Saturday, July 2, 2011

Why Social Enterprise Sector Needs to Get Off its Pulpit

In a brilliant piece for the Guardian's Social Enterprise Network, Rob Greenland recently pleaded for us to take a more nuanced view of profit. One which places it in an intelligent conversation about the right level of profit, rather than a binary one which pits 'for-profit' organisations against 'not-for-profit' ones.

This is where a lot of the talk in social enterprise finds itself. You are one or the other. For or against private profit. Like any binary approach it contrasts the good guys with the not-so-good, those 'in it for themselves' versus 'those in it for the common good'. If social enterprise were to have a 'national anthem' it would be Billy Bragg's (wonderful) 'Which Side Are You On'?

But this worldview misses important realities. Firstly, as Greenland points out, it forgets that profit is often the fair reward for risk or effort in the same way that wages are the fair reward for the week's work. If there's proportionality there - and in many businesses there is - profits are as just from an ethical point of view as salaries or any other benefits. Indeed, saying to risk-taking investors that they can't make a profit - as the sponsors of Social Business Day are- is, in my view, ethically questionable. If we don't ask people to work for nothing, neither should we expect there to be no price for risk.

Secondly there is enormous variety within the 'for profit' world. For every Southern Cross, there are ethically run businesses which, when you look at them closely, deliver the 'blended return' that many social enterprises themselves aspire towards: they care for their people, they contribute to their community and recycle profit to produce general social benefits.

Indeed, go back 40 years, before the rise of the City and global financial capitalism, and much of business, particularly in Europe, even in the USA, operated in this way (for a really good account of how US corporations operated, read 'The Puritan Gift' by Kenneth Hopper).

Thirdly, by throwing a ring around 'not-for-profit' activity, the social enterprise sector anchors itself needlessly to a very small base, leaving the rest of the private sector that doesn't behave like Southern Cross feeling left in the cold. This is a real waste. The most interesting space, in my view, is that which is emerging between the hard end of the private sector and the existing world of social enterprise. It involves some ambiguity, some risks and yes, occasionally, it allows charlatans into the tent.

But it is also the most fertile soil that is still virtually untilled. This is starting, thank-heavens. You see it most vividly in initiatives like Liam Black's Wavelength, where private and social businesses help each other, learn from each other and, yes, occasionally do business together as a result.

On a very minor level, you're seeing it with businesses like my own, Stepping Out. This is essentially a private business but 20% of all net profit goes into a new Foundation which is supporting emerging social entrepreneurs. About 10% of Stepping Out's time goes on pro or low-bono work. Stepping Out has a clearly social aim - to change the UK public sector by supporting public managers to become social entrepreneurs - which has equal standing with its other goals.

But my decision, after much agonising, was that I could best pursue this business as a private company rather than as a social enterprise, as currently defined. Why? - you ask. To begin with I had to borrow £25k to get going. This was secured against my own assets. Then I had to work for six months without pay - and work bloody hard too. One screwed-up project or bad debtor and I was dead in the water.

A year in, of the £250k we've brought in, I've personally seen £25k of it, the rest has gone on wages, paying back loans and so on. Well, not all the rest. There's a profit you see. We're not sure yet, but it could be as much as £40,000. Let's imagine it is. £8000 will go on tax, leaving £32,000. About half of that will need to stay on the balance sheet to support our cashflow in year 2. We're now down to £16,000. Up to £4000 will go into the Foundation, leaving, at the very top, £10,000 for the business owner (me). Were I to pocket this, my earnings for the year will top £30k.

OK, I own the business, I hear you say, but that's my point - I own the business. That's the only reward I am getting here. A fair reward, I venture. If the business was 'asset-locked', I couldn't benefit from its sale, its balance sheet would be mainly socialised. There would be big limits on how much I could take out of whatever profit was produced. My contention (or perhaps more accurately my wife's) was that this model was not fair (I won't use her term), except to say it rhymes with forelocks!). In other words, a just outcome for me meant pursuing social goals through a private business.

