Purpose unclear

One of the most baffling developments of 2014 was the emergence (at least in social enterprise policy-world) of the ‘Profit-with-Purpose’ business.

For those who missed it, the ‘Profit-with-Purpose’ business is an idea primarily championed by social entrepreneur support provider, Unltd, to explain their support ‘for-profit’ businesses (companies limited-by-shares) dedicated to fulfilling a social mission.

Unltd ceo, Cliff Prior, chaired the Mission Alignment Working Group (MAWG) of G8 Social Impact Investment Taskforce and their report explains the idea at length.

Prior also explains the idea (to some extent) in this interview with Pioneers Post, where he responds to criticism from Unltd’s former partners in Scotland, Can and Senscot, who ended their relationship with the storming assertion: “UnLtd has developed into one of the UK’s leading advocates against the regulation of social enterprise and for the inclusion of private profit companies in the sector.

While I understand that many readers are experts in the minutiae of social enterprise policy debates present and past, less firmly embedded readers may appreciate some explanation of the terrain on which this battle is being fought.

Very roughly, it’s this (from the MAWG report, p18): “From a legal point of view, the main difference between profit-with-purpose business and social or solidarity enterprise is the degree of flexibility regarding the distribution of profits and use of assets.

What, in a UK context, is the nature of the inflexibility that Unltd are railing against?

Umbrella body, Social Enterprise UK, state that in order to be considered a social enterprise (for the purposes of membership): “the majority (more than 50%) of an organisation’s profits should be reinvested to further its social or environmental mission.

That’s a pretty flexible definition, even without creative interpretation, it enables a company to pay 49.9% of its profits out to private investors and retain the other 50.1% in the company ever year if appropriate.

When it comes to assets, SEUK’s position is: “We believe that an asset-lock can be effective in ensuring that a social enterprise operates in the wider interests of society for perpetuity and is not at risk of sale. But we recognise that many social enterprises receive no public funds or assets. Some have benefited from considerable personal investment on the part of the entrepreneur and need the money back.

So the official social enterprise position on profits and assets – to the extent that there is one – is that a social enterprise can distribute half its profits to private investors and doesn’t need to have any sort of asset lock (as long it can bear the ignominy of failing to pursue an approach that SEUK believes can be effective).

Elvis and Kresse, the business used in the Pioneers Post article as an example of a ‘profit-with-purpose’ business is (entitled to call itself) a social enterprise (if it wants to) by the SEUK’s definition.

That said, there’s absolutely no reason why a socially-minded entrepreneur should sign-up to SEUK’s commitments if they don’t want to. In that situation, they can start an ethical business like Ecotricity or Lush, that does business in the open market using a conventional ‘for-profit’ structure – attracting ethically-minded customers on the basis of the way they do business rather than their corporate set-up.

In the UK context, a ‘profit-for-purpose’ apparently fills the gap between social enterprises and ethical businesses. Look carefully. Can you see it yet?

Profit can be good

Despite, this deeply inauspicious premise, Prior and the Unltd team are neither bad nor stupid people so there must be some reasons why they’ve ended up on this bizarre wild goose chase.

There’s at least one good one, based on what are (whether or not you agree with them), honorable principles. In a recent discussion on social media, Dan Lehner, formerly Head of Ventures at Unltd and now working at CLS social enterprise/profit-for-purpose business, Oomph!, explained his support for the thinking that mutated in ‘profit-for-purpose’: “My biggest reason to push the issue is because I think there’s need for a new level of awareness-raising (partially with consumers/government and funders/investors but mostly with really talented, imaginative, ambitious entrepreneurs) that it’s ok to make money out of social purpose – if social outcomes are genuinely achieved and evidenced.

Why shouldn’t people who want to earn a decent living, provide well for themselves and their families and make the world a better place in the process be encouraged to do so? It’s difficult to imagine many of us in social enterprise world offering any suggestions as to why not (although some of might argue that that’s often possible using a social enterprise structure, too).

Why should, Unltd, a charity set-up to support ‘social entrepreneurs’ (rather than ‘social enterprises) support those people? Senscot and Can, amongst others, clearly do have some suggestions but others of us are pretty relaxed about that, too – School for Social Entrepreneurs is another example of an organisation that supports ‘social entrepreneurs’ without specifying the type of organisation they have to work for or set-up.

Two bald men lose will to live during ethically-produced comb brawl

The less principled driver of ‘profit-for-purpose’ is as one skirmish in the distastefully absurd scrap over the £400million worth of ‘unclaimed assets’ allocated for investment in ‘Social Sector Organisations’ via the government’s semi-detached social investment wholesale finance institution, Big Society Capital.

The starting point is that: “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.

The ‘Governance Agreement’ definition combines the clarity of wool with the flexibility of nylon to deliver a set of criteria that virtually any business could meet if it could be bothered.

It states that: “the payout of cumulative profit after tax to shareholders will be capped at 50% over time” but doesn’t specify how much time so, presumably, as long as time (or your business) doesn’t stop you can pay as much profit out to private shareholders as you like on the basis that you’re firmly intending to start the process of reinvesting the majority of overall profit generated over the lifetime of the business at some as-yet-undefined point.

Big Society Capital’s view (as I understand it) is that a key reason why the social investment market didn’t really get going in 2013/14 was that social investors were spooked by this potentially confusing situation.

