About social enterprise
What is a social enterprise? What characteristics, principles and features define them? In an increasingly complex world, with many structural and cultural differences, these are not straightforward questions to answer.
As the leading agency for the social enterprise movement, SEWF has collaborated with our networks and partners to outline what we believe to be most important standards to use in defining these organisations.
Our goal is not to propose a set of rules. Instead, we want to facilitate a conversation and promote a greater understanding of social enterprise, respecting the efforts of all of those who work towards sustainable and inclusive economic development.
What is a social enterprise?
We believe that there are six top-level primary characteristics and features that are shared by all social enterprises.
Social enterprises have a clear primary social or environmental mission, which is set out in their governing documents and at the core of their operations.
Surplus invested in mission
Social enterprises generate income from sales of products or services, reinvesting profit into the pursuit of their mission. This differs from a private business, which, although may commit to spending some money on social causes or to addressing the UN Sustainable Development Goals, will still be accountable to shareholders and owners.
Social enterprises are accountable to their mission: they reinvest the majority of their surpluses in pursuit of their mission. This proportion of investment is one of the most significant distinctions between social enterprises and private businesses, which, instead of investing a majority, might invest a discretionary portion of their surplus as part of corporate strategy.
For example, in the UK, the Community Interest Company (CIC) structure was designed to ensure that investor shareholding is capped at 35% of total shares. The CIC structure gives social enterprises the important ability to retain the majority of surpluses for reinvestment in mission.
Ownership tied to mission
Though legal structures differ globally, social enterprises are majority controlled in the interests of the enterprise’s mission and are usually autonomous of state. Social enterprises exist to serve the wider community. They should not be individually controlled. Unlike private business where shareholders or private owners make decisions about investment or the company’s direction, social enterprises must be permanently focused on their social or environmental mission.
SEWF recognises that across the world many social enterprise use ‘for-profit’ structures. For some, this is by choice, where they reinvest the majority of profits in their mission on a voluntary basis. For many, it is due to necessity. SEWF engages differently with social enterprises using for-profit structures through necessity rather than choice. SEWF is committed to supporting the introduction of legal structures that lock-in commitment to mission in return for tax or other advantages.
For-profit or private businesses can be regarded as social enterprises when they are owned and controlled by one or more non-profits. This structure is popular where non-profits cannot legally trade. When a non-profit or group of non-profits has control over the private business, the activity and/or the surpluses will be committed to social or environmental purposes. These enterprises are a key part of the social enterprise movement.
SEWF recognises that governments are critical actors in the social enterprise ecosystem, playing an essential role in ecosystem development. We believe that social enterprises should be independent of the state while still partnering with governments when possible and appropriate.
Ethically transparent and accountable
Social enterprises are transparent about and accountable to their mission. Beyond their mission, social enterprises aspire to the highest ethical business standards in all internal and external dealings. Social enterprises should not only do good, but they should do good, well. This includes respecting suppliers by paying them on time, developing a social enterprise supply chain, avoiding ingredients and materials with known health and environmental risks and valuing staff by treating them well and paying a living wage. Value-based organisations should aspire to low pay differentials (between highest and lowest paid), participation in decision making and employee benefits that are family friendly. If social enterprise is to be a business model for a sustainable global economy, then treating people well is fundamental.
Social enterprises should also be transparent in reporting, such as how they use their surpluses and how they measure their social impact. How social enterprises do business, is just as important as what business they do.
Trade generated income
Social enterprises aim to generate the majority of their operating income from sales of products or services as opposed to grants, donations, philanthropic sponsorship etc. SEWF recognises that during the start-up phase this may not be feasible. Typically, social enterprises strive to generate the majority of their operating income after 2-3 years of trading. Traditional operating income used to resource core services is also distinct from income streams typically used for capital projects, expansion and scaling, which can reasonably come from grants and other funds at any stage of a social enterprise’s operation.
The interpretation of ‘trading income’ may be different across the world and will depend in part on the methods and systems used by governments to commission services or responses to social or environmental challenges. While stating that most social enterprises will generate the majority of their income from trading, SEWF recognises that trading is highly dependent on context, sector and maturity.
Social enterprises strive to protect the distribution of their assets. Asset lock is a provision in the founding documents of a social enterprise that prevents distribution of residual assets upon dissolution, disposal or conversion. It is something social enterprises should enshrine if legally feasible. The asset lock is important to ensure that social enterprises cannot be aggressively, or softly, purchased by new owners for greater financial return. Incidences where high-profile social businesses are sold to private equity funds or private businesses damage the perception and reputation of social enterprises.
Your social enterprise questions answered
What role do business ethics and accountability play in social enterprise?
