Defining social enterprise: the Scottish Criteria

Defining social enterprise: the Scottish Criteria

Senscot made contact with RISE (the originator of the Social Enterprise Mark (SEM)) early in 2008 – immediately started promoting it in Scotland, and soon joined the London Steering Group.  Scottish Govt declined development funding but encouraged us to gauge the appetite in the sector through our bulletin and the emerging social enterprise networks (SENs).  Senscot also hosted a series of specific meetings about SEM, from which a `reference group` emerged – around twenty social enterprise practitioners as well as representatives from a number of intermediaries bodies.

In England, the RISE initiative attracted the support of the Whitehall Govt and the English Social Enterprise Coalition (SEC) – who both exercised increasing influence.  Late in 2009, a joint venture SEM company was established between RISE and SEC. From its outset, through the adoption of an ambitious business plan, the new SEM Company came under external pressure to go for maximum growth.  This led to the late relaxation of criteria (relating to profit distribution) – which Senscot felt unable to support.

We consulted widely (including an online poll) within the social enterprise community in Scotland about the best way forward and concluded that a clear majority of those canvassed supported a devolved Scottish SEM, with its own locally agreed criteria and, failing that, an independent Scottish alternative. With the help of the Scottish reference group, the SEM Criteria were redrafted, tightened and circulated widely. This option (using devolved Scottish Criteria) was not acceptable to the SEM Company and, at that stage, Senscot ended the London connection – to pursue a Scottish alternative.

In April 2010, however, the Board of the Scottish Social Enterprise Coalition (SSEC) took the view that while it preferred the new Scottish eligibility Criteria – it could not support the notion of a second SEM within the UK.

Rather than subject the Scottish sector to an ongoing argument (when there are more important issues), Senscot has `parked` the idea of a separate Scottish SEM. However, interest in the 5 Scottish Criteria for Social Enterprise continues – not only in Scotland. The truth is that our Scottish social enterprise community is distinct from others – Senscot will continue to promote this distinction.

These criteria may well evolve through further debate within Scotland’s social enterprise community.

The FIVE Criteria
Criterion 1 – Social Enterprises have social and/or environmental objectives.

As one of its defining characteristics, a social enterprise must be able to demonstrate its social mission.  This will be evidenced in its constitutional documents but the production of other (externally verified) evidence is encouraged – to provide transparency of purpose and accountability to stakeholders.  Tools and techniques to measure social and environmental impact are becoming more effective and user friendly.
Criterion 2 – Social Enterprises are trading businesses aspiring to financial independence.
This second defining characteristic is demonstrated by an enterprise earning 50% or more of its income from trading.  This will be evidenced by the accounts of the business over a reasonable period.  A high level of income from the public sector is acceptable in the form of contracts – but not grants.
Criterion 2 is intended to mark the boundary between social enterprise and much of the voluntary sector. (Many Voluntary orgs trade over 50% without calling themselves social enterprises)
Criterion 3 – Social Enterprises have an ‘asset lock’ on both trading surplus and residual assets.
Whether or not it’s a charity, a social enterprise re-invests all its distributable profit for the purpose of its social mission. Where the business has shareholding investment (very few in Scotland) no more than 35% of profit may be distributed in dividends (*) In addition, the constitutional documents of a social enterprise must contain a clause to ensure that, on dissolution of the business, all residual assets go to social/environmental purposes.
Criterion 3 is intended to mark the boundary between social enterprise and the private sector.
Criterion 4 – A Social Enterprise cannot be the subsidiary of a public sector body.
Whilst a social enterprise can be the trading subsidiary of a charity, it must be constitutionally independent from the governance of any public body.  Additional evidence of this would be required from Public Sector externalisations.
Criterion 4 is intended to mark the boundary between social enterprise and the public sector.

Criterion 5 – Social Enterprises are driven by values – both in their mission and business practices.
Social enterprises operate in competitive – often fierce – markets but there is an expectation that their dealings will be ethical and that they will offer their people satisfactory wages, terms and conditions.  Enterprises of a reasonable size are expected to have clear human relations and environmental policies. Transparency would be achieved through the voluntary adoption in the sector of a maximum ratio between highest and lowest paid – of say 1:5 – investing a culture of equality.

Download criteria here (pdf)

June 2010