In August 2013, BSC ceo Nick O’Donohoe stated: “We need to more clearly segment the social impact investment market and also define more specifically what should count as a social enterprise.” and that: “That definition, in my view, will need to be 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.

‘Profit-with-Purpose’ clarifies that situation so that, in the words of MAWG report, p19, there is: “a way for social investors to identify eligible profit-with-purpose businesses with confidence and familiarity.

In a UK context, this means a way for social investment intermediaries to investment UK citizens’ unclaimed assets in businesses that are not ‘regulated social sector organisations’.

Few within either civil society or social investment world disagree with the idea that if government is going to provide money for a social investment and (tax relief for it) it should provide a regulated registration system for those eligible to receive it (particularly if their social mission is not already regulated in some other way).

My strong expectation is that vast majority of organisation who could be bothered to register would meet SEUK’s definition of a social enterprise. For Unltd, the idea that might be a few that might not but would be keen to receive ‘social investment’ is apparently justification for the creation of ‘A New Sector’.

The more worthwhile stuff that’s ignored

BSC’s money is a relatively small, specific chunk of cash set aside to support ‘Social Sector Organisations’. The parochial battle over whether (or which) private companies should be eligible to receive it ignores the far bigger and more interesting discussion about the promotion of social purposeful activity in the private sector.

Dan Lehner’s point that: ‘it’s ok to make money out of social purpose – if social outcomes are genuinely achieved and evidenced‘ – is an important one but the last thing it suggests is the need for the creation of ‘A New Sector’ of businesses for a bemused public to attempt to get their head around.

Whether we’re using the term ‘social investment’ or ‘impact investment’ there’s huge potential investors to invest in companies and customers to buy products based on the social good generate by those activities. This is not necessarily about companies demonstrating their impact through SROI, it could be about being Living Wage Employers, using sustainable materials or demonstrating their support for their local community.

If what the company does with its profits and assets doesn’t matter, then why else should an investor be interested in what it is as opposed to what to what it does? If an investor is investing what an organisation does, social requirements can be just as usefully written into an investment agreement as written into a company’s mem and arts. If a social entrepreneur running a private business doesn’t what their social mission distorted by an investor, they should get that mission written into the deal.

Shoving the good stuff done in the private sector into the cul-de-sac of ‘Profit-for-Purpose’ businesses serves no one other than a support organisation struggling to explain what it does, and some social investment organisations struggling to do what they’re meant to do.

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34 Comments

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34 responses to “Purpose unclear

  1. David, to the best of my knowlege Profit-for-Purpose is a termed coinded by us in 2004. It’s used to describe a business which issues no shares and invests at least 50% of profit in community develoment funds retaining the remander within the business, It had been first described in the position paper our founder delivered in 1996. .

    In 2006, as I relate in my blog it was a subject for discussion on Skoll Social Edge where Kim Alter and I were among the participants. I heard the term Profit with Purpose within the RSA a few years ago.

    As might have been expected the concept of doing business for good while making money soon arrived with the constantly promoted B corporations, but in 2011 our arguments for capitalism to be applied for social benefit would turn up in Harvard’s Creating Shared Value.

    According to those behind creating shared value, business could profit from solving social problems. Taking us from proft-for-purpose to profiting from a purpose,

    http://www.p-ced.com/1/node/291

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  2. Love this for all sorts of reasons!

    Peter Holbrook

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  3. Until more recent times, the purpose of business has rarely been considered. The argument for a profit-for-purpose model begins with this question:

    “At first glance, it might seem redundant to emphasize people as the central focus of economics. After all, isn’t the purpose of economics, as well as business, people? Aren’t people automatically the central focus of business and economic activities? Yes and no.

    People certainly gain and benefit, but the rub is: which people? More than a billion children, women, and men on this planet suffer from hunger. It is a travesty that this is the case, a blight upon us all as a global social group. Perhaps an even greater travesty is that it does not have to be this way; the problems of human suffering on such a massive scale are not unsolvable. If a few businesses were conducted only slightly differently, much of the misery and suffering as we now know it could be eliminated. This is where the concept of a “people-centered” economics system comes in.”

    In 2006, re-emphasising the case for people over profit we said this in our proposal for a national scale social enterprise development project:

    ‘This is a long-term permanently sustainable program, the basis for “people-centered” economic development. Core focus is always on people and their needs, with neediest people having first priority – as contrasted with the eternal chase for financial profit and numbers where people, social benefit, and human well-being are often and routinely overlooked or ignored altogether. This is in keeping with the fundamental objectives of Marshall Plan: policy aimed at hunger, poverty, desperation and chaos. This is a bottom-up approach, starting with Ukraine’s poorest and most desperate citizens, rather than a “top-down” approach that might not ever benefit them. They cannot wait, particularly children. Impedance by anyone or any group of people constitutes precisely what the original Marshall Plan was dedicated to opposing. Those who suffer most, and those in greatest need, must be helped first — not secondarily, along the way or by the way. ‘

    I was given the official SE-UK (then SEC) position on this approach when we joined in 2006:

    “Thank you very much for your email which we have read with interest. At present, your area of work lies beyond the focus of our work, however, we know of some people who may be more aligned with what you are going. Please see details below:,”

