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It might be time to rationalise the regulation of social enterprise

The UK’s third sector is a complex beast. Alongside registered charities – and their excepted and exempted counterparts – community interest companies are becoming a prominent sub-sector, while social enterprise in its broad form is also on the rise and the rules around cooperative and community benefit societies (also known as bencoms) have recently evolved.

When I was researching the growth of CICs for a feature on page 32 of the new June edition of Third Sector, out next week, one question kept cropping up: is it time to rationalise the regulation of social enterprise?

This regulation is currently piecemeal and unfocused – the many charities that consider themselves social enterprises are of course regulated as charities, CICs have their own regulator, a much lighter-touch one at that, and mutual societies, including coops and bencoms – which can be exempt charities – register with the Financial Conduct Authority, alongside credit unions and building societies.

Meanwhile, organisations such as Social Enterprise UK and B Corps provide what could be seen as voluntary self-regulation, although many social enterprises are housing associations regulated by the Homes and Communities Agency (and, in some cases, also by the Charity Commission), and the higher education sector is grappling with the role of “alternative providers”, a sector whose main players – the universities – are charities, with the exception of those in Wales, Scotland and Northern Ireland, and Oxbridge and Durham colleges. Social enterprises in health, social care and medical fields are also overseen by sector regulators regardless of their legal form. I could go on.

For once, I’m quite happy with the idea that my readers should be thoroughly confused at this point.

It doesn’t need to involve red tape, registration and enforcement, but at the very least some modernisation, a bit of legal thought or the creation of a statutory concept of what social enterprise means – something proposed last year by Labour – could, if done well, be a real boon to social enterprise, and to society itself.

It won’t be easy, and I’m not sure that it’s likely to be feature anywhere high on a list of the new government’s priorities. But Nick Temple, deputy chief executive of Social Enterprise UK, told me it needs to be considered, at least, and the issue also came up at a session I attended last week at which charity lawyers discussed the Law Commission’s charity law project. The Law Commission, alas, says this is outside the scope of its project on charity law. The question also came up when I spoke to Luke Fletcher, a partner at the law firm Bates Wells Braithwaite, for the CICs feature. He suggested that the government should consider whether exporting social enterprise could be just as important a part of the UK’s overseas development programme as regular aid work, and said that this would be well served by better regulation.

There is no consensus over the true nature of social enterprise, no golden rule to balancing profit and purpose. If social enterprise is ever to look charity in the eye as an equal partner in the third sector, there needs to be serious discussion about what regulatory framework there should be for social enterprise. Even if they spawn no legal changes, the conversations could prove fruitful in themselves.

  • When you put it like that! I am in two or possibly three minds about regulation. Working a lot with colleagues from other parts of the EU as we do – most social enterprises in other EU countries are employment or employability social firms, we spend quite a bit of time discussing the merits of regulation. Colleagues are always surprised to hear that we have no legal definition of social firm in the UK, despite being seen as a global leader in the model. I think it fair to say that most countries have a legislative framework for the social firm model, and that model has often grown out of the old-fashioned sheltered workshop model. In the UK, we tended to look at sheltered workshops and decide that they were no longer fit for purpose – so we did something different (social firms). In other parts of the EU, they looked at the model, appreciated the statutory framework, and set about changing the model within that. Obviously this is a very crude analysis, and doesn’t quite match the subtlety of what actually happened, but it is a context and an important one.

    So in some EU countries, social firms are defined and supported by legal frameworks, in the UK, some began within a statutory duty scenario, but many more were just started by concerned individuals. For example, it is astonishing how many family-run social firms there are.

    There are advantages and disadvantages to both scenarios. In countries with a regulatory framework, there is statutory funding – less now than ever of course – and a sense of a right to exist. They are still good social firms that adhere to principles of enterprise, employment and empowerment – but in return for their status, they are not flexible. They can’t just diversify because the market demands it and it makes sense, for example. With no regulatory framework in the UK, social firms can change their product, service, business plan as circumstances require. Neither are they required to move people on to other employment if everyone is happy with the current arrangements. But then most employment social firms find it hard to raise the additional £3000 pa that it costs to employ severely job-disadvantaged people.

    It raises its head in other places too. On a recent project around social firms and trade unionism, we came up with some great findings together. For most other countries, the next step was to get the findings recognised in a legal framework, and then implement them. My lone voice from the UK was saying that’s fine, but let’s not wait til then. Let’s get on with it.

