Tag Archives: senscot

The social impact of profit – part one

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

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Fear of the bogus

“If social enterprise is to stay under the third sector’s umbrella or more precisely under the umbrella of the Office of the Third Sector, mechanisms should be set up in order to monitor and control ‘bogus’ SEs that may be using the SE logo (and legislation) in order to maximise individual gains (in other words, cheating), that is, even in those cases when organisations have clear social or environmental aims and benefit the community.”

Outsider, missing link or  panacea? Some reflections about the place of social enterprise (with)in  and in relation to the Third Sector – Dr Leandro Sepulveda, Third Sector Research Centre, December 2009

The Office of the Third Sector is no more but the threat of ‘bogus’ social enterprises shamelessly generating untold riches by duping the public into believing that they’re really a bunch of underpaid community activists working themselves to the bone to earn less than they’d get for doing the same thing for the council looms large.

As the bogus purveyors of fake social change hoover up the contracts, plunder the profits and head off to Mustique to splurge the booty, it’s real, non-bogus social enterprises who’ll be left to pick up the pieces. I think. In the case of Dr Sepulveda’s paper, this is a frustrating detour from an otherwise thoughtful contribution on the relationship between social enterprise and what New Labour called ‘the Third Sector’ but it is something that many in the social enterprise movement worry about.

So far, the real life evidence that there are – or are soon likely to be – significant numbers of conventional business ‘using the SE logo (and legislation) in order to maximise individual gains’ is as thin on the ground as social enterprises that would survive as real businesses if they received no grant income. Aside from public sector contracting (of which more later), I can’t think of many commercial situations where a clearly dishonest or false claim to be a social enterprise could possible serve any commercial advantage – when compared to the alternative option of selling people or businesses high quality goods or services at a competitive price. Kids selling dishcloths door-to-door ‘for charity’ maybe?

Of course “in order to maximise individual gains (in other words, cheating), that is, even in those cases when organisations have clear social or environmental aims and benefit the community” may be suggesting that limited-by-shares companies with clear social aims and delivering positive social outcomes are in fact ‘bogus’ and ‘cheating’. If so, I struggle to get my head round who these businesses are cheating and on what basis.

Both non-distributive and distributive structures have a role in the social enterprise world. I don’t see the (ongoing) rewarding through share dividends of those who’ve either put in time (and maybe cash) as founders of a social enterprise, or those who’ve just made a financial investment to help make it happen, as something that makes that enterprise ‘bogus’ in any way as long as the company is open and honest about the way it operates.

There is another (more complicated) thread of bogusness debate, though. The bogus (or nominal) social enterprises that may be produced from public sector spin-outs. Peter Holbrook of the Social Enterprise Coalition, partly echoing the often expressed fears of Laurence DeMarco of Senscot, recently said that:

“There is a risk that, resulting from cuts, we will see the creation of spin-off organisations from public services that are not social enterprises, which could be vulnerable to buy-outs from the private sector. We need the government to give guidance and support, and make sure that commissioning enables real social enterprises to thrive.”

I’m less interested than Holbrook and others in the lobby in the issue of whether spun-out companies or others ‘are social enterprises’ – the official definition of a social enterprise is a conversation between the lobby and the government from which most social entrepreneurs are (voluntarily or otherwise) excluded – but I share Holbrook’s concern about the tag ‘social enterprise’ being used as a mechanism to deliver full scale privatisation of public agencies, particularly parts of the NHS.

The belief that health services should be delivered primarily by the private sector – specifically, large multinational outsourcing businesses – is a perfectly legitimate political position but it’s one that it’s supporters ought to argue for openly if they want to put it into practice. While Craig Dearden-Phillips has a more optimistic take on the possible outcomes of largescale spin-outs, the idea of social enterprise as the route to fullscale marketisation of health services is potentially disastrous for the social enterprise movement – with social enterprise at risk of becoming a focus for a public backlash against subsequent cuts in jobs and services.

The question is ‘what mechanisms or policies would enable the social enterprise movement to deliver the changes it promises without the possibility of being a scapegoat for an agenda that it doesn’t endorse or support?’


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Senscot rebuffed by SSEC

It’s probably best to avoid another lengthy post on the Mark saga but this development is worth noting. The Scottish Social Enterprise Coalition have rebuffed Senscot’s attempts to reject the Social Enterprise Mark and launch a badge of their own.

This doesn’t stop Senscot from going ahead but I imagine it would make it more difficult for them to secure a large chunk of taxpayers’ money to replicate a UK-wide taxpayer-funded scheme with extremely similar aims based on the limited correction of some minor ideological gripes.

While I’m sure the letter from SSEC’s Antonia Swinson is a political fudge hashed out in a committee rather than a meaningful professional opinion, it’s still somewhat disingenuous to suggest that “the robust and sensible criteria” proposed as those for the Senscot Badge “are far preferable to the Mark’s more relaxed approach and acknowledge that the SEM company is unlikely or unwilling to tighten the criteria in future.”

Senscot are robust about seeing profit distribution as a bad thing. When it comes to measuring social impact – social enterprises having to prove they’re actually doing something socially useful in order to keep their accreditation – its Senscot who are relaxed, while the Mark team actually expect social enterprises to demonstrate that their social and environmental aims are being achieved.

The issue isn’t so much the strictness of the overall criteria as it is different ideas about what is important.

Obviously I continue to oppose both schemes equally.

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Why the anti-distributionists are wrong

I don’t know much about the social enterprise scene in Scotland but, if this is anything to go by, the membership of Senscot seem slightly lacking in the gritty pragmatism that you generally need to run a successful social enterprise.

