What makes a social enterprise?

Debate on the term revolves around social impact and profit redistribution
By Willie Cheng, Published The Straits Times, 16 Feb 2013

SOCIAL enterprises are increasingly fashionable across the world. Although they have been around for some time, rising interest in impact investing has led to the mushrooming of social enterprises in both developed and developing countries.

In Singapore, the three-year-old Social Enterprise Association - which boasts 550 members, including individuals and organisations interested in the space - estimates that there are 200 active social enterprises locally. So pervasive is the movement that the 2012 President's Challenge introduced a Social Enterprise Award with four inaugural winners.

A social enterprise is loosely defined as a business with a social mission. However, there is a surprising lack of clarity and agreement about what it actually constitutes despite the abundance of literature and conferences on the subject.

Consider these four organisations whose founders or representatives have used the label "social enterprise":

- Food For Thought is a cosy and hip European-style cafe with outlets at Queen Street and Botanic Gardens. It gives at least 10 per cent of its profits to charity.

- A-changin is an upmarket apparel alteration service with retail outlets at Orchard and Raffles Place. It has about 34 employees, of whom two-thirds are disadvantaged women. Any profit from the operations goes to the owners.

- The India-based SKS Microfinance helps alleviate poverty by providing financial services to low-income households. It is the largest microfinance institution in India with a loan portfolio of over $1.1 billion and more than six million borrowers. In 2010, it listed on the Bombay Stock Exchange, raising $430 million in equity and enriching its founding investors in the process.

- The Hong Kong Jockey Club is a non-profit organisation that provides horse racing, sporting and betting entertainment. It devotes its surplus each year to charity and community projects. It is the top grant-maker in Hong Kong, donating $267 million last year.

There are many people in the social sector who would argue that these organisations, notwithstanding the good they are doing, should not be called social enterprises. The confusion and debate seem to rest on two key features of such enterprises: social impact and profit redistribution.

Social impact

AN ORGANISATION can be socially impactful in several ways.

Internally, a company can actively employ the disadvantaged of society who otherwise may not be able to find a job. For example, A-changin trains and employs single mothers and former out-of- work women. Similarly, the other three winners of the President's Challenge Social Enterprise Award employ ex-offenders (18 Chefs and New Soon Huat) and at-risk youths and persons with disabilities (Adrenalin Events).

The ComCare Enterprise Fund, which provides budding social enterprises with seed funding of up to $300,000, regards this aspect so important that one of its grant-qualifying conditions is the provision of employment opportunities and skills training for needy and disadvantaged Singaporeans.

Externally, a company can create positive social impact by providing a product or service that alleviates the condition of the poor and needy. For example, SKS Microfinance provides credit and other financial products to people living in poverty, particularly those who do not have access to typical banking services. Social impact can also be achieved if an organisation contributes all or part of its surpluses to charitable causes, as in the cases of the Hong Kong Jockey Club and Food For Thought. In other words, each of the four organisations mentioned above can claim to have some degree of positive social impact.

The objection to Hong Kong Jockey Club being labelled a social enterprise is that its surpluses are derived from the vice of gambling. There is, therefore, an implicit presumption that not only should a social enterprise create positive social impact, but also it must not create negative social impact. It would go without saying that such an organisation must be socially responsible in how it treats its staff and the environment.

The objection to the other three organisations being labelled social enterprises is that positive social impact, while good and necessary, is by itself insufficient.

After all, most companies can claim some degree of social impact. Apple, for example, creates products with significant positive social impact for the world's rich and poor, but it has never sought to call itself a social enterprise. Many mainstream companies also engage in corporate social responsibility and some level of corporate philanthropy.

Profit redistribution

ACCORDING to purists, the key test of whether an organisation qualifies as a social enterprise is whether it substantially redistributes its profits to the community.

On that count, A-Changin and SKS Microfinance, whose profits wholly accrue to their shareholders, would not pass the test. In the case of Food For Thought, 10 per cent of profits is not deemed high enough and can be argued to be just good marketing copy.

The reason for this stance by the purists goes back to the roots of social enterprises. Historically, they emerged from the charity sector's search for the holy grail of financial sustainability. Social enterprises were established to fund specific charities or charitable causes in general. Many were set up by the charities themselves.

