Trust, social investment, and the real definition debate

25 Nov

mission_drives_the_businessA couple of weeks back, I was on a panel at the Good Deals conference – it was an interesting and informative event, and Matter & Co had done wonders on the pricing (day 1 free, day 2 very reasonable) for social enterprises + charities. As David Floyd has pointed out since, this had some effect, though perhaps not as much as I expected. There is still a divide to be bridged clearly, be it of language, jargon, perception, location or relevance – there just simply weren’t many frontline practitioners there.

The panel I was on was looking at something that is both a hoary old subject and one of increasing current relevance: the definition debate. The premise was that social enterprise as currently defined (mission in governing docs; 50%+ income from trading; 50%+ profits reinvested / gifted to social mission; controlled or owned in interests of social mission; transparent in how it operates / reports impact) is not fit for this ‘brave new world’ of social investment. Primarily, this is based on the assumption that, because most social enterprises can’t give equity, they can’t get access to capital to grow or give investors exits in the same way. Which limits both their potential to scale impact, and the investor appetite and ability to get involved. See James Perry’s (good) recent piece for this argument expanded.

I do think there is a definition debate – but it is not about ‘what is a social enterprise?’ – that’s pretty much agreed; as I’ve pointed out before, there’s very little difference between ourselves, the SE Mark, SENSCOT’s code etc. on this. The definition debate is actually about ‘what is a social venture?’ or ‘what is a social business?’ I asked this at the event, and got no answers – did it mean they were companies limited by shares, but with their social mission in their governing documents? Did it mean they had committed to operating ethically and transparently reporting their social impact? Did it mean they had committed to giving a proportion of their profits to the mission, rather than shareholders? It is entirely unclear how they differ from a standard business, apart from in most cases (for now) the ethical values and purpose of the founding social entrepreneur.

This question has led to a discussion about ‘trust engines’ or ‘commitment devices’ which can provide trust to a customer (be they public sector, private sector, social sector) that they are really ‘social’. I also asked at the event if anyone could give me any examples of trust engines or explain what they are – no answer again. I’ve heard differing things – some have told me it’s about mission lock; some about reporting; some about what they do with their profits; some say it’s all three. Interestingly, none of these are anything new (they are all part of the social enterprise definition). Worryingly, one social entrepreneur running a social venture said on video that her ‘trust engine’ was “my personal integrity“; another told us that they would “go to the press” if the investors tried to change their mission. This isn’t encouraging, when these organisations are receiving public money and publicly funded support.

None of this is about social enterprise being ‘better’ than anything else; or necessarily saying that they do all of these things (reporting, reinvestment, operations etc) perfectly. But it is about knowing what we are talking about on the spectrum – blurred lines don’t build trust. If government money and social investment are going to flow to these organisations, rather than social enterprises and charities, should there not be demands on them or standards they have to reach / aspire to? Otherwise, how can we tell them apart from any other business, apart from some nice words? It’s been noticeable that Treasury seems to be going for regulated social sector organisations (namely CICs, BenComms, charities) to qualify for its tax incentive – even companies limited by guarantee (a non-dividend, non-shareholder owned structure) with a social mission enshrined wouldn’t qualify in that scenario. And yet we read articles about how ‘trust engines might be the answer’ to the tax relief? How, when we don’t even know what they are? It’s on a spectrum between baffling and mythical.

There is something even more critical at stake here – social investment wholesalers and intermediaries are under increasing pressure to ‘loosen’ up their criteria so that they can invest in ‘social ventures’ and ‘social businesses’ (no, we still don’t know what they are). In some cases, this is money that has been *explicitly* ringfenced and set aside for investment into social enterprises and charities. And yet, because “the structures don’t work” or because “there isn’t enough pipeline“, we apparently have to widen definitions and broaden the scope. Rather than continue to innovate and improve the financial products to suit social enterprises and charities (who might have chosen those structures for good reasons of governance, transparency, community ownership and much else besides), or work to find ways to reduce rates of return or its price, there is instead a rush to suit the models to the finance. As Nigel Kershaw of Big Issue Invest might say, we are at risk of forgetting that the finance is a tool – it is a means to an end.

