Two quotes on the recurringly vexed issue of profit in the social economy:
“1.2 Regardless of its legal form, the constitution of a SE will include the requirement that profits are reinvested in the business or in the beneficiary community – and not distributed to owners/shareholders/investors.” – from Senscot’s new Voluntary Code of Practice for Social Enterprises, launched at Social Enterprise Exchange last month.
“… we also seek, quite unashamedly, to make a profit and we focus hard on this too. Partly because this allowa us to be successful, live reasonably well and grow our founding mission. And partly because this does create a meaningful surplus which we can share with others through the Stepping Out Foundation. I suppose what I am getting to here is that our being a for-profit organisation doesn’t in any way detract from our primary mission – to change public services.” – From former social enterprise ambassador, Craig Dearden-Phillips of Stepping Out explaining why he chose to launch his current company as profit-making venture:
All businesses attempt to make profit*. This includes charitable businesses that describe profit as ‘surplus’. The big arguments in the social enterprise movement at the moment are mainly about profit distribution and, specifically, shareholder profit (where the shareholders in question are individual directors and owners rather than members of a co-op).
It’s comfortable for one-wing of the social enterprise movement to declare themselves as being opposed to shareholder profit, and for another to say that there’s nothing wrong with shareholder profit as long as the organisation concerned makes a positive social impact. Comfortable because both positions avoid engagement with the more complicated question: ‘what is the social impact of shareholder profit?’ or, more usefully ‘what is the social impact of shareholder profit in this situation?’
It’s a question for social entrepreneurs and, in markets that are dictated or dominated by the state, it’s also a question for politicians. This initial post (briefly and in no way comprehensively) considers some of the complicated issues around shareholder profit from public service delivery. Part two will look at the equally complicated issues about how shareholder profit affects organisations that consider themselves to be social enterprises (or some variant of the term).
In recent months, there’s been (widely perceived) outrage that Emma Harrison, the boss of back-to-work provider A4E, pocketed £8.6 million in dividends from her business that receives almost all its income from public contracts.
It seems unlikely that the cause of this outrage is not that people, as represented by the Daily Mail, believe that shareholder profit from the spending of taxpayers’ money is a bad thing in itself.
Large numbers of private companies supply goods – for example, chairs** - to the public sector. Directors of companies selling chairs may make even more money in dividends than Harrison. While many of us might support a positive decision by a public sector agencies to buy chairs from a social enterprise, there’s not a sense of moral outrage when they (hopefully) chose the best chairs the market has to offer based on their available budget.
Public sector agencies buy a lot of chairs but, they’re not a single customer, and if even they were they wouldn’t buy enough chairs to fundamentally dictate the shape of the market. It is unlikely that anyone in the UK is running a successful chair-making business based solely on their ability to convince a few public sector commissioners that they should buy their chairs.
The ability to generate shareholder profit drives people to start businesses selling chairs. Part of the profit generated is spent on making cheaper and/or better chairs. Or if isn’t, new businesses enter offering chairs that are better and/or cheaper.
Attitude to shareholder profit from chair manufacture does have a social impact. If distributed-profit from making chairs goes to a few rich people, it increases economic inequality. If most distributed-profit making chairs goes to all the employees or members of a co-op, it reduces economic inequality. If profit is not distributed at all but is spent on delivering services into the community that is also likely to reduce inequalities.
As social entrepreneurs, we might want to see more companies in social ownership – I’m not assuming this is true for all social entrepreneurs – but we probably wouldn’t argue that private profit from chair manufacture is fundamentally wrong in principle. Even it were legally possible to ban private investment and profit from chair manufacture – or stop public sector agencies buying chairs from companies generating private profit – we’d end up with worse, more expensive chairs.
The situation is different when private companies, charities and social enterprises are delivering public services – services that they deliver to the public on behalf of the public. In many instances – as with back-to-work provision delivered by A4E and others – the government is the only customer. It decides on the size of market (including deciding whether or not the market even exists).
As with chair manufacture, the fact that profit from delivering public services leaves the social economy and goes to a rich individual (or, as in other markets, groups of rich investors or foreign government’s sovereign wealth funds) has a negative social impact in itself in terms increasing wealth inequality.
The question is whether that negative social impact is outweighed by the positive impact of profit-distributing providers in the market. If, for example, shareholder profit-distributing providers such as A4E got 25% more people (or even 10% more) back into work than the job centre (or civil society providers who don’t distribute profit) then it would suggest that the shareholder profit motive was generating positive social impact in the back to work market.
And the positive social impact of hundreds of thousands more people finding work would be far greater than the negative social impact of some rich people getting richer. Unfortunately, that isn’t what’s happened so far.
In a situation where the government is taking money off the taxpayer and giving to some organisations in order to get things done, politicians clearly need to consider the overall social impact of that decision. It may that there’s a clear argument, in the particular instance of back-to-work provision, as to why their shareholder profit motive will ultimately contribute to better overall social impacts (even if it hasn’t so far). The point is that politicians have a responsibility to make that argument – to make clear that it’s not just a case of giving our money to some people who are already very rich.
Part two will look at how shareholder profit – support for, and objections to, it – affects organisations that consider themselves to be social enterprises.
*With the exception of organisations that are engaged in a deliberate process of winding down their operations
**This post is not drawing on any specific knowledge of or interest in chair manufacture