    I also took the opportunity to introduce this to the EU in their 2008 Citizen Consultation. About 18 months ago, it became a “new concept” at the EU:

    http://peoplecentredbusinesses.splashthat.com/

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  4. Perhaps unsurprisingly I really liked this article which I believe sums up the situation very well. In particular the final paragraph which draws a strong conclusion. There are perhaps some nuances that are missing which add strength to the arguments voiced.
    For profit business whether for social purpose or otherwise has access to one of the oldest and most developed markets. That is the capital market. Profit based organisations can pay dividends and issue shares that hold majority sway over the mission and direction of an organisation. This makes them eligible for significant investment, particularly of risk capital with potential for gains commensurate with risk, realisable down the track through an exit (sale or IPO). There is nothing wrong with this, but they are for profit businesses. Aldi is not a social enterprise because it sells basic foodstuffs inexpensively at times of economic hardship!
    Social Enterprise which subjugates profit for purpose does not have the same advantages for those seeking profit and as such has restricted access to capital, particularly risk capital. With no exit (sale or IPO) investors seeking returns are not attracted and as such there is a limited pool of capital for organisations seeking to provide maximum benefit with no leaks from the bucket of purpose.
    I have no issue with either sector. In my former life I witnessed two IPO’s and saw much tax paid from for profit business, however I would not expect to see for profit business whatever its purpose or more normally “target market” masquerading as a Social Enterprise or being the recipient of the limited funds set aside for social organisations or their creators.
    A key issue with the lack of development in the social investment market is also the mismatch between the requirement of the investee and the existing investor market which is seeking to price in risk based on its own ignorance of a nascent arena and to cover the costs associated with lending in small amounts with small loam books and inordinately high overheads.

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    • Beanbags admin

      Hi Andrew,

      Yes, I agree. While I’m very much in the liberal/broad church wing on ‘what is a social enterprise?’, I have no sympathy whatsoever for social investors and intermediaries who’ve received shedloads of government money on the basis that they’ll find ways to meet the finance needs of specifically social organisations who can’t access mainstream finance, who then say that social sector organisations represent a risky market where their cut & paste mainstream finance approaches don’t work.

      The ‘unclaimed assets’ bit of Big Society Capital was handed over primarily to tackle the problem that you describe. I think there’s an extent to which, for social investment leaders, supporting ‘Profit-with-Pupose’ is a displacement activity.

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    • Precisely our position Andrew, investing both our IP and own funds to pur people ahead of profit.

      We are impeded by massively funded organisations like Unltd whose salaried shills, regurgitate what was shared openly, as if their own thinking and often censor us from this kind of dialogue.
      A case in point was the Oxsef conference on a New fom of Capitalism which came just after our presentations at Sumy State University on the same subject, from the perspective of a practitioner.

      Our proof of concept project in Russia has sourced a community microfinance back based on an unsecured “loan circle” model which helped deliver funding to around 10,000 microenterprises in Tomsk who would otherwise have no access to conventional finance.

      The proposal that introduced this to government and the social enterprise community 11 years ago, said this about the application off profit.

      “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.”

      ,

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  5. Putting the BSC/social sector organisation debate to one side, why don’t SEUK/the social enterprise community just drop the 50% of profits must be reinvested shtick and then we have a broad church where everyone is happy? It’s this arbitrary profit cap (which you gloss over) that excludes many social enterprises and which makes UnLtd feel as if they must create a niche within in niche within a niche within a nice (ad infinitum).

    Many social enterprises are excluded by the current definition. Despite what you say, Elvis & Kresse aren’t considered a social enterprise by the SEUK definition if they don’t reinvest more than 50% of profit. Another example is Oomph! who are patently a social enterprise and who’s founder is billed as a ‘social entrepreneur’ at your event next week – but who (as I understand it) don’t have a profit cap.

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  6. Beanbags admin

    Hi Matt,

    I agree entirely with your desired outcome but I disagree with your take on the detail of the current situation and, perhaps for that reason, the relevance of Unltd’s response to it.

    I’m wary of getting into too much discussion on Elvis & Kresse because I don’t know whether they want to be considered a social enterprise – and, for me, (possibly the biggest) point about being a social enterprise is that it’s opt in and I don’t see anything in SEUK’s guidelines to stop a company with their model opting in.

    ‘reinvested to further its social or environmental mission’ is an extremely flexible term which could reasonably be (and is) taken to include many different activities including (but not restricted to): donating profits to social causes, investing money in new socially useful activity within the business and keeping money within the business as reserves.

    To fail to meet the SEUK definition, a company using Elvis & Kresse’s stated model would have to actually pay out more than 50% of its annual profits to private investors as dividends. The definition doesn’t demand a legal profit cap.

    (As I’ve argued often in the past) a phenomenal proportion of the UK’s CLSs (possibly most of them) with no social mission would comfortably be able to fulfill SEUK’s guidelines (specifically) on reinvestment.

    With Oomph, for me social entrepreneurs can operate in any sector using any structure and I’m using the label on that basis – but I’m also not saying Oomph isn’t a social enterprise, I don’t know if they chose to use the label.

    That arbitrary profit cap is there as a fudge to demonstrate that, in principle, social enterprises are businesses that don’t exist primarily for private gain in order – partly in order to keep those who believe social enterprises shouldn’t distribute profits to private individuals (at all) in within the broad church that we both support.

    Despite the annual % being a fudge, the underlying principle that a business shouldn’t exist primarily for private gain is a core principle of social enterprise – and the idea that what you do with profits (should you make any) can be a key part of that is also a reasonable one.

