Tony Benn is famous for saying that, in his view, there are too many socialist parties in the UK and not enough socialists. Coming at a time when Benn’s enthusiasm for worker ownership is now finally being embraced by leading figures in the Conservative Party – hot on the heels of the Labour government’s nationalisation of the banks – it might also be a good moment for the social enterprise movement to take on board a variation of his thoughts on organisational proliferation.
A danger for the social enterprise movement in the UK seems to be that we end up with too many social enterprise structures and not enough viable social enterprises. The latest suggestion for a new type of company is outlined on the Social Enterprise website by Luke Fletcher of solicitors Bates,Wells and Braithwaite.
“If we want social enterprise to go mainstream, we need to get the message out that businesses are able to trade for a social purpose – and that an asset lock and express limits on dividends are not absolute requirements. To do this, company law should be developed to create a new legal identity for mainstream businesses which trade for a social purpose.“
There’s lots of possible objections to this view.
One is the position that, for the reasons explained in the article, the asset lock and limits on dividends are a barrier to investment – of both cash and sweat equity – in CIC’s Limited-by-Shares but that, rather than create a new form, it would make more sense to adapt the exist CIC structure. While there’s a clear logic to a lock on physical assets that might be given – or sold at a preferential rate – to a CIC based on the fact that it’s trading in the interests of a community, it’s less logical to prevent entrepreneurs or investors from profiting from the increased value of their shares based on the increased value of the company. It’s actively discriminates against entrepreneurs and early-stage investors.
A second objection, from the other end of the social enterprise spectrum is that we don’t ‘want social enterprise to go mainstream’ unless it’s on our own terms. Companies that exist (at least in part) to make a profit for shareholders are not part of the social enterprise family and don’t need to be encouraged by government or the social enterprise movement. This line of thinking can just about tolerate CIC’s Limited-by-Shares with a strong asset lock in place but regards further ‘concessions’ to the practices of mainstream business as a dilution of the social enterprise brand.
A third objection, which is broadly my own position, is that a new ‘social business’ form is a solution in search of a problem. Luke Fletcher explains that: “A curious quirk in the Companies Act 2006 provides a glimpse of how a Social Business form could be created in law… there is an exception to the general rule that a company exists for the benefit of its members or shareholders where the purposes of a company ‘consist of or include purposes other than the benefit of its members’. In the case of a company which has a social purpose in its Articles, the directors are therefore obliged under the 2006 Act to promote the success of the company by advancing its social purpose.“
He adds that: “Unhelpfully, the 2006 Act does not give any clue about how the social purpose of a company limited by shares is to be reconciled to its ability to return profits to shareholders.“
Fletcher believes that this reconciliation can and should be achieved by the creation of a new legal structure. A more pragmatic option is that shareholders in social businesses can, should and currently do reconcile competing shareholder and commercial interests themselves based on their own judgment. I’m happy to be corrected on this but as far as I know there hasn’t been an instance where the directors of Cafédirect, or a similar ‘for profit’ social businesses have been sued by shareholders for neglecting their interests in favour of pursuing the company’s social purpose.
Fletcher claims: “The new legal status would give mainstream businesses which operate for a social purpose a perfect opportunity to self-identify as a Social Business. It would also enable commissioners, customers and social investors to identify those businesses which are expressly run for social benefit and from which financial and social returns are available.“
I’m slightly baffled as to how this could or should be the function of an organisation’s legal status. A company’s legal status is a good vehicle for setting out what it wants to do but, unless the annual registration fee is going to be very expensive, it’s a very bad vehicle for finding out whether it’s any good at achieving those aims. Companies engaging with (and needed to enthuse and reassure) commissioners need proper kitemarks, awarded by people qualified to judge the impact of their work and/or their competence. Customers and investors need to be convinced of the social value of a business by the people running it – though specific certificiations such as the Fairtrade Mark clearly also have a role in explaining the social impact of products to customers.
There’s lots of evidence that it’s difficult – but certainly not impossible – to generate profit for shareholders while delivering demonstrable social impact. There’s no clear evidence that running businesses for both shareholder profit and demonstrable positive social impact is difficult because we lack the legal structures to do it, or that those who have done it successfully need a new legal form to enable them to communicate what they’ve done and why. If the government is keen – as I am – to see more successful social businesses it should steer clear of new structures (while possibly adapting existing ones) and focus on providing practical support.