I relay this story not to show my social credentials. Although I would like you to approve of what I have done, I am not going to lose sleep if people throw rocks. Those that do this tend to be fairly insulated, normally salaried and seldom on the wrong side of risk. The reason I am sharing this now is to underline that there's a world of socially minded people just beyond the outer-edge of the social enterprise sector whose pursuit of profit is neither immoral, self-centred or exclusive.

This group of people believe in balanced businesses that concile a number of objectives - social and environmental - alongside the requirement for profit. At the moment, we are viewed, from the pulpit of social enterprise, as mere 'for-profits'. I think the time is nigh for a big rethink. If companies are giving away a lot of their profits, let's consider bringing them in. Likewise if they are proving their social and environmental impact.

Social enterprise needs to be about progressive business, a broad church, a bit, dare I say it, like the Labour Party which mixes Blairites with the disciples of Tony Benn. Social enterprise in 2011 feels a bit like the SWP, a sect which, in forging its own exclusivity, limits any impact whatsover on the world beyond its immediate membership.

I know there are lots of people like me who feel a deep attachment to the social enterprise agenda of blended return and shared ownership, but are uneasy about the ring of steel thrown around it by its founding organisations. I believe, over time, that risks will be taken and the ring of steel lifted. For me, it can't happen soon enough if a progressive business sector of any strength is going to emerge to take on the darker forces that dog a successful, fair capitalism.


Jeff Mowatt said...

Craig, Let me offer the perspective of arguing for it in the context of poverty relief. The argument is this, that we need to find a more effective mechanism than charity to tackle poverty. A business model is proposed, with a core social purpose. In the case for it, it is acknowledged that many will prefer to make a lesser contribution and that there's nothing wrong in doing so. The non dividend distributing form which replaces charity would distinguish itself by in our case investing at least 50% of profit into the community and retain the remainder for growth. Like Yunus' social business it is one end of the social enterprise spectrum with no obligation for others to make the same commitment. The exact words were "If a corporation wants to donate to its local community, it can do so, be it one percent, five percent, fifty or even seventy percent. There is no one to protest or dictate otherwise, except a board of directors and stockholders. This is not a small consideration, since most boards and stockholders would object. But, if an a priori arrangement has been made with said stockholders and directors such that this direction of profits is entirely the point, then no objection can emerge. Indeed, the corporate charter can require that these monies be directed into community development funds, such as a permanent, irrevocable trust fund."

So afics, there never was a pulpit. One defined an operational model and gives it a name. For example, if a CIC were to decide to increase it's dividend distribution, would it still be considered a CIC?

Dean said...

You raise some great points, I find it interesting, as someone with total private sector management background, now setting up a social enterprise. I looked at all the options, and like yourself have opted for limited by share status.

This decision was primarily based on having the flexibility in those early stages to operate quickly and efficiently. Some of the other options tend to be too bureaucratic. The status can always be changed at later date.

This does mean that some funding doors are closed to us, but this shouldn't be to detrimental given the business plan. As long as we can raise initial investment it will become self financing. This was always my aim, with ever shrinking charitable donations, I didn't want to be dependant or even take from that pot.

This is where I think the key is, by having a self financing sustainable business model, the project will have longevity.

Yes some will enter arena with personal self gain the motivator, I believe in human nature and think the majority will be motivated by social benefit.

Even those that enter for self gain, will we can only hope, will still be achieving social benefits whilst achieving this.

Profit is not a swear word or a bad thing. Those that start social enterprises on profit making sustainable models will aslo be in the position to support new social enterprises.

This is where I think I see the biggest benefits to attitude change. We will have socially minded companies in the financial position to seed fund new enterprises. This can only benefit us all as a whole.

Jeff Mowatt said...

Hi Dean, Yes, that's precisely where I'm coming from. The self-sustaining model of business invests profit in seeding new enterprises. That was how it was pitched in 1996 and in the business plan from which this extract derives:

Projected yield in 2004 was £100m/year for investment into social enterprise via local CDFIs. We are still waiting for a BS Bank to do what this intended.

In Tomsk, Russia from 1999, the process was used to leverage further investment for a community bank which became self-sustaining in the second year and created thousands of micro enterprises.