What does it mean to be a social enterprise today? Is it about profit, purpose, or both? Steven Moe takes us through the various definitions.
One of the comments I’ve heard about the social enterprise sector is that it’s unclear what the criteria is to be one. Ultimately, aren’t all businesses social enterprises? If nothing else, businesses employ people. This is a question that will be increasingly common as the term becomes more widely known, and it’s one I think is worth considering.
But first, let’s remind ourselves what a social enterprise’s core features are. To do that, we need to get straight what we even mean when we use the term.
“How are you defining a social enterprise then?”
The Ākina Foundation exists to grow social enterprise across New Zealand. It offers the following definition which sums up the key elements of a social enterprise philosophy:
“Social enterprises are purpose-driven organisations that trade to deliver social and environmental impact.”
So, according to this definition, there’s no mandate about the specific form of impact, what’s being traded, or exclusivity when it comes to the legal form chosen – charity vs. company vs. incorporated society etc (more on that here). “We see social enterprises of all shapes and sizes, but there’s one thing that they have in common — their drive to create a sustainable, positive impact in their communities and make the world a more inclusive and prosperous place for everyone,” says Ākina’s CEO Louise Aitken. Ākina’s definition is a pretty wide one, but the key word is ‘purpose’, of which more below.
Before getting to tied up in local definitions, let’s look overseas, where the social enterprise conversation has been going for longer. For example, Social Enterprise Scotland says: “Social enterprises are innovative, independent businesses that exist to deliver a specific social and/or environmental mission. All their profits go towards their mission. Social enterprise is a dynamic, ethical and more sustainable way of doing business.” While the organisation says it tries to be as inclusive as possible, it also sets out five essential characteristics of a social enterprise in its voluntary code of practice:
- They trade goods and services, but the primary objective is social/environmental impact.
- Profits are all reinvested in the business or in the purpose.
- If dissolved, assets go to another organisation with similar aims (this part and the last one make up ‘asset lock’)
- Is managed in an accountable way and reports back
- Not part of public sector
This shows the divergence of views on things like profit distribution and asset lock in social enterprise. For example, I think it’s possible to have some private return to individual shareholders if someone has a great business idea that’s social enterprise. Social enterprises aren’t a subset of charity, where there can be no private gain. Social enterprise is a whole new category unto itself that reinvents business, combining the best of both charitable intentions and profit-making aspirations.
Here’s the Canadian Social Enterprise Foundation definition of social enterprise. “Social mission driven organisations which apply market-based strategies to achieve a social purpose. The movement includes both non-profits that use business models to pursue their mission and for-profits whose primary purposes are social. Their aim is to accomplish targets that are social and/or environmental as well as financial: is often referred to as the triple bottom line. Many commercial businesses would consider themselves to have social objectives, but social enterprises are distinctive because their social or environmental purpose remains central to their operation.”
Note that in the definition above there are no restrictions on return of profit.
The challenge for the local social enterprise community is to look at what’s been done around the world and then be clear about what a social enterprise is here in New Zealand.
“But wait – for real – isn’t every business a social enterprise?”
When I’m asked about why all businesses aren’t really social enterprises, I come back to two words: purpose and profit. A traditional business focuses primarily on profit. A social enterprise often takes profit into account as a major factor (it needs to because it’s trading), but it also has a purpose which likely surpasses the profit drive and brings it under the purpose umbrella – in other words, the profit is a means to achieve the purpose. It’s that single-minded focus on purpose which really sets a social enterprise apart from most businesses. I think it also means that most businesses could, if they chose to, take on more of the principles and characteristics of a social enterprise in the future.
For now, let’s look at what the difference means for a social enterprise. First, it often means that explaining the business case is a little more complicated than simply stating how much the return on investment will be. The traditional way of thinking about a business and its beneficiaries is limited to focusing mainly on shareholder returns. For a social enterprise, the purpose may be met by thinking about who’s being employed, what’s being made, how it’s being made and whom it’s being sold to.
In other words, a social enterprise can be a success without generating massive profits for its shareholders. By simply existing, it may employ people who would otherwise not have jobs – that’s positive. Equally, a successful social enterprise may generate profits and it may be that the investors receive dividends from their operations. That’s positive too. In either scenario, there’s some extra element – some special sauce – that makes a social enterprise different from a normal business. Defining what that special ingredient is will vary from situation to situation, but they generally boil down to this focus on purpose rather than profit.
“Sorry, I really need an example of how this would play out practically…”
No problem. Let’s look at two hypotheticals to flesh out how the approaches might differ between a traditional business and a social enterprise.
John has an idea: a business making widgets. It’ll employ ten staff. He’ll source materials from the cheapest source. He’ll make a profit of $100,000 per year.
Jane has an idea: a business to make biodegradable widgets. It’ll employ ten staff, most of whom come from a marginalised community and have had trouble finding jobs. She will source materials from fair trade sources and companies that are transparent about their CSR (corporate social responsibility) policies and procedures. She’ll make a profit of $50,000 per year, but in operating, the business itself will be generating a positive impact in several areas – particularly environmental and societal.
These are crash test dummies you can pick apart, but the point is that in both of these examples, John and Jane are operating businesses. Yet you can see how some extra purpose has seeped into Jane’s approach in really practical ways. This isn’t about discouraging John from what he’s doing or arguing it’s not worthwhile. It’s about laying a challenge for those setting up a business to start thinking more broadly about how they will operated and the impact their business will have, beyond the profits they’ll make.
Can we say that every business is a social enterprise? I don’t think so. But the discussion is important as we push the boundaries of what’s possible in this sector.
Steven Moe is a Christchurch lawyer who hosts a podcast interviewing social entrepreneurs called “Seeds: Talking Purpose”. He’s written a legal handbook for social enterprises, available free by email at firstname.lastname@example.org.
The Spinoff’s business content is brought to you by our friends at Kiwibank. Kiwibank backs small to medium businesses, social enterprises and Kiwis who innovate to make good things happen.
The Spinoff Daily gets you all the day's best reading in one handy package, fresh to your inbox Monday-Friday at 5pm.