    But (I’ve often argued) it’s not necessarily the most important issue and I’d be very happy to sign-up to any suggestion for the guidelines to be amended – so that (it’s clear that) social enterprises that embed their mission using a golden share but don’t have a legal profit cap can join SEUK (and be considered a social enterprise) if they want to.

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  7. The markets will clear the mess up. Wait and see.

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  8. Your blog could do with a Œshare¹ button David.

    Good post. Cat, pigeons, nice one!

    Mike.

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  9. Good discussion. Just to Matt’s point, Oomph has a social charter which commits them to “Reinvesting the majority of our profits to furthering our social mission – investing in improvements in the experience for older people the world over.” (http://www.oomph-wellness.org/impact/#charter)

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    • We chose to describe ourselves as a social enterprise after confirming with the DTI that our approach of investing at least 50% of profit in community development complied with their definition. Our statement of purpose says much the same as Oomph!

      “P-CED is now based in UK as a profit-for-purpose company, since 2004. We conduct small business for profit in UK, and invest profits for social purpose under UK rules. This is somewhat similar to non-profit in the US, except we can conduct any business we see fit according to normal business rules without restrictions that bind non-profits or charities. We pay company and personal taxes according to usual business rules. Profits are not shielded in any way from normal taxation that any for-profit business has to pay. Whatever is left over is invested in the social purpose or purposes of our own choosing. That way we can do business in the normal, traditional way, changing only one thing: the output, what happens with profit.”

      “Our social purpose is poverty relief and childcare reform in the former Soviet Union. Core framework is straightforward: to build bridges of friendship based on common ground for the common good in the former Soviet bloc. We firmly believe that this “soft power” approach to international relations is inevitably the only solid ground for establishing and building understanding, good will and peace. We have therefore pursued that strategy from the beginning of P-CED. In this regard we consider that Peace is our Business.”

      “We research and design regional and national programs. More about these programs are in the “Projects” section. We continue throughout with advocacy and activism in raising awareness of stakeholders we aim to help: vulnerable children, and people in poverty, first. “

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    • Beanbags admin

      Thanks, Nick. That’s sorted that then. Oomph are definitely (eligible to call themselves) a social enterprise by SEUK’s definition (if they chose to).

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    • Dan Lehner

      I’m flattered to be seen as the honourable exception in this sorry, dishonorable business. And nostalgic for the days I could spend most my time contributing to this endless debate. Alas I made the foolish decision to try and actually create some social impact so have to save my comments for the evenings.

      So yes, Oomph! are a ‘profit with purpose business’ though I wholeheartedly agree with the author that there’s no need for a new definition or category. I would sooner do away with all fancy new legal statuses and ever changing definitions – and let the impact speak: If you can demonstrate the impact you create and your buyers (government, corporates or consumers) are in the business of buying impact, then great… you have a market.

      If you want to access social investment or grant funding you probably need a commitment to mission and transparent, audited reporting. This might require the creation of a central body (paid for by grant funders and social investors) to do this social due diligence on any company (of any legal structure) wanting to be – and stay – ‘in the club’.

      The ‘51% profits’ point annoys me because it’s so arbitrary (and completely unrelated to social impact) so if we must have definitions I’d be inclined to agree with Matt Black. But ultimately it’s a red herring. It’s the asset lock on exit that I fear is restricting the talent pool of entrepreneurs and high risk investors coming to the sector (and yes I know SEUK are vague on this but many grant funders and social investors have blanket bans).

      It feels ironic that many of the people uncomfortable with the profit with purpose tag are the same people frustrated by the inability of the social investment sector to capitalise small high risk companies in the space.

      (And yes, Matt, we did add the 50% profit cap to our articles as part of the Nesta investment – but, if we’re honest, probably because we felt not to do so would open too many cans of worms… and to do so wouldn’t negatively impact our growth plan (do you know any fast growth commercial start-ups that pay out vast dividends in year 3?!)) We certainly didn’t do it because we longed for SEUK’s approval!

      And therein lies the rub…. I generally agree with this article but I don’t understand the initial point dismissing UnLtd’s definition by comparing it to SEUK’s. Frankly it makes absolutely no difference to me and many others (sorry Nick) how SEUK define things – if the people and organisations that really matter to businesses like ours won’t support a company with an asset lock, regardless of the impact they create.

      I can’t imagine advising any business to pick a model in order to fit SEUK criteria. But when potentially powerful new funds like Power to Change is ringfenced for asset locked companies (and SITR and half the social investment sector likewise) then you can see why people would be put off alternatives. If SEUK have a role to play in this (and genuinely believe that asset locks are optional) they should be working to correct this misalignment.

      Oomph! set up as a business explicitly to deliver social impact (definitely unlike Aldi! But also unlike ethical businesses who have a businesses model and a commitment to behave in the ‘right way’ which is quite different)- in the most sustainable, scalable way. But we are choosing to opperate in markets that are, by definition, broken or dysfunctional. We invest heavily in a team to evidence our impact – even at a time when cash is tight.

      Because that’s why we’re in business. It’s in our governing documents for all to see: impact first.

      But I’d love to know the vast commercial capital markets that Andrew Croft thinks Oomph could tap into, given the above. The social investment market is the right market for us. And I’m grateful to Nesta and UnLtd that they are enlightened enough to see that.

      We – and others like us – should surely be able to access support and cash (including government, philanthropic money, unclaimed assets and the like) if we can prove that we can help the funders achieve their social goals. There really is nothing more to it for me.

