Social enterprise: Bridging two worlds

Social enterprise: Bridging two worlds
Civil Society, by Vibeka Mair
31.01.12

Vibeka Mair charts the apparently unstoppable rise in the popularity of social enterprise.

When serial entrepreneur Richard Branson published his latest book, Screw Business As Usual, at the end of 2011, he was the latest in a long line of senior figures advocating the merits of social enterprise. With a strapline ‘doing business for good’, he urges companies to switch from a focus on profit to caring for people, communities and the planet.

The book reflects heightened global attention on how society works, prompted by continuing economic turmoil and the worldwide public protests in response. For many, the classic capitalist model of relentlessly pursuing profit is no longer sustainable or ethical, leading to a focus on a model which considers a range of factors, such as those described by Branson above. This has put social enterprise in the spotlight, both in the UK and wider afield.
 
In the UK, social enterprises have enjoyed political attention since the 1990s. Labour’s shadow minister for civil society, Gareth Thomas, led the first debate on them in the Commons in 1999. And the UK social enterprise sector, which sprang up from the co-operative movement in the early 1990s, became the responsibility of the then Department of Trade and Industry in 2002 under Labour. It then moved to the former Office of the Third Sector, after lobbying from NCVO and CAF.
 
Following the 2010 general election, there has been even greater emphasis placed on the potential role that can be played by social enterprises in the UK – driven heavily by the new government’s Big Society agenda.

Two months after gaining power the coalition government published a White Paper outlining its aim to create the largest social enterprise sector in the world, as part of its NHS reforms.

Ministers have also said that they expect charities to rely less on government grants and become more enterprising. Here again, the government has made significant funds available to stimulate social enterprise, most notably setting up Big Society Capital, the early thinking for which had been undertaken by the previous Labour government.

However, despite the government’s enthusiasm for social enterprise, ministers are resisting calls for a legal definition of this form of activity. Currently, any organisation can legally call itself a social enterprise.

In answer to a recent parliamentary question from Hazel Blears MP, minister for civil society Nick Hurd confirmed that the government had no plans to introduce a statutory definition.

He said: “The government uses the broad definition of social enterprise that was agreed by the sector.

“Social enterprises can take a wide range of legal forms, including the community interest company (CIC) form, which was custommade for social enterprises and is regulated by the CIC regulator.

“As the definition for social enterprise is inclusive, and there exist legal forms specifically for social enterprises, there are no plans to introduce a statutory definition of social enterprise.”

Nicky Stevenson, a consultant for social enterprises, says it suits governments to have a broad definition: “It suited the last government,” she says. “And it certainly suits this government to have a vague thing that is social enterprise as you can include anything you want.

“I think we are vulnerable to policy-makers picking and choosing which bit of social enterprise they want to follow.”

Differing views

For some, having such a broad definition for the sector is positive. Allison Ogden-Newton, chief executive of Social Enterprise London, understands why a legal definition is attractive, but insists it would restrict the sector and says it needs to be about values not legal governance.

But she does contend that it can get “incredibly complicated” when it means all things to all people: “A fixed notion of charitable status through enterprise would struggle with a 49 per cent employee-owned company earning £100m from the City,” she says.

In contrast, Labour MP Blears, a strong proponent of the social enterprise movement, thinks a legal definition is vital. Blears has repeatedly voiced concern that the government’s mutualisation agenda could taint the social enterprise brand and lead to the eventual privatisation of public assets.

She told civilsociety.co.uk: “I think that if taxpayers’ money has been used to provide assets then there has to be an asset lock because otherwise what you could do is have an undercapitalised social enterprise, then three years down the line that folds and the only people who can take it over are Capita. Therefore you’ve transferred public assets into the private sector with no compensation to the public purse – which is wrong.”

Others also insist that rigour around the definition of social enterprise is needed to protect beneficiaries. A delegate at a recent conference on social enterprises was very clear on the point: “I hope ten years down the line the social enterprise sector is not looking at itself in shame as we’ve left our beneficiaries at the mercy of a big, uncaring business which claimed to be a social enterprise.”

Scottish dimension

Laurence De Marco, chief executive of Senscot, a body for Scottish social entrepreneurs, also insists a legal definition is necessary, for similar reasons: “Circle has recently been awarded a £10m contract to deliver NHS services at Hinchingbrooke Hospital in Huntingdonshire. It calls itself a social enterprise but, in my view, it’s not. It is a for-profit company. I think that the government in England is quite comfortable with this encroachment by the private sector into the social enterprise world, because in reality it is the privatisation of public sector areas. That would not be happening in Scotland.”

Circle itself takes a different view. The company describes itself variously as an “employee-owned social enterprise”, a “John Lewisstyle partnership model” and a “co-operative model”.

A spokeswoman told civilsociety.co.uk that Circle employees, from the most senior doctors to the porters, own just over 50 per cent of the organisation, with the rest owned by external investors.

She added that the “vast majority” of profits made by the company are reinvested in the business “to support the local heath economy”. Once certain benchmarks are reached, some profits will be returned to investors and also shared among the employee-owners, she said.

