This year’s model

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.

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6 Comments

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6 responses to “This year’s model

  1. David, At meeting with Cooperative Futures on Tuesday we talked of applying the Bencom model to our own social business model.It seems entirely congruent with a business for social purpose.
    One of the things on which we had immediate agreement is that the CIC model is ‘ethics lite’ in that it doesn’t say anything about sustainable economies or economic and social rights to offer two examples. What we’ve seen locally is for the CIC model to be part of the effort to privatise the NHS at district and now county level.
    I understand the reasoning made in this article about social business because the same reasoning will be found in our own white paper which says:
    “The only restrictions are the normal terms and conditions of free-enterprise. If a corporation wants to donate to its local community, it can do so, be it one percent, five percent, fifty or even seventy percent. There is no one to protest or dictate otherwise, except a board of directors and stockholders. This is not a small consideration, since most boards and stockholders would object. But, if an a priori arrangement has been made with said stockholders and directors such that this direction of profits is entirely the point, then no objection can emerge. Indeed, the corporate charter can require that these monies be directed into community development funds, such as a permanent, irrevocable trust fund. The trust fund, in turn, would be under the oversight of a board of directors made up of corporate employees and community leaders. ”

    Interesting to see this coming from the Bates Wells and Braithwaite stable who created the CIC model, then last year ‘revolving funding and now capitalism for social purpose. All of these were described in the business plan we distributed to the SE community in 2004. It said this in particular:

    “Traditional capitalism is an insufficient economic model allowing monetary outcomes as the bottom line with little regard to social needs. Bottom line must be taken one step further… by at least some companies, past profit, to people. How profits are used is equally as important as creation of profits. Where profits can be brought to bear by willing individuals and companies to social benefit, so much the better. Moreover, this activity must be recognized and supported at government policy level as a badly needed, essential, and entirely legitimate enterprise activity”

    http://www.ecademy.com/node.php?id=169485

    Interesting too that it appears in Social Enterprise Magazine to whom I described this work for their SE 100 index.

    Where this ‘social business’ suggestion differs is that it is not making the case for a business for which the entire point is a social objective. That would be how both we and Yunus interpret it. It’s making the call for a partial interpretation of social purpose, another dilution of social innovation perhaps offering scope for social branding of that which may not be very social at all.

    Today, all our politicians seem to have joined the enlightened capitalism chorus.

  2. Beanbags admin

    Well, Jeff, I imagine John Mulkerrin of the CIC Association might have some comments on the idea that CIC is ‘ethics lite’. What’s clearly true though is that the most important element in creating an ethical CIC or a sustainable social business is some people and their social purpose, combined with an ability to deliver the activity their business is set up to deliver in a way that causes people to pay them for it. That’s what we need to focus on supporting.

  3. Being paid is the primary problem for us. On the core business side, we have customers who just decide they don’t want to pay for support and much the same on the mission side.

    For example, we approached USAID, The British Council and Erste Bank with our proposal for social enterprise in Ukraine and they got together to create their own project, rejecting our application to be partners.

    The social enterprise definition of an “UK expert” is written in Ukrainian.

    http://www.britishcouncil.org/ukraine-projects-social-enterprise-development.htm

    One may conclude that what we were trying to tackle in neglect and abuse of children in psycho-neurological internats, as they’re know, scared the risk averse parts off of them. Our politicians and their oligarchs have been getting rather cosy of late.

    This is the work we approached SEC for support with in 2006 when we joined. They said it was beyond their current focus. That leaves us supporting ourselves in expecting to be paid for our intellectual property and direct it to the intended purpose of creating rehab centres and family type homes.

  4. So there’s some solicitors in favour of law changes that would probably mean more people consulted solicitors about them? And why that’s surprising to anyone?

    This is the second time recently I’ve seen BWB in the social enterprise sector. The first was in the EU Social Business Initiative, responding for NCVO on behalf of UK Social Enterprises (wow, wrong organisation in charge there, eh?), and apparently resulting in a call for an “exhaustive” register of social enterprises, which is so wrong-headed and basically anti-social that I’m not sure where to start on it!

  5. @Jeff – ‘One of the things on which we had immediate agreement is that the CIC model is ‘ethics lite’ in that it doesn’t say anything about sustainable economies or economic and social rights to offer two examples’

    perhaps we’re not saying it Jeff, but we are doing it. Who is the collective we that can so readily agree? Was there a vote on the issue? Were there any CICs there? There is a Co-operative CIC for example, does your comment include them?

    CIC is being used to help privatise the NHS? Here’s me thinking most of the evidence suggests it is being used to stop the NHS being privatised.

  6. Think Jeff has a point. The CiC model was adopted by the NHS in the most part as it was the only SE model that could legally hold the complex medical contracts which must go to a shareholding company, ruling out any other options. In transferring lock stock and barrel complete NHS departments into SE the transition to social business in most cases is still to happen. Arguably the driver for culture change will not be the legal form but the requirement to measure the benefits. Who will ask about it I wonder at a time of cuts, crisis and uncertainty? Will it be the commissioners or companies house or neither?

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