SEWF believes social enterprises should aspire to the highest ethical business standards and corporate citizenship. This includes, for example, respecting suppliers by paying them on time, developing a social enterprise supply chain, avoiding ingredients and materials with known health and environmental risks and valuing staff by treating them well and paying a living wage. If social enterprise hopes to be a business model for a sustainable global economy, then treating people well is fundamental.
Social enterprises should also be transparent and clear in the ways they report the use of their surpluses and how they measure their annual social impact. In this sector, how organisations do business should be just as important as what business they do.
Why is it important for SEWF to characterise social enterprises?
In order to be the unifying voice for the global social enterprise movement, we need to be clear about what we mean when we say ‘social enterprise’.
We are not strictly defining nor proposing a new set of rules social enterprises must follow. SEWF’s characterisation of social enterprise is simply that: a characterisation. We offer these broadly universal characteristics alongside some features and other principles that we believe are important.
We do so to enhance understanding. Ultimately, this understanding is important because it makes the movement more inclusive as a greater number of individuals understand what we mean when we say ‘social enterprise’. SEWF remains steadfast in its commitment to social enterprises where social or environmental mission is the primary function of the business.
What role should asset lock play in social enterprises?
Asset lock is a provision in the founding documents of a social enterprise that prevents distribution of an enterprise’s residual assets upon dissolution, disposal or conversion. Social enterprises should ensure their enterprise is asset locked if legally feasible.
The asset lock is important to ensure that social enterprises cannot be aggressively – or indeed softly – purchased by new owners for greater financial return. Incidences where high-profile social businesses are sold to private equity funds or private businesses damage the perception and reputation of social enterprises.
How do CSR and social procurement strategies fit with social enterprises?
Corporate Social Responsibility (CSR) efforts are important to the success of social enterprises. These efforts might include investing in larger enterprises looking to scale their impact, supporting start-ups that need support before they generate trading income or engaging with smaller social enterprises to benefit local communities and causes. This engagement benefits both parties, but is essentially discretionary and, in most cases, time limited to deliver a specific project or programme.
In recent years, social enterprise engagement with corporate business has moved from CSR to procurement. Social procurement often involves CSR personnel making introductions and reporting social impact, but when a company is purchasing goods or services from a social enterprise, the transaction may have more value than a donation.
While still making good decisions that benefit communities and social enterprises, a business that donates to social causes or purchases from social suppliers does not become a social enterprise by engaging in that act.
Where do buy-one, give-one business models fit in?
Both private businesses and asset-locked social enterprises can operate under this model, which is simple for consumers to understand and successful because many consumers identify with the social issues that these companies address. There are distinctions between private businesses and social enterprises that use this operating structure: buy-one, give-one social enterprises can be identified by the features and characteristics outlined above.
With the right implementation the buy-one, give-one model can have significant social impact. When the approach and implementation around giving is not carefully thought through and genuinely empowering to the recipients, it may not be an effective or sustainable method of addressing social issues.
That’s why it’s important that social enterprises operating under this model always think about ways in which they can address the root causes of the social or environmental issues they are aiming to address, not simply material manifestations of those issues.
What types of legal structures should be used to establish a social enterprise?
The legal structures used to establish a social enterprise will vary across regions, cultures and economic systems. The variations are important as the diversity of social enterprise models results in greater global transferability.
In some countries where there are traditions of a social solidarity economy, social enterprises will have a greater emphasis on participation. In other areas, social enterprises will emerge from an increasingly enterprising non-profit sector or from former state-controlled enterprises. While outlining features of social enterprise, we also look at some hybrid and alternative social impact models with common features and values.
Some countries only offer social entrepreneurs the option of registering as a traditional for-profit company since their nonprofit organisations have trading restrictions. In these circumstances, many groups and entrepreneurs choose a for-profit structure where the social purpose is very visible but not legally protected or controlled. SEWF recognises and appreciates these restrictions and is working with governments and our legal partners to increase the range of legal structures available to social enterprises.
What role do certified benefit corporations (B Corps) play?
B Corps are part of a growing global movement and SEWF is supportive of their challenge to the concept of shareholder primacy. The values and behaviours of B Corps are rooted in business being a force for good and many are doing less social and environmental harm than business where profit generation is the key focus. .
The B Corp model gives business leaders an opportunity to make money while doing good. Yet B Corps still have shareholder value at their core, and this is distinctly different from social enterprise businesses established primarily to solve social or environmental issues, not generate shareholder value.
Corporate businesses, B Corps or otherwise, should recognise their potential to address social and environmental challenges, as their role is highly complementary to the social enterprise movement.
Whatever your involvement or interest in social enterprise, find out more about the ways you can get involved with our mission to champion the social enterprise sector and accelerate the creation of a global impact economy.Get involved