Would I invest? Part 2 on our arms manufacturing social enterprise

This is the follow up post to this one here.

Thanks for everyone’s input on this – I hope you enjoyed it as much as I enjoyed writing it. People’s answers demonstrated the two basic philosophical approaches to looking at the problem:

a)      A deontological or Kantian ethics approach: that investing in weapons manufacture is intrinsically not social. Therefore neither ethical nor social.

b)      A utilitarian approach: that investing in this weapons manufacturer would overall reduce loss of life and civilian casualties and is therefore a social investment.

In my limited experience when there is an argument between people where one is taking a utilitarian approach and the other a Kantian the best  thing to do is to leave and go to the pub, as they are starting from such different background frameworks they are unlikely to achieve consensus.

A route that combined the two was put forward by Phil Caroe of Allia (thank you Phil), in an ethical investment model: If you believe weapons are unfortunately necessary, and therefore in your universe of acceptable investments, then this investment would score highly on a comparative basis with other potential weapon manufacturer investments. This combines the two by using rules to determine your investment universe and then comparative methods to make a selection. My only concern with this is that it is a passive investment methodology, where your starting point is that you have money to invest and a set of possible investments, which are the best ones?

So where do I come out on this? Well if we apply an active impact investor type model for understanding this investment, one would look at three elements:

a)      Does it have a sensible theory of change or evidence base? In other words do we believe that its actions will lead to the outcome that it is seeking.

b)      Is there a better way to achieve the goals than the way proposed?

c)       What might be the unintended consequences and are they serious enough for us to worry about?

When understanding a) there are a number of attractions. The model has thought through a best angle of intervention, where the pressure points might lie. It has thought through how to be credible to its target audience. It understands the market it is in and the change it is seeking to create. There isn’t any evidence base of course, but this kind of change agent role wouldn’t have an evidence base.

As for b) a much deeper analysis would be required with the team and talking to external experts. Other possibilities might be more grant funded, campaigning or lobbying for example, but we should be able to compare them and then make an assessment rather than allowing our chosen investment methodology to determine our answer.

If I have any concerns, it is around c) unintended consequences… In other words the What Ifs? For example, if they made land mines more acceptable again, would more countries start using them again? One can start getting into quite deep analysis of the value of improving defensive strategies if you aren’t careful. To use a different example, Drones are, some might argue, the ultimate social weapon as they minimise civilian casualties and focus on the bad guys. But their very nature makes them easier to use, more acceptable even. The potential consequences of that ease of use are still playing out. There is quite a good discussion on this on the moral maze, a BBC radio programme. You can download the podcast here (The one thing it does demonstrate is that the last person you want sitting at the other end controlling the drone is Melanie Philips from the Daily Mail).

So I would not be inclined to invest myself. But if someone with real expertise in the area felt they had explored all the other options, and that this was the strategic route to making a difference in this particularly thorny problem then I would be open to them investing and considering it social investment. I don’t think the moral hazard quite puts it out by default in other words.

A few things to highlight from all this.

First, when people try to make ethical decisions they can start from at least two very different starting points. Therefore attempting to reconcile all into a universal answer to impact investment decision making is not going to succeed.

Second, finding answers to complex social issues is not easy. Potential points of leverage and strategies are not straightforward or necessarily comfortable. Many of them transgress traditional red lines for foundations or social investors. They might involve private enterprise. They might be perceived as subsidising government. Someone might make a profit. My fear is that in their struggle to work through what to invest in, organisations start by putting these red lines in place. What this means in practice is that some of the most interesting potential answers will struggle to raise investment.

Social Enterprise Arms Manufacturer – Would you invest? Vote now!

I’m doing a series of posts exploring the edges of social enterprise. In each instance I will create a poll for you to choose between:

  • This is a social enterprise and I would invest in it.
  • This is a social enterprise but I wouldn’t invest in it.
  • This isn’t a social enterprise and if someone else invested I would  question their credentials as a social investor.

After the poll I will put my own thoughts. If you have any questions you would like to put to the management of my fictitious social enterprise please ask a comment and I will endeavour to respond appropriately. In this instance they have some quite strong opinions.

Social enterprise arms manufacturer 

So, a group of ex-military types have got together. They have seen the horrors of war and in particular the impact on civilian populations. They have also been involved with clean up operations afterwards. They have ideas on how military hardware can be made easier to clean up and lower impact on non-combatants without impacting on its lethal effectiveness against the enemy.

In particular they have ideas for a clean up mechanism for mines, where an encrypted key can be used to make them safe and more easily detected with the relevant equipment that would only be available once hostilities were over. They are confident that they can make this work to the satisfaction of the military users of such equipment and that this would be a “route to salvation” for some of the larger non-signatories to the Ottawa Treaty on anti-personnel mines, including the US, Russia and China.

Their plan is to go to the arms manufacturers state customers to create an impetus behind “safe but lethal” weaponry. They then plan to work alongside the more sceptical manufacturers around design and the further research and development needed to move their ideas into implementation. They believe that over time they will build credibility with the manufacturers due to their military experience and complete comfort with, indeed enthusiasm for, weapons being as lethal as possible to the opposition.

