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Whatever the definitional difficulties, social enterprise is building the future 14 January 2015

Posted by cooperatoby in cooperative, EU, Social enterprise.
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Another excellent post from Les Huckfield, who traces the evolution (or degeneration) of the idea of ‘social enterprise’ in Britain since 1998, when Social Enterprise London was founded. the idea had collectivist roots but never succeeded in bridging the gap between the (democratic) cooperative model and the (more hierachical) voluntary sector/charitable model. Under New Labour the idea was transformed (or deformed) to include investor-driven enterprises. Under the Coalition it has degenerated to cover public service spin-outs majority owned by venture capitalists but misleadingly labelled ‘mutuals’. He concludes:

Public Service Mutuals, like Social Enterprise, are becoming a term of public derision, killing off what’s left of the cooperative and mutual idea.

The fatal loophole is the inclusion of the fatal word ‘primarily’ in the UK government’s definition of social enterprise:

A social enterprise is a business with primarily 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.

The most interesting point is made by Jim Brown, who in 2003 suggested that it was not so much the government as the co-operative movement that was responsible for this dilution of principle. This is logical for co-ops, whose members do indeed have a right to a distribution of trading surpluses, in the form of a rebate or bonus related to their contribution to the co-ops business (e.g. as customers, suppliers or workers). But the loose way it was phrased also conveniently leaves the door open for distributions to investors of capital. If it was due to co-operative movement lobbying, then one would also have expected participation (if not full democracy) to have figured in the definition – but it is absent.

European parallels

The Trojan horse that was inadvertently let into the gates of social enterprise by the different visions of the co-operative and voluntary sectors might never have been born had Britain made the distinction that exists in Italy between co-operatives in general and social co-operatives. Although Italy introduced a legal definition of the social enterprise (impresa sociale) in 2006, in practice it is synonymous in most Italians minds with the social cooperative (cooperativa sociale). Italian social cooperatives can in fact distribute up to 80% of profits may be distributed, however interest is limited to the bond rate and dissolution is altruistic (assets may not be sold off).

The ambiguity over profit distribution has been carried over into the European Commission definition, which to its credit does include the criterion of participation:

The Commission uses the term ‘social business’ to cover an enterprise:

– whose primary objective is to achieve social impact rather than generating profit for owners and shareholders;
– which operates in the market through the production of goods and services in an entrepreneurial and innovative way;
– which uses surpluses mainly to achieve these social goals and
– which is managed by social entrepreneurs in an accountable and transparent way, in particular by involving workers, customers and stakeholders affected by its business activity.

This definition has the necessary virtue of inclusiveness, and is leading to a European convergence, with successive Member States introducing legislation and support programmes. However in practice, operationalising the criterion of whether trading profits are ‘primarily’ or ‘mainly’ reinvested is problematic, because most businesses (excluding asset-strippers) reinvest a large part of their profits. A minimalist interpretation, as adopted by the UK’s Social Enterprise Mark, sets the bar at 50%. This criterion was a major stumbling block in the way of the Commission’s mapping study, whose summary was published last November. This study (led by Charu Wilkinson of GHK with me as a member of its scientific committee) had great difficulty setting the boundaries, and adopted the criterion:

It must have limits on distribution of profits and/or assets: the purpose of such limits is to prioritise the social aim over profit making.

Les Huckfield deplores the loss of co-operative self-confidence, but there is an upside. Even today, most social enterprises in European are co-operatives. Yet beyond that, the social enterprise meme is attractive to many people with varied political views who see the evident malfunctions of modern capitalism. It offers them a way forward, and its broad appeal should be seen as a sign of its success and its potential. It is clearly making a very cogent criticism, and saying that corporate social responsibility is not enough. A new economic model is needed. Whatever the definitional difficulties, social enterprise is building the future.

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