    We have a great tradition in the UK of getting on with it, finding out what works and what is important, and then later, getting it enshrined in law. It is that tradition that has led to this wide and disparate regulatory framework. Our instinct might be that it needs tidying up, and certainly there are many self-professed social enterprises that are quite simply not, but we must beware of boxing ourselves into a framework that constrains the famous British pragmatic problem-solving attitude that is admired and admirable.

    However, I do also believe that social enterprise is a valuable export proposition, so we do need to find a way to define it at least to ourselves!

    It is interesting how the Social Enterprise Mark is making inroads into exporting a market-led pragmatic definition – not an inflexible legal definition.

  • Jill Poet (ORB)

    A thought provoking article Sam. I love that you purposely start by leaving the reader confused – the social enterprise market place certainly is confusing! Hopefully I’ll be forgiven by adding yet another layer of complexity to the conversation.

    This article is intentionally placed in the Third Sector section and the
    discussion revolves around regulation for charities, CICs, social firms and
    social enterprise.

    How odd then that there is no mention of business!

    Let’s be absolutely clear, social enterprises and particularly CICs are
    businesses with a social purpose. In many instances, the social purpose is at
    the core of operations e.g. an organisation working with ex-offenders to reduce re-offending rates. But increasingly fairly “normal” companies
    register as CICs / social enterprises: e.g. a broad-based consultancy that
    helps businesses develop CSR strategies; a company selling “widgets”
    that donates 10% of profits to charity; a cafe selling local produce………

    The line between “normal” business and social enterprise is increasingly becoming blurred, particularly when making a comparison with SMEs, and remembering that 99.9% of private businesses in the UK are SMEs. Many normal small businesses operate ethically, engage and motivate their employees, support their local communities and pro-actively work to reduce their environmental footprint. Unfortunately, we have all seen examples of social enterprises and indeed charities that may be very good at delivering their core product, but don’t look after their employees, don’t engage with the local community and haven’t got a clue about their environmental impacts. Similarly, they may not be efficient, robust and compliant in their operations. And even worse, there are increasingly examples of “normal” businesses being harmed and displaced by social enterprises that have obtained large sums of grant funding. It’s a very unfair playing field!

    A particular personal concern is the over-use and misuse of the phrase “not-for-profit.” I would argue that all organisations need to make a profit in order to exist, albeit the “dirty word” profit is sometimes replaced by the more acceptable phrase “surplus.” A small business owner, for example, is able to draw a salary from his business if he makes a profit and then re-invests the rest back in to developing the business. That’s a pretty standard small business way of operating. Strangely, that is the requirement of a CIC i.e. to reinvest profits back in to the organisation or the community. Some CICs even have options to pay dividends on shares! Clearly, where there is a huge difference is when comparing with large organisations with a big shareholder base and a requirement to maximize shareholder dividends. Let me make it absolutely clear that the comparisons I am making are with socent and small business.

    The CIC Regulator sums up the “not-for-profit” debate as follows:

    “The phrase ‘not for profit’ is frequently used when discussing social enterprises. This can be misleading and should only be used in the context of the company not having as its primary purpose the generation of profits for its owners. If a CIC fails to make profits from its activities (or in some way generate sufficient income to cover its running costs) it will eventually fail altogether. Therefore rather than thinking in terms of CICs being non-profit making they should be thought of as making profits for their community purposes.”

    The criterion for membership of bodies such as Social Enterprise UK and the Social Enterprise Mark focuses on “genuine social enterprise principles,” with the former being very much self-regulatory. The Social Enterprise Mark is more robust in ensuring an organisation is meeting social enterprise criteria and delivering social value. However, in both cases there are absolutely no requirements for these organisation to evidence responsible business practices i.e. to show that they operate efficiently and ethically; meet and exceed legislation, always consider their impacts on people (the workforce, the community and society at large;) and the environment.

    I believe there should be more robust guidelines relating to social enterprise.
    But even more importantly, I think social enterprise and small business should
    be working together. Rather than separating these organisations via a social
    enterprise label, the focus should be on whether or not an organisation is
    robust, efficient, ethical, compliant and socially and environmentally
    responsible. That’s why we developed the Responsible Business Standard!