Who do you trust in social enterprise?
A growing number of companies limited by share are applying for social enterprise funding. So UnLtd have introduced ‘trust engines’ to help organisations display their social commitment
For any kind of organisation to be successful, it has to have the trust of key stakeholders: customers, partners, staff and funders or investors. But if you are in the business of social change, this trust is doubly important. It matters that those working with disadvantaged people can be trusted to put their needs first. When it comes to the crunch, does your social purpose come first, or is it just a means to increase your profits?
For social purpose organisations, the rather blunt instrument that has historically been used to earn this trust is a legal structure that restricts private benefit and a regulator to which the organisations report. Hence many social ventures opt for charitable status, or a legal form with an asset lock and limit on the distribution of profits such as the community interest company.
But in today’s blended-value world, there are many blurred lines between the extremes of traditional charity on one side and pure profit-maximising business on the other. Social ventures take a variety of legal forms, sometimes using structures that were designed for other purposes.
Here at UnLtd, we are seeing an increasing proportion of applications for support from what are nominally for-profit companies, but that satisfy our assessment process as having a clear primary social purpose. This year’s Big Venture Challenge – UnLtd’s programme for the most ambitious, growth-oriented early stage ventures – saw 48% of all applications (and 63% of all shortlisted candidates) coming from organisations registered as private companies limited by share (CLS).
What’s behind this shift? The reasons social entrepreneurs give for choosing the CLS vary, from an increased ability to raise early stage investment to a freedom to innovate and experiment. For example, Mohammad Al-Ubaydli, founder of health records social venture Patients Know Best, decided to "create a CLS to recruit investors and staff who deliver growth, rapidly scaling up the benefits to as many patients as possible". For social ventures operating in public service markets, it could reflect a shift in commissioning culture that focuses more on measurement of social impact and less on legal form.
None of our award winners who have gone for the CLS feel that this compromises their ability to prioritise social value creation over other objectives. But most do acknowledge the challenges they face in winning the trust of stakeholders.
It’s fair to say that most grant funders, social investors and public sector commissioners, not to mention the general public at large, are uncomfortable with what are ostensibly private companies operating in the social space. So how can these social ventures secure the trust of those around them and be held to account? How can the social entrepreneurs safeguard their ventures’ social missions in the future? And how can we ensure we’re not just being hoodwinked by clever marketing and PR by companies that aren’t genuinely social purpose?
It was in this context that UnLtd headed to Oxford Jam this month alongside our lawyers, Bates Wells and Braithwaite, experts in legal models for social ventures. As a grant-making foundation ourselves, we need to ensure we are true to our charitable objectives. But also, as a support provider for social entrepreneurs, we need to understand how all the organisations we work with can access finance, markets and additional support in order to achieve their social missions. Without the goodwill of other stakeholders in the sector, the progress of these privately owned, profit-distributing, social purpose organisations could be hampered.
We have coined the phrase "Trust Engines" to describe the different means we think are out there to secure the buy-in of these stakeholders. We have heard about some good examples already of Trust Engines that are already out there: Year Here has worked with a legal team to add social clauses into its Memorandum and Articles. Patient Choice has set up a charity into which all profits will be donated. Other ventures are striving hard to be transparent about their impact – for example, B4Box has calculated that for every pound spent on its services, between £2 and £8 are saved by society. But these ventures are all experimenting with bespoke solutions; there remains no "off-the-shelf" mechanism to guarantee purpose and trust for social purpose companies limited by shares.
Different trust engines will work best for different stakeholders and in different sectors. There is likely to be greater pressure to produce robust measures for a health and social care venture working directly with beneficiaries than a trading platform for ethical products, for instance. We suspect that Trust Engines will include legal measures, but they may also be more nuanced and tailored to the specific venture. For Patients Know Best, Mohammad says: "To facilitate trust we encrypted patients’ data so that only the patient, and the people the patient chooses, can decrypt and use the patient’s data."
Over the next few months, we’ll be delving into this subject in more depth. We’re convinced that it’s necessary to find robust ways of recognising social purpose ventures, which are more sophisticated than legal form alone. So we’re looking for more examples of Trust Engines used by social entrepreneurs and also of those demanded by their stakeholders – investors, funders, commissioners, customers, and members of the public.
Please tell us what you look for and why, and how you check. We are looking for this debate to be wide-ranging so please do take part: comment on this article, post on Twitter with the hashtag #TrustEngines, on Facebook, or send us an email at firstname.lastname@example.org. Look out for events we’ll be hosting. We will publish what we uncover later in the year.