What do I mean by a social enterprise? BIS defines it as:
“A business with primary social objectives whose surpluses are principally reinvested for that purpose in the business or in the community rather than being driven by the need to maximise profit for shareholders and owners.”
This is a very broad definition. It does not include any obligation to maintain social enterprise status and nor does it require that key elements of being a social enterprise are hardwired into its constitution.
Big Society Capital has grappled with this. Big Society Capital seeks to invest in “regulated social sector organisations such as charities and community interest companies and industrial and provident societies with an asset lock plus a limited range of for profit social sector organisations which have a clear constitution covering:
- Social objects
- Capping distribution of profits at 50%
- A constitution or contractual lock on its central objects
- Demonstrating that remuneration of its officers and employees is reasonable and proportionate.
- Making best efforts to preserve the social purpose or social mission in the event of a change of control.”
How many social enterprises are there?
This is a vexed question. The Annual Small Business Survey (ASBS) in 2012 published by BIS claims that there are 62,000 social enterprises in Britain today. Back in 2003 the DTI as it then was, thought that there were only 5,300 social enterprises in the UK. The 2003 research looked for social enterprises that have a specifically social ownership structure. The ASBS research uses a far looser definition which includes allowing organisations to self certify themselves as social enterprises. It is thought that 89% of the 62,000 (now 68,000) social enterprises in the UK are owned by private individuals and can at any point decide to pay 100% of their profits to their owners. So the number of non-charitable social enterprises which meet a strict definition is probably not much more than 6,000. There are now 8,428 registered community interest companies currently active and 8,034 industrial and provident societies but of those how many have an asset lock is unknown. On the other hand according to NCVO’s Civil Society Almanac, 45% of the UK’s 180,000 registered charities self-identify as a social enterprise. That is 81,000. Those almost certainly will not be covered by the ASBS research. So remember most social enterprises are charities, so how can they be a foe?
Building on the NCVO research it is worth emphasising the degree to which many charities are social enterprises and are becoming increasingly so as government funding is cut and donations stagnate. Hence NCVO 10 years ago relied on grant income for 60% of its revenue. That figure is now 3%. Clearly NCVO is a social enterprise.
I want to concentrate on genuine social enterprises by which I mean, picking up the BSC analysis:
- Community interest companies.
- Industrial and provident societies with an asset lock.
- Socially responsible companies that have a hardwired social mission, social purpose and social responsibility into their constitutional forms.
And in particular to look at non-charitable social enterprises for if they are a foe – they be it.
I believe non-charitable social enterprise is a value addition to British society. When Roger Warren-Evans and I came up with the idea for the community interest company back in 2002, it was because it was more expensive to set up a non-charitable social enterprise than it was to set up a for profit company. Many would be social entrepreneurs did not want to set up as a charity. They did not want to hand their baby over to the control of the trustees. They wanted to run a socially responsible organisation but with an executive board rather than a board of non-executives. They also wanted to be able to provide for some limited financial returns to investors.
I have been in debates about this issue where charities have expressed the view that social enterprises will hollow out the charity sector. In particular there is concern about tax breaks being given to social enterprises. This is likely to become a real and live debate as the government is currently considering following its consultation as to what, if any, tax breaks to allow for investment into social enterprises in the 2014 budget.
I would like to pause now and raise a question about what creates a sense of public spirit, public ownership and public commitment in a society. I was recently in Morocco and I was struck forcibly by the huge disparity between private wealth and public squalor and the visible absence of the public domain. In many towns there are no pavements; rubbish blows freely around; there are no parks for children to play in and there is very little street lighting and there is a general impression in many towns of an almost complete lack of a public realm. On the other hand open a door in a wall and step inside a riad and you are into a completely different private world where fountains play, palm trees sway in the wind and a sense of calm prevails.
What I experienced in Morocco was of course common in Britain in past eras. It was only in the 18th century that there began to build a sense of the public. Hence we saw the beginnings of new types of charities; the Foundling Hospital; the Royal Academy; the British Museum; organisations started being established to make pavements and street lighting. There was a general recognition that for society to work individualism and private ownership was not enough. If you like large amounts of issues had to be “socialised”.
The 19th century saw an expansion of this sense with government becoming more involved in what was previously private life. Whether it was the control of pernicious drugs; the provision of clean water supplies, the building of better roads; the creation of an education system. All of this was part of a greater belief in the public realm. And this then expanded in the 20th century, particularly because of the influence of two world wars. Victory in the Second World War was seen in part as a triumph for planning which also had had a huge boost by the success of Stalin’s Russia in the war. Hence post war there was an even greater expansion of the public domain through nationalisation of key industries but charities were nationalised as well which people often forget; schools and hospitals. At this point the notion of the public had become equated almost exclusively with the state, rather than the more general concept relating to public spaces, public services and public spirit. Indeed there was a debate in the 1950s as to whether or not there was any room for charities in health given the creation of the National Health Service.
