Revving the trust engines?

In a period where social sector policy ideas increasingly seem as disposable as the managers of struggling premiership football teams, many more casual observers of developments in social enterprise wonkery may have entirely missed ‘Trust Engines’.

In August 2013, social entrepreneur support organisation, Unltd, was plugging the concept of these ‘mechanisms that allow social entrepreneurs to articulate, evidence and then protect the social value and social purpose of their organisations’ with zeal and purpose.  

Unfortunately, a read through Pushing Boundaries, the organisation’s recent publication on ‘Why some social entrepreneurs are using a for-profit form and how they are embedding their social mission’ suggests that it’s all gone wrong ‘Trust Engines’. The idea is as prominently featured as David Moyes in next year’s Manchester United team photo. 

On reflection, ditching ‘Trust Engines’ may have been a mistake. It is a silly name but the things that it’s a silly name for, the mechanisms for articulating social value, are potentially interesting enough to write a 48-page report about.

Unfortunately, the vast majority of Pushing Boundaries is not about that. The starting point for the research is that ‘A growing number of social entrepreneurs are choosing for-profit legal for their social ventures‘.

Based on that starting point, there’s at least three interesting angles worth exploring:

(i) to ask whether an increase in numbers of for-profit social ventures is a good thing – why it might be and why it might not be

(ii) to look at why there’s an increase in numbers of for-profit social ventures – is it because markets are changing? is it because funding is changing? is because attitudes are changing? is it because different people are starting social ventures?

(iii) to explain how for-profit social ventures are combining meeting the needs of shareholders with delivering a social mission

Pushing Boundaries deliberately avoids (i) and attempts to cover (ii) and (iii) solely by asking 25 (mostly early stage) social entrepreneurs who use a Company Limited By Shares (CLS) structure what they think.

As someone who spends a considerable part of their professional life asking social entrepreneurs what they think and turning it into blog posts and publications, I’m a big supporter of the practice but it’s difficult to learn much from anyone’s personal opinions about anything unless you put them in some sort of context.

The lack of context in Pushing Boundaries isn’t a mistake, it’s a position of principle, as the conclusion explains: ‘The key focus of this research has been on social entrepreneurs’ voices rather than on external assumptions about how organisations should act‘.

The problem is that unless you engage with the ‘external’ arguments about why you didn’t chose some other structure that someone else might want you to, or the particular market or funding situations that have motivated your decision, there’s nothing very interesting you can say about ‘motivations for choosing a CLS’ (which is the focus for section 1).

With the exception of one entrepreneur who made the choice based on a principled belief in demonstrating that profit and social purpose can go together, all the others apparently chose the form either based on it being simple and/or the best structure for taking on investment. Fair enough.

The section on ‘Attitudes to securing social mission’ doesn’t deliver many surprises either. Some of the entrepreneurs think legal locks and guarantees don’t matter because it’s what you do that counts, others worry about ‘further down the line’ when ‘suddenly people start rubbing their hands together’ and prioritising profit over social mission. Fair enough. Maybe we could compare some examples of where for-profit social ventures have scaled up and protected their mission and where they’ve been unable to do so?

The section on ‘Embedding Social Mission in Practice’ is the only section that amounts anything other than ‘this is what some entrepreneurs think about their business’.

It outlines some of the approaches interviewees have used to embed their social mission:

  • structure-based approaches – such as putting the social mission in your articles of association
  • legal models such as golden shares held by charities
  • publishing evidence of social impact
  • commitments to profit distribution

A table at the end of the section shows some of the interviewed organisations are using two or more of these approaches while others aren’t explicitly using any of them but may be amongst those believing that social impact is ‘in our DNA’.

In the final section, ‘Experiences of Being a CLS’, ‘external assumptions’ get a look in on the basis that they might have a negative impact on an organisation’s ability to get grants or generate sales. At one point, one entrepreneur reflects: “It would have been a lot easier to set this up as a charity with no commercial purposes – there’s just something in the word ‘charity’ that makes people very comfortable. And I think that’s fallacious – that’s just a matter a perception.

