Clearly there was something in the fairtrade coffee at The Fire Station last week. Not content with celebrating the success of some of the UK’s finest social enterprises and social entrepreneurs at the UK Social Enterprise Awards, the Social Enterprise UK(SEUK)’s staff team somehow found the time to make swashbuckling interventions into the latest debate about social enterprise definition.
First up was Director of Business & Enterprise, Nick Temple. In a strongly worded blog post, he tore into the idea that ‘trust engines’, a proposed mechanism to tackle the problem of how organisations can deliver a return on equity investments to private investors whilst demonstrating a clear social mission, would be a useful tool in the social investment market: “What we don’t need right now is woolliness and blurriness that confuses and doesn’t build any trust: the opposite is true” he stormed, before adding: “We also don’t need to divert money away from charities and social enterprises who badly need it, just because social investment isn’t working as well or as quickly as people might have hoped to start with.“
Temple’s blog was quickly followed by an equally robust intervention on similar themes from SEUK’s chief executive, Peter Holbrook. In his conclusion, Holbrook stated: “I resolutely do not accept that charities and social enterprises need to adopt corporate models in order to resource themselves and grow. This in my view would be a disaster – and the first step towards the privatisation of civil society.“
Both posts were powerful contributions to arguments that have been going on forever but are coming to a head due to the emergence (or not) of a social investment market in the UK.
As I mentioned in my report from Good Deals 2013, while most within the social enterprise movement itself have either agreed on a definition of what ‘a social enterprise’ is or just got bored of talking about it, the debate has been restarted by social investors and advocates of ‘for-profit’, privately-owned social ventures/social businesses.
Amongst those making those demanding change is Nick O’Donohoe, chief executive of social investment wholesale finance institution, Big Society Capital (BSC) who recently called for a social enterprise definition: “driven by a specific legal form or golden share which guarantees a lock on social mission and also allows capital providers to earn a reasonable return consistent with the risks they are taking“.
Elsewhere, leading figures at Unltd – including now departed Head of Ventures, Dan Lehner – have been amongst those championing the concept of Trust Engines and this work to enable ventures to enshrine their social mission while taking equity investments was welcomed by incoming Esmee Fairbairn Foundation chief executive, Caroline Mason, in this interview.
Widening the argument in a recent blog for Pioneers Post, James Perry of social investment charity, Panahpur, claims that social structures that cap investor returns are: “like building a Berlin Wall between a social entrepreneur and the ‘real economy’. It excludes the vast majority of investors. By capping the return that an investor can make, it is both reducing the available capital and reducing its risk appetite. It forces the social entrepreneur to take on debt (which weakens it) rather than equity (which strengthens it).“
A useful first step to resolving this growing mess would be to work out what the discussion is actually about. Whether or not people want to have a debate about what ‘a social enterprise’ is, or whether (most organisation currently regarded as) social enterprises can currently (or ever) offer investors a financial return, the key practical question at hand is: ‘which types of organisations should be eligible to receive money allocated by the government for *social investment*?’
Most charity and social enterprise leaders -including Nick Temple and Peter Holbrook- want that money to go organisations with some form of regulated ‘social’ structure, some social investors and many people running or supporting ‘for-profit’ social businesses want (at least) some of the money to go to private ‘for-profit’ companies with a social mission.
The current position is a faintly absurd attempt to split the difference. BSC, which is spending around £400million of unclaimed assets claimed by the government for the purpose (plus £200million from the ‘Merlin banks’), is currently committed to investing in intermediary organisations who will invest in Social Sector Organisations (SSOs).
This definition is explained in its FAQS in answer to the question “How do you define ‘social sector organisations’?” as follows: “The statute under which BSC was established defines third sector (or social sector) organisations as those that ‘exist wholly or mainly to provide benefits for society or the environment’. BSC has interpreted this to include regulated social sector organisations such as charities, Community Interest Companies or Community Benefit Societies as well as some profit-making companies or enterprises that have a clear social mission where these entities can meet the specific criteria set out in the attached Governance Agreement.“
At least four of the ‘specific criteria’ in the Governance Agreement depend very heavily on the personal judgement of whoever is deciding whether or not they’ve been met. Even before considering the issue of investors getting a return, it’s easy to understand why someone in Nick O’Donohoe’s position – with a remit to build the UK social investment market – might prefer ‘a specific legal form’ rather than tasking intermediaries with judging whether ‘for-profit’ companies are ‘social’ on a case-by-case basis.
He is, as discussed here, broadly right. It’s not that we need a new definition of a social enterprise* but that we do need a definition or – more usefully – a system of registration for, organisations eligible to receive ‘social investment’. BSC’s current term, Social Sector Organisation (SSO), is probably as good a tag for those organisations as any. Registered SSO’s could include private ‘for-profit’ companies, possibly based on their use of a ‘trust engine’ if/when we’re able to establish what one is. Registration could be an additional function performed by the CIC Regulator (if appropriate funding were provided for it to be carried out).
This registration system wouldn’t fulfill the desire of many in the charity and social enterprise world for all social investment to go to charities and regulated social enterprises but it would mean that: (a) all recipients of social investment would have to demonstrate their ‘social’ status, based on consistently and independently applied criteria and (b) it would be possible to achieve some transparency about how many of those organisations registered to apply for social investment were charities, CICs, bencoms (add other social structures as appropriate) and how many were ‘for-profit’ SSOs.
The battles of principle and the battles for resources would, of course, continue but on a slightly more sensible basis.
*I’d like the government to have greater cross-departmental clarity about what it means by ‘a social enterprise’ but that is a slightly different discussion