Money, greed and social enterprises

Money, greed and social enterprises
Social Enterprise Live
25.04.11

Is limiting the profit one can make from supporting socially impactful enterprises the equivalent of biting off one’s socially entrepreneurial nose to spite the venture capitalist’s face? Do we yet have a structure that allows profit and social impact to balance out in a way that really works? Stephen Lloyd, who co-created a bespoke legal form for social enterprise in the UK, is asking if the innovation could now go a step further.

The last 30 years has been dominated in the West by a belief in free markets.  Reaganomics; privatisation and Big Bang in the 1980s were all based on the fundamental principle, the market knows best. We are reaping the whirlwind now following the implosion of the world financial markets in 2008. The truth is that free markets are ultimately an oxymoron. Free markets lead to monopolies. The Americans realised this as early as the 1880s when they introduced anti-trust legislation to stop the growth of monopolies which the otherwise unfettered free market would create. Markets are like fire. Fire is good in a grate but disastrous when it is burning your house down. Fire has to be kept under control. So too do markets. Someone once defined the role of social democracy as saving capitalism from itself.  That is absolutely true of markets – they need to be controlled in order to be effective.

The Americans know this well. The American football league is a prime example of a controlled or rigged market designed to stop the power of money dominating and therefore ruining sport. The contrast between the American football league and the Premiership is stark and compelling. American football is not dominated by money because money is controlled.

What has this got to do with social enterprise? Well actually, quite a lot. Community interest companies [CICs – a bespoke legal form for UK social enterprises created around six years ago. Stephen Lloyd is widely acknowledged to be the co-creator and architect of the form] have built into them strict controls on the financial rewards that financiers can take out either through share capital or performance related interest. Effectively CICs can only give their investors a bond type rate of return – that is, interest and no capital appreciation. Moreover, this is within the context of the 35 per cent cap, which means that only that amount of distributable profits can be distributed in any one year in dividends. This is also subject to the 20 per cent cap, that is, that investors cannot more than 20 per cent yield on the value of their investment.

Are these controls necessary? Some CICs fervently believe they are – being, understandably, suspicious of the power of money. They are worried that if these controls were lifted, that this would give social enterprises and CICs in particular a bad name. But is this entirely fair?  Why should an investor who wants to support an organisation that is fulfilling a community purpose – the essence of a CIC – have to take a capped or lower rate of financial return than someone who invests in socially damaging activities, for example, largescale pollution or pornography?

Could we create a refinement for CICs which allows a proper financial rate of return for investors whilst at the same time requiring the CICs to deliver real social impact? This is becoming a key debate.

In America, benefit corporations are now being established which, like CICs, represent an in-road into the sacred doctrine of shareholder value. Benefit corporations require the company to fulfil a wide range of purposes and delivering shareholder value is only one of them.  Benefit corporations will have to prove through reporting, etc, that they are delivering their non-financial returns and shareholders will have a right to enforce this. But there are no caps on financial returns. Should we be thinking about reforming CIC law along the line of benefit corporations? This could involve much tougher reporting requirements about social impact and a beefed up role for the regulator but in return scrapping the caps on financial returns.  Would it really be so damaging for the social enterprise world if a few investors in CICs made some healthy financial returns on their investments? This is a pretty unlikely scenario in many cases but it is a possibility – and why should we let that possibility freeze out the chance of driving greater investment into CICs which the caps currently prevent?

This is going to become an even bigger debate as attention turns to a proposed new legal form, the social enterprise LP – or limited partnership – which will be designed to co-mingle charity, government and private sector finance into a dedicated social purpose limited partnership in order to achieve charitable purposes.

Should there be any limitations on the financiers’ returns in such a model or should we accept that if people make money out of investing for good that is better than investing for bad?