BRIAN KENNY: According to the Prison Policy Initiative, the US criminal justice system holds about 2.3 million people in state, local and federal prisons. That means that with just 5% of the world’s population, the US holds 25% of all incarcerated people in the world. These are staggering numbers, and they’re fueled by the fact that up to 40% of those released from prison, find themselves back behind bars within three years. Life outside of prison poses enormous challenges, but there’s one thing that has proven to help: employment. Today on Cold Call, we’ll discuss the case entitled, “Nehemiah Manufacturing Company: Providing A Second Chance,” with professor Michael Chu. I’m your host, Brian Kenny, and you’re listening to Cold Call.
Michael Chu’s research focuses on business and low income sectors, particularly in the use of commercial platforms to deliver what has traditionally been considered public responsibilities. And he’s deeply involved in Harvard Business School’s Social Enterprise Initiative. Mike, thanks for joining me today.
MICHAEL CHU: My pleasure.
BRIAN KENNY: We’re facing a situation right now with a pandemic and it’s going to leave us in a pretty uncertain world when it comes to employment. So you think about the ripple effect of some of the things that we anticipate we’re going to go through, and it has direct bearing on the conversation we’re going to have today. So thanks for taking the time to discuss it with us. Let me ask you, your first time around on Cold Call, so the way we start every conversation is to ask the faculty member, if you were starting the class right now, what would your cold call be to the students?
MICHAEL CHU: When I start this case, I ask the class, what do you think of Nehemiah as a business? And the reason I do that is because the case deals with employing people that have a felony or a prison record and/or may have been drug addicts. There is obviously a powerful social impact side precisely because of that, I want them to focus on the business model first.
BRIAN KENNY: Okay. So let me ask you how you found out about Nehemiah and more importantly, how does this case in particular, relate back to the work that you do in your scholarship?
MICHAEL CHU: I found out about Nehemiah because in my course at HBS, I have every year, some Advanced Leadership Fellows that come and ask me permission to be in the class. The Advanced Leadership Fellows is a very interesting program at Harvard in which people that have had a distinguished career already applied to the Advanced Leadership Initiative to see if they can spend a year at Harvard with access to any course that’s given at Harvard University, so long as the professor lets them in. They come to my class and one of them said, “In our program, we just heard one of the founders of this amazing company and you ought to talk to them.” The reason why they thought it was a good fit is because my interest is on business models that involve, what I call, the base of the pyramid. But that is, in most of the world, the 70% of people that are below the 15%, 20% that are very well served, but above the bottom of the pyramid, which is the 10% that are indigent or close to indigent, so that the market isn’t that relevant for them. Now in the States, it’s not 70% as it would be in Mexico or India, but it is like 45%. Nehemiah is at the core of that interest with a special angle. Most of the times, I look at models that are delivering goods and services to that 70% underserved population. In this case, it was reaching out to the underserved low income sectors vulnerable populations, but as an input to the production process.
BRIAN KENNY: Just tell our listeners what Nehemiah does. And if you can explain where the name comes from because I thought that was a really interesting part of the case.
MICHAEL CHU: Nehemiah’s business is actually taking orphan brands. What are orphan brands? A company like Proctor and Gamble, and other fast moving consumer good companies, have great flagship brands. These flagship brands often develop smaller niches along the way. Nobody pays attention to them because in a big company, you have flagship brands, all the attention is on those things that really move the needle for the large company. Nehemiah, they put the tension and the focus necessary to make them successful in ways that aren’t possible in these large companies. So they’ll for example, license a brand and take it over, and the name of the company comes from Dan Meyer, one of the co-founders, who thought of the biblical reference to Nehemiah who rebuilt the walls of Jerusalem. So he liked the idea because the initial purpose of starting Nehemiah was going and offering employment opportunities to the inner cities of a place like Cleveland that had been at one time, a great industrial employment hub, but through the years, had declined. This was sort of like rebuilding Cincinnati again.
