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We need to clearly define the meaning of social enterprise

On Friday, I read a short piece by Laurence Demarco, founder of Senscot, the network for social entrepreneurs in Scotland. Demarco – a popular figure in Scottish social enterprise who should probably be better known south of the border – is worried that the government seems determined to widen the definition of social enterprise to include anything it wants.

He is also concerned that a lot of profit-making businesses want to call themselves social enterprises because it sounds good and it helps them win business from local authorities. In the most worrying recent example, Andrew Lansley, the health secretary, decided to invent his own definition of social enterprise that includes government-owned organisations such as NHS foundation trusts.

Demarco’s problem with this is that this leaves the social enterprise sector open to public corporations, private enterprise, Uncle Tom Cobbleigh and all. Already, lots of people are calling themselves social enterprises even though they aren’t. Others are dithering about whether they are social enterprises or not.

As support grows for social enterprises, it becomes more and more useful to become one. And it becomes more important that the term is more clearly defined. Fortunately, there is already a reasonably clear definition of what social enterprise is: you can’t distribute the majority of your profit, and you must do something socially beneficial.

Any business that doesn’t meet that definition shouldn’t call itself a social enterprise.

Not that it’s a bad thing to distribute your profit. There are plenty of socially-focused businesses out there that do, and in many cases, this is a more sensible model. It’s one which can attract growth capital more easily – and obviously a bigger business can do more good. Also, if an entrepreneur has to risk his own capital to get a business up and running, he should be entitled to a reward when it works.

But they aren’t social enterprises. They should just be called something else. “Social business” is the term Demarco favours, and one already in use. Let’s use it.

  • simon teasdale

    At the Third Sector Research Centre we have been looking at the different definitions of social enterprise used to quantify their scale and scope, and will be publishing a paper on this shortly.

    You say that “Fortunately, there is already a reasonably clear definition of what social enterprise is: you can’t distribute the majority of your profit, and you must do something socially beneficial.”

    With regards to not distributing the majority of profits, it would appear that definition was developed so as to include co-operatives as social enterprises. However, most FTSE 100 companies do not distribute more than half their profits to shareholders.

    As regards doing something that is socially useful, this is particularly hard to define. Moreover, who should define what is (and isn’t) socially useful? Many people would argue that TESCO do something socially useful.

    The most widely circulated estimate of 62,000 social enterprises in the UK derives from the Annual Small Business Surveys which asked small and medium enterprises whether they derived income through trading, distributed more than half of profits to shareholders / owners and whether they feel they are a good fit with the government definition.

    This led to estimates of around 62,000 businesses that are social enterprises. However around 90% of these businesses would not be considered part of the third sector as they place no constraint on the distribution of profits. That is they have legal structures such as company limited by share.

    At the other end of the spectrum, around half of third sector organisations responding to the recent National Survey of Third Sector Organisations self identified as social enterprises, but only around 5% derived half their income through trading AND felt they met the government definition.

    Can private sector businesses be social enterprises? If not where should the boundaries be drawn and whose place is it to draw them?

  • Roy Norris

    Martin Price has published “Social Enterprise: What it is and Why it Matters”. And it’s in the 2nd Edition. This demonstrates the already wide range of organisations encompassed by the term.

    But a “Social enterprise” seems to be the latest “must have” or “must be”, often without consideration of whether this is the most suitable structure for (especially) a new group or for any group that has not identified a gap in an already crowded market place.

    But at least the description is better than the “Second Loser” aka Third Sector!

  • David Floyd

    I’m amazed if it’s true that 90% of the mythical 62,000 social enterprises are limited by shares.

    In the Social Enterprise Coalition State of Social Enterprise 2009 survey between 73% and 93% of respondents were entirely not for profit.

    Is it really realistic for the two – often interchangeable – terms social enterprise and social business to be definitely made to mean specific things?

    The problem is that the government and the social enterprise movement have already missed two opportunities to define what ‘a social enterprise’ is.

    The first was the formation of CICs when the government set up a governing structure specifically for social enterprises but neither the government nor the social enterprise lobby put any resources or energy into promoting it.