They need investment, initially of £3m, rising to £10m for both the lobbying effort and to do the initial work on their designs to get them to the point of detailed designs and non lethal replicas which are important for arms fairs, a key part of the marketing cycle. The can’t get this from traditional commercial sources, though if they are successful, they should make a reasonable return on your investment.

This may appear an unconventional investment. Some of their opinions are uncompromising, but the intensity and seriousness of their interest in reducing civilian casualties, and enabling countries to rebuild after war cannot be questioned. Nor can the blood curdling stories on which that passion is based.

Taxonomy of Social Enterprise

The difficulty for those thinking of funding or investing in social enterprise is that the concept is wide, some might say baggy; a term that encompasses a range of different organisations with very different needs. This can cause sterile arguments about “what is needed to help social enterprises” where each of the participants is concerned about a different type of organisation.

For a more complete taxonomy of social enterprise, I was delighted to find one on a website called 4lenses. You can access it here. Thank you to Kim Alter and her crew for developing it.

So, let’s consider a quick segmentation of the social enterprise universe, for the purposes of thinking through what types of subsidy might be wanted or required, and therefore help funders choose their area of focus and develop a coherent offer.

a)      Serving disadvantaged populations: social enterprises building business models to bring goods or services to those who cannot afford them as they are presently provided. These may need permanent subsidy, may need subsidy while developing the business model or sufficient scale, or while the actual needs and pricing that is possible in the new market is figured out. Microfinance is a good example of this kind of social enterprise. Initially supported with grant capital, as the risks and potential of the market became clearer and therefore lower a wider variety of capital became available. However as the business model became more commercial so many potential customers started to get left behind again, and regulation started to become necessary as the incentive alignment between providers and beneficiaries became less clear.

b)      Change agents: Many social enterprises are looking to change something, typically behaviour, for the benefit of the service user and wider society. This means there is an element of preaching to the unconverted and as John Kingston formerly of Venturesome puts it “you can’t get the unconverted to pay for the priest”. Will need subsidy during the conversion process, which may be a while if there are always new hordes/ markets to focus on. Government may want to subsidise change agents, if they are seeking a change that is aligned with government’s agenda and spending focus. Otherwise such a subsidy is likely to come from those motivated by the change mission of the organisation.

c)       Supply chain supporters: For example fair trade, where an organisation effectively buys its supplies for more in order to benefit the suppliers or the environment. This may need subsidised availability of investment capital but probably need to be able to make the value of the proposition compelling enough to consumers that they are willing to pay a premium for the product. It is not clear that government necessarily has a role to play in such investment, but in the same way that it is comfortable subsidising charitable giving with a tax subsidy even if it isn’t part of the government’s direct agenda, so investment into fairtrade organisations would have a reasonable case for tax incentives similar to gift aid.

d)      Social ownership structures: mutual, co-operatives or similar employee ownership models may be social enterprises but their services may exist in a normal marketplace (John Lewis for example). For those spinning out of government, they may have issues of being thinly capitalised and therefore needing investment. With all such organisations they struggle raising outside capital so getting scale up without some kind of supportive capital can be difficult. Those in social services therefore should have access to social enterprise investment. Those in more commercial marketplaces, for example an employee owned software company I once worked for, don’t have a particular argument for social investment.

e)      Providers of social services: Not all social service providers are social enterprises, some are from the private sector. So this gets to be a tricky area, what justification would there be for government or other subsidy if others don’t appear to need it. Here the potential value of providing supportive investment is high, but there are issues about how you sort the wheat from the chaff…

This last is in some ways the nub of the problem. What differentiates a commercial company from a social enterprise working in the same space, both competing for government contract? Who needs to differentiate them? Why? I’ve been picking round this topic for a little while. Time to tackle it soon…

Is the government definition of Social Enterprise fit for purpose?

I’m not a big definition guy. I’ve found for most of my work that the adage “you may not be able to define it but you know it when you see it” works quite well. But most debates around social enterprise include some tortured discussion on definition for the simple reason that a number of key stakeholders feel they need a definition in order to allow them to create boundaries around their work. For example if you are running a social enterprise fund your starting point is likely to be “who can I fund?” This is likely to be followed by the equally sensible question “who needs my money and what form should it take?”.

The definition of social enterprise used by government is:

A social enterprise is an organisation ‘with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or community, rather than being driven by the need to maximise profit for shareholders and owners’

At one level this is an elegant solution, it builds on the characteristics of charity that its assets are locked for social good in perpetuity and tries to make it a bit more business-like.

Looked as another way, it makes little sense. It effectively says “We will support any organisation with a social purpose that has structured itself in such a way that it has no access to commercial capital and therefore needs our support.” So if the definition is needed in order to decide who the government provides subsidy to this is simply an abdication of responsibility to think. It says we will consider support only to organisations who structure themselves to require charitable or governmental support.