BRIAN KENNY: So tell us a little bit about Dan. He’s an interesting person, pretty much a straightforward marketing background coming out of P and G. But clearly just from the name that he chose, this is a guy who is kind of focused on giving back in some way. Tell us a little bit about Dan.
MICHAEL CHU: Dan, as he would tell you, is a devout Catholic and he met his co-founder, Richard Palmer, and they were both in an interesting situation in their careers. Dan had done very well at normal business and then founded a company that actually took on these orphan brands and did well. He sold that company and he was thinking that the next thing he wanted to do was something that was commercially successful, but would respond to some important social problems. At first, he thought that this was employment in the inner cities that had lost the traditional sources of employment with history. He met Richard Palmer who also had a career in fast moving consumer goods. They were both really interested in doing something that was terrific business and also, high social impact. So that’s how Nehemiah was born.
BRIAN KENNY: This is based in Cincinnati. What’s the economic outlook like in Cincinnati at the time of the case, which I think was 2009?
MICHAEL CHU: Well, Cincinnati at the time when Nehemiah was founded, was in the same trajectory as the rest of the States coming out of the financial crisis. As we know, there followed a period of sustained growth. Now, Cleveland, outside of what was happening in the business cycle, had been declining year after year from its heyday as a center in which there were large companies and manufacturing plants, and so on. Within a period of slow recovery and then sustained growth, Cincinnati was a city that had these inner city pockets where it showed a lot of the ravages that we see in cities that are similar; once a great center of employment, but now with neighborhoods that have declined, have become the urban slums. And of course, all this exists in a period in which the United States, for many reasons, gets into the opioid crisis. You talked about the numbers of incarceration, which was one of the ways that the state responded to this at the same time that you’d have people that are affected by drug addiction and both those things sometimes coming together make somebody really, really not employable. One of the reasons why the cycle keeps repeating itself is because they can’t find a source of employment, so they’re trapped in this horrible cycle
BRIAN KENNY: The future for somebody coming out of prison and an economic situation like that is probably pretty bleak, I would imagine, and that leads, sort of fuels the whole recidivism rate of people getting in this cycle where they get out, they can’t find meaningful work and they wind up resorting back to crime and finding themselves incarcerated again. That’s sort of the cycle. Is that not right?
MICHAEL CHU: That’s right. And Brian, not everybody that leaves prison wants to redo their lives, but many do. The problem is they can’t redo it because nobody wants to employ them. Then there’s no other recourse than going back to some of the things that landed them in jail in the first place.
BRIAN KENNY: How does Dan sort of… I guess what’s the insight that he has that leads him to think that doing the second chances approach might work for Nehemiah?
MICHAEL CHU: It’s interesting that neither Dan or Richard when they started, this were thinking about second chances. They were thinking about providing the old type of manufacturing good paying jobs to parts of the city that had gone through hard times. But one day in talking to a NGO, one NGO said to Dan, “Hey, we have a lot of people in our neighborhood that have gone to jail and are being released and now can’t find jobs. So is there a possibility that you might take some of them on?” So Dan took some on. To his surprise, some of them turn out to be really good employees. He started saying, “Well, maybe we’ll have to do this in a more serious way.” what he discovered was that he could have a source of really loyal and committed employees, but he had to work to solve the obstacles somebody has that comes out of jail. As he reminds me, everybody has their special problem. It’s not like a cookie cutter that everybody that comes out of jail has the same problem. Some of them may be they need a place to live. Another may be how to deal with a young family that they have. What he learned in time was to set up a structure within the company that could deal with each particular problem and bring solutions to it. What he found very interestingly was that there were several social agencies and nonprofits that could address bits and pieces of this puzzle. Just aligning them right, getting the right intervention for the right person could provide that solution so that somebody could become a really good employee because they had those issues resolved.
BRIAN KENNY: I’m just wondering how many people are we talking about in terms of the overall workforce of Nehemiah?