Of course that ideal of state provision gradually fell away. Post 1979 with the rise of the new Right, and the assault upon the “Nanny State” we have seen the rise of free markets and the marketisation of a huge amount of society. This has had a corrosive effect upon our sense of the public. We have foregone state control of key industries and we have opened up huge areas of society to market forces. The belief has been that markets are perfect and market solutions will deliver better outcomes. That was just another false utopia, like Stalin’s communism. We have learnt all too quickly that the prophets of the market are wrong. As Michael Samuel writes in “What Money Can’t Buy”, we have moved from a market economy to a market society. That book shows the way in which financial institutions have created a market in Life and Death with Walmart and other companies taking out massive life insurance policies on their staff so if the individual dies, Wallmart collects. Not a cent goes to the deceased’s family. This is cynical use of insurance for financial gain. The current government, however, still believes in marketisation. Hence the sale of Royal Mail; the opening up of the NHS to competition, the reorganisation of the Probation Service, and the latest foreign finance initiative to build Hinkley Point. The theory now is that it does not matter who delivers a public service provided they are efficient and we are happy if profits are made because that is a sign of efficiency. I think this is a very dangerous development. The government is creating an oligopoly of suppliers in a number of key areas who will do what oligarchs always do. Charge low prices in the short term so as to then force up prices over the long term having killed off the competition. The oligarchs will have the government over a barrel.
I believe to combat the force of marketisation we need a much bigger public sector in the broad sense to include charities and social enterprises to counter balance the mass power of the corporations who are taking over from the state.
Remember corporations now make up 59% of the largest 150 economies in the world. Walmart is the 22nd largest entity and outstrips Poland, Sweden and Saudi Arabia. Shell and Exxon Mobil at 34 and 35 are bigger than Thailand. AXA is bigger than Nigeria. BP is bigger than Finland. Toyota is bigger than the Czech Republic and Sony is bigger than Pakistan. The sheer scale of these companies means that governments are at a disadvantage in dealing with them. Another example is that if Manchester United were a charity, it would rank as the ninth largest charity in England and Wales by turnover. However, its turnover of £363m is only the same size as a large branch of Tesco’s. Tesco’s turnover is in excess of £60bn.
In America since 1979, 144 new charities have achieved new turnover over £50m. In the same period, 46,136 private companies achieved the same amount of turnover. In other words growth in the charity sector is rare.
This is not in any way to criticise civil society. It is brilliant at mobilising public opinion for one off causes such as the Anti-Slavery Campaign, the Jubilee Debt Campaign and of course getting millions of people every year to volunteer and give their time for nothing. All of that is fantastic, to be commended and encouraged. But we also need to create scalable public purpose, public spirited organisations to take on the running of our vital institutions. We cannot run hospitals on volunteers. The problems of marketisation demand this. It is interesting to note that in Germany there is now a backlash against privatisation and in Berlin the water system has been bought back and there has now been a referendum demanding that the national electricity grid be brought back into public ownership.
Hence charities should see the rise of non-charitable social enterprises as fellow comrades in arms.
That is subject to there being a proper legal definition of social enterprise. Currently there is no legal definition. It needs to be limited to legal forms that have appropriate asset locks. Hence CICs and industrial provident societies would qualify. There may also be scope for other companies which adopt those principles by their Articles of Association to qualify provided the principles are embedded within them and it is hard to change, as Big Society Capital operates. I imagine the government will legislate to achieve this if it grants tax breaks for investment in social enterprises.
Over and above this, I would urge all non-charitable social enterprises to live up to high standards of transparency in governance. Social enterprises should ensure that they have an independent director on the board who always speaks for the social purpose; they should be prudent in their salary scales and adhere to a maximum ratio between top and bottom salary. They should publish detailed impact analyses over and above the requirements of the CIC Annual Report.
If we are to have a vibrant public sector – in the broader sense – in this country, then the social enterprise sector, including charities, needs to be able to take on a major part of services currently provided by government. It is worth reflecting that in Germany health provision is provided one third by the state; one third by the private sector and a third by charities/social enterprises. In Britain it is 90% by the state and 10% private. The Germans have a similar ecology when it comes to banking whereas in Britain we regard banking as purely a private preserve and the RBS/Lloyds shareholdings as a temporary measure. I suspect we are moving increasingly to a point where health services are free at the point of delivery but there will not be a centralised National Health Service delivering all of this. We need to ensure that the supplier is not an oligarchy of major health companies. We need great charities and social enterprises who are public spirited to take on and win these contracts. We need to combat marketization and the stripping out of profits for private gain. Public services need to be operated in the spirit of public benefit. There is inevitably a conflict at the heart of private companies operating public services. When push comes to shove, their primary duty is to their shareholders and not to the public good. The public good should be the star by which public services are steered. If the government is not to provide that service then we need a vibrant social sector to help take the operation of public services out of the control of business oligopolies. To do this we need vibrant social enterprises, many of whom will be non-charitable because they may find greater access to capital than charities because they can offer some financial return to investors. Those social enterprises will need to meet the strict definition I have suggested above. If this can be achieved, those social enterprises will be a beacon as to how businesses can be run both profitably and sustainably but in the public interest.
Abraham Lincoln famously said “a house divided against itself cannot stand”.
If the charity sector sees the rise of non-charitable social enterprises as a threat, I fear for the maintenance and development of vibrant publicly minded organisations in this country. For too long the advocates of the Free Market have been allowed to dominate public discourse with their belief in perfect markets. Markets are not perfect. They are open to distortion and corruption. Public service needs to be taken out of a box that is honoured in the Birthday and New Year’s Honours List and made central to the whole operation of our society. Social enterprise can be a part of that and charities should encourage new social enterprises.
Robert Kennedy in the speech he gave following the assassination of Martin Luther King quoted “the Greeks” when he said we needed “to tame the savageness of man and make gentle the life of the world”. Charities and social enterprises can help tame that savageness. We need as many of them as possible and should encourage them as much as we can.