    The second was the Social Enterprise Mark which is a complete dog’s dinner failing dismally either to be a business to commissioner kitemark providing useful information about companies, or a business to consumer mark (like the Fairtrade Mark) telling customers something about the impact of the products they’re buying.

    Maybe it’ll be third time lucky but I’m dubious that any more money, time and effort needs to spent on failing to define social enterprise when those resources could be better directed at actually doing some socially enterprising activity.

  • David Ainsworth

    I think it’s practical to have a broad, term for profit-distributing businesses with a strong social purpose, and another based on a legal restriction which prevents the distribution of profit.

    I think the current definition will basically stand up, although there’s a lot more detail to it than the single sentence I suggested above. (In answer to Simon’s point about FTSE 100 companies, the difference is the asset lock: many organisations don’t distribute half their profit – but they can, and if their shareholders decide it’s a good idea, they must. They can say they’re driven by social good, but in the end they’re driven by shareholder value.)

    A good definition is necessary to stop chancers, including Andrew Lansley, declaring that their organisation is a social enterprise.

    I also think that having a tight definition would help in any future lobbying for tax breaks, or when negotiating with commissioners. I hope the Social Enterprise Mark will serve the latter purpose, in time.

    I think the CIC should have served both purposes, but was neutered at the last minute. It should have had a tax break attached, really. (For my views on this, see this blog: http://community.thirdsector.co.uk/blogs/thirdsector/archive/2010/03/05/tories-hint-at-tax-breaks-for-social-investment.aspx)

    A strict definition would help in another area, too: marketing.

    The movement is currently not well-known and well-understood in the wider world. If it can’t or won’t define itself, you can’t easily explain it to people. If you want to get more people starting social enterprises, and more people involved in social investment, it helps to be able to tell them what they’re getting into.

  • Graham Duncan

    Why do we spend so much time on trying to define social enterprise? It is an impossible task and yields little or nothing for the effort invested. Any “objective” measure will be flawed.

    Take the profit distribution test suggested in the blog. Suppose I run a for-profit business that employs people with severe learning difficulties and, as a result of the extra costs, make only 20% of the profit that I could do otherwise. If I pay a dividend of 90% of the accounting profit I would not be deemed to be a social enterprise. Yet the accounting profit approach is not geared to recognising the social profits.

    The social enterprise sector needs to spend far more time on creating and running great social enterprises and far less time on worrying about abstract definitions.

  • Jeff Mowatt

    Now just hold on there. “Social Business” is a term that’s already in use by Grameen founder Muhammad Yunus to describe a “non-loss non dividend distributing” business which directs its purpose to social objectives. It is already a subset of social enterprise.

    In an article today from a series on social business from Axiom News, P-CED founder Terry Hallman offers his view on limiting ROI to protect social emphasis.

    http://www.axiomnews.ca/gennews/966

  • Jeff Mowatt

    As one who believes in getting on with it rather than arguing over definitions it was nevertheless necessary to define it to one unfamiliar audience and this is how the concept of national investment was pitched:

    “An inherent assumption about capitalism is that profit is defined only in terms of monetary gain. This assumption is virtually unquestioned in most of the world. However, it is not a valid assumption. Business enterprise, capitalism, must be measured in terms of monetary profit. That rule is not arguable. A business enterprise must make monetary profit, or it will merely cease to exist. That is an absolute requirement. But it does not follow that this must necessarily be the final bottom line and the sole aim of the enterprise. How this profit is used is another question. It is commonly assumed that profit will enrich enterprise owners and investors, which in turn gives them incentive to participate financially in the enterprise to start with.

    That, however, is not the only possible outcome for use of profits. Profits can be directly applied to help resolve a broad range of social problems: poverty relief, improving childcare, seeding scientific research for nationwide economic advancement, improving communications infrastructure and accessibility, for examples – the target objectives of this particular project plan. The same financial discipline required of any conventional for-profit business can be applied to projects with the primary aim of improving socioeconomic conditions. Profitability provides money needed to be self-sustaining for the purpose of achieving social and economic objectives such as benefit of a nation’s poorest, neediest people. In which case, the enterprise is a social enterprise.”

    http://en.for-ua.com/analytics/2007/08/09/110003.html