Believing that it’s better to buy from a charity is a matter of perception but it’s a perception based on a legal registration process and an ongoing system of regulation, and possibly on that customer’s beliefs about what it means to do social good.

Pushing Boundaries primarily consists of Unltd getting some social entrepreneurs to tell their customers and wider society (at great length) that the way they structure their organisations is none of anybody else’s business. Not many of those customers or members of wider society were interested anyway. The message to anyone with any ‘external assumptions’ is sod off.

 

About these ads

8 Comments

Filed under Uncategorized

8 responses to “Revving the trust engines?

  1. Well David,
    The idea of the so called mssion lock goes back to our 1996 paper which said:

    “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. ”

    In 2004, when interviewed about our wotk in Russia and Crimea by a diaspora leader, we ‘d set up as a CLG and this is how we described the operational model:

    ” The P-CED model is not a charity sort of operation. It is business. What we choose to do with profits is entirely up to us, and we choose before anything else happens to set most of our profits aside to assist poor people. In fact, our corporate charter requires us by law – UK law, where rule of law is very well established – to use our profits only for social benefit. We cannot do anything else with it.”

    At the same time we shared our business plan with the sociala enterprise community:

    “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”

    By 2006 with our founder effectively stranded in Eastern Europe and all avenues for social investment exhausted, we reformed as a CLS for simplicity but retained the principle of non dividend distrbution

    There’s an interesting conference today in London on Inclusive Capitalism where Bill Clinton the recipient of the 1996 paper will be a keynote speaker. I know where the thlnking comes from,

    http://www.p-ced.com/1/node/292

  2. David, thanks for your thorough reflection on our recent research in to why some social entrepreneurs are choosing a for-profit legal structure. This is a real trend happening across the economy, which we’re noticing more and more in our own work with social entrepreneurs.

    UnLtd supports approximately 1,000 social entrepreneurs a year, and although less than 10% of all UnLtd Award Winners use a for-profit legal form such as the Company Limited by Shares (CLS), since 2009 the number of CLS applying for our investment readiness programmes has continuously grown, making up over half of all applications for the Big Venture Challenge. We have already started exploring why this is in our Spotlight on Building a Social Investment Pipeline (http://unltd.org.uk/2013/11/07/%EF%BF%BCbuilding-a-social-investment-pipeline/), though as the ‘Pushing boundaries’ paper evidences, it is largely being driven by social entrepreneurs themselves.

    Our work in this area has now extended beyond our conceptual discussion about ‘Trust Engines’ to include showcasing and developing real-life examples. Rather than dropping the term, we are ramping up our activity on it. Over the next few years will be working to clarify and make more readily available the variety of mechanisms that can be used by social entrepreneurs who choose a for-profit legal form to lock in or demonstrate social mission and social impact.

    We see this work as a natural experiment, though acknowledge the need for more contextualisation. This is why we are working to improve understanding of the risks and benefits to individual social ventures and to society as a whole of supporting and investing in social ventures across the whole range of legal forms available. What are the benefits of supporting for-profit social ventures, and what happens if it goes wrong? Likewise, we will continue to research and promote the benefits of supporting more traditional forms of social venture, but we also want to examine any risks associated with not enabling a full array of social purpose organisations to flourish. Ultimately social entrepreneurs want to make an informed decision about the best model for their venture, taking into account their own objectives and their ventures’ specific operational contexts.

    I don’t know if you’ve had a chance to see yet, but we have recently published ‘The realities of early stage social investment’, looking at the first year of some longitudinal research, looking at what happens to social ventures limited by shares one year after they receive investment (http://unltd.org.uk/wp-content/uploads/2014/05/UnLtd_Research_Publication_Number_8.pdf). This shows that ventures have been able to access the risk capital they need to grow their social impact and help more people, with no compromise of social mission to date. It also highlights that an experience of working with a social venture can impact on the social consciousness of investors themselves. We aim to continue this work, following these early stage entrepreneurs through the years ahead, broadening the investor base, improving access to risk capital and ultimately improving the lives of more people.

