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.

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2 thoughts on “Is the government definition of Social Enterprise fit for purpose?

  1. Thanks for writing about this. I love the blog.

    The capital vs. mission quandry is one that I am currently living. As a 14-year-old company that has always been a for-profit social enterprise (type A and E) and a tech company, the #ImpInv market is what we’ve dreamed of for years (we produce great, researched, financially calculatable results).

    Yet, my investment choices are either practically guaranateed mission drift or limping ahead. We’ve made $40+ million, but investors take one look at my numbers battered with sequestor and recission and reduction and every other social-service-reduction-political-wind and say… 70 – 80% minimum. I know, they know, we all know, that if there’s an option to get away from the craziness of the social services world, private equity investors are going to demand we do so. We’re the only ones crazy enough to care about this vision to carry on through the past 14 years and to push through the newness of Pay for Success. Or, we can limp through, way-underfunded, conceding to better-funded less-experienced competition and try to make it through on fumes.

    It’s a love/hate world for social entrepeneurs. Yet, we keep the faith.

    • Hi Kim – thank you! Completely with you on this frustration. Just interested – what scale would impact investment need to get to, in terms of capital investment for your business, for it to work as an alternative to commercial capital? Best wishes and thank you for your thoughts. Toby

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