japanese society can be compared to the changes that took place in Eastern Europe after the collapse of the Berlin Wall.

The year 1995 marked the dawn of a new age of volunteerism in Japan, and during the next decade—punctuated by the 1998 enactment of the Law to Promote Specified Nonprofit Activities (NPO Law) and the 2003 reform of public interest corporations—Japanese society came to recognize the pivotal role of citizen engagement in supporting the public interest.

Meanwhile, in the two decades of economic contraction and stagnation that followed the collapse of the asset bubble, the Japanese were forced to rethink their collective values. Japanese society began to confront the problems inherent in mature capitalism and to search for a more sustainable model. Businesses were called on to redefine their responsibilities to society, and a large number responded by actively undertaking philanthropic programs in the name of corporate social responsibility.

Of course, most major Japanese corporations were built with a social mission in mind. A well-known example is Matsushita Electric (today’s Panasonic), founded by Konosuke Matsushita, who adopted the following corporate philosophy in 1929: “We will strive for the development of the nation’s industry and the betterment of society with a firm commitment to harmony between business profits and social justice.”

But this essential component of business management receded into the background during the era of rapid growth and the decade of the asset bubble, as society embraced the concept of the corporation as an entity designed solely to pursue profits on behalf of the shareholders to whom it belongs. Viewed in this historical context, the recent emphasis on CSR and creating social value can be thought of as a bid to fuel new growth by revisiting the nature and potential of business as a positive force in society.

Another aspect of this trend was the appearance of a new business model: the social enterprise, or social business, an operation whose success is gauged not only by its bottom line but also by its contribution to the public interest and the resolution of society’s problems. In recent years this model has drawn considerable attention, and a new breed of social entrepreneurs eager to launch such businesses has sprung up in Japan and elsewhere. The interest this trend has generated among talented men and women of all ages, but especially among the young, is cause for genuine hope for the future.

Recent years have also witnessed the rise of a variety of initiatives to encourage and support these trends. In addition to policy measures at the state and local levels, private corporations and nonprofit organizations have undertaken a number of important projects. The business daily Nihon Keizai Shimbun has instituted the Nikkei Social Initiative Award to honor the achievements of Japanese social enterprises and NPOs, while NEC, Kao, and other companies are collaborating with the nonprofit ETIC (Entrepreneurial Training for Innovative Communities) on a program to train social entrepreneurs and assist them in the development of new business models.

Challenges of Nonprofit Management

After the Great Hanshin Earthquake, the term NPO (nonprofit organization) came into currency to describe the various public-interest-oriented community groups that had played such a prominent role in the recovery effort. After the government enacted legislation to facilitate the incorporation of these groups in 1998, nonprofit activity expanded rapidly, thanks in large part to volunteer activity. Certainly the image of ordinary citizens working selflessly for the greater good, without thought for financial profit, resonated with the public and helped drum up support for such groups. But the public’s strong association of nonprofit activity with volunteerism is one of the reasons that NPOs have found it so difficult to embrace principles of sound business management.

I founded the Kyoto NPO Center in 1998, at a time when terms like “social business” and “social enterprise” were rarely heard. Even so, the center’s founding members shared an orientation toward organizations built on business principles. Our hope at the time was eventually to make Japan’s nonprofit sector a place where people could find employment and make a living. This has proven quite difficult, in part because the Japanese public has come (mistakenly) to associate nonprofit work with uncompensated work. Nonetheless, we did find that there was a niche for our work in the community, and we undertook a number of civic initiatives.

One was the launch of a local community radio station. Although “community FM” had existed since 1992, most of the stations covered by the pertinent law were run by quasi-public entities funded by government. Feeling the need for a radio station by and for local citizens to help build an independent “people’s media,” we supported efforts to operate a station as a nonprofit corporation.

However, we soon ran up against a major difficulty: A broadcasting license proved much harder to obtain for an NPO than for a profit-making business. There were many reasons for this, but the main factor was the lack of generally accepted criteria for assessing the performance of a nonprofit. A commercial business could be assessed by capitalization, sales, and other financial measures, but since no such yardsticks existed for NPOs, there was no way to evaluate them.