  3. From my own perspective as a startup, we’ve found it so much easier to attract resources by making it clear that we’re a profit for purpose company (limited by shares). When I say resources I mean talent and money and ideas.
    I’ve noticed SEUK’s Peter Holbrook beginning to widen the definition of ‘social enterprise’ that he uses when addressing an audience, so clearly the subject of is topical.
    I’m beginning to wonder if ‘not-for-profit’ was a passing phase…

    • Beanbags admin

      Hi Mike,

      I think ‘not-for-profit’ became fashionable as our version of the US term ‘nonprofit’. I think it’s unhelpful for several different reasons – not least because it can encourage customers to believe that your products or services are or should be free – but I do quite often end up using it as it’s the quickest and most easily recognisable way of describing organisations that don’t distribute profits to shareholders.

      I’m not sure what Peter H has been saying in this instance – I generally agree with him on a lot of things – but social enterprises have never been defined by their corporate structure and I’ve always opposed the idea that they should be. I support a registration process for tax breaks and funding streams aimed at social enterprises but not a structurally defined one.

      I’ve been involved with (either as staff member, director, member or volunteer) with social enterprises using structures including: CLS, CLG, CIC CLG, CIC CLS, registered charity, IPS co-operative, IPS Bencom and, last but not least, unregistered trading name connected to a bank account. They all have their pros and cons.

      Some of my favourite social enterprises that I haven’t been involved with directly – including Ethical Property Company and Cafédirect – are PLCs. For me, what matters about social enterprise is what they do and how they do it. Corporate structure – and the way it’s used – might be a key part of what makes the enterprise social or it might not.

      As your comment suggests, the starting point for the Unltd paper is a really interesting one – with passionate views coming from various different angles. Unfortunately, the execution of the paper means it runs to 48 pages without telling us much more than your comment tells us but it’s definitely a subject we’ll hear a lot more about.

  4. Hi David

    I agree with you on many points here (not least that trust engines was a silly name ;-) I’m pleased that UnLtd seem to have replaced it with ‘Mission Locks’). I’m also pleased that UnLtd continue to flood their research and policy reports with quotes from front-line entrepreneurs as this is (bizarrely) still something badly missing in the sector.

    Where I personally felt disappointed in the paper was that very few of the entrepreneurs interviewed really seem to have mission locks that are meaningful and this wasn’t really highlighted.

    I pushed the concept of trust engines hard last year because I believe there’s a really important – and still unexplored – opportunity between Regulated Social Sector Organisations and off-the-shelf Companies Limited by Shares. I believe more than ever that if you’re in the business of public service provision, it really does matter that there’s a solid commitment that the interests of the beneficiaries come first. It’s important for staff, funders, investors etc but absolutely critical for game-changing, sector-wide initiatives like tax relief and to open up markets.

    What’s exciting about the ongoing work of BVC – and highlighted again in this paper – is the calibre of the entrepreneurs coming to the sector and the level of ambition they hold. But these companies all need early stage high risk investment. Despite what others say I just don’t believe this can really happen without equity and I don’t think equity and CICs will ever truly be friends.

    The company I am now a Director of – Oomph! Wellness – has found a nice sweet spot here. We are a standard CLS with individual staff shareholders (myself included) and an angel investor. We are a profitable company but, like most ambitious start-ups, we reinvest all profits into further growth (but I would say we do this for the good of the company, not because we think it inherently makes us ‘more social’ at this stage). We are ‘social’ because we make money out of doing social good: transforming the health and quality of life of older people. Shareholders hope and expect an exit – to reward the blood, sweat and tears put in by our founders and early investors.

    Last Christmas we received institutional social investment (equity) from Nesta Impact Investment Fund (NII). Despite only owning a small % of shares NII have absolute control on the social objects in our Articles. Without NII’s say, we cannot fundamentally change the fact that our purpose as a company is to improve the health and quality of life of older adults. Nor can we sell to a buyer that doesn’t share this mission – or stop publishing our social impact. And NII themselves couldn’t approve such changes because of the terms with their investors (including Big Society Capital and the Nesta charity endowment). This relationship is perfect for us: it gives everyone reassurance that we cannot go ‘off mission’ whilst allowing us all the freedom and growth potential of a standard company.

