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Social enterprise

Type of organisation

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Overview

Origins and definitions

One of the first examples of a social enterprise, in the form of a social cooperative, can be traced back to the Victorian era. Like social cooperatives, social enterprises are believed to have emerged as a result of state and market failure. However, market failure is emphasised in the UK, while state failure is emphasised in the United States. Contemporary social enterprises are viewed to have been created as a result of the evolution of non-profits.

The first description of a social enterprise as a democratically owned and run trading organisation that is financially independent, has social objectives and operates in an environmentally responsible way, was put forward by Freer Spreckley in the UK in 1978 and later written as a publication in 1981. It was developed as an alternative commercial organisational model to private businesses, co-operatives, and public enterprises. The concept, at that time, had five main principles divided into three values and two paradigm shifts. The three values, now referred to as the triple bottom line were:

  • Trading and financially viable independence
  • Creating social wealth
  • Operating in environmentally responsible ways

The two paradigm shifts were:

  • A common ownership legal structure where members/owners have one voting share and different forms of investment
  • Democratic governance, where each worker/community resident is a member with one vote

It was intended as part of the original concept that social enterprises should plan, measure and report on financial performance, social-wealth creation, and environmental responsibility by the use of a social accounting and audit system.

Social enterprise has philanthropic roots in the United States and cooperative roots in Europe and Asia. In the US, the term is associated with 'doing charity by doing trade', rather than 'doing charity while doing trade'. In other countries, there is a much stronger emphasis on community organising, democratic control of capital, and mutual principles than on philanthropy.

Types and differences

Social enterprises can be structured as a business, a partnership for profit, or a non-profit. Depending on in which country the entity exists and the legal forms available, they may take the form of a co-operative, mutual organisation, a disregarded entity, a social business, a benefit corporation, a community interest company, a company limited by guarantee, or a charity organisation. They can also take more conventional structures. Social enterprises are dynamic, requiring adaptation to ensure they meet the needs of communities and individuals in an ever-changing world. Their shared common thread is that they all operate to achieve a balanced financial, social and environmental set of objectives. Types of social enterprises includes trading enterprises, financial institutions, community organisations, and NGOs and charities.

Trading enterprises are worker- and employee-owned trading enterprises, co-operatives, and collectives. These vary from very large enterprises—such as John Lewis Partnership in the UK and the Mondragon Corporation in Spain—to medium-sized enterprises owned by their staff with traditional management hierarchies and pay differentials, to small worker cooperatives with only a few directors and employees who work in less hierarchical ways and practice wage parity. Within the trading enterprises, there are employee-owned enterprises and membership-owned enterprises. Examples of membership organisations registered as social enterprises are community enterprises, housing co-operatives, community interest companies with asset locks, community centres, pubs and shops, associations, housing associations, and football clubs. These usually exist for a specific purpose and trade commercially. All operate to reinvest profits in the community. They have large memberships that are customers or supporters of the organisation's key purpose. There are village cooperatives in India and Pakistan that were established as far back as 1904.

Organisations that do not take the distinct form of either a private, public, or non-profit organisation are classified as hybrid organisations. For legal and tax purposes, hybrid forms are classified as for-profit entities. The most common types of hybrid organisations are the low-profit limited liability company (L3C) and the benefit corporation (B-Corp). L3C's main objective is to achieve socially beneficial goals and do so by employing the financial and flexible advantages of a limited liability company. States in the United States that have authorised the use of the L3C model have established three requirements: to operate for charitable or educational purposes, not the production of income, and not the fulfilment of a political or legislative agenda. A benefit corporation, or B-Corp, is a corporation that operates to achieve or create a "general public benefit".

Many non-governmental organisations (NGOs) and charities operate commercial consulting and training enterprises or subsidiary trading enterprises, such as Oxfam International. The profits are used to provide salaries for people who provide free services to specific groups of people or to further the social or environmental aims of the organisation. While not all social enterprises are non-profits, and vice versa, some social enterprises operate in a non-profit form. They earn income for their goods or services and are typically regarded as non-profits that use business strategies to generate revenue to support their charitable missions.

The organisational and legal principles embedded in social enterprises have, in some instances, come from non-profit organisations. Non-profit organisations rely on governmental and public support, but can struggle to obtain funding and, as result, have started to rely on profits from their own social change operations. The methods by which social enterprises create sustainable revenue streams differ between social businesses, but all share the goal of abandoning the need for government or donor support. Gregory Dees and Beth Anderson discuss this difference in funding strategies as the innovation that differentiates the social enterprise from the traditional non-profit actor. The Social Enterprise Alliance (SEA) identified four factors that they believe caused this transition: increase in non-profit operating costs; decline in government and public philanthropic support; increased competition due to growth in the charitable sector; and expansion in the demand for non-profit provided services. In 2012, survey data from non-profits in 12 countries found that donations accounted for 12% of income, with the largest source of income (43%) coming from revenue-generating activities. Some non-profits have evolved their business model to model that of a social enterprise. This change has resulted in a type of hybrid organisation that does not have concrete organisational boundaries. Various scholars have argued that this may have come about due to the marketisation of the non-profit sector, which resulted in many non-profit firms placing more focus on generating income. Other scholars have used institutional theory to conclude that non-profits have adopted social enterprise models, because such models have become legitimised and widely accepted. Some organisations have evolved into social enterprises.

