Co-op 3105:Social Enterprise Development Third Year, Semester II Department of Co-operative Studies

Social Economy The social economy is formed by a rich diversity of enterprises and organisations, such as cooperatives, mutuals, associaltions, foundations, social enterprises and paritarian institutions, sharing common values and features: • Primacy of the individual and the social objective over capital • Voluntary and open membership • Democratic goverence • Combination of interest of members/users and/or the general interest • Deference and application of the principles of solidarity and responsibility

• Autonomous management and independence from public authorities ,though cross-sector collaboration is common • Reinvestment of at least most of the profits to carry out sustainable development objectives, services of interest to members or of general interest Social economy enterprises and orgainzations have different sizes, ranging from SMEs to large companies and groups that are leaders in their markets, and operate in all the economic sectors. Social economy refers to not-for-profit activity geared towards meeting social needs. Third Sector organisations, the social economy covers a range of services, such as training, job and entrepreneurial experience, housing,welfare, consumer services, and environmental upgrading.

• The Social economy thus marks economic activity(traded and non-traded) with a social remit. • The social economy can inculcate an ideology of selfmotivation and self-provision, helping to return individuals as free market agents. • The Social economy is seen as part of a community-building project, helping to revitalize solidarity and reciprocity in localities of common ailment. • The social economy in the European tradition have long been an important part of the European social, economic, and political history,

• Social economy organisations have been grouped into four major categories: cooperative enterprises, mutual societies, foundations and associations, whose legal form may vary considerably from one country to another. Cooperative enterprises • A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise . • Cooperatives often are an effective method to overcome economic and social difficulties.

• In both industrialized and developing countries, cooperatives continue to contribute to socio-economic development, support employment growth and sustain a balanced distribution of wealth. Mutual Organisations • A mutual or mutual aid society can be defined as an association that offers insurance services to the benefit of its members. • Mutual aid societies are based upon reciprocal contracts and require that members receive benefits as a consequence of their participation.

• New forms of mutual aid societies are starting to develop in countries where social security systems are at an early stage of development and only cover a small part of the population. Associaltions • An association is a group of people who join together for a particular purpose and give rise to a lasting organisation. • Associations can be formal, with rules, Mutuals can be established to cover a wide range of risks including health, death, funerals and bad harvests or catches. • Association can be either general-interest or mutual-interest organisations.

Foundations and other organisations • Foundations are legal entities created to accomplish specific goals for the benefit of a specific group of people or of the community at large, through the use of an endowment or systematic fundraising. • These organisations are above all committed to promoting social, religious educational activities or various general-interest activities according to the founder’s will. • Foundations can take of some other country-specific organizational form. • Foundations typically take on one of two roles: in some instances they engage directly in the provision of goods and services, while in others they provide funding for specific categories of people or activities, including the production of specific services.

• Social economy organisations can even adopt enterprise forms that typically belong to the for profit sector. • Some agricultural cooperatives have created shareholder companies in order to more effectively pursue the commercialization of their products. The universe of social economy organisations, social enterprises have emerged in recent years as a new and very significant phenomenon not only throughout Europe but also in other continents. The concept of social enterprise is increasingly used to identify a different way of doing business, which occurs when enterprise are created specifically to pursue social goals.

• The European commission gives the term social enterprise the following meaning: an operator in the social economy whose main objectives is to have a social impact rather than make a profit for their owners or shareholders. • It operates by providing goods and services for the market in an entrepreneurial and innovative fashion and uses its profits primarily to achieve social objectives. • It is managed in an open and responsible manner and in particular, involves employees, consumers and stakeholders affected by its commercial activities.

• A Social enterprise or social business is defined as a business with specific social objectives that serve its primarily purpose. Social enterprises seek to maximize profits while maximizing benefits to society and the environment, and the profits are principally used to fund social programs. • Maximizing profits is not the primary goal of a social enterprise as is with a traditional business. • Unlike a charity, social enterprises pursue endeavors that generate revenues, which fund their social causes.