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      • Indeed Dan and you’ll find the argument for this approach in our own position paper which says:

        “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. ”

        When I saw a picture of elderly people doing lycra exercises on your Twitter page I was reminded of a charitable NGO who were using this to treat disabled orphans in Eastern Europe. Their story of ‘concentration camp’ conditions and child abuse would have a profound impact.

        There is a particular meaness of spirit which prevails in social enterprise. It’s not just about access to funds but the means to share stories and raise awareness. The SEC who had no public list of members had been delivering only email bulletins. They hadn’t included us I was told because there were so many joining each week. I offered to create a directory and the conversation ended.

        When Martin Luther King said “our lives begin to end the day we become silent about things that matter”. We were being silenced, not only by vested economic interests but by a community who didn’t care to hear about profit for purpose in action. It cost lives.

        http://www.p-ced.com/1/node/64

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      • Beanbags admin

        Dan,

        Sorry to tone down the flattery but it was the reason for profit-for-purpose that you were expressing (albeit in an exceptionally articulate way) that I was describing as the ‘one good one’ rather than you personally. I do think you’re personally honourable but I don’t think that’s any less true of Cliff or anyone else who supports the idea!

        On the SEUK guidelines, I was contrasting ‘Profit-with-Purpose’ with those guidelines because it’s being put forward – both by Cliff in his interview and in the MAWG report – as an alternative to a social enterprise and SEUK’s guidelines are the nearest we’ve got to a set of criteria for ‘a social enterprise’ in the UK.

        You have a position on what makes an organisation social – ‘impact is the only thing that matters’ – that contrasts (anecdotally and based on their choices) to most people who run organisations that as describe themselves as social enterprises whose outlook is along the lines of ‘impact is the most important thing but (one or more of) ownership models, profit distribution and asset locks are an important part of delivering that’.

        My view is that, in the (currently extraordinarily rare) instances where founders/owners/staff are so unequivocally committed to social impact that they put it in their governing documents and set up a ‘golden share’ model, they should be (more than) welcome to use the term ‘social enterprise’ and be eligible for social investment – whether or not they want to join SEUK.

        Or equally, if unaware of, uninterested in or cheesed off with the social enterprise movement, they should be eligible to receive social investment while being registered as a ‘Social Sector Organisation’ and describing themselves as ‘Profit-for-Purpose’ or whatever other label they prefer.

        That isn’t what’s being argued for in Unltd’s Profit-for-Purpose campaign. If Unltd start a campaign for that, I’ll support it.

        As yet, advocates of Profit-with-Purpose, including you and Matt, haven’t provided a single example of an organisation that has embedded a commitment to social impact within its structure and is demonstrably seeking to delivering a measurable social impact but is being actively prevented from calling itself a social enterprise if it wants to (or claiming social investment as a social sector organisation).

        Over recent years, while supporting a handful of businesses that have embedded a commitment to social impact within their structure and are aiming to demonstrate measurable impact, Unltd has also given funding and support to several hands full of social entrepreneurs who run private businesses while asserting that what they’re doing is good and that some customers want to pay for it.

        Whether they’re ethical businesses or good businesses or anything else, I don’t see these organisations as social organisations as distinct from any other business.

        I wish them luck. I’m keen to see as many people as want to launching conventional private businesses that do good. If relevant to either them or investors, I also wish these organisations socially motivated investment based on what they do – as opposed to what are – but I don’t wish them access to public funds allocated to Social Sector Organisations.

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  10. Well said. I personally believe that there is such a lack of clarity of what a social enterprise is that we are a few major incidents away from a crisis of confidence from consumers who assume that the “social enterprise” that they are buying from is something it possibly isn’t.

    The sector feels unrecognisable to me at the moment and has for last 2 years. There are companies who when you look at their website have references and links to social enterprise type stuff yet are actually trading as a private company with those at the top creaming off as much as they can. I raised a complaint last year about a “social enterprise” in Merseyside that had been awarded European funding which used hard sell techniques to get unemployed people to take out unsecured start-up loans so that they could then purchase further support to help them get a risky venture off the ground. My complaint didn’t go anywhere because the CEO was a mover and shaker and closely aligned to SENW (which had lots of resources and strategic influence before its recent closure).

    From what I’ve heard from ex member of staff, the Coop bank is on brink of collapse as ex-Chair was not a lone wolf but acted in a way that set dreadful standard of behaviour across the organisation. Recruiting apprentices and individuals off the work programme to fill entire customer service teams who think they are working in a call centre rather than for an ethical bank with compassionate customers.

    Then there are those CICs where CEOs / Directors pay themselves massive salaries compared to their lowest paid employees whilst rewarding themselves company cars (not an essential business need) and holidays (I mean business development away weeks – I kid you not) often using income from NHS or social care public service contracts.

    I’m a massive believer that good business should benefit as many people as possible. I set-up as a CIC in Dec 2012 but it soon became apparent to me that the regulator is rubbish and transparency is the main way that I can prove to our customers and supporters that we do what we say. But there is NO onus on me to do that nor any other CIC.

    Social investment financing will end up causing nothing but trouble and this will likely be even more exacerbated once ERDF & ESF funding starts to be channeled through the (hugely unaccountable) LEPs and their preferred projects.

