Monday, 4 August 2008

Social enterprise defined

Ask a group of people to define 'social enterprise' and you're likely to get different answers. I've experienced it myself on several ocassions. There's no one definition with social businesses meaning different things to different people.

The problem with that however means some individuals may set up what they call a social enterprise but might not been seen as so by others. Most importantly, investors may get confused which of course is bad for the sector as a whole, while at the same time entrepreneurs running organisations which actually could be classed as social enterprises may not see themselves as such and fail to attract relevant investment.

With all this in mind, I was pleased to spot an attempt at clarity. A report by Venturesome, the social investment fund established by the Charities Aid Foundation, puts forward what it says are three models for social enterprises:

Model 1: Enterprises operating a profit making trading activity that has no direct social impact, but they give some or all of their profit to a charity. Examples: trading subsidiaries of charities like Save The Children’s Christmas card business and companies which promise to give a percentage of their profits to charitable projects such as Belu water.

Model 2: Enterprises operating trading activities that have a direct social impact but manage a trade-off between producing a financial return and social impact. Examples: fair trade businesses like Caf├ędirect, microfinance funds, such as The Grameen Bank. Test question: can you increase the social impact of the firm by decreasing financial returns? If the answer is ‘yes’, then the organisation is a model 2 organisation.

Model 3: Enterprises engaging in a trading activity that has a direct social impact but also generates a financial return in direct correlation to the social impact created. Examples: Windfarms, FareShare 1st, farmers’ markets. Test question: Can you increase the social impact of the firm by decreasing the financial returns? If the answer is ‘no’ then the organisation is a model 3.

Venturesome also calls for a rethink about how social investors chose to invest. Many, it says, are beginning to recognise that economic forces can shape social problems such as market forces, misalignment of price incentives etc. As a result, the report claims, they should use a calculation of risk and reward which is different to purely commercial investors.

As Venturesome says the report should be used to provoke a debate in the sector. The issue wasn't so important a few years ago but with new social enterprises being set up every day as new social entrepreneurs enter the market it is important to nail exactly what they are doing and what they want to achieve.

It should also provoke government ministers into better supporting the sector. In particular, in my view, the Community Interest Company initiative needs to be reviewed. The excellent Nigel Kershaw of Big Issue Invest made a renewed plea this week for the kind of tax breaks enjoyed by traditional investors to be made available to those backing social enterprises. I couldn't agree more. At the same time, the dividend cap on CICs needs to be reviewed because, as I've heard from several social entrepreneurs, it is proving a dis-incentive to investors.

Let the debate begin!


Helen said...

Interesting. I've just been trying to fit my commercial business's planned social initiatives into those categories, and come up with 2 points to make.

Firstly, social enterprises can change models over time, depending on what stage they're at in their lifecycle.

For instance, there's a social initiative that we're building separately with the same technology that powers our commercial platform. There's a possibility that ultimately it's a Model 3 enterprise, as there could be a revenue model, but at the moment it represents a Model 2 on account of the financial risk necessary to get to Model 3. In the beginning it'll certainly involve financial and time trade-offs with our purely commercial business, although ultimately it may be sustainable / profitable in its own right.

My second point is a question. Surely there are degrees of social enterprise as well as different models?

For instance - whilst I'd not argue that ours is a social enterprise in its entirety - we are doing some social enterprise type things which we needn't do. For instance we're planning to allow businesses using our service to make charitable donations to reward customers for feedback or compensate them for poor service. Elements of Model 1 there, but it's not our whole business.

And we offer our core services for free to charitable and non-profit organisations. (Contact Niggle if you want to take advantage ;-). Again not something that makes us "a social enterprise", but evidence of degrees of social enterprise?

Dan Martin said...

Many thanks for comments Helen.

There is a big debate over whether carrying out some kind of 'social enterprise' activities makes that business a social enterprise.

In my view, to be a social enterprise, everything a business does should be aimed at a social, environmental or community cause, not just certain elements. On that basis, giving something to charity or allowing certain services to be used for free by certain people fits under the corporate social responsibility banner. That was a point Jonathan Bland, CEO of the Social Enterprise Coalition, made in his reaction to Venturesome's report. Referring to the group's inclusion of CSR programmes in its definition, he said: "Although they are an important and growing part of many businesses, they are not social enterprises. A social or environmental mission is absolutely central to a social enterprise. It is not just one aspect of it."

Ultimately though anything which any business does to benefit society rather than focus purely on traditional profit generation is a great thing so good on you for doing just that!