In addition, the group seeking to operate the station had issues of its own. Its members instinctively rejected the concept of making money, and organizational difficulties emerged owing to the group’s origins in a citizens’ movement. It took some time to overcome these obstacles. This experience gives some indication of the factors—particularly the deep-rooted prejudice against money-making activity by a nonprofit group—that have necessitated the adoption of new models, such as the “community business” and the “social business,” that stress a business orientation along with a social purpose.

Quasi-Governmental NPOs

Another factor that has influenced the development of Japanese NPOs is the fact that the 1998 Nonprofit Organization Law and associated provisions were drawn up with an eye to supporting a far-reaching reform of Japan’s welfare system, specifically, the introduction of Long-term Care Insurance in 2000.

The government had high hopes for NPOs as providers of nursing care in Japan’s rapidly aging society, and in fact, many of the NPO corporations that function as businesses today fall into this category. According to figures released in April 2015, loans to social businesses from the Japan Finance Corporation, a policy-based financial institution, have surpassed ¥50 billion annually, and more than 90% fall into the category of nursing care or welfare.

What this signifies is that among those NPOs that operate more or less as businesses—as opposed to community volunteer organizations—the majority are essentially government contractors, providing social services at the behest of government agencies. Theirs is a business model dependent on and originating in government.

To be fair, there are also many NPOs that seek to use such financing to address society’s problems in a commercially sustainable manner. But many issues remain to be resolved, including the lack of established lending criteria for nonprofit organizations and difficulties in assessing the social value of these groups’ ventures.

Many NPOs are unable to collect compensation from the citizens they serve, which limits their sustainability. In order to continue providing such unprofitable services, these groups need to tap into other resources: either other activities that are more profitable or access to volunteer labor and charitable giving. Unfortunately, per capita charitable donations are quite low in Japan compared with many Western countries. Religious and cultural factors are often cited for this difference, but noncultural factors seem to be operating as well.

A recent survey found that NPOs registered in Kyoto Prefecture collect a total of ¥700 million annually. This averages out to about ¥650,000 per organization, but a full 70% of those donations go to the top 10%. In fact, the median income from charitable donations is ¥0, meaning that more than half of all registered NPOs receive no contributions whatsoever because they have no mechanism in place for collecting donations. The organizations that do actively solicit donations, on the other hand, seem to get results.

In Japan today, tax revenues are funneled to the prefectural governments, which are responsible for providing social services to their residents and have broad discretion in the allocation and disbursement of funds, including funding for NPOs and similar organizations. Under this system, NPOs are all the more apt to assume the character of government contractors and become extensions of the local government.

Many people active in the nonprofit community are acutely aware of this danger. Increasing funding through charitable donations is one way organizations can avoid this trap and operate independently while fulfilling their social purpose. Many societies have tax systems designed to encourage and facilitate charitable giving. As Japan continues the process of decentralizing political and fiscal authority, it needs to incorporate such systems as a means of creating multiple funding channels to support a vibrant civil society.

The Role of Community Foundations

Local governments are at a crossroads. The needs of residents are mounting and diversifying, while the government’s human and fiscal resources are increasingly strained. At the same time, demographic shifts are creating unprecedented challenges. The government cannot address all these problems single-handedly. The demands on NPOs are bound to grow in the years ahead, and social businesses are likely to extend their sphere of activity as well.

The ability to develop a citizen-based business model in lieu of the government-based model that currently dominates the social service sector will determine the success or failure of such enterprises and have a huge impact on the future of our society.

The values of Japanese society are shifting, and new social issues emerge as the times change. The figure below illustrates the relationship between changes in society’s awareness of social issues and the development of social movements over time. In phase 1, people directly affected or those close to them become aware of an issue and begin to take action when they feel they can no longer leave things as they are. But at this point, society does not yet appreciate the public good to be gained from such efforts and is apt to treat the activists as troublemakers or extremists. The cause is not regarded as a legitimate issue impacting society as a whole.

