Benefit without Burden – An explainer on Social Enterprise

feat 2

This article is the first part of a series on social economy. It aims to give an outline of social enterprise in the context of other forms of socially-minded organisation. Keep an eye on Convex for more writing in this series.

Benefit without burden

An explainer on Social Enterprise

GAINING STEAM – World statistics from OECD data and the FASES Report

When public funding isn’t easily available for people working against broad social issues like unemployment and poverty, how else can they find the resources to operate?

It’s a vital question. Particularly in times where big policy discussions are preoccupied with national debt, social programs struggle to keep up with the needs of the people who rely on them. It’s even harder to target the causes behind problems, and to establish better social systems, when issues on the front line are already overwhelming capacity.

Social enterprise (SE) aims to create lasting social change while easing burdens on public finances. There are many ways to do social enterprise (just as there is no single model for doing business, or for running a non-profit organisation), but there are some key elements which are essential to achieving the benefit without the burden.

In brief, SE combines commercial sustainability (doing for-profit trade, as in a cafe or a landscaping business) with a strong structure for social impact. SE is neither a final, nor unified answer to the question above, but is a broad set of approaches with growing recognition in the area.

To see how social enterprise is different from general social-minded activity – for example, a company with a strong Corporate Social Responsibility program, or a charity with trade operations – some key points in context are useful to consider.

The Social Economy

To understand how social enterprise is a distinct approach, let’s contrast it with well-established forms of social-minded organisation

Welfare, the use of public money (mostly from taxation) for social programs, is one of the most significant forms of social-minded activity. The average social expenditure of the 34 OECD countries (including the UK, the US, most of the EU, Japan and Australia) was 22% of GDP[1], largely supporting low-income families and pensioners. Usually the largest area of government spending, welfare is under continual and intense scrutiny by a great number of competing interests, and to administrations seeking to reduce its impact on national resources.

AUSTERE CONDITIONS – The Australian Government is allowing welfare spending to fall by maintaining the nominal amount while the real value diminishes with the effect of inflation (Budget 2014)

Social economy is a term for social-minded activity among non-government and private organisations. It is separated from welfare and large-scale government initiatives in order to identify the role of communities and individuals. Traditional examples of the social economy include:

  • Charity. The public contributes resources to people in great need, often through an intermediary who conducts the appeal and manages the resources. The contribution is usually money, being the most liquid form of value (easily converted into anything from basic emergency supplies to research costs for disease prevention), but can include in-kind goods like canned food, building material, devices and equipment.
  • Volunteering. While charity usually refers to money or goods, volunteering refers to the delivery of services. This can be anything from the tradition of high school students helping to build basic facilities in the Third World, to highly technical work (e.g. pro bono legal advice) in situations where costs might normally be prohibitive.
  • Grants. Money given without the expectation of repayment, usually by a government or philanthropic entity, awarded to an individual or group for a particular purpose. Grants can commonly be seen in the form of small amounts awarded to a community group for a local project.

BIG SOCIETY: Opinions differ as to what a minimal CSR obligation is, but progress is made. In 2013, for example, India’s parliament began requiring companies to spend 2% of profits on CSR if their net profits exceeded a certain threshold.

It is important to mention Corporate Social Responsibility (CSR) here. In its most basic form, this involves a company visibly complying with the expectations of society; the minimal self-regulation it needs to operate with the consent of the public, or its own stakeholders. This might include care for environment, or transparency around its financial activities. Beyond this, companies might support initiatives that are described as having an impact on broader social issues. However, while prominent corporations can generate much attention for social initiatives, it is important to consider the overall impact of a company, and how CSR can play a role in creating a positive image regardless of actual change.

Having looked at the broader field of social economy, it should be easier to see the context in which SE works, and the forms of organisation it combines.

What is social enterprise?

SE seeks to help the same people as the broader social economy; those who are unable to get the support they need (food, shelter, healthcare and so on) by participating in the market economy in the standard ways (owning or working for a commercial business). It is different, however, in the way it creates a middle ground between funding-dependent/non-profit organisations, and profit-oriented commercial operations.

There are two equally vital aspects here:

  • Self-sustaining: a social enterprise relies on its trade operations and investment to exist (at least to a critical degree), rather than on donations, grants or other non-commercial inputs.

However, social enterprise is not merely a business with a CSR program, because:

  • Impact-oriented: the core activity and composition of a social enterprise is designed to have a positive effect on the broader community with regard to one or more specific issues. This is reflected in everything from the governance structure of the organisation, its employment program, its planning and strategy, to rules around managing profits

Some further detail and some examples around these aspects are needed for a full understanding.

More on Self-sustainability

The need for commercial sustainability is drawn from thinking more comprehensively about the two limitations from before – longer-term effectiveness and the market environment.

The organisations commonly taking care of disadvantaged people are primarily focused on front-line, vital support. Their efforts might revolve around clothing, housing, feeding, providing health care, support and so on. This process exhausts finances, since none are generated by the operation, rendering its type of network, infrastructure and purposes inoperative without new funding.

As a result:

  • There is little systematic change, leaving the individual problems and situations to recur
  • Working capital has left the control of the organisation, and will not be returned to its financial backer
  • The market has developed around the recurrence of the social problems
  • Social initiatives and the market are vulnerable to the volatility of public/gratis funding

By contrast:

Social enterprise creates a position in the market economy for those people to get what they need – either by participating in the operation as employee, benefiting from the goods/services it produces, or benefiting from the assets and capital made available.

  • A system is created to prevent front-line problems from occurring
  • Working capital is retained through successful trade, and can come back to the financial backer as a return on investment
  • The market has developed around trade of a social nature
  • Social initiatives and the market are less dependent the supply of public/gratis funding.
More on Impact orientation

Businesses keep a visible social mission to cater for customers and investors who want to have a positive impact on the world, while getting the standard of goods, services or returns that could be expected from regular commercial operations.