    There are genuine needs for our sector to develop and thrive so that we can shift the financial churn in the UK economy from private to social benefits. But at the moment it feels like the “good uns” in our sector are being left out in the cold as the big players block the doors to opportunities to ensure they get their deserved slice of a management fee.

    I’ve gotten so disheartened by it all that I have opted out of this brave new world and I’m feeling much more satisfied focus on doing the business that I want to do in the way that I believe helps tackle the social problems that are dear to my heart and causing serious problems for my friends, family and neighbours.

    In my opinion, virtually everything else (social return on investment, social impact, social value, profit with purpose, social innovation & social capital) is wonky bullcrap with the sole purpose of creating a language barrier (much like lawyers and legalese) to professionalise common sense and make good people believe that they need to pay people large fees because they don’t understand what leaders in the CVSE sector are talking about.

    Personally I’d like a legal definition (similar to protected characteristics) introduced and to see new EU funding and procurement of business support products and services channeled through successful SEs (that meet the protected characteristics) who trade products and services (that isn’t mainly enterprise / start-up support), have a good track record of satisfied customers and can evidence what positive difference they have made to peoples’ lives by reinvesting their profits. Possible? Of course. Likely? Well, not for a long time i reckon.

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  11. Jenny North

    Great post and discussion – enlightens me further as to why many people spent many hours last year discussing organisational structure (which always seems to come at the cost of discussing organisational effectiveness – which gets taken for granted despite lack of evidence to do so).

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    • Beanbags admin

      Hi Jenny,

      Thanks. While, in this instance, it is directly relevant to the use of £400million of public funds, a key reason why I write about structure a lot on here generally is because, as a good social entrepreneur, I’m responsive to market demand. This post is now my most read blog post ever – narrowly beating the 2010 stuff on why I didn’t support the Social Enterprise Mark! I’m more interested in stuff about business models.

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      • I write about business models and take great interest in what the Catholic church has been saying of late. Cardinal Nichols, Archbishop of Westminster for example who speaks of a Blueprint for Better Business.

        “My starting point is simple. It is the good of the human person. As a Catholic I have a fundamental belief, along with many others and indeed shared by very many people of no faith, that we must start from the conviction that people really matter. We are none of us simply producers, or consumers, or employees. What we all share first and foremost is a common humanity. Good societies are built on that fundamental respect for the human person. All human institutions — whether public, private, charitable or for profit, secular or faith based– have an overriding obligation to act in a way that serves human dignity and promotes the common good. When they fail to do that – and the Catholic Church has experienced in recent years just such failures — then trust is eroded. Recovering trust, or better recovering trustworthiness, is hard work and takes a long time.”

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  12. Jenny North

    Haha – as no one ever seems to read my blogs I may start posting about business models too

    Like

  13. Beanbags admin

    I like your latest one – in terms of its clarity and relevance – but I’m with Michael Gove on careers education so I don’t really have a positive contribution to make in response.

    Like

  14. Like Dan, busy doing stuff & busy start to year, so coming to this in an evening, People can read my thoughts on this in lots of places previously, but briefly:

    – don’t think this is about SEUK (I think David could have used the Mark / govt definitions equally to make his point) & obviously we don’t think we are a reason why people choose a particular structure (!); we set out our criteria so people know what they are joining as a membership body; they have been the same for many years

    – agree on the points of transparency; this applies to social enterprises and the more commercial spectrum too – as Ben C points out, this isn’t a binary issue, there is good & bad practice in different sectors; transparency about mission lock, governance, impact etc helps commissioners, users, investors, partners make judgements (Oomph do this very well)

    – asset locks are important – this is particularly the case in relation to public services where there are (valid) worries about privatisation, where we have supported asset locks; they are arguably less important in other areas, as discussed above

    – SITR was established for investment in social enterprises to level the playing field (this was the starting point) because CLS’ could already access EIS or SEIS; so it obviously was targeted at those asset-locked structures that couldn’t “do equity”

    – the point Dan makes about the ongoing gap in finance is well made; but our consistent position is that the finance needs to suit the structures chosen by practicing orgasnisations of the sector, not the other way round (though I recognise it is not always as binary); I think that there is growing evidence that is understood & being addressed (eg the Market Devt Fdn); if people / the market think there is need for other structures to be added, I think that’s fine

    – largely agree with Dan about the profit point as red herring; and about the need for some central body / golden share holder / regulator – we have been arguing for this, as SITR misses lots of CLGs with a social mission as much as it doesn’t allow standard CLS’

    – also agree with a focus on impact; but until there is more consistency, transparency, proportionality etc (across all sectors), then I think people will always seek other protections and things that give trust

    Oomph have got investment from BSC (via Nesta Impact Investments) & Big Lottery (via Big Venture Challenge). Seems a very good use of that money to me.

    Our focus will remain on building the markets for social enterprise – in the private, public and social sectors, and with the general public. Because for all the focus on finance and support, which are very important, most social enterprises talk to us most about customers – be they commissioners, corporate procurement officers or the man & woman on the street. So back to that now. Hope 2015 a good one for everyone.

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  15. For us, the mechanism of an irrevocable trust was the proposed asset lock for what we described as a Community Funding Enterprise.
    In 2003, the idea of using this to deal with widespread homelessness and poverty was well received by US govt who brought $40 million dollars to the table in response to a proposal to prevent terrorism. It made a point about the value of other people:

    “By leaving people in poverty, at risk of their lives due to lack of basic living essentials, we have stepped across the boundary of civilization. We have conceded that these people do not matter, are not important. Allowing them to starve to death, freeze to death, die from deprivation, or simply shooting them, is in the end exactly the same thing. Inflicting or allowing poverty on a group of people or an entire country is a formula for disaster.