• Regarding employment, preference is given to job-seekers from at-risk communities. • Funding for a social enterprise is often obtained by selling services and goods. • The concept of social enterprise was developed in the U.K in the late 1970s to counter the traditional commercial enterprise. • Social enterprises exist at the intersection of the private and volunteers sectors. • The seek to balance activities that provide financial benefits with social goals, such as housing for low-income families or job training.

• The concept of social enterprise overlaps with the traditional social economy orgaisations and cuts across legal forms, as an entity that operates as a social enterprise might choose to be registered as an association, cooperative , charity etc. as a private enterprise or as one of the specific forms set up in recent years under national legislation. • A benchmark sometimes used for a social enterprise is that at least 50% of its turnover is earned income, although opinions vary on what the best threshold would be.

• A social enterprise is typically created when a social entrepreneur or founding group of citizens sharing a specific and well defined social goal succeed in translating it into a new organization displaying some key features: the activity it performs is of general interest and it is managed in an entrepreneurial way, striving to maintain a constant balance between the social and the economic dimension. • Social enterprises have made it possible to provide social and general interest services in a way that is economically sustainable and in many ways more effective and efficient than what could be done by the public sector alone.

• The strong social vocation of these enterprises means that the profits gained by a social enterprise, are mainly reinvested in the organisation and used to support its mission. • One specific feature of the European social enterprise tradition is the creation over time , of specific institutional arrangements designed to pursue a social goal in a stable and continuous way. • Social enterprises adopt organizational that further the participation of a range of stakeholders including those that are directly involved in the activities of the enterprise as workers, users, or volunteers.

• Many social enterprise include a combination of different types stakeholders in their membership or decision-making structures. The fields of activity of social enterprises • Social enterprise come in very different shades and colours depending on the development of the welfare system, civil society, the social finance market and dedicated public policies in each country. • The two main fields of activity are work integration and welfare service provision

• While welfare service provision is largely supported by public funding, work integration often is accomplished thanks to the production of goods and services that are traded on the market. • The service of work integration social enterprises include for instance cleaning, gardening, facility management services, furniture production, renovation, re-use and so forth. • Social enterprises display a great variety also in terms of their size. • The expansion of social enterprises in new fields, based on the interests and needs of their communities and society.

• Social enterprises have proven to be extremely versatile organizaitons, which share the core common features described in the previous section but that over the years have been able to engage in a variety of activities and constantly innovate their products and services. • Social enterprises are at the vanguard in the transformation of our societies and economies, offering an alternative way of generating income, realizing values and balancing work with private life.

Legal structures and their evolution • Social enterprise initiatives were set up using legal forms made available by the different national legal systems, primarily not for profit, including for instance associations, foundations and cooperatives • Social enterprises were established as associations in those countries where the legal form of association allows for a degree of freedom in selling goods and services on the open market • Social enterprises to this day operate using pre-existing legal forms without any particular modification, including the legal forms used by mainstream small and medium sized enterprises such as the limited liability company.

• Starting in the 1990s specific legal forms were created either by adapting the cooperative model or through the introduction of legal forms that recognize the social commitment taken on by a plurality of entities, with more attention being paid to the structural features of social enterprises.

Accountability and Social Enterprises • An organization is accountable to the extent that its activities can meet the public’s expectation of social responsibility, which means that the organization is not just spending money properly but doing so in a way that has a positive social impact. • Accountability is an information reporting process in which actors answer higher authorities and are held responsible for actions. • Accountability can be externally driven and be internally generated • Accountability information come from multiple sources which usually can be categorized as the internal and external sources of accountability.

• Internal users are those within an organization who use financial information to make day-to-day decisions. Internal users include managers and other employees who use financial information to confirm past results and help make adjustments for future activities. • External users are people outside the business entity who use accounting information. Examples of external users are supplies, banks, customers, investors, potential investors, and tax authorities. • There are four types of accountability in democratic system which may be driven by external forces like political pressure and legal regulations, or be internally initiated in the hierarchy and professional communities.

