Guest Post: Social Enterprise Structures for a Sustainable Economy

Alan Greig

Alan Greig is the director of Ownership Strategies at The Mercury Centre Cooperative, a cooperative development agency and social enterprise. His wealth of knowledge on social enterprises and cooperatives makes him an authority on the sector. He writes today about social enterprise in Australia, its role in the economy and the social impacts of the many for-social-purpose business models.

 

 

“A social enterprise is not defined by its legal status but by its nature: its social aims and outcomes; the basis on which its social mission is embedded in its structure and governance; and the way it uses the profits it generates through trading activities” — Take Back the Economy, An Ethical Guide For Transforming Our Communities

Innovative social enterprise can go a long way towards introducing the kind of ‘values’ into capitalism that Kevin Rudd once made reference to: “the values of equity, sustainability and community”.

Social enterprise (SE) is not just about patching up the local economy—it has a big role to play in building a better economy overall. Most people in social enterprise see that what they are doing is pertinent to both business and society—and that SE can change the way we do business everywhere in future.

While the SE sector in Australia is yet to focus on this role, they have been tackling it in the UK for some time. For example, in a 2007 article in The Guardian Jonathan Bland, then chief executive of the Social Enterprise Coalition, is quoted saying that Britain has a very “thin” model of business. He says the reality is that there are, “a range of fantastic business models but a real ignorance about the fact we can use them and be successful”.

The point is that there is a great need for more diversity in the way we do business today. Currently, private corporation dominates the business system, with only one stakeholder that matters. It is questionable whether this business model is environmentally and socially sustainable. Economic systems need to develop beyond the ‘financial bottom line’ and look to opportunities for involving a wider range of stakeholders—employees, customers, suppliers and the broader community.

SE is ideally placed to deliver what is needed here. The business case for SE is built on social impact, empowerment and stakeholder ownership. SE encourages enterprises that are designed to further ‘human well-being’—while SE has a business focus, creating ‘social value’ is at its core. It achieves this through trading activity that is both profitable and self-sustaining. SE is not anti-market and not necessarily anti-capital, though it is not based on capital ownership (profit distribution is usually limited to re-investing into the social mission of the business). SE believes that knowledge is as powerful as money and that collaboration is as an effective strategy as competition.

Social enterprise may even return us to the self-help, mutualism and trust of the ‘old days’ when these values underpinned social activity.

By definition, SE business models deliver a social good while keeping wealth in the hands of the community. SE is generally both participatory and collaborative. To sustain this mission, structure and governance becomes instrumental.

But what forms of incorporation can deliver this?

We already know much about the most prominent form of SE incorporation in Australia—the company limited by guarantee—though questions remain about its ability to deliver ‘equity and participation’, given its restricted scope for ‘capital raising’. There are limits to this form of incorporation if SE is to evolve to meet the challenges described above.

The Community Interest Company (CIC) in the UK was legislated for in the UK in 2005 to address this problem of limited equity and participation in the SE sector. The legislation solved these problems through the introduction of the ‘community share’ holder and the ‘social investor’. Over 5000 organisations have now incorporated under the CIC legislation in the UK. (For a very successful example, see the article on Greenwich Leisure Services called “The Evolution of Social Enterprise”.)

There are alternative business structures available in Australia that can deliver transformative change in the system.

We are already evolving towards the not-for-profit, not-for-charity, but for-social-purpose business model at the grass roots level.

There are now dozens of these businesses operating. Together, they represent an emerging ‘Fourth Sector’, beyond the traditional three sectors of business, government and not-for-profits. They operate in the space in between, representing a blend of the best elements of the other sectors: self-sustaining like businesses, focussed on social impact like not-for-profits.

What can we learn from examining these for-social-purpose business models?

