Defining Social Sector Organisations

Defining Social Sector Organisations
The Big Society Capital
13.09.12

Big Society Capital was established to grow the social investment market in the UK. To do this we are investing to build the market infrastructure and support development of the financial intermediaries that are required to connect investors looking for both a social and financial return with the enterprises they can invest in to achieve this goal.

All the intermediaries we support are required under statute to use our funding to invest in “third sector organisations”.

But how should third sector or social sector organisations be defined? The statute which governs the establishment of BSC defines them as organisations that “exist wholly or mainly to provide benefits for society or the environment” This definition includes regulated social sector organisations such as charities, Community Interest Companies or Community Benefit Societies. But should it also include companies or enterprises that have legal forms that allow them to earn profits and distribute dividends?

First and foremost we will seek to ensure that the vast majority of the investments made by the intermediaries we support will go to regulated social sector organisations. We believe, however, that it would be wrong to completely exclude companies that seek to create significant social value but have organised themselves as for-profit companies.

We will therefore permit some of the intermediaries and vehicles we invest in to provide funding to for-profit companies under the following criteria:

1. The Objects of the company set out that it is primarily concerned with providing benefit to society;
2. The company  ensures that any surpluses are principally used to achieve social objectives and payments to shareholders are capped;
3. There is a constitutional or contractual lock on its Social Objects, dividend policy and an “asset-lock”;
4. Remuneration levels reflect social sector organisation norms and are disclosed in line with the accounting requirements for charities; and
5. In the event of a change of ownership, it will take steps to preserve the mission as that of a social sector  organisation.

These criteria are explained in more detail in the Governance Agreement.

We recognise from our extensive consultations with those directly involved in social investment that there is a divergence of opinion. There are those who would like to define social enterprise and social purpose companies broadly particularly because they believe that that is the only way to attract the type of risk capital needed to support and encourage early stage investment in start-up enterprises.  Others believe that Big Society Capital funding should only benefit organisations that fit into a regulatory category that ensures oversight and specific legal constraints.

Our proposed governance rules seek to find a middle ground that ensures that regulated social sector organisations can attract funding more easily from investment intermediaries but also that enterprises that are set up and managed principally for social purpose can obtain the type of capital that they need to grow and maximise their impact on our communities.