Trust Engines: What does being a ‘social’ business mean?

Trust Engines: What does being a ‘social’ business mean?
Big Society Capital

Since our launch we have been grappling with the question of what being a ‘social’ business means and how it can be evidenced to various stakeholders that have different definitions, motivations and priorities. We have attempted to define the ‘unregulated’ social sector in our governance agreement, but along with other social investors, grant makers and commissioners, we know that we need to do more in developing our understanding of this area so that we can build a diverse market that provides appropriate financing to a range of social organisations, and ensure that social impact is not restrained by legal form.

To increase understanding in this area between key stakeholders, and to introduce the concept of ‘trust engines’ (mechanisms that allow social enterprises to articulate and evidence their social value) we hosted a roundtable in partnership with UnLtd. We had a mix of key voices around the table including public and corporate commissioners, social investors and angels and of course the social entrepreneurs themselves. This is what they had to say:

A ‘social’ business

The definition of social enterprise has been debated endlessly. While we may not yet be able to answer that question, there was a surprising level of agreement across the group, most of whom agreed that the three key drives that would need to sit at the heart of a ‘trust engine’ were:
1.the prominence of social mission;
2.evidencing social value;  and
3.measuring social performance over time.

There was also agreement that profit distribution and asset locks and caps on remuneration were not particularly helpful in allowing social businesses to scale and attract further investment.

Development stage and sector

While the question of how these drivers of social value could be evidenced and what tools could be developed to protect these trust engines was controversial, there was agreement that both the stage of development and sector made a substantial difference. For example, the tools and standards needed to be different for a start-up as compared to a company that was attempting to scale, given the difference in resource, time, staff and key stakeholders. Furthermore, companies in certain sectors, such as health and social care, were already used to reporting on a range of metrics to commissioners and local authorities, while social enterprises in education were less used to having to measure their social impact or even key outputs.

Metrics and data

On the topic of choosing ‘social’ metrics, angel investors argued for simple metrics that were easy to screen. They noted that they looked for models where the financial and social objectives of the company were well-aligned, and hence aimed to avoid the question of trade-offs where possible. Commissioners and social investors wanted to see a more in-depth impact analysis that fed into the organisation’s broader strategy. Commissioners also stressed the importance of social outcomes, not just social purpose, stating that for them it was the results, and not just the intention, that mattered. However the social investment fund managers wanted flexibility and the ability to develop their own social screening criteria instead of being forced to tick a few boxes.

One of the key issues that arose was the lack of existing outcome data for these organisations and the lack of standardisation of impact measurement methodologies in the sector. Social investors and angels agreed that the variety of measures led to a lack of comparability when it came to understanding the social impact generated by different organisations in the same sector. However social enterprises strongly stressed that they needed to be allowed to choose their own metrics, given the bespoke and evolving nature of their work.

Legal forms

The question of whether the social legal forms in the space were sufficient- and met the needs of various organisations adequately- was also raised. The CIC form in particular was debated- as there seem to certain misconceptions around the flexibility and scope of the form when it comes to dividend distribution locks.

The next challenge

If we are all committed to enabling social enterprises to grow and scale, this is an issue that we need to address. It is clear at the heart of the challenge in developing ‘trust engines’ will be the need to balance intelligent decision making and flexibility with clear definitions and tools to evidence social value and performance. There are still more conversations to be had, and thinking to be done, to ensure that solutions can be developed that will bring together the needs of investors and commissioners with social enterprises.