As I’ve outlined in previous posts, I don’t support the Social Enterprise Mark. Primarily because I think it’s a solution in search of a problem. Senscot, on the other hand, do support the Mark in almost every way but – so incensed are they by the fact that the Mark allows holders to distribute 50% rather than 35% of its profits – they’ve gone off and launched a kitemark all of their own.

The big 15% aside, the other main operative difference between Senscot’s ‘Scottish Social Enterprise Badge’ and the Social Enterprise Mark is that while the Mark, to its credit, is at least attempting to measure whether ‘Markees’ are achieving their social and environmental aims, the Badge is just going to be based on ‘objectives’ and the policies that are in place to attempt to deliver them.

It needs a deeper thinking philosopher than me to discern a clear principle contained in that missing 15% of hypothetical profit that is or isn’t being distributed by the Scottish social enterprises who will be forced to remain badgeless but as the full ‘Criteria 3’ makes clear, the members are really gunning for profit distribution in a general sense (their bold and itals):

“Criterion 3 – Social Enterprises have an ‘asset lock’ on both trading surplus and residual assets.

Whether or not it’s a charity, a social enterprise re-invests all its distributable profit for the purpose of its social mission. Where the business has shareholding investment (very few in Scotland) no more than 35% of profit may be distributed in dividends (*) In addition, the constitutional documents of a social enterprise must contain a clause to ensure that, on dissolution of the business, all residual assets go to social/environmental purposes.

Criterion 3 is intended to mark the boundary between social enterprise and the private sector.”

For me this position is a category error. As someone who wants to achieve positive social change, I’m keen to look at all available options for delivering it. The means are as important as the ends. That’s a fundamental difference between being social enterpreneur and a philanthropic businessperson but I don’t accept Senscot’s position that shareholders making money from investments is, in itself, a socially bad thing – particularly in comparison with the other options for raising finance.

For example, any Scottish Social Enterprise Badge holder who takes a loan from a shareholder-owned bank will, in paying that loan off, be taking money out of the community and providing profits for that bank’s shareholders. But in that case it’s not profits from the enterprise that leave the community and no longer contribute to social outcomes, it’s revenue. Even having an overdraft benefits the bank’s shareholders at the expense of the community at the revenue stage.

So, according to Senscot, its fine for bank shareholders to get the community’s cash but socially bad for dividends to paid to individuals or organisations who’ve taken a much bigger risk by buying shares in the company – and who don’t get any money back at all unless the company achieves a surplus.

But surely encouraging investment in social enterprises from people who want to help their communities but would also like to get their money back is a good thing? Surely social enterprise lobby organisations should be pushing for tax benefits for (particularly) small investors who are prepared to take the risk of using some of their cash to buy equity in a social enterprise rather than putting it in a bank or pension scheme?

Aside from (in a social enterprise sense) big players such as Cafe Direct, I fully accept that this sort of investment isn’t happening much, yet, but I don’t accept that it can’t or shouldn’t happen in the future and changing the apparent attitude that equity investment is a moral evil is an important step towards doing that.

None of this is in any way a defence of companies pursuing dividends for shareholders as a goal that trumps all others. Mark’s and Badges aside, if social enterprise means anything at all, it means harnessing the power of business for an aim that goes beyond just making profits for investors. Social enterprises have to prove the value of what they do. Non-profit structures are right for many organisations but they’re no more socially valuable in themselves than shareholder profit is socially valuable in itself.

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Marking time

I was busy in London on the first day of Voice! 2010 but managed a day trip to Cardiff for day two and enjoyed it a lot. Missing day one, though, meant I missed the big event of the conference – the launch of the Social Enterprise Mark.

It would be euphemistic to describe the reaction of the wider social enterprise movement to the Mark’s launch as ‘mixed’.

SEL boss, Allison Ogden-Newton is not in a position to say ‘this is crap’ but the fact that she does feel able to say: “… let’s keep the movement growing, counting people interested in delivering positive social impact through business as ‘in’ and not ‘out’ shall we?” suggests something less than a fulsome endorsement for the Mark from one of the lobby’s most prominent figures.

Commentators with no official role have been less circumspect. Rob Greenland, views the Mark’s specifications as a victory for those ‘ideologically driven by a dislike of profit distribution’ rather than ‘social change’.

Dan Martin at Social Enterprise Focus asks the pertinent question ‘Does your social enterprise qualify for the Social Enterprise Mark?’ Worryingly, in the comments, top social entrepreneur Amanda Jones of Red Button Design answers “no”.

My own position is that while I broadly accept suggestions that the Mark may lead to some benefits for some organisations, I  question whether it’s the most effective use of the public money being invested in getting it up and running.

I’ve got a two pronged main objection:
1. I don’t accept that not being able to say definitely what ‘a social enterprise’ is one of the more important problems currently facing the movement.
2. If that it is an important problem, the Mark is not an effective solution to it.

The Mark is not significantly relevant to the issue of councils (and other public bodies) awarding major contracts because councils awarding major contracts – in fact, any contract worth over £25,000 – have to do investigations into company structures and track records which go miles beyond the info the Mark provides.

The Mark is not obviously relevant to consumer sales to the public because it doesn’t tell the customer anything about the social impact of the specific product they are or aren’t buying (as the Fairtrade mark does).

The Mark doesn’t promote a specific way of doing business (as a Co-Operative Mark would). I’m not really clear what it tells people or organisations that is of any use to them.

The final word in this review of the current debate, though, has to go to Senscot, the Scottish Social Entrepreneurs network. Despite the fact that those with an ideological preoccupation with % percentage profit distribution won the debate around the Mark’s provisions – probably at the expense of long-term credibility and viability of the entire project – this particular wing of that faction has hilariously refused to accept victory. The likely social benefits to be derived from the bold position are unclear but it is quite funny.

Update: Post updated due to the discovery (see comments) that reports of The Phone Co-Op’s rejection had been greatly exaggerated.

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