    I’d love more of the UnLtd / BVC entrepreneurs to further their mission locks in a similar way: it’s not to say I don’t trust any of the people involved individually, but that’s because I know many of them personally. HMRC can’t afford this luxury. I would have more confidence in championing their positions if each would find go out and find a charitable golden shareholder that shares their mission. This needn’t even be an equity investor necessarily; the ‘shareholder’ needn’t have any other decision-making powers other than controlling these social objects – and the shares could be very notional value.

    I hope UnLtd continue to make the case for this. I agree with you, David, in that even policy work that focuses on bringing entrepreneur perspectives to the fore should provide context and critique alongside it in order to move thinking forward.

    Dan

    • Beanbags admin

      Hi Dan,

      Thanks. Agree on the value of quotes from frontline entrepreneurs – I’ve recently been writing a social enterprise-related report (hopefully out later this month) which will have an even higher quote quota that Pushing the Boundaries – it’s the lack of context and challenge that’s the problem here.

      That and the other issue that you raised that not most of the entrepreneurs – to the extent it’s revealed in the report – haven’t done much (so far) on explaining their impact or protecting their mission so it’s mostly a lengthy discussion of why some people think something isn’t interesting or important.

      You’re point about public service provision is a really important one. In public services, it’s not good enough for CLS social ventures to just say ‘we provide really good services that make people’s lives better’.

      There’s no reason why Serco, A4e and G4S shouldn’t say that too. If social ventures believe they’re offering a social alternative to private sector outsourcing companies, they need to be able to demonstrate why – beyond saying ‘trust me, I’m a good guy’ – otherwise they’re just the same as Serco, A4e and G4S but smaller.

  5. Hello everyone,

    Dan L – tell me if I’m wrong here, but were we one of the first SE that came as a fully for profit without a mission lock?

    After a while, I have to say I just tried to avoid the debate of legal status… And what is a social enterprise conversation etc…

    It v rarely comes up in our world. I don’t seek funding, charitable donations or other contributions where our legal identity would be a sensitive issue… In fact, I’m not sure even describe our organisation as a social enterprise anymore and no one seems to care.

    I suppose this might offend some, but given I’m not in competition over resources it doesn’t seem to be a concern.

    I am however very focused on our social impact and am constantly straining every sinew to improve that impact, and how we capture it.

    legal status and mission lock discussions became a distraction for us…

    So we just got our head down an tried to figure out how to improve the things we could control…

    The product, recruitment, the processes, training, pricing, administration, internal processes and sales etc…

    We have grown it to £1M this year… That might sound a lot but in reality there is very little profit in it…

    I’m not sure I will ever find a pot of gold where I am suddenly rolling in it! I just don’t think that sort of money exists in this space. You just have to see how many social ventures fail to see that worrying about legal identity is a very distant secondary thought than just surviving!

    It’s wasted energy as far as I can tell.

    We will work with over 1,000 young people this year … Ultimately how I improve the experience for them and how it impacts their life is all I really care about.

    Obtaining resources to do that has always been the greatest challenge as it probably is for everyone who is driven by a social mission.

    Sorry to hear about social spider too :(

    Best of luck with your next adventure/venture…

    Best

    • Beanbags admin

      Thanks. Social Spider’s still going strong. It’s just One in Four magazine that’s stopping.

      Structures matter more to some people than others and matter more in some situations than others. I completely agree with your point that if entrepreneurs aren’t seeking to access resources (or promote their organisation) on the basis of being ‘a social enterprise’ or ‘a social sector organisation’, their corporate structure is none of anyone else’s business.

      I’m fairly happy with Social Enterprise UK’s criteria for social enterprise members and we’re happy to be a member but equally happy to work with companies (and charities and others) who are doing good work using different models (or just aren’t interested in that side of things).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s