• Seven sources of demands for accountability are (1) market exchange: properly functioning markers allow buyers and sellers to exchange goods and services to ensure accountability through an invisible hand (2) Legal accountability: it is required by public managers and fulfilled by following laws and regulations (3) Political accountability: it emphasizes how public organizations achieve their missions to serve the public (4) Managerial authority: leaders and managers in organizations use formal and informal mechanism or techniques to enforce accountability needs

• (5) professional control: it is enforced through certifications, norms, ethic codes, and standards maintained by trade associations and occupational communities • (6) informal networks: personal ties, professional affiliations, and network relationships affect employee’s attitude and belief toward accountability system • (7) personal vales: values are important to have influences on making accountable actions and decisions. • Accountability can be considered as an information generation process that has at least two essential elementls.

• One is the entities that have higher authority to hold actors at lower position accountable • Another element is the value that actors are accountable for. • Examining with the two essential elements, accountability in social enterprises may be different from it in traditional public organizations in terms of the sources of accountability and the values that social enterprises are expected to achieve. • The sources of accountability, social enterprises have mixed stakeholders from traditional nonprofits and commercial organizations; in terms of the expected values, social enterprises are driven by the double bottom line: financial success and social mission achievement.

Sources of Accountability: Mixed Stakeholders

• Accountability is a process of fulfilling information demands from higher authorities. • Nonprofit organizations have responsibility for reporting accountability information to their stakeholders • The accountability system of social enterprises, we need to review the diverse stakeholder community and its demand for information and expectation of organizational performance. • Social enterprises have mixed stakeholders from traditional nonprofits and commercial organizations. • Traditional nonprofit rely on charitable donations, but social enterprises may receive funding from investors who request return of investment.

• Mixed stakeholders in social enterprises may incur conflicting accountability relations • Social enterprises build accountability relationships with consumers on the basis of economic exchanges • Social enterprises also have responsibility to their clients who have relied on social enterprises provide services without charge • Social enterprises may commit to provide free services to a group of disabilities who would expect stable and continuous services instead of social enterprises’ risky innovation.

Expected Performance: Double Bottom Line

• Social enterprises are established to create social value and to solve social problems that governments and markets fail to address • Social enterprises do so by operating in the area between traditional non-profits and traditional for-profit organizations • Unlike these traditional organizations, social enterprises are driven by the double bottom line: the need for financial success and the need to achieve its social mission • The problem with this is that the goals of creating social and economic values do not always coexist without conflict.

• Bielefeld also indicates that there are tensions and a need of trade-off between nonprofit missions and economic profit in social enterprises • There is a concern about the engagement in commercial activities that may drive social enterprises drift away from their social mission • Nonprofit organizations engage in commercial ventures not directly related to their core missions • Engaging commercial activities may cause social enterprises drifts away from the mission statement

• When social enterprises engage in commercial activities , its leaders and staff will increase they spend on commercial business, which diverts their time and energy away from the organization's primary mission. The Analytical Framework for Social Enterprises

• There are both external and external stakeholders who demand accountability information of social enterprises. • Internal stakeholders of social enterprises include the executive, board members, staff and volunteers who involved in the process of decision making, and goods and services producing activities in social enterprise. • External stakeholders of social enterprises include the government, donors, clients, potential investors, customers and the public who own the authority or resources that may have influence on social enterprises’ operation.

• Internal and external stakeholders expect social enterprises to not only create social impact but also maintain their financial sustainability. • Accountability in social enterprises is distinctive in two aspects: mixed stakeholders and double bottom line.

Cell 1: Accountability for mission • Social enterprises consist of the actors, including executives, board members, staff and volunteers, who are sharing the same vision and mission. • Members in social enterprises are motivated by mission. • The shared belief influences individuals on making accountable actions and decisions that lead the organization generate social impacts.

• As accountability information users, internal stakeholders, including board members, executives, staff, and volunteers need the information about whether and how the projects and activities contribute to desired social change. Cell 2: Accountability for financial sufficiency • Social enterprises are expected to be financially self-sufficient by generating adequate income to cover their operating and social programs costs without continued reliance on donor funding. • Social enterprises are encouraged to diversify income sources and adopt business-oriented resource management skills to ensure they will be financially sufficient.