MICHAEL CHU: Nehemiah today employs a few hundred people. But the interesting thing is that that core to deal with what is the equivalent of the social workers embedded within Nehemiah is a very small group. That group’s power lies in understanding a second-chancer, what their specific needs are and connecting them with the institutions that will help them solve that. Some of the problems Nehemiah can set up, like for example, transportation. One of the things that really becomes an obstacle for somebody from low income sectors to get to work is transportation. So where there is no public transportation, Nehemiah coordinated with other companies to establish a transportation system. It can go from drug addiction to housing to making sure that somebody ill in the family gets attended to and so on. What really interested me in writing this case is that the additional costs of setting this response to the special needs of Second-Chancers was offset by having a workforce that was hugely loyal and hugely engaged, so that in terms of attendance and dedication to the job, those were things that were so superior in Nehemiah that they compensated for the additional cost of setting this special services group. So in effect, you have a company that is as profitable as other companies of its type. What is exchanged is the cost structure. So where some other company may have higher costs because of labor churn, absenteeism, and difficulty to recruit a labor force, Nehemiah has more people wanting to join it from large numbers of people that are returned to the streets by a penal system. Today, if you go to Nehemiah and look at the factory floor, everybody in that factory floor is a Second-Chancer.
BRIAN KENNY: Wow.
MICHAEL CHU: And some of the members of supervision and management have come from that.
BRIAN KENNY: That is remarkable. Those results are pretty amazing. So I want me to ask you this, Michael, because you’ve worked a lot with social enterprises over the years. How would you define what a social enterprise is, and is Nehemiah a social enterprise?
MICHAEL CHU: Well, this is a great opportunity, Brian, to give you the HBS definition of social enterprise. When the Social Enterprise Initiative was set up at Harvard Business School, which is now like 25 years ago, it was quite interesting that the definition that was brought to that initiative was: any organization that has, as one of its core pillars, addressing a problem important to society, whether it’s for profit, nonprofit, or actually public sector. So that was a very unique interpretation of the term, “social enterprise,” at that time. For me, that is a great definition. Within that definition, I think Nehemiah is absolutely a social enterprise. It’s a for profit social enterprise. Now in my view, it is a powerful social enterprise model, precisely because it is built on a commercial model that is successful. The social impact here of course, is changing people’s lives through the Second-Chancers and giving them an opportunity to realize the potential of their lives. Whereas absent this kind of job, mean that they will return to the penal system. The reason why other companies are taking another look at Second-Chancers is because they’re a profitable growing company. The power of a Nehemiah is that it’s combining both. It seems like profit and social impact are actually a tradeoff. Nehemiah shows that it isn’t. The most powerful combination is when the two come together.
BRIAN KENNY: If you’re one of our listeners out there and you’re thinking, “Well, this is might be an interesting way for me to go,” how do you make sure you balance the mission with the profit making motive of what the firm is hoping to achieve financially? Can that mission overrun the other profit making motive?
MICHAEL CHU: Well, in many organizations, it does overrun it and then you have something that may be powerful socially but cannot achieve much scale because it’s not a viable economic model. Then it depends solely on donations. The bigger the problem is, the less it can rely on donations. In effect, I think what is great in a model like Nehemiah is that the two are really aligned. They’re not a tradeoff. Because they’re aligned, the more profit that Nehemiah can make, the better it is in terms of the social impact. It will grow faster. It will be a more attractive example to follow. It is one of those instances in which both are aligned. Part of my course is about models that align and models that do not, and what are the differences between them.
BRIAN KENNY: So this is a great example for what you’re trying to convey to the students. What’s the culture like for people working at Nehemiah?
MICHAEL CHU: Well, one of the big things, the employees, the Second-Chancers will tell you is, “When I go to Nehemiah, I don’t feel like an oddity. I’m in an environment in which I feel totally comfortable. People know what I’m going through as a Second-Chancer, and everybody else is a Second-Chancer.” It’s an organization that has hugely engaged personnel. There’s a lot of research that shows that how a company does is highly related to how engaged your personnel is with the enterprise. Retention is much more correlated to the engagement that an employee feels for the institution that he belongs to then actually pay level.
