The Social Enterprise Revolution

To date there have been three major reorganisations of society – the Agricultural, the Industrial, and the IT and Digital Revolution. Each fundamentally changed the way society operates. We may now be on the cusp of another revolution which may require a societal and technological adjustment equivalent to that of the Renaissance.

There is no doubt that businesses are now working in a ‘pressure cooker’ environment – globalisation, shifts in economic influence, increased consumer awareness and power, along with swift changes in technology, are drastically changing the paradigm in which we live and are forcing businesses fundamentally to change the way they operate. Earlier this month, Tim Smit, Co-Founder of the Eden Project, spoke to Criticaleye Members and guests on the subject of social enterprise and what he believes will be a ‘social revolution’. He asked the question: will businesses respond to this by becoming social enterprises? Whether you are behind him or not, he is not alone… some believe that social enterprise could be the most important innovation in capitalism in 200 years.

Ed Mayo, Secretary General of Co-operatives UK, says, “Changes in economy and technology are turning business models on their head. The traditional corporation was designed to hold and use capital and assets, but the new business drivers are around innovation and knowledge which require opening out and the capabilities for co-operation. In many ways, the co-operative sector, the original social enterprise, is now the model from which emerging businesses are learning.”

According to government figures, there are 62,000 social enterprises in the UK contributing £24 billion to the economy and employing nearly 800,000 people. Despite the recession, social enterprise saw good growth with 56 per cent having increased their turnover from the previous year, compared to only 28 per cent for SMEs.

However, the definition of social enterprises is still foggy, and can often be looked upon as not-for-profit organisations. “I rail against this all the time,” says Tim.

Social enterprises are for-profit organisations that invest a portion of their profits back into society. “Social enterprise is a corporate structure that takes account or even has shareholders that include the community of interested parties all around the sphere of its operations,” says Tim, whose own enterprise has reinvested over £800 million into the Cornish economy (a figure greater than all the EU subsidies to the region combined).

Sally Wilton, an entrepreneur who founded and then sold Etc Venues to private equity investors, is now the Founder of The Lexi Cinema, London’s first social enterprise community cinema. Her personal definition of a social enterprise “would be a business where the profits are re-invested or covenanted to another body ‘to do good’. I think businesses should respond to Kofi Annan’s call of ‘using capitalism to do good’. I actually find it very refreshing that there is no single model.”

Just as most companies have a clear business mission, social enterprises also have a clear ‘social’ mission. Sophi Tranchell, Founder of Divine Chocolate, says, “The social mission should be at the heart of the business – this makes it good at what it does and defines where the money goes. This is a significantly different way of doing business from the dominant profit maximisation model. It changes who has the power and who gets the money.” Sophi was recently named Ernst & Young’s UK Social Entrepreneur of the Year.

Nigel Kershaw, Chief Executive of Big Issue Invest and Chairman of The Big Issue Company says, “Social businesses are redefining what businesses do and are challenging philanthropy. They are a surplus-generating business that put social impact at the heart of what they achieve.” The Big Issue Invest is the Big Issue’s specialist provider of finance to social enterprises. The fund provides finance to socially-driven businesses that will have a real and measurable social impact while also delivering financial returns for investors. As of October 2010, they had invested nearly £7 million in 27 social enterprises with measurable impacts on society.

Nigel’s intention with the fund was to replicate what happened with the magazine. Although the premise behind The Big Issue is socially minded, since its inception it has been run as a business, not a charity. It now has 2500 vendors who are homeless or vulnerably housed. Selling the magazine, which they purchase for 85 pence and sell to the public for £1.70, allows vendors the first step towards getting off the streets.

Although The Big Issue is a staple for most Londoners, the mere premise of the idea would have been laughable to most financiers when it was pitched. Big Issue Invest allows such entities to grow and create more of a social impact through a mix of loans, quasi-equity and equity.

Being a socially aware organisation is by no means a new idea. In fact, the roots of social enterprise date back to the 1840s, when a worker’s co-operative was set up in Rochdale. Not the first of its kind, The Rochdale Society of Equitable Pioneers was founded by a group of artisans who had been forced into poverty by the industrial revolution. The store provided members (who paid £1 to join) with food that was otherwise unavailable to them.

Their principles for cooperation, the Rochdale Principles (drafted in 1844), have formed the basis for which co-operatives around the world have been built and are used to this day.