New employees are given an initial allocation of shares in the business when they join, and there is an annual distribution of shares on the basis of company performance.

De Marco notes that there are very different attitudes to social enterprises in England and Scotland. While in Scotland, he says, 90 per cent of social enterprises are charities – a legacy of its socialdemocratic leanings – he senses some “arm-wrestling” south of the border between the business world and the charity sector, each wanting to claim social enterprise for itself.

Indeed, without a legal definition there are wildly different estimates for the number of social enterprises and the range of legal forms they take. At a recent NCVO conference, charity lawyer Stephen Lloyd said most social enterprises were charities. However, the Third Sector Research Centre (TSRC) says that research in 2008/09 by the previous government, found there were 62,000 social enterprises in the UK and – says TSRC – most are for-profit businesses with no legal restrictions on paying dividends to shareholders.

Even Nick O’Donohoe, chief executive of Big Society Capital, the new social bank which plans to capitalise the social sector, has said it will be difficult to define social enterprise: “Is an enterprise in a deprived area giving jobs to the unemployed, but making a financial return, a social enterprise? It’s still an open issue.”

Gordon Morris, chair of the Social Enterprise Mark Company, which is seeking to be a kitemark for the social enterprise sector, thinks a legal definition would be helpful: “Anything that supports the rigour of identifying an organisation that really is a social enterprise would be no bad thing,” he says. “My only concern is that if there were a legal definition which made it too restrictive it would be the wrong direction of travel.”

Charity dimension

Morris is head of enterprise at Age UK, one of many charities which call themselves a social enterprise. He sees social enterprise as being a way in which Age UK can respond to the traditional commercial market’s failure to serve its beneficiaries:

“A very simple example would be the market failure of the financial services industry ten years ago,” he says. “If you were 70 and you wanted travel insurance it was quite difficult to get hold of it, so we started to offer it. Nowadays there are probably a dozen companies that will do travel insurance for this age group – so we’ve addressed this market failure and given consumers choice.”

Other charities welcome the independence that social enterprise delivers. Speaking recently at a Charity Leaders event, Steve Porter, director of corporate services at the Children’s Society, said its large number of charity shops gives the organisation flexibility to fund “non-sexy” things like the HR department and finance, for which the public do not traditionally give money.

Further, some charities which deliver public services find calling themselves a social enterprise on tenders means they are more likely to win contracts. The government has said it wants social enterprises and charities to deliver more public services. But some see an inherent conflict in this.

Growing tension

Rosie Chapman, the former Charity Commission policy chief, predicts a growing tension between service-delivery charities forced to defend their fiscal and legal privileges, and social enterprises which may not get tax breaks, depending on their structure, demanding a level playing-field with charities.

Some warn that the traditional structure of charities does not lend itself to an enterprising business model.

Patrick Nash is chief executive of digital provider to charities Connect Assist, which describes itself as a social business created by a charity. He says the structure of charities often does not fit the entrepreneurial nature of social enterprises:

“I was a charity chief executive of two charities,” he says. “I was an entrepreneurial person but if I wanted to take risks I had to go to the board.

“Now I work for a social enterprise, I am a member of its board. That is a fundamental difference. I can’t fault the nonexecutive structure of a conventional charity in cases where you are in the business of raising money from people for social good, and you hold the money in trust to deliver that mission. But that’s not the same as setting up a business to raise money.”

Nigel Kershaw, chief executive of social finance investor, Big Issue Invest, adds: “A lot of good social enterprises have spun out of charities into arms-length trading arms. A hands-off relationship between trustees and the trading arm is crucial.”

Perhaps worryingly for many charities, Ogden-Newton from Social Enterprise London says the average trustee-governed charity is not an attractive investment vehicle – a key to growing enterprises.

Further, Sir Stuart Etherington, chief executive of NCVO, warns that many trading arms and social enterprises increasingly being set up by charities will fail if trustees don’t have the skills to scrutinise business plans.

Indeed, some charities have told civilsociety.co.uk that their trustee boards have radically changed over the past couple of years to accommodate a new enterprising direction. Perhaps linked to this, Anglia Ruskin University noted last year that there was high demand from charities for its social enterprise management course.

It looks, therefore, as if growing numbers of charities are aware of the need to operate in a more enterprising manner as they seek funds from a wider range of sources. For their part, for-profit companies are also showing far greater interest in social enterprise. In some cases they are motivated by a genuine desire to more effectively fulfil their corporate social responsibilities, but, it has to be said, in a minority of cases the motivation appears to be based on the belief that describing their company as a social enterprise will unlock new profit streams.

Lynne Berry, former chief executive of WRVS and now researching the subject of social enterprise at Cass Business School, says that attitudes within companies and charities are rapidly evolving and merging:

“Making money is no longer considered evil, and being socially responsible is not just about doing good. You can use both disciplines to create something in charities and companies. It’s a bridging of the two worlds and this is where social enterprise comes in.”

So, with social enterprise on a rising tide of popularity, it looks like Richard Branson, as ever, is backing a winning formula.