Mainly we find that they are innovative forms of older themes —while different to the dominant form of business structure, most are not new after all. They include:
• Cooperatives, credit unions and mutuals;
• Employee owned companies (worker cooperatives, majority ESOPs and job-saving employee buyouts);
• Community or other stakeholder controlled trusts (especially in the land care and environment protection area);
• Mission-driven private corporations (green businesses and eco-enterprises such as earth sanctuaries, eco forests etc);
• Associations (especially those in the ‘alternative currency’ field, such as LETS);
• Hybrid organisations (non-profits with income generating subsidiaries)

All of these business models have a social impact. Most manage well the trade off between financial return and social impact. Some have a social impact while also generating a financial return (eg: community owned wind farms or other renewable energy projects, or community buyouts such as stores, service stations etc). All usually aspire towards stakeholder participation and shared ownership principles.

However, legal structure is something that is ‘chosen’ by your strategy, not the other way around—the management mantra of “structure follows strategy” always applies. On this, the following serves as a useful guide—get the business strategy right and in place and the rest should follow:

• Structure follows strategy
• Social purpose drives strategy
• Strategy defines business model
• Business model details business plan, finance and legal form
• Legal form supports constitution and governance structure
• Governance structure directs accountability and sustainability

In terms of the principles that might be used to guide the construction of a legal model for a social enterprise, the following are the best I have seen —from the UK Cabinet Office report “Private Action, Public Benefit: Organisational Forms for Social Enterprise” (2002, page 12):

Drawing on the previous analysis, and our consultation and case studies, we can say that social enterprises are likely to look for a legal form which has most (and sometimes all) of the following characteristics:

1) Ability to trade, generate surplus and create wealth for social aims
2) Entrenchment of a non-profit-distributing nature (e.g. limits on forms of financing that involve profit distribution)
3) Assets to be devoted in perpetuity to public benefit objectives (protection against conversion into a for-profit)
4) Regulation which does not stifle innovative and entrepreneurial activity, but prevents abuse
5) Flexibility to implement a variety of governance structures, often with active stakeholder participation
6) Strong “public benefit” brand
7) Ability to access a range of forms of finance
8) Limited liability for members or shareholders
9) Ability to merge or to be taken over
10) Capability for transition between forms

For those seriously interested in the question of organisational strategy for social enterprise, I would recommend a study of the short, recent SEUK brief entitled “What makes a social enterprise a social enterprise” (2012).

In considering such organisational development/legal models ‘choices’, there are three interest groups in the social enterprise sector, each with different needs in this area. These are:
1. The ‘social entrepreneur’ who will use a variety of structures depending on their business model and their financing needs, including private companies.

2. The ‘group enterprises’ which are catered for by existing development and support agencies in the areas of cooperatives, community renewable energy, employee ownerships etc.

3. ‘Not-for-profits’ which include charities with trading subsidiaries generating income for the ‘cause’ and new start NFPs with specialist ‘social missions’ that involve trading as the primary activity.

While space is not available to explore in depth all the issues of organisational development and business models for a more sustainable and participatory economy, the above gives a glimpse of what an alternative economic system could be based on and how change might begin to be managed by reform minded social enterprises.

Alan Greig has had a long standing interest in social enterprise and employee and community ownership dating back to the 1970s. He has been Public Officer of the Australian Employee Ownership Association since its inception in 1986 and is now a board member of its successor, Employee Ownership Australia (EOA). Among is many postings, he was a board member of the government funded Australian Employee Buyout Centre, which has now merged with EOA, and a Director of Social Business Australia. Greig was also a member of the UN International Year of Cooperatives  2012 Reference Group in Australia. He is currently the director of Ownership Strategies at The Mercury Centre Cooperative, a cooperative development agency and social enterprise that specialises in building collaborative enterprises through consultancy, research, information, advice and training.

Alan Greig, Director, Ownership Strategies
The Mercury Centre Co-operative Ltd
Sydney, Australia.
www.mercury.org.au
(Disclosure: Alan is a Board member of Employee Ownership Australia Ltd and a Director of Social Business Australia)