    These points were made to the President of the United States near the end of 1996. They were heard, appreciated and acted upon, but unfortunately, were not able to be addressed fully and quickly due primarily to political inertia. By way of September 11, 2001 attacks on the US out of Afghanistan – on which the US and the former Soviet Union both inflicted havoc, destruction, and certainly poverty – I rest my case. The tragedy was proof of all I warned about, but, was no more tragedy than that left behind to a people in an far corner of the world whom we thought did not matter and whom we thought were less important than ourselves.

    We were wrong.”

    http://charterforcompassion.org/node/4514

    As I mentioned earlier, when this approach to economic development was introduced to the SEC, it was “beyond our current focus.”

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  16. Hi David,

    Thanks for starting an interesting debate. I would like to add my thoughts…

    What is the problem that the creation/definition of profit-with-purpose businesses is trying to solve?

    The report of the Mission Alignment Working Group (MAWG) is quite clear about this when it states its own mandate as follows: “For the field (of social impact investment) to develop, investors need confidence that the profit-with-purpose companies they finance… will continue to achieve social objectives even beyond change of ownership. The [Mission Alignment Working Group] will examine ways of achieving this through corporate form, governance, and legal protection and make recommendations.”

    This strikes me as yet another example of the social finance market ignoring the core task that it should be trying to achieve – providing the most appropriate way of funding the delivery of social impact – in favour of diversionary activity which is of no relevance to anyone other than, ahem, the social finance market.

    Once again, we see the growth of the social investment market as the key motivator without any real understanding that this, like the development of any market, requires the matching of supply and demand. Social finance will never thrive as long as it continues to focus almost exclusively on the needs of the supply side (social “investors”) while paying little or no attention to the demand for funds from social enterprise.

    The MAWG report makes the following points about profit-with-purpose businesses:

    “What sets them apart from social sector organisations is that profit-with-purpose businesses have no asset lock or restrictions on the distribution of profits, encouraging more commercial investment and thereby allowing for more rapid growth and impact.”

    “As fully profit-distributing enterprises, they find it easier to raise commercial investment, especially at the critical early stages and for transformational growth. Investors are therefore likely to see more rapid growth with commensurably higher financial returns.”

    So, while acknowledging the importance of access to the right funds at the right time in order for social impact to be maximised, there seems to be an assumption that it is the existence of asset locks and caps on distribution of profits that is the limiting factor for most social organisations when it comes to accessing finance. Is this really the case?

    Let’s examine this in several parts:

    1) Profit caps are a problem and if investors were able to access a greater share of available profits than the 50% currently permitted for social organisations then funds would flow more freely into the sector. In the meantime, finance should be prioritized for profit-with-purpose companies who can distribute 100% of their profits.

    Detailed research into the financial health of the social economy of the Liverpool City Region, which I have undertaken based on an analysis of Companies House data on over 1200 social organisations, shows that there are a miniscule number who earn profits of £50,000 or more a year. The rest are pretty evenly balanced between those generating losses and those earning between zero and £10,000.

    Are we seriously trying to shape the future of funding for the sector on an assumption that investors will be forming an orderly queue if only they had access to the extra £5000 or so a year of profit that they are currently denied?

    Of course, it is entirely possible that the social entrepreneurs of Merseyside are just rubbish at running their businesses and that there is a lot of profit potential there to be realized by profit-with-purpose companies or others.

    Having analysed a very large number of UK companies operating across all the main social impact areas, my own conclusion is that these are inherently difficult markets – costs are high, customers are very price sensitive and have strong bargaining power, and in many cases the “market” is not yet fully functional. All of this makes profit generation difficult, especially in the short term. But not impossible, especially for those prepared to be patient.

    If social enterprises are given the time and appropriate funding to develop then they will be best placed to exploit the opportunities that are available in these markets and it should, ultimately, be possible to provide reasonable financial returns to those investors who provide the right sort of money.

    2) The fact that residual assets cannot be distributed to anyone other than an approved entity on sale or wind-up of the company limits the “exit” opportunities for investors.

    This is true and will be a particular problem for those investors who operate on a venture capital-type model whereby a fund is established with a limited life (usually 10 years) after which an “exit” is required at several times the value of the initial investment, usually well before the end of the fund term. But this is a constraint which is entirely of the financiers’ own making. If they created this system and now they are saying that it doesn’t work for them then why don’t they go back to their drawing boards and come up with something different that works better?

    Back in the real world, social enterprises are capable of meeting need and creating significant social impact on an ongoing basis as long as their organisation can be sustained as a going concern. Asset locks are only an issue if the company fails or needs to be sold for some reason. The biggest issue facing the sector at the moment is how to get the right money, in the right amounts, at the right time to enable social impact to be delivered on a sustainable basis. Of course, some consideration needs to be given to what happens if it doesn’t work out but having the asset lock tail wagging the social enterprise dog is a road to nowhere.

    3) Investors will benefit from more rapid growth with commensurately higher financial returns.