If you want to make social change you have to make a choice early on, structure your organisation so that it can get social capital but not commercial capital or vice versa. Now social capital and grant money probably makes it easier to start an organisation with an interesting social idea, but it is not generally available to help it grow beyond a certain size. Commercial capital is unlikely to be available in early phases but might be available to scale an interesting proposition, though it might also then pressurize the business model to focus more on return. This feels like an odious choice to me and one that acts as a serious constraint to the development of a sensible social enterprise market.

Subsidised capital or social investment is more necessary in the start-up phase of an organisation if it has a social purpose. Later on such capital can also have a crucial role – constraining the interests of more commercial investors, and making sure that the management maintains an authentic balance between social and commercial concerns. One option might be to provide capital on the basis that, if further investment is raised, the management needs to outline the continued social aspects of its business model and be held to them by their original social capital – or they repay the social capital with a commercial return on the arrival of more commercial money.

This would give social funders an understanding of the careful ethical decisions organisations make when providing social services while sustaining themselves, and social organisations would have to articulate and justify what makes them different, rather than simply “we’re better than those nasty private sector people”, without much further thought.

Another option might be to allow social investment funds to be defined as having a social purpose and to require of them an impact reporting requirement. They would then need to select organisations to invest in and hold them to account according to their impact metrics.

A further option is to allow social enterprise to include all organisations that measurably disadvantage their commercial position in order to achieve social good for a stakeholder in their work. This might be suppliers, for example in fair trade, it may be customers, for example those seeking to give a fairer deal to poorer customers.

All this leads to a sense that for government to support the development of an effective social economy and investment into it, we need a clear understanding of what a social purpose brings to social service provision that is different from private sector alternatives, and therefore what it is seeking to nurture. We also need to consider constraints such as state aid, and conflicts of interest – where the state is both supporting investment and a potential monopsony buyer. Plenty to ponder on further.

Is Social Enterprise all it’s hyped up to be?

This is the second in a series of blogs on social enterprise, and the first of the follow-up posts to Social Enterprise and Social Change

Many people are a bit unsure of the idea of social enterprise. “Oh it’s just another name for a charity with revenues” from some, or similarly “it’s just charity rebranded to be trendy for High Net Worth Donors”. From the investor community we hear “we hear a lot about all these fantastic social enterprises, but where are they? We can’t find many interesting ones to invest in.” I’ve even heard a few from the private sector complain “government prefers social enterprises to the private sector, so we have to work harder in procurement”.

Personally, I think the idea is important and that provided we get the environment around them more enabling, they could be a significant force in the UK in the future. I’ve set out below the four reasons and trends that I think support this view and, as ever, would be interested in other people’s thoughts and ideas on the subject.

Need for social innovation and change

We are living in a time of consistent and widespread change, economic uncertainty, climate change, globalisation, migration, technological advancement to name but a few.

Some of these are frightening, some are exciting but they all have social consequences. They have consequences for the people living in our societies who are typically powerless to manage them. It is not just the people in the ground who feel powerless. Politicians are also living with the consequences of looking like passengers on the bus, unable to conduct it or steer its direction. Many would argue this is at least in part behind our present delusion with them.

So who do we have to deal with these consequences? And how well do we gear them up to do so? An entrepreneurial social economy is vital to provide the level of adaptation required.

Changing social economy

For want of better terminology, I have used the term social economy to cover organisations providing social services and services to our communities.

So an enterprising social economy, able to adapt to this changing environment, able to support the needy and provide those on the edge with routes back into society is essential.

Partly in response to these challenges we are living in times of extraordinary change for the social economy itself. The idea of the public sector providing and responding to need as a monolithic institution is being eroded. The roles of the private and charitable sectors are intended to grow as we define a more mixed environment. But there is a problem. The private sector can feel, well a bit private sector. Shareholder value’s time in the sun may be receding, but it has left a suspicion that private enterprise will put short term profit before customers, and certainly before service users, if they are not the ones paying for the service.

Charity, in the meantime, can feel well a bit charity. Management can seem under-resourced, systems may not be in place. The organisation may be unable or unwilling to cope with scale and may give a slight sense of indiscipline. This, like the charge of not caring placed at the door of the private sector, is often unfair. But it is a view that is there and that sticks in the mind of commissioners.

The idea of social enterprise therefore, mission driven but
with business discipline, is deeply attractive to many in government sitting there wanting to buy social services, rather than delivering them all themselves.

Rise of social entrepreneurship

There is no question that more people want to be social entrepreneurs. It fits the spirit of the age and allows people to bring together their head and their heart in whatever they choose to do. If we create a functioning environment, all the ingredients in the primordial soup are ready to go.

The need for more socially authentic business models

A number of business sectors have lost trust with their consumer base, or left some consumers to the side in search of profit. Financial services, particularly consumer financial services, is a particularly strong example. Whether it is extended warranties, payment protection insurance, asset management fees, dodgy but lucrative tax “mitigation” structures… It doesn’t look good. To my mind the market is crying out for lower cost, transparent, authentically marketed products that it can trust. A huge social enterprise opportunity.

So in summary, the idea of social enterprise has enormous potential and real appeal. The interesting question is therefore, what’s holding it back? I start on that soon, but next up – is the government’s definition of social enterprise fit for purpose?