Awareness of Social Issues and Social Movements

In phase 2, those seeking change begin to organize and broaden their base of support, and citizens in different communities coordinate their activities in an effort to address the issue. At this stage, research and activities designed to raise the public’s consciousness promote a deeper structural understanding of the issue.

By phase 3, society as a whole clearly recognizes the problem as a social issue, opening the way for public policy and legislative action at the national and/or local level. At this phase, efforts to address the issue are embraced as a social value, and fiscal resources can be mobilized to support them.

Phase 3 is also the stage at which government-based business models are apt to take hold. The key here is whether social businesses dedicated to the cause in question were able during the previous phases to secure nongovernmental management resources so as pursue their social activities independently and sustainably.

This is where community foundations can play an important role. Community foundations have drawn attention as an effective means of generating diverse funding channels for community projects. These foundations rely completely on charitable giving from donors in the nongovernmental sector for their basic financial assets as well as their grant funding. One of the first such organizations in Japan was the Kyoto Foundation for Positive Social Change, which I established in 2009. The movement spread rapidly after that, and in 2014, I created Community Foundations Japan as an umbrella organization.

Community foundations regard charitable giving as the right of all citizens and an important tool for community involvement. They act on this principle by functioning as intermediaries connecting donors with various organizations and helping to channel the resources of the business community into social action. Some have also begun working with local financial institutions. Community foundations serve a vital role by pooling contributions from citizens and organizing participation in grassroots movements at phase 1 and phase 2—when such movements still lack the social recognition and momentum to secure government action—thus providing crucial management resources and promoting a broad-based sense of ownership at this critical stage.

The Potential of Social Investment

In the coming years a growing number of established companies, particularly small- and medium-sized enterprises, are likely to seek a new lease on life by expanding into the field of social action or reinventing themselves as social businesses. We can also expect to see an increasing number of partnerships between corporations with business know-how and NPOs that excel in identifying social issues. As communities around Japan struggle with the structural changes triggered by demographic aging, depopulation, and globalization, a growing number of corporations and entrepreneurs will doubtless seek to tap the business opportunities presented by these changing needs.

Increasingly, people are looking beyond CSR and asking how SMEs can be encouraged to venture into the social realm and seize the opportunities for growth while leveraging their business know-how and core competencies to help meet society’s challenges.

I believe that social investment has a critical role to play in supporting the dynamic growth of such enterprises. Social investment differs from traditional business investment in that the results are assessed in terms of social benefits as well as monetary returns. In 2013, during Britain’s presidency of the Group of Eight, Prime Minister David Cameron announced the launch of the G8 Social Impact Investment Taskforce. Subsequently, each member state established its own national advisory board. The Japanese government, having incorporated the basic principles into its 2014 Basic Policies for Economic and Fiscal Management, has begun deliberating measures for encouraging such investment.

In terms of community financing, the money is there, but unfortunately, it is flowing out of local communities instead of circulating within them. The loan-deposit ratio of Japan’s shinkin banks—regional cooperative-type institutions that have long played a key role in financing local enterprise—has fallen by more than 20% in the past 15 years, as more bank capital is used to purchase Japanese government bonds. Incentives for social investment could help stem this drain, foster investment in social businesses and other enterprises oriented to community improvement, and support the independence and sustainability of Japan’s regional economies.

Of course, a new paradigm of social investment presents challenges of its own. Any organization that uses social resources must produce results. Formulating criteria and methods for assessing these results is one of the biggest challenges ahead. We also need to recognize the wide range of purposes and management styles encompassed by not-for-profit organizations, even within the category of NPOs. This diversity is fundamental to a vital civil society, but this does not mean that all NPOs are equally worthy of receiving society’s limited resources. NPOs must realize that good deeds and honorable intentions are not enough; they must analyze the causes of social issues and contribute to their resolution. Our urgent task is to develop mechanisms for channeling management resources into those organizations and businesses that have a results-oriented commitment to social change.