Will those making the decisions look back and be saying, “Yes, those hundreds of millions were originally intended for charities and social enterprises, but that proved quite hard, so we decided to open it up to businesses that said they were social. That was a lot easier, although I couldn’t really tell you what they are up to now, or what impact they had. The financial returns were excellent, though.”

It’s a curious state of affairs – we are told that social enterprises can’t achieve scale; but two of our members between them (both charities / companies limited by guarantee) have raised twice as much social investment in external bonds this year than Big Society Capital has got out of its doors in total in its entire existence; the first six-figure investment of a new forthcoming energy-related social investment fund isn’t a company limited by share – it’s a CIC which has successfully raised several million pounds from a wide variety of investors. Community share offers are flourishing up and down the country, largely under-the-radar, quietly achieving great things in local areas through local ownership. Our own Social Investment Deal of the Year nominees demonstrate how social investment can provide appropriate finance to social enterprises and charities who need it – when the financiers have alignment of mission, and when the partners work hard to innovate and develop models that work.

It’s also a curious argument and position to take at a time when public trust in shareholder-owned, profit-maximising organisations is arguably at an all-time low (be that in banking, energy, or public service outsourcing). What we don’t need right now is woolliness and blurriness that confuses and doesn’t build any trust: the opposite is true. We also don’t need to divert money away from charities and social enterprises who badly need it, just because social investment isn’t working as well or as quickly as people might have hoped to start with. If I’ve learned anything in this sector in the last decade and more, it’s that things generally take a lot longer than we think – a little patience wouldn’t go amiss right now; nor would a little robustness and rigour. If the easy path was always the right one, we would all be doing something different.

This also isn’t about ‘purity’ or, as I read recently, being ‘cultist’ about social enterprise, as opposed to being ‘big tent’ (though I’m yet to see the evidence that those proposing social ventures / social business are larger in numbers…). I’d actually welcome a more rigorous definition of social ventures, so that we could more proactively advocate for what they do – they might not be able to join us as members as things stand, but obviously we would be hugely supportive of more businesses locking in social mission, reporting against a triple bottom line. operating ethically and transparently, and so forth…than not. Then you might get to a big tent of social enterprises and social ventures side-by-side, some suited to some areas (eg. NHS / public service delivery where public trust is paramount, so social enterprise is more appropriate) and some to others. Agreeing to disagree in some areas, but broadly aligned on how business itself needs to change in the round. But there is much work to do to get there – and we need to focus on the right definition debate.

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2 Responses to “Trust, social investment, and the real definition debate”

  1. Alastair November 27, 2013 at 4:22 am #

    Social entrepreneurs should stop getting caught in that awkward discussion trap between charity and business. It’s unnecessary, wastes time, and frankly nobody cares. If you’re a social enterprise that relies on donations/charity, then you’re not a social enterprise. Likewise, if you rely entire on peoples compassion in order to sell your product (e.g. Belu, Rubies in Rubble, Toms Shoes) then you won’t make it. It’s business that sells things, business that makes money, business that can invest properly into social problems. everything you take away from the commerce focus is putting more risk into investors money and ultimately endangering the mission. if you can’t pay the bills, you’re screwed.

    I also think there should be social entrepreneurs really looking at how we value money – which is an artificial construct and so can be tweaked to fit our needs. could there be a way to differentiate between a pound that has been made by G4S and one that’s been made by a social enterprise? but tough gig – true “break the system” social entrepreneurship!

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  1. Private murmurings | Beanbags and Bullsh!t - December 4, 2013

    […] up was Director of Business & Enterprise, Nick Temple. In a strongly worded blog post, he tore into the idea that ‘trust engines’, a proposed mechanism to tackle the problem […]

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