Social enterprises have become a trending term in the business world over the last year, as proven by the more than 1,600 delegates attending the Social Enterprise World Forum in Christchurch last year. But what are some of the concerns with the legalities of social enterprises? And what actually is a social enterprise, anyway?
What is a social enterprise?
To start with, we need to get the definition right. In New Zealand the Ākina Foundation works in the social enterprise sector and its definition is a good one: Social enterprises are purpose-driven organisations that trade to deliver social and environmental impact.
The key word there is purpose. Traditional business has had more of a focus on profit than purpose. In fact, that focus on profit is baked into our business model. For example, how important the shareholders of a company are and the focus on the directors returning profit to them.
Social enterprise flips that around and places the primary importance on purpose over profit. While these are businesses which are trading and they need a profit to continue, there is often some other reason for their existence beyond the money factor. In the past we might have relegated this ‘do-good’ approach to the realm of charities and not-for-profits. Social enterprises bring purpose front and centre and, perhaps most critically, provide a self-sustaining model for achieving good in society. Think about it – how are charities and not-for-profits operated? Often they are dependent on grants or funding streams, which may dry up over time and as the political climate or giving habits of donors shift. Social enterprises are longer-term solutions that often address real needs in a practical way. They seek to combine the heart of charity with the profit-making mindset of business.
Other factors making social enterprises different
This all may be intriguing, but what are some of the additional elements that set social enterprises apart?
1. Purpose: This should be clearly defined and set out
2. Profit distribution: A percentage should be reinvested into the purpose (how much is a point of debate)
3. Asset lock: May provide for the distribution of assets on wind-up to another similar entity acting for a comparable purpose, and
4. Reporting: Transparency and clear communication of how the purpose is being fulfilled and its tangible impact.
In New Zealand, there is no bespoke form of legal entity for social enterprises. If an entity has most of the elements above then it may start calling itself a social enterprise. In other words, there is no box to be ticked on a form or a particular legal structure that signals to the world that intention. This is in contrast to countries such as the United Kingdom, Canada and the United States that have adopted legal structures better suited to social enterprises.
Legal forms of social enterprises
Often a social enterprise will end up being a limited liability company. Some may choose to become charitable entities, either as charitable trusts or companies. There is a tension here, of course, because a charitable entity cannot return profits to investors. That means they are not the best option to raise money (investors seek a market rate return). In contrast, while a company may attract investors, it can be difficult explaining that the business has more than just profit in mind.
A good argument can be made that we need some new legal form that sits in the middle between a charity and a profit-making entity and embraces the best of both those structures. Such a ‘social enterprise company’ would certainly raise the profile of the sector and provide a means to empower those individuals who want to combine purpose and profit.
How might all this affect traditional business?
By now, you will recognise that the intention behind social enterprises is not new – people have acted in ways that go beyond profit for years. Often the outlet has been through charities (think op shops) so, in some ways, ‘social enterprise’ is just a fresh term and new way of expressing older concepts. What is clear is that it aligns with the next generation seeking purpose in their work. Often job interviews are not ending with questions such as, “Will I get a company car”, but instead, “How will my role contribute to society?”
Traditional business can learn from the approach of social enterprises and even be involved in supporting them in different ways, such as:
- Social procurement: Consider how goods and services are secured. For example, at the next board retreat have lunches from a social enterprise catering company?
- Purpose and vision: Whatever your business, it can be helpful to write down your purpose and vision. Get your ‘why do we do this?’ right as that can also help motivate staff, and
- Impact: What is the footprint of your business? Who are your suppliers? Who do you employ? Is your corporate social responsibility policy gathering dust in a drawer?
Social enterprises are a growing force, but they will only have true impact if they can scale. To do that, they need traditional companies to better understand what they are and support them too.
Challenges ahead for social enterprises
Some of the challenges have been hinted at already such as gaining access to funding and finding buyers for the products made, or the services offered.
At the upcoming conference at Te Papa in April, Perspectives on Charity Law, Accounting and Regulation in New Zealand, there will be a session about social enterprises and where they fit in the not-for-profit world. Many charities are actively exploring what it might look like for them to start a social enterprise to diversify their income streams. Increasing education and awareness about the role social enterprises can play remains a challenge for the sector.
Another more subtle challenge is when businesses adopt the term ‘social enterprise’ as a way to entice consumers to buy what they are offering. This could result in the entire sector being discredited and dilute the true value of what the term stands for.
This is more than a passing trend. The social enterprise sector is growing and it provides an alternative way of thinking about doing business. Whether or not you choose to be involved in starting a social enterprise or working for one, the principles that sit behind them have broader application to all businesses that are looking to have a positive impact on the world.
Steven Moe is a senior associate with Christchurch law firm Parry Field Lawyers. This article was first published in the Autumn 2018 edition of Fineprint, the client newsletter of NZ LAW Limited member firms. Parry Field Lawyers is a member of NZ LAW.