However, a visible purpose is, in some cases, little more than a marketing tool. Companies can use them to attract business, while ultimately having a minimal or even negative effect in regard to their claims. This is often the sole or primary aim of a corporate social responsibility strategy.

Consider:

  • Greenwashing, where the marketing and branding of a company or of its products misleads the public about the environmental impact of their business (Examples here).
  • Pinkwashing, a similar form of marketing, but regarding a social or health issue (often suggesting an association with the cause of breast cancer sufferers or LGBT communities)
  • Astroturfing, where the activities of commercial or political interests are disguised as having come from unrelated groups or individuals, often fabricating community-based collaboration (as in “grassroots” movements, hence the reference to AstroTurf, a brand of imitation grass).

The above are examples of the use of of social impact as a marketing tool for a profit-oriented business. In SE, the social mission is secured through the ordinary processes and structures of the operation. The various ways they achieve this are not all mandatory, and social enterprises differ in the combination of methods and the extent to which they are implemented.

  • Reinvestment of profits – profits (revenue after paying production costs, wages, debts, etc) from the trading operation are reinvested back into the entity or its mission, instead of being lost to standard profit extraction (dividends, bonuses and so on).
  • Social impact goals – Precise indicators to demonstrate and replicate good work, failing which the enterprise could be considered unsuccessful. Vital in attracting the interest of investors which otherwise limit themselves to standard businesses, and philanthropists who otherwise seek social impact in more traditional ways.
  • Democratic organisation – flat or horizontal management structure is implemented, where decision-making powers are shared more equally among members of the organisation, instead of being constrained by several levels of executive control. This is especially true of cooperatives.
  • Employment/procurement strategy – mobilising workers from long-term unemployment in production or service, and choosing suppliers in a manner which supports the social cause (perhaps by choosing a Fair Trade manufacturer).
  • Social business network – where possible, a social enterprise will maximise outcomes by involving social-minded businesses over standard commercial businesses, and encouraging customers towards socially-minded consumption.

An SROI workshop in Othide village, western Kenya. (PIC: Niel Palmer)

One way of measuring impact is Social Return on Investment. “SROI is a form of stakeholder-driven evaluation blended with cost-benefit analysis tailored to social purposes. It tells the story of how change is being created and places a monetary value of that change and compares it with the costs of inputs required to achieve it. ”

Disputed criteria

As interest in SE grows from investors and policy makers, the specific parameters for defining social enterprise are becoming more contested. There is yet to be any sophisticated consensus, as the following passage from the Australian FASES Report 2010 illustrates:

“…It is clear that the language of social enterprise does not yet have distinct meaning for many civil society organisations and businesses in this country… The relative newness of this terminology, and the fact that it does not automatically attach to identifiable organisational forms, creates challenges both for conducting research and creating a self-identifying movement or coalition of social enterprises in this country.” (The full report can be found here)

The debate is not merely an exercise in semantics. Confusion around the criteria gives ground to the kind of deceptive marketing described earlier, which is becoming increasingly significant with the sheer volume of socially conscious consumption. More importantly, a shared knowledge discipline is vital to the legitimacy of the sector in attracting both private investment and government procurement for good social enterprises.

To illustrate the variance from different definitions, consider the figure of 62,000 enterprises claimed to be in operation by the UK government in 2012. As an article from The Guardian notes,

“Closer analysis… yields the interesting finding that the overwhelming majority (89%) of the 151 social enterprises have a legal form that places no constraints on the distribution of profits to external shareholders. So 89% of the 62,000 (now 68,000) ‘social enterprises’ in the UK can be entirely owned by private individuals and can, at any given point, decide to pay 100% of their profits to their owners.” (Full article here).

This ambiguity about commercial structure leaves the official figure (since updated to 68,000) questionable, to say the least.

Meanwhile in the US, in a 2009 study by Duke University and the Social Enterprise Alliance (both US organisations), the definition of social enterprise included ventures within organisations which do not have to be sustainable in their own right, and could rely on the parent organisation for funding. For those who envisage SE as the establishment of a proper long-term market position, this is somewhat contradictory.

If governments and businesses are to make informed decisions about SE, it is clear that there is much to discuss.

State of the sector

Social enterprise has been a significant force around the world for some time. In 2010, the OECD found that:

  • For European Union nations, social enterprises employ up to 6% of the EU working population
  • Around the world, the 300 largest cooperatives (one form of social enterprise) in the world have combined assets of US$30-40 trillion and an annual turnover of US$963 billion (source)

Recent figures (although limited by issues already mentioned) point to a rapidly growing sector. In 2015, UK research put the number of social enterprises at 70,000, with just under half of them under five years old, altogether employing one million people and contributing £24 billion to the UK economy (report here). Significantly, SE turnover grew more consistently than that of standard small-to-medium enterprises (52% of SEs compared with 40% of SMEs).

In Australia, the number of social enterprises was around 20,000 in 2010, according to the FASES report, which discovered a quite mature sector, with 73% of respondents having been in operation for more than five years, and 62% for more than ten. The majority of respondents were in the services industry, and had, on average, 47 paid, full-time workers. Around half were businesses administered by non-profit entities, with cooperative/mutual entities accounting for 18%.

It is timely for investment and policy discussion to examine social enterprise more closely. Increasing opportunity exists for social procurement, in which business can meet genuine CSR goals by awarding private contracts to SE operators, and governments can maximise policy outcomes by delivering services through social enterprise tendering. Investment-ready and tender-capable SEs are not in abundance, but the sector is developing at pace.

Leave a Reply

Your email address will not be published. Required fields are marked *