Born out of crisis, the idea of an organisation giving back to a society in need changed the way business was done. Will the changes facing organisations today be the catalyst to transform traditionally accepted business models?

“There has to be a systemic change to the way businesses are run. Organisations can no longer be driven by short-term value,” says Nigel. “Long-lasting investments need to be made in lieu of short-term profits.”

Tim believes that, within 25 years, many of the ‘big businesses’ will be social enterprises. However, there is an intrinsic problem in that social enterprise has been labelled as the antithesis of big business. If the actual (or even perceived) focus of social enterprise is to reinvest profits into society then it is a fundamental departure from the idea of maximising shareholder profit. This is a major obstacle to widespread adoption, at least in the current environment. “One of the things that you cannot get around is the fact that a public limited company must maximise its profits,” says Tim. He continued, giving the example of Henry Ford who was sued by shareholders for providing suitable accommodation close to factories so that his employees would not be exhausted on the line. Ford could not prove that this investment would yield more profit and so was forbidden to continue and forced to pay shareholders back personally.

Ed says, “Ultimately, it may not be possible to serve two masters (shareholders and stakeholders). That is why many social enterprises, such as co-operatives, limit the rights of external shareholders in preference to the input and capital from members engaged more directly. But, for as long as the two hang together, any business will be passing up opportunities for profit if they ignore the social enterprise paradigm.”

There are a number of emerging examples of existing giants of capitalism taking up the challenge of social awareness and trying to ingrain it into the way that the organisation operates.

An excellent example of how corporates are able to support social enterprise is through Oxfam’s partnership with Marks & Spencer – the M&S and Oxfam Clothes Exchange – which, since January 2008, has attracted more than 1.5 million M&S customers:

  • Saved over 5 million items of unwanted clothing from going to landfill
  • Raised over £3 million for Oxfam…
  • … money that could be enough to help provide safe water for 4.8 million people or…
  • … 600,000 mosquito nets to protect children from disease or…
  • … 3 million new school books

The Clothes Exchange encourages donations of unwanted M&S clothes to Oxfam by providing a £5 M&S voucher in return. The voucher is redeemable against every £35 spent at M&S.

The positive impact of the partnership – which initially only ran for a six-month trial – means the Clothes Exchange will continue indefinitely. The Clothes Exchange has also supported one of Marks & Spencer’s Plan A environmental objectives to encourage the recycling of clothes, and reduce the one million tonnes of clothing sent to landfill each year. Richard Gillies, Director of Plan A & Sustainable Business, says, “The success of the M&S and Oxfam Clothes Exchange shows that it is possible to be responsible, to support social enterprise and save money at the same time.”

Unilever is also a good example of a company that goes beyond traditional CSR. Paul Polman, CEO of Unilever, says, “A company’s contribution to society is absolutely critical in today’s environment. The global recession has shown us what greed and mismanagement can lead to and affect society at large. It is very clear that this world faces some considerable challenges: poverty, water, global warming and climate change. Businesses like Unilever have a responsibility here and thus a major role to play. This role is, frankly, very appealing to me. Every day in our business about two billion people use one of our brands. Over two-thirds of greenhouse gas emissions and half the water used in our products’ lifecycle come from consumer use so, if we do the right thing and leverage this enormous scale, we have a tremendous opportunity to make a major impact on society and the environment. As a social enterprise, we have ambitious plans to grow Unilever, but not at any price. We must develop new ways of doing business which will ensure that our growth does not come at the expense of the world’s diminishing natural resources.”

This is not to say that Unilever is immediately going to transform in a social enterprise as defined in this article. It also does not mean that society will demand that major corporates must completely and immediately reinvent themselves in order to be socially acceptable. Large organisations can have a dramatic impact simply by supporting social enterprises by, for example, lending resource, mentoring or bringing their CSR policies to life by integrating the best social enterprises into their supply chains and encouraging their workforce to play their part. “Large businesses can buy goods and services from social enterprises. An example of this would be O2 who have created a dedicated product for social enterprises,” says Sophi. “Some of the corporate world is recognising the importance of social enterprise and the way that they are able to respond to some of the social, economic and environmental challenges of today.”

It remains to be seen if Tim’s belief that the FTSE 100 will be populated by social enterprises will ever come to pass. What is certain though is that big businesses can no longer turn a blind eye to the ills of the world and society. Organisations have a clear and major part to play in a sustainable future.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

 

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