• Cell 3: Accountability for legitimacy • Social enterprises are established to “strengthen, expand, or enhance their missions by creating more meaningful social impact, by reaching new client markets, or by diversifying their social services.” • Social enterprises obtain their legitimacy by carrying out social impacts and fulfilling the expectations of external stakeholders effectively. • External stakeholders, including clients, donors, and the public, need the accountability information about whether and how social enterprises generate positive social impacts to the society.

• Social enterprises set in the non-for-profit form should follow the legal regulation and rules to maintain their tax exemption status. • The government’s legal regulation is one of the sources of legitimacy accountability.

Cell 4: Accountability as market forces • Generating income through business-oriented activities is a common strategy that social enterprises adopt to diversify funding sources and maintain financial stability. • The properly functioning markets can hold social enterprises accountable. Social enterprises provide quality services with competitive price to successfully attract customers, or they would be eliminated through market competition.

• A feasible and profitable business model can help social enterprises attract the funding from potential investors. Investors are the audience of social enterprises’ business plan for the purpose of obtaining financing. • Social enterprises are expected to achieve their mission, and be self-sufficient financially. • Social enterprises also need to fulfill their external stakeholders ’expectation on the market performance. • The major challenge social enterprises facing is to make a logical connection between creating social impacts and generating revenue activities.

• The crux of the individual social enterprise lies in the specifics of its dual objectives – depth and breadth of social impact to be realized, and amount of money to be earned. • Mission drives social value creation, which is generated through not-for-profit programs. • Financial need and market opportunities drive economic values creation, which is delivered through business models. • The social-related and economic-related information should not be treated as disjoined pieces that are generated merely for serving different accountability purposes respectively. • Investors may request recipient organizations to keep certain business secrets in order to maintain competitiveness and profitability.

Chapter III Governance and Social Enterprises • The practice and study of governance has revealed techniques and mechanisms for managing organizations to realize the interests of their primary beneficiaries.

• Over time, a particular legal framework has evolved around socially orientated organizations. This framework broadly encompasses: • The legal form used to incorporate the organization: - trusts/unincorporated associations: - clubs/village halls; - partnerships; - industrial and provident society companies; - limited by guarantee; - limited by shares, PLC:

- community interest company; - limited liability partnership; - charitable incorporated organization; • The rights and responsibilities of board members, as defined by the Charities Act 2006, as well as official guidance, such as Trustee Remuneration Guidance; • The supervision of some types of SEs by defined institutions (the Charity Commission – see Locke et at., 2003). • Governance can be defined broadly as a ‘set of relationships between [an organization’s] management, its board ... and other stakeholders’.

SEs exist for a variety of reasons, including: • Democracy; • Social justice; • Empowerment of minority or excluded groups; • Entrepreneurship; • Sustainable development; • Working in partnership. These elements generally fit with the aims of SEs – that is, they work in partnership with staff, service users and support groups to achieve social (or environmental and economic ) outcomes.

• The points made above illustrate how governance might fit with the expected characteristics of SEs as well as the potential groups that might affect or be affected by the governance of such organizations. Table 3.1 Stakeholders’ expectations of the governance of SEs Stakeholder groups relevant to governance

Expected features of governance of SEs

Service users

Ethical governance

Internal staff (mangers, directors, trustees)

Board-level strategic leadership

Local communities

A requirement to manage stakeholders’ interests Enabling and supporting an internal culture of

Local government

maximizing social benefits Promoting inclusion of stakeholders

Funding bodies

Managing

the

establishment

Support groups

accountability and transparency

of

a

culture

of

• ‘Governance’ involves leadership of the board (including, but not limited to, a group of trustees) and management of different interests. • Strategic and operational board-level leadership, enabling service users, managers, trustees and other defined stakeholders to create and maximize social benefit. This definition encapsulates a number of linked elements: • The general tasks of the board in the SE, recognizing that it has strategic and operational responsibilities; • The groups they influence and are influenced by; • The raison deter of the SE – creating and maximizing social benefit.