BRIAN KENNY: Yeah, I think that’s true in any enterprise. In this case, maybe it’s more important to make that connection. Does this mission… Is it something that they could use to enhance their brand? I’m wondering what customers would think about this mission. Would it make them more inclined to support Nehemiah or would it act in the inverse?
MICHAEL CHU: One of the questions that is posed in the case is whether Nehemiah, which until then, did not emphasize its mission, it just said, “We have great products,” and then somewhere along the way, there’s a logo that says, “Second-Chancers,” but it didn’t emphasize that social side at all. So one of the debates was whether it should, or it shouldn’t. Naturally, in my view, it is great that Nehemiah doesn’t emphasize it over the reputation of its products. For those who want to look a little bit more, they’ll see that side of Second-Chancers. The reason why I think that is very interesting is because I believe the market gets smaller if you put it forward as Nehemiah central core is providing employment for Second-Chancers because its success in the business world ultimately depends on its products and how good the products are. It’s driven solely by the Second-Chancer mission. I believe that the market gets smaller. Whereas if you emphasize your products and then people find out that it also has this fantastic impact, it’ll strengthen your market and it may broaden your market.
BRIAN KENNY: How is Nehemiah measuring success when it comes to the mission? What are the metrics that they’re looking at to know if they’re actually succeeding beyond just the financial piece?
MICHAEL CHU: It can look at the number of employees that it has and the rate of retention, but it also has some other things that I think are quite interesting from this perspective. For example, as Nehemiah’s reputation and the reputation of its labor force has grown, people tried to recruit out of Nehemiah. Nehemiah’s response is really interesting. It celebrates that. When somebody is going to accompany that, for whatever reason has offered him a promotion or her, what they’ll do is actually throw them a party and also say, “If it doesn’t work out there, there’s always a place for you here.”
BRIAN KENNY: That’s terrific. That is great.
MICHAEL CHU: And I think it continues that alignment because people within Nehemiah, first of all, they were happy to have a job. Then they say, “Wait, it’s not only a job. It’s a career path,” and then when this celebration takes place when they’re hired by others, they say, “Well, I’m being integrated into society at large,” but with a safety net because if things don’t work out, this company is saying, “We’ll welcome you back.” And that of course builds even more the loyalty and engagement of its employees. So I think it is a model that is very wise and that it developed through all this adapting to the realities as they evolve with intelligence, with a great sense of mission.
BRIAN KENNY: So as they look to the future and they’re in an industry, manufacturing, that’s becoming much more automated, is it possible for them to remain competitive when their mission relies on a workforce of people doing the work and not machines? How do they think about that?
MICHAEL CHU: Ultimately, that’s an open question in the case and I wanted, of course, for the students to struggle with exactly the question you pose, Brian. I think looking towards the future, there is no question that Nehemiah will incorporate the advances of technology and automation. What it means is that it will have to train Second-Chancers to not only be good at lines that are labor intensive, but have the capability to deal with lines that are more automated. The reason why this makes sense is because you have to succeed in the business.
BRIAN KENNY: So, Michael, this has been so interesting and insightful. I have one last question for you, which is if there’s one thing you want listeners to take away from this case, what would it be?
MICHAEL CHU: I think in the specifics, it can be a rational business choice to incorporate Second-Chancers into your payroll. But in general, it’s the power of taking something that delivers social impact and mounting it on a really powerful, successful commercial model.
BRIAN KENNY: Michael, thank you so much for joining us today and Nehemiah is a great example for our listeners, really appreciate it.
MICHAEL CHU: Thanks, Brian.
BRIAN KENNY: If you enjoy Cold Call, you might like other podcasts on the HBR Presents Network. Whether you’re looking for advice on navigating your career, you want the latest thinking in business and management, or you just want to hear what’s on the minds of Harvard Business School professors, the HBR Presents Network has a podcast for you. Find them on Apple Podcasts or wherever you listen. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School on the HBR Presents Network.
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