Charity or social enterprise or private business...
Posted: 30 Jan 2012
The below piece was written for Charity Finance magazine and can be seen on page 26 of the most recent edition.
HCT is a charity and a social enterprise, are these two forms contradictory? There is no legal definition of a social enterprise as there is with a charity, however I feel that the definition ‘a social enterprise is a company that trades primary for social good’ is, whilst not legal, easily understood.
When HCT Group (formerly Hackney Community Transport) decided in the early 1990s to turn the business model on its head and move away from reliance on grant funding to a reliance on trade, we did so to ensure that the community transport services that we provided were sustainable and could develop. What was, and still is, the most important aspect of the business model is that the social impact created by the organisation is what drives the organisation, what we make the fundamental decisions around, and how we operate.
After almost 20 years of operating to this business model we have learnt many things, made many mistakes, gone up many dead ends and have survived. Not only survived but thrived. And sometimes I think we have been successful despite the legal structures, not because of them.
What is different as a social enterprise as opposed to a charity and why, if they are different, do we have both?
The greatest difference between a charity and a social enterprise is that the latter trade. A social enterprise is a business, therefore it has to compete in the market, it sells products or services to support its social mission, and therefore to be a successful social enterprise you have to be a successful enterprise.
A charity is a charity, and whilst some may be more enterprising than others and some may wish to go down the social enterprise route, it is not for all charities and should not be for all charities. Social enterprise is a different business model; many fantastic charities could not, and should not go down the social enterprise route. If in their line of work there is not a market, not a business, then they should not stray from their charity model.
Over the last five or so years I have spoken to many people who are in the process of turning their charity into a social enterprise. My question is always the same; why?
Social enterprise is not a new funding stream, not a new way to attract money and certainly not a new way to run charities. If anything, social enterprise should be a new way to run business and not a new way to run charity.
So then why is HCT, a successful social enterprise, a charity? There is one very clear reason why we have chosen this path: having a charity as the owner of the group provides us with the best asset lock we can have. It is, for us, very simple. We are custodians of the organisation and we will in time pass the organisation over to the next generation of custodians, in this manner we will build a sustainable organisation for the long term. Having the asset lock means the organisation, or any part of it, cannot be sold for private gain.
It has been said that having a charity structure will reduce the scope for an enterprising approach as you have a board of charity trustees and the Chief Executive does not sit on the board. Governance is very important and whilst in small start up social enterprises it may not be appropriate for a trustee structure I think in more mature and larger organisations the structure works well.
The key, however, is people, be it on your board or in your executive team. You need a board of trustees who understand the business model, who are clear in their focus on social impact and who hold the CEO to account.
In my experience you need a good balance on the board. Even though social enterprises are businesses it does not follow through that the best people on your board are from a business background. In some cases these people can be the least valuable. You need a board that understands social mission, that understands risk, that understands that some things therefore fail, that are clear in agreeing the business plan and that support the executive team in reaching these goals.
A lot of businesses understand risk and enterprise but not social value (or if they do understand social value it is a by product of their enterprise not the reason for the endeavour). A lot of charities fully understand social value (it’s what they do) but risk and enterprise are difficult for them. Social enterprises fit in the space in between and need governance structures that reflect this space.
HCT is a rapidly growing social enterprise, twenty percent plus growth on average each year for the last 10 years. There is no problem with the structure. We have raised capital, have raised bond finance, have taken on significant lease commitments, have bought premises, and we still have a trustee structure. It is easy to blame structures, or to use them as an excuse for not doing something, but in reality that is usually a fault of management, be it board or executive, or both.
HCT Group contains charities, community interest companies, IPS, share companies and joint ventures, not a structure one would advocate if we were starting with a clean sheet, but it is a structure that works. We could introduce another form, a legal form called ‘social enterprise’, but what would we gain? As the top company in the Group is a charity and has the asset lock over all other entities there seems little point in developing new structures.
Where I feel changes could be made which may help the creation of quality trustee boards to run social enterprises is in the role and responsibilities of trustees. A Director of a private limited company has a legal duty to maximise shareholder value (profit?), whilst a charity trustees responsibility seem to be more targeted at minimