Building the ‘New Economy’ With Sustainable Social Enterprise

There is a critical need for more diversity in business, and social enterprise could be the answer, writes Alan Greig, from the Social Enterprise Legal Models Working Group.

Sustainable social enterprise can go a long way towards introducing the kind of “values” into capitalism that Kevin Rudd once made reference to in 2009 – “the values of equity, sustainability and community”.

With the range of “values based” enterprises that are rapidly developing – many of them profiled in Pro Bono Australia News – social enterprise is already setting the pace in this direction. Social enterprise is changing the way we do business. As social enterprise grows in terms of scale and diversity, it will provide a solid foundation for building a people-centred “new economy” by also changing the way that income and benefits are distributed through the economy and within society.   

How do we know this? In the UK, they have been tackling the task for some years. For example, Jonathan Bland, then chief executive of the Social Enterprise Coalition, said in the UK Guardian newspaper in 2007: “Britain has a very ‘thin’ model of business. The reality, he says, is that there are a range of fantastic business models but a real ignorance about the fact we can use them and be successful.”

The point being that there is a critical need for more “diversity” in the way we do business and the way we own businesses. Social enterprise is now delivering this diversity in spades through its operating models which create social impact, community empowerment and stakeholder ownership.

The economy is currently dominated by the private corporation where only one stakeholder matters – the investor. It is questionable whether this business model is environmentally and socially sustainable. Business systems need to develop beyond the financial bottom line and look to opportunities for involving a wider range of stakeholders – employees, customers, suppliers and the broader community.

Social enterprise business models can do this by delivering social good while keeping wealth in the hands of the community, and achieve this in the mainstream economy through trading activity that is both profitable and self-sustaining. Social enterprise is not anti-market nor is it anti-capital – though they are not based on maximising returns to shareholders through capital ownership (profit distribution is mostly limited to re-investing into the social mission of the enterprise and capital gain is often restricted through an asset lock). The social enterprise belief system is that people and their knowledge are more powerful than money and that collaboration can be more effective than competition. Also, some forms of social enterprise – cooperatives for example – are re-invigorating the self-help, mutualism and trust of the “old days” when these values underpinned social activity and civil society.

To sustain the social enterprise mission, shared ownership, governance and reporting structures are instrumental to their design and operational makeup. With appropriate design and management talent, any of the existing forms of incorporation in Australia can contribute to transformative change in the economic system through trading activity. There are already dozens of variously incorporated social businesses operating on not for-profit, not for-charity, but for-social-purpose principles in Australia. Together, they represent a kind of emerging “fourth sector” operating beyond the traditional sectors of business, government and Not for Profits. In fact, most represent a blend of the best elements of each of the other sectors: self-sustaining like businesses, focussed on social impact like Not for Profits, mitigating inequality and injustice like democratic governments.

Social purpose legal structures tend not to be “new” however – they are usually adaptations of older themes, such as:

• cooperatives, credit unions and mutuals
• employee owned companies (worker cooperatives and job-saving employee buyouts)
• community or other stakeholder controlled trusts and corporations (especially in the Indigenous business, landcare and environment protection areas)
• mission-driven private corporations (green businesses, eco-enterprises, for social benefit companies)
• associations (a broad social field, including those in “alternative currency”, such as LETS)
• NFP businesses (both start-ups and commercially oriented charities / companies limited by guarantee)
• hybrid organisations (Not for Profits with income generating, often for-profit subsidiaries).

The nature of social enterprise means that it can manage well the trade-off between financial return and social impact within any form of incorporation. However, only some forms of incorporation can facilitate stakeholder participation and shared ownership. Opening up one’s structure to different ownership involvements can be complicated, but “conversions” towards this end should not be discouraged.   

Structure is driven by business strategy – the management mantra of “structure follows strategy” always applies. Get the business model driven by social objective right, and the rest should follow through a business plan covering market, revenue, finance, ownership preference and legal form. The legal form will provide the foundation for operations in terms of constitution, rules and governance arrangements. Good governance will then maintain accountability, reporting and sustainability.

Business strategy is not always easy for social enterprise, with the ongoing need to integrate social mission with commerce. However, to “be” a social enterprise you need to be well versed on the key elements that will qualify you as a social enterprise. To understand these, I would recommend the excellent, short SEUK brief, titled What Makes a Social Enterprise a Social Enterprise, which you can see here.

Sustainability should improve as one builds the organisation and scales up operations. Not all social enterprises succeed in doing this – some will fall by the wayside. Access to finance is a dominant issue and this often means that legal form is modified to facilitate raising appropriate forms of finance.

Organisational “needs” also drive legal form considerations (as well as diversity). Such needs appear to be different for the three interest groups involved in the social enterprise sector:

1. Social entrepreneurs tend to use a variety of legal structures depending on their business model and financing needs, with some operating as sole traders or pty ltd companies.
2. Group enterprises are covered by cooperatives, community (and employee) ownerships and Indigenous corporations.
3. Not for Profits are a broad field and include charities, associations, trusts and Not for Profit start-ups.

In some developed economies – the UK and Canada most notably – specialist social enterprise legal forms such as the community interest company (CIC) are being legislated for. These new forms are capable of addressing a range of social enterprise specific organisational and finance needs, including equity investments and stakeholder participation. Over 11,000 social organisations have now incorporated under the CICs legislation in the UK since it was legislated for in 2005 and CICs have become the fastest growing form of social enterprise in that country. For what we need to do in Australia to introduce the CIC structure, see my previous article, Community Interest Companies’ Could Change the Face of Social Enterprise in Australia, here.

While space is not available to explore in depth all the issues involved in sustainable business operations and organisational development, the opinions above hint at what a “new economy” could look like if it was populated by a greater number and more diverse range of operating social business forms. To study this future, there is a conference in August, called Building the New Economy: Activism, Enterprise and Social Change, which will address the issues involved.  

The conference will have as one of its aims developing a “new economy coalition” in Australia along the lines of that now set up in the US.

About the author: Alan Greig is a Board member Employee Ownership Australia Ltd , a director of The Mercury Centre Cooperative Ltd and coordinator of the Social Enterprise Legal Models Working Group.