Social impact may refer to the overall effects of a business, but a business that has social impact may or may not be a social enterprise. Corporate social responsibility (CSR) is a practise that businesses can use to be conscious of the social and environmental impacts of their activities. There are a variety of CSR markers, such as accountability and internal and external elements. Social enterprises place a lot of emphasis on external social responsibility as a result of their social objectives, so social impact is built into the organisation. However, there has been debate on whether or not social enterprises place enough emphasis on internal CSR, such as human resources and capital management, health and safety standards, adaptation to innovation and change, and the quality of management within the organisation. Since a large majority of social enterprises do not have sufficient funding, they are unable to pay competitive wages to their employees, and, as a result, have to resort to other, non-financial techniques to recruit employees. Many managers utilise the social component of the social enterprise's dual mission and purpose for this. Financial institutions are savings and loan organisations such as credit unions, microcredit organisations, cooperative banks, and revolving loan funds, and are membership-owned social enterprises. Credit unions were first established in the 1850s in Germany and spread internationally. Cooperative banks have likewise been around since the 1870s, owned as a subsidiary of a membership co-operative. In recent times, microcredit organisations have sprung up in many developing countries to great effect. Local currency exchanges and social value exchanges are also being established.

Socially responsible investing (SRI) seeks to maximise both financial gain and social impact. Many commercial enterprises would consider themselves to have social objectives, but commitment to these objectives is motivated by the perception that such commitment will ultimately make the enterprise more financially valuable. These are organisations that might be more properly said to be operating corporate responsibility policies. Social enterprises differ in that their commitment to impact is central to the mission of the business. Like social enterprise, social entrepreneurship has a variety of existing definitions. Currently, there is not a widely accepted standard definition for the term, and descriptions vary in level of detail. There is an emphasis on change agents for social entrepreneurship, in contrast to the organisational focus of social enterprises. Social entrepreneurship usually takes place in the non-profit sector, with a focus on creating and implementing new solutions.

Tensions between social missions and business ventures within a social enterprise are separated into four distinct categories: performing, organising, belonging, and learning. Performance tensions arise as organisations seek to fulfil various conflicting goals, such as varying stakeholder demands, social mission goals, and performance metrics. A major challenge is figuring out how to gauge success with conflicting goals. Organising tensions are caused by inconsistencies in organisational structure, culture, and human resource practices. Many social organisations grapple with whom to hire, as many want to help disadvantaged people but also need workers with business skills to ensure the success of the enterprise. Organisations face the challenge of deciding which organisational structure and legal form (e.g., non-Profit, for-profit) to operate under. Belonging tensions arise from identification or a sense of belonging to contrasting goals and values, which creates internal organisational conflict. These tensions are amplified by the maintenance of relationships with stakeholders who may have conflicting identities within the organisation. Learning tensions are a result of conflicting time horizons (i.e., short-term vs. long-run). In the short term, organisations aim for stability, which can be evaluated based on metrics such as costs, profits, and revenues, but in the long run, they want growth, flexibility, and progress in achieving their social mission.

Academia

When social enterprise first emerged, much of the scholarly literature focused on defining the key characteristics and definitions of social enterprise. Since then, there is more of a focus on the emergence of the social enterprise sector, as well as the internal management of social enterprise organisations. Due to the dual-purpose missions of social enterprises, organisations cannot directly employ the typical management strategies of established business models. Recent academic literature has argued against prior positively held views of social enterprises success in striking a balance between the two tensions and instead argued that the social mission is being compromised in favour of financial stability. Prioritising social good over financial stability contradicts rational firm management, which typically prioritises financial and profit-seeking goals. As a result, different management issues arise that range from stakeholders (and management) agreeing on the firm's goals but disagreeing on an action plan to management and stakeholders disagreeing on the firm's goals. Some social enterprises have taken on same-sector and cross-sector partnerships, while others continue to operate independently.

The first academic paper to propose worker co-operatives involved in health and rehabilitation work as a form social enterprise was published in 1993. The scale and integration of co-operative development in the 'red belt' of Italy (some 7,000 worker, and 8,000 social co-operatives) inspired the formation of the EMES network of social economy researchers who subsequently spread the language to the UK and the rest of Europe through influential English language publications. The first international social enterprise journal was established in 2005 by Social Enterprise London (with support from the London Development Association). The Social Enterprise Journal has been followed by the Journal of Social Entrepreneurship, and coverage of issues pertaining to the social economy and social enterprise is also covered by the Journal of Co-operative Studies and the Annals of Co-operative and Public Economics. The European Social Enterprise Research Network (EMES) and the Co-operative Research Unit (CRU) at the Open University have also published research into social enterprise. The Skoll World Forum, organised jointly by Oxford and Duke universities, brings together researchers and practitioners from across the globe.

In the United States, Harvard, Stanford and Princeton universities built on the work of Ashoka and contributed to the development of the social entrepreneurship field through project initiatives and publications. As of 2018, the field of social enterprise studies had not yet developed firm philosophical foundations, but its advocates and academic community were becoming more engaged with critical pedagogies, such as that of Paulo Freire, and critical traditions in research, like critical theory, institutional theory and Marxism, in comparison to private-sector business education. Teaching related to the social economy draws explicitly from the works of Robert Owen, Proudhon, and Karl Marx, with works by Bourdieu and Putnam informing the debate over social capital and its relationship to the competitive advantage of mutuals. This intellectual foundation, however, does not extend as strongly into the field of social entrepreneurship, where there is more influence from writings on liberalism and entrepreneurship by Joseph Schumpeter in conjunction with the emerging fields of social innovation, actor-network theory, and complexity theory to explain its processes. Social enterprise, unlike private enterprise, is not taught exclusively in a business school context, as it is increasingly connected to the health sector and to public service delivery. However, Oxford University's Said Business School does host the Skoll World Forum, a global event focused on social entrepreneurs.

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