Why the anti-distributionists are wrong

Why the anti-distributionists are wrong
David Floyd

I don’t know much about the social enterprise scene in Scotland but, if this is anything to go by, the membership of Senscot seem slightly lacking in the gritty pragmatism that you generally need to run a successful social enterprise.

As I’ve outlined in previous posts, I don’t support the Social Enterprise Mark. Primarily because I think it’s a solution in search of a problem. Senscot, on the other hand, do support the Mark in almost every way but  so incensed are they by the fact that the Mark allows holders to distribute 50% rather than 35% of its profits  they’ve gone off and launched a kitemark all of their own.

The big 15% aside, the other main operative difference between Senscot’s Scottish Social Enterprise Badge’ and the Social Enterprise Mark is that while the Mark, to its credit, is at least attempting to measure whether Markees’ are achieving their social and environmental aims, the Badge is just going to be based on objectives’ and the policies that are in place to attempt to deliver them.

It needs a deeper thinking philosopher than me to discern a clear principle contained in that missing 15% of hypothetical profit that is or isn’t being distributed by the Scottish social enterprises who will be forced to remain badgeless but as the full Criteria 3¡ä makes clear, the members are really gunning for profit distribution in a general sense (their bold and itals):

Criterion 3  Social Enterprises have an asset lock’ on both trading surplus and residual assets.

Whether or not it’s a charity, a social enterprise re-invests all its distributable profit for the purpose of its social mission. Where the business has shareholding investment (very few in Scotland) no more than 35% of profit may be distributed in dividends (*) In addition, the constitutional documents of a social enterprise must contain a clause to ensure that, on dissolution of the business, all residual assets go to social/environmental purposes.

Criterion 3 is intended to mark the boundary between social enterprise and the private sector.

For me this position is a category error. As someone who wants to achieve positive social change, I’m keen to look at all available options for delivering it. The means are as important as the ends. That’s a fundamental difference between being social enterpreneur and a philanthropic businessperson but I don’t accept Senscot’s position that shareholders making money from investments is, in itself, a socially bad thing  particularly in comparison with the other options for raising finance.

For example, any Scottish Social Enterprise Badge holder who takes a loan from a shareholder-owned bank will, in paying that loan off, be taking money out of the community and providing profits for that bank’s shareholders. But in that case it’s not profits from the enterprise that leave the community and no longer contribute to social outcomes, it’s revenue. Even having an overdraft benefits the bank’s shareholders at the expense of the community at the revenue stage.

So, according to Senscot, its fine for bank shareholders to get the community’s cash but socially bad for dividends to paid to individuals or organisations who’ve taken a much bigger risk by buying shares in the company  and who don’t get any money back at all unless the company achieves a surplus.

But surely encouraging investment in social enterprises from people who want to help their communities but would also like to get their money back is a good thing? Surely social enterprise lobby organisations should be pushing for tax benefits for (particularly) small investors who are prepared to take the risk of using some of their cash to buy equity in a social enterprise rather than putting it in a bank or pension scheme?

Aside from (in a social enterprise sense) big players such as Cafe Direct, I fully accept that this sort of investment isn’t happening much, yet, but I don’t accept that it can’t or shouldn’t happen in the future and changing the apparent attitude that equity investment is a moral evil is an important step towards doing that.

None of this is in any way a defence of companies pursuing dividends for shareholders as a goal that trumps all others. Mark’s and Badges aside, if social enterprise means anything at all, it means harnessing the power of business for an aim that goes beyond just making profits for investors. Social enterprises have to prove the value of what they do. Non-profit structures are right for many organisations but they’re no more socially valuable in themselves than shareholder profit is socially valuable in itself.