Dr Mechai Viravaidya, the Thai founder of more than a dozen social enterprises including Cabbages & Condoms Restaurant and Birds & Bees Resort, sums it up best in his inimitable way: "A social enterprise is the best way of financing a non-governmental organisation. I have tried begging for money. It gets harder and harder. I have tried praying. It does not work. Make your own donations with social enterprises."

Microfinance is the quintessential industry which proved that social enterprises can operate at scale while being socially transformative. Professor Muhammad Yunus and Grameen Bank in Bangladesh have been pioneers and the poster children of the microfinance movement.

However, as the industry grew, microfinance institutions funded by regular equity capital came into being.

The debate on the role of shareholder returns for social enterprises came to a head with the spectacular initial public offerings (IPOs) of SKS Microfinance and Compartamos (a Mexican microfinance institution), both of which started as donor-funded non-profits.

Prof Yunus was one of the strongest critics of the IPOs and their profit maximisation maxims. He alluded to SKS Microfinance as loan-sharking. After its IPO, SKS was plagued with losses and bad publicity from reports of suicides linked to its loan collection policies. Several months ago, its founder, who stepped down in 2011, a year after the IPO, publicly said: "Prof Yunus was right."

Disappointed with the direction that the social enterprise movement was taking, Prof Yunus has coined a new term, "social business". A social business has most of the characteristics of the traditional social enterprise, but it functions within a set of tight parameters. Among these is an explicit principle on investment returns: Investors get their investment amount back only. No dividend is given beyond the investment money.

Since then, Prof Yunus has created eight Grameen social businesses. The Yunus Centre, which he founded and chairs, promotes social business to the world and serves as a one-stop resource centre for social business.

Does it matter?

SOME may argue that how a social enterprise is defined is largely irrelevant as long as the vulnerable are not exploited under the guise of charity and the organisation in question is, fundamentally, doing some good.

However, from a governance standpoint, having a clear definition is helpful, if not crucial, to those dealing with, and especially those giving preferential treatment to, social enterprises. After all, apart from being cool, there are some real advantages to being a social enterprise and these advantages should not be abused.

First, there is funding support (free seed capital in most instances) from foundations, social investors and special-purpose funds such as the ComCare Enterprise Fund and the Tote Board SE Hub.

Suppliers and service providers are more likely to be supportive and less demanding. DBS Bank, for example, has a Social Enterprise Package which includes "virtually free banking services".

Staff may join more for the cause than the money. They could be more motivated and less costly. There may even be volunteers helping out for free.

Customers are more likely to buy, and buy more, as people like to be associated with a good cause. Where beneficiaries are employed, the sympathy element goes up.

Regulatory framework BEYOND gaining clarity with key stakeholders, what is more important is a regulatory infrastructure by which social enterprises can operate.

Currently, there is no legal structure for a social enterprise in Singapore. An organisation can choose to either be registered as a charity (in which case it forgoes doing business) or be registered as a full commercial company (where the profits can, but need not, go to charity).

Most social enterprises in Singapore are set up as private limited companies and we have to take the word of these companies that they are social enterprises.

Recognising that the traditional legal structures do not reflect the reality of social enterprises, the authorities in Britain and the United States have sought to create new legal structures.

In Britain, a new legal entity called the community interest company (CIC) was introduced in 2005. There are limits to the dividend (maximum one-third of profits) and interest payments that can be made to shareholders and financiers.

The CIC's American cousin is the low-profit limited liability company (L3C). An L3C focuses on achieving a socially beneficial objective. Profit is secondary and shareholders are limited to a financial return on investment of 5 per cent or less.

It is unlikely that we can expect any similar legal vehicles in Singapore in the near term. A four-year review of the Companies Act was recently concluded and a set of proposed amendments - without any such provisions for social enterprises - has been tabled.

An interim approach could be an accreditation scheme based on a clearer and agreed definition of what a social enterprise is. Accredited organisations can then receive a trust mark analogous to the CaseTrust mark given by the Consumers Association of Singapore to companies.

The growth of social enterprises is a positive development of both the social and business sectors. However, this growth can be facilitated by a clearer understanding of what social enterprises are, and it should be bulwarked by a defined framework and structure by which they can operate.

The writer is a former managing partner at management and technology consulting firm Accenture. He sits on the boards of several commercial and non-profit organisations. He is involved in the setting up of a social enterprise, and is author of Doing Good Well.