Explaining social enterprise

Explaining social enterprise

SEWF collaborated with our networks and partners to highlight the defining characteristics of social enterprise. These characteristics, along with principles and features SEWF believes are important, capture what social enterprise is. Since social enterprise exists in a complex world where there are many structural and cultural differences, we are constantly researching global social enterprise to enhance understanding.

SEWF works to promote a greater understanding of social enterprise, not to propose a set of rules. We respect the efforts of all those who work toward sustainable and inclusive economic development in a world with many structural and cultural differences. As the leading agency for the social enterprise movement, we remain steadfast in our commitment to social enterprises where social mission is the primary function of the business.

CHARACTERISTICS

Mission Focused
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Social enterprise have a clear and primary social or environmental mission set out in their governing documents.

We value individuals and businesses who are striving to make our interconnected local and global communities more just and equitable places. All social entrepreneurs will have a social or environmental mission in pursuit of local, national or global community benefit, but not all individuals pursuing this community benefit are necessarily social entrepreneurs. We value all organisations that do good in their communities and support causes they believe in, but social enterprises are different from charitable projects or commercial sector social initiatives. At its heart, a social enterprise is a business where a social or environmental mission is the primary focus.

Surplus Invested in Mission
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Social enterprises reinvest the majority of their profits in pursuit of their mission.

Investment of surplus is one of the most significant distinctions between private business and social enterprises. Private businesses may commit to social expenditure or address the UN Sustainable Development Goals, but they are still accountable to shareholders and owners. Social enterprises reinvest the majority of their surpluses in pursuit of their mission, instead of simply investing a discretionary portion of their surplus as part of corporate strategy.

For example, in the United Kingdom, 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 its surpluses for reinvestment in mission, since that reinvestment is critical to the identity of the organisation and how it is perceived by its staff, customers, and stakeholders.

Organisational Ownership Tied to Mission
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Social enterprises are majority controlled in the interests of the enterprise’s mission and are usually autonomous of state.

Social enterprises serve the larger community and should not be individually controlled. They are different from a private business where the shareholders or private owners can make unilateral decisions about investment and the direction of the company. Social enterprises must be permanently focused on the social or environmental mission and the community or cause.

SEWF recognises that throughout the world social enterprises use “for-profit” structures, but reinvest the majority of their profits in pursuit of their mission on a voluntary basis. We differentiate and engage differently with social enterprises that use “for-profit” structures through necessity rather than by 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 nonprofits. This structure is popular where nonprofits cannot legally trade. When a nonprofit or group of nonprofits has control over the private business, the activity and/or the surpluses will be committed to social or environmental purposes and these enterprises are a key part of the social enterprise movement.

It might seem obvious that social enterprises should be independently controlled from the state. Some countries have structures where the state, in the form of national government, local government, or government agencies, can establish charitable or nonprofit structures to deliver state priorities at arms-length from government. In such entities, priorities, values, and behaviours will reflect the interests of the state; social enterprises create and deliver entrepreneurial strategies to achieve their mission, which may address areas of perceived government or market failure.

SEWF recognises that governments are critical actors in the social enterprise ecosystem, playing an essential role in ecosystem development. We believe that social enterprises must be independent of the state while still partnering with government when possible and appropriate.

FEATURES

Ethical Transparency & Accountability
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Social enterprises are transparent about and accountable to their mission.

Social enterprises should not only do good, but they should do good, well. SEWF believes social enterprises should aspire to the highest ethical business standards and corporate citizenship. This includes: respecting suppliers by paying them on time, developing a social enterprise supply chain, 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 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 the social enterprise sector, how social enterprises do business should be just as important as the business they do.

Trade Generated Income
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Social enterprises aim to generate the majority of their operating income through trade.

Sales revenue is one of the ways of differentiating social enterprises from nonprofit and voluntary sector organisations that are not focused on trading as a means to deliver their mission. Social enterprises aim to derive the majority of their operating income through exchange and trade of goods or services, not through grants, philanthropic sponsorship, donations, or other means. Traditional operating income is distinct from grant income and other funds typically used for capital projects, expansion, and scaling.

Additionally, many social enterprises do not generate the majority of their operating income through sales during the start-up period of their organisation. However, once a social enterprise has been operating beyond the start-up period of 2-3 years, they typically generate the majority of their operating revenue through trade and look primarily to sales to resource their core services.

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; however, this characteristic reflects the enterprising culture of social enterprise organisations.

Asset Lock
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Social enterprises strive to protect the distribution of their assets.

Asset lock – a provision in the founding documents of a social enterprise that prevents distribution of an enterprise’s residual assets upon dissolution, disposal or conversion – 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.

FAQ'S

Q: What role do business ethics and accountability play in social enterprises?
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Social enterprises are transparent about and accountable to their mission.

Social enterprises should not only do good, but they should do good well. SEWF believes social enterprises should aspire to the highest ethical business standards and corporate citizenship. This includes: respecting suppliers by paying them on time, developing a social enterprise supply chain, 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 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 the social enterprise sector, how social enterprises do business should be just as important as what business they do.

Q: Why is it important for SEWF to characterise social enterprises?
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In order for SEWF to be the unifying voice for the global social enterprise movement, it is important for all of us to understand what we really mean when we say “social enterprise.” In our work to create a new global impact economy that will enable our planet to regenerate and our communities to flourish, SEWF is attempting to increase global understanding of 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 fairly 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.”

Q: What role should asset lock play in social enterprises?
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Asset lock – a provision in the founding documents of a social enterprise that prevents distribution of an enterprise’s residual assets upon dissolution, disposal or conversion – 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.

Q: How do CSR and social procurement strategies fit with social enterprises?
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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. The CSR transaction will benefit both parties, but is essentially discretionary, and in most cases time limited, to deliver a 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, services, or works 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.

Q: Where do buy-one, give-one business models fit in?
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Both private businesses and asset-locked social enterprises can operate under this model, but there are distinctions between the private businesses and social enterprises that use this operating structure. It is a simple model for consumers to understand and it is successful because many consumers identify with the social issues that these companies address.

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. Therefore, social enterprises operating under this model should 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.

Q: What types of legal structures should be used to establish a social enterprise?
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These structures 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 nonprofit sector or from former state-controlled economies. 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.

Q: What role do Certified Benefit Corporations (B Corps) play?
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B Corps are 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 harm than their private business competitors. The model recognises that B Corps give 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, and their role is highly complementary to the social enterprise movement.

MAPPING SOCIAL ENTERPRISE TO ENHANCE UNDERSTANDING

Our global mapping project helps us better explain social enterprise globally by collecting information on the social enterprise ecosystems in as many countries around the world as possible. Contribute to our mapping project here.