    If I have understood this properly, the argument is that socially-motivated organisations that are given access to appropriate funding, “especially at the critical early stages and for transformational growth” will be in a position to properly exploit the opportunity they have to deliver both social impact and profitable growth. As a result, they will be attractive to investors and will therefore be better able to secure finance. UnLtd see this as an opportunity for profit-with-purpose businesses but I’m wondering why we don’t just go ahead and fund “regular” social enterprises on this basis right from the start?

    Why do we need to jump through all these hoops of creating yet another corporate form that most people will struggle to understand?

    Oh, and by the way, there was no mention of social returns. And maybe that is our answer. At the root of all this is exclusive focus on the money and the requirements of the financiers.

    The profit-for-purpose model is a construct of a social finance industry that has totally lost touch with its raison d’etre. Nowhere is there evidence of anyone asking “how do we fund high potential social enterprises in the most appropriate way in order to maximise social impact?” Rather, this has the feel of the social finance industry grasping for fresh ideas – anything! – to enable them to give the appearance that they are (finally) distributing the funds that were entrusted to them specifically to fund the delivery of social impact.

    Good luck with that, guys.

    In the meantime, I will continue the work I am doing with Robbie Davison on Builder Capital. During 2015 we will show that there are social investors out there who are committed to providing long-term risk capital with a view to supporting high potential social enterprises to sustainability, generating significant social impact from the outset and reasonable financial returns over time.

    Liked by 2 people

  17. In 2012 with her book on The Shareholder Value Myth, it was Cornell law professor Lynne Stout who argued that there was no law which made it a duty of corporations to maximise profits.

    She goes on to say that the corporations that fail to address the needs of other stakeholders are doomed to extinction,

    It’s a theme picked up by McKinsey, servant to the world’s oligarchs, who begin to use the term profit-with-purpose about a year ago, making the same points about corporate survival. There arguments focus on sustainablity not people.

    B Corporations are feted as profit-with-purpose businesses and today we learn that the Charity Bank has become one. Rather than definitiions they apply a conformance list to “business for good”.

    To my knowledge, none of the above have developed their own business model or used it to create social benefit.

    Yesterday we learn from a Oxfam Blog that Pamela Hartigan of Said business school now says “social entreprenueurship is a distraction.It’s mainstream capitalism that needs to change”. Hartigan is a partner of Volans, another B Corporation.

    That takes us full circle to the argument for an alternative to capitalism and a business model which uses all its resources to create community benefit.

    http://www.p-ced.com/1/node/112

    .

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  18. Pingback: No profit, negligible purpose: Have I Got Social Enterprise News For You | SSE

  19. Like this blog and that’s all I’ll say. I’m one of the bald men wondering what all the fuss about the comb is for. Anyway, actions speak louder than words.

    Liked by 1 person

  20. Yes – action speak louder than words, I agree Charles. As one of those profit for purpose (I describe my organisation http://www.RunAClub.com as social purpose) organisations, definitions are simply not relevant to us – we are full-on changing the world and I personally work extremely long hours to achieve this. All we care about is delivering our services to support community clubs and groups nationwide (we have over 1000 signed up).
    However, I would like to point out that the poor examples of social type organisations mentioned above can apply to any sector. Week after week I read of trustees, accountants etc who mis-use funds from the charity they support/work at.
    The entire reason we decided not to set up as a charity was because we felt the cumbersome stuff around running a charity – drawn out decision making, loads of rules and regs, would slow us down. We wanted to be ‘entrepreneurial’ as a team – not something a charitable structure would suit. We knew we would need some grant type funding, but eventually we will be entirely self sustaining and personally I think that’s a huge achievement.

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    • Beanbags admin

      Hi Sally,

      Thanks. I’ve come across lots of social entrepreneurs who hold your position. For me, people deciding to start a business doing some good stuff using a mainstream business structure is a good thing and I’m keen to see more of it. I’m equally keen to see more people doing social good as sole traders and via unconstituted organisations.

      I’m not clear, though, how ‘profit-with-purpose’ solves the problems you’ve identified with social structures.

      As put forward by Unltd, it is a definition, and it does involve rules, regulations and a specifically socially-focused structure – just not one related to asset locks and profit distribution (it involves missions locks and golden shares instead).

      While not necessarily agreeing with it, I get the argument that (some or all) social investment and related funding should be invested in organisations based on ‘what they do’ without considering ‘what they are’.

      Profit-with-purpose doesn’t offer that. It offers an alternative version of ‘what they are’.

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    • Hi Sally,
      We have some confusion above with for purpose and with purpose used interchangeably. Our argument for a for purpose model made similar points about the restrictions of charity, but the core argument was for an alternative to capitalism, where people come before profit.
      Profit for a purpose was discussed on Skoll Social Edge in 2006 and had no connection with the finance industry.
      Whats interesting of late is to hear that Pamela Hartigan who headed the Skoll SE foundation has recently declared that social entrepreneurship is a distraction, reforming capitalism is the real issue.
      So we have come full circle after nearly 20 years.

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  21. For all the argument which continue to rage even now according to Pioneers Post, on whether to profit, or not to profit, there is one glaring inconsistency in those who one would be expect to be ‘on side’ when it comes to those of us who are pioneers of “profit-for-purpose”.

    Today I raise a question of Big Lottery as to why funding should be awarded to the wife of an Ukrainian oligarch who happens to have purchased the UK’s most expensive residence several years ago. I also question the integrity of Tony Blair, who made social enterprise government policy.

    http://www.p-ced.com/1/node/369

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  22. Pingback: Private view | Beanbags and Bullsh!t

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