• Formal systems of performance measurement, includes measures such as testing how well the organization has performed against its objectives and the processes used to check performance. Table 3.2 Opportunities and challenges in the governance of SEs Opportunites

Challenges

Establish strong strategic leadership

Board management difficulties

Provide staff empowerment and upskilling

Identifying and resolving leadership issues

Enhance democratic accountability

Prohibitive cultural barriers to change

Establish a level of competitiveness in new and Enabling the inclusion of stakeholders existing markets Foster and maintain board-level transparency

Managing

function-specific

expertise

(such

as

Manage and deliver benefits to a range of identified marketing) stakeholder groups

Problems with identifying and managing diverse stakeholder interests

• The unique element of and SE’s board, and its governance activity, is the management of the defined social/business objectives. • The boards of these organizations have the difficult task of ensuring that the organizations can meet their (often conflicting) objectives. • Objectives are considered to conflict when their simultaneous pursuit entails trade-offs, resulting in lowered performance in the attainment of one or more of the objectives. • In the traditional corporate view of governance, the board is charged with ensuring that managers are working towards the agreed goals of the organization.

• Board members have a fiduciary (legal) and moral duty to make sure that primary stakeholders benefit from the organization’s activity. • This need may originate from source or arise when a decision has already been made at board level and it then requires immediate and ongoing consideration. • The stakeholder model has prevailed for a long time in academic circles and remains popular due to its roots in social responsibility and application to non-profitmaking organizations. • SEs have a shared history with non-profitmaking organizations, prompting a transference of ‘values’ from one to the other.

• The stakeholder interpretation of governance of SEs supports the notional integration of various interests into decisions made within the organization. • Therefore, the stakeholder model promotes diverse interests in the organization, provided that the individuals or groups concerned influence or can be influenced by the organization. • Such efforts are intended to enhance the organization’s accountability by leveraging the moral rights of marginalized groups. • This model is very popular and has grown in significance in recent times because many organizations recognize the long-term benefit of stakeholder engagement, but the approach can also be problematic.

• The stakeholder model is less radical to non-profitmaking organizations than it is to corporations. • The stakeholder model is useful for corporations because it legitimizes a previously hidden or even non-existent dialogue between the organization’s internal staff and other neglected though influential groups. • The stakeholder model is useful for corporations because it legitimizes a previously hidden or even non-existent dialogue between the organization’s internal staff and other neglected though influential groups.

• For the stakeholder model to be useful to SEs, then, it must help to explain how such relationships can be managed more effectively. • In theory, the communities these SEs serve are also (mainly) the same individuals who run the organizations. • Therefore, to maximize their benefits, they must pursue the best interests of the organization. • Like stakeholder theory, stewardship theory does not consider other factors that can influence managers and directors to make them more effective.

• A prominent approach that provides an option other than the stakeholder and stewardship views is the institutional theory of organizations. • This approach emphasizes the importance of relational and cultural influences on governance and places legitimacy at the heart of analysis, which is useful for examining the roles of stakeholders. • The legal (regulative) influences are the formal expectations regarding the behavior and performance of board members and other staff.

It has established a strong set of core values to illustrate this and communicates if to its many stakeholders. • Excellence as an organization and as an enabler to other organizations, we strive for excellence in everything we do, practice and demonstrate. • Inclusive and diverse the global alliance is inclusive and diverse in terms of the people and organizations involved and in its ideas. • Innovative promoting and multiplying innovative approaches for increasing and diversifying sources of support. • Accountable the Resource Alliance holds itself accountable to those it works with and promotes the highest standards in resource mobilization and fundraising practice. .

• The final component in this view is a consideration of the role of cultural/cognitive elements of the institutional environment, which requires the analysis of taken-for-granted aspects of SEs. GOVERNANCE CHALLENGES Accountability • The uniting factor between governance contexts is the concept of accountability. • Accountability is defined as the ‘duty to provide an account (by no means necessarily a financial account) or reckoning of those actions for which one is held responsible’. • The value of accountability for SEs is that it symbolizes an ethos of proving the effectiveness of its governance, focusing on the performance of individuals as well as management teams and the board.

Transparency • Making activities and decision-making processes transparent encourages trust in them among the organization’s stakeholders. • Often, ensuring transparency and the efficacy of such activities is achieved by subjecting them to external scrutiny for verification. • Transparency is recognized as a central feature of good governance across sectors, including non-profitmaking organizations and SEs.

• The formal and informal safeguards and pressures that ensure the proper running of an organization represent transparency. • Both formal and informal elements are integral to ensuring that governance is transparent and thereby contribute to its legitimacy. • Transparency is valuable because it fosters trust and confidence in key stakeholders about the governance of the organization. • A commitment to transparent governance processes signifies that the board is performing more effectively than if they are not committed to standards of transparency.

• Though the importance of transparency in terms of the performance of the board is noted in the academic literature, there are many other factors that will influence perceptions of ‘effectiveness’. • There are two types of transparency: financial and governance transparency. Democracy • Democracy is a central component of the organizational life of many SEs. The tenets of fairness, equality and inclusive decision making/ participation are all easily identifiable with SEs.

• Democracy in a broader political context, in relation to liberty and equality. • Democracy is a central part of governance because it pays need to notions of equity and trust that should exist in key fiduciary relationships, where powerful internal actors represent the interests of beneficiaries. • Democracy refers to the achievement of specific objectives, including how directors are recruited, tenure and voting rights. • Democracy is crucial to governance because it demonstrates that the board is representation of stakeholders and members serve on the basis of approval conferred by key stakeholders.

• Democracy is embedded in systems of voting, where all interested parties have allocated rights to influence the management of the organization and its composition. • This enhances democratic accountability as there is participatory consultation and it becomes an expected feature of governance. Critical Issues Managing diverse stakeholder interests • The types of stakeholders also depend on the nature of the service provided by the SE, as some enterprise activity might require that particular individuals serve on the board.

• Their interactions with the board are determined according to specific stakeholder needs that require representation. • The acceptance of accountability to an increased number and variety of stakeholders, other than merely shareholders, is a fundamental principles of SEs. The role of trustees • The role of trustees in the governance of SEs closely resembles the role of non-executive directors in mainstream governance. • Trustees should ensure fair and honest accounting for interests at board level. • In some organizations, trustees have a legal responsibility (and liability) to ensure financial probity.

A relational model for the governance of SEs • Four main groups are identified in the model: primary beneficiaries, managers, the board of directors and a stakeholder committee (presently this is represented by a board of trustees).

Primary beneficiaries/service users • Naturally, the central focus of governance activity is that of creating the conditions for staff to maximize the social benefit to the primary beneficiaries and/or service users. • The primary beneficiaries group overlaps with the other key governance groups. As recipients of the social benefits generated by the SE, this group has key inputs to make to strategic decision making and consultation on matters including democratic accountability.

Managers and internal staff • Managers (or key staff) form an important part of the SE governance model. • The board to participation by internal staff, who traditionally, have been excluded from the board. • This inclusion might enhance the SEs transparency and accountability, though ensuring that it is within the remit of the stakeholder committee.

• The outputs could include better product/service delivery, skills development and added value. • The more useful this group is at board level, the more the board’s credibility to service users and external stakeholder groups is enhanced.

The board of directors

• The conception of the board of directors is as an instrumental, functional group of business experts. • This differentiates it from the role of a board of trustees – a body that is expected to fulfill two roles: oversight and strategic impetus. • This is ineffective because there is no separation of powers. • In this model, however the board of directors, serving the key stakeholders, is relieved of the task of holding itself and the entire organization accountable.

• The board also has fewer members than is usual, avoiding the problem of large boards indicated in the literature. • The board of directors would accommodate a chief executive, who may be drawn from outside the organization. The stakeholder committee • The stakeholder committee is a body that coexists but is independent of the board of directors. • Boards of trustees are required to provide a range of inputs on an ad hoc basis. • Repositioning this board as an oversight committee could define the exact boundaries of the committee’s responsibilities.

• The committee has the sole task of ensuring that the methods the board adopts to achieve this are transparent, accountable and concordant with institutional norms. • The responsibility for strategic development is the remit of both the board of directors and the stakeholder committee. • First, committee members must have an agreed brief and remit in terms of responsibility. This needs to determine where the responsibilities of the group begin and end. • Second, the group must be able to meet on a convenient and relatively frequent basis if it is to influence the governance of the SE. • Finally, the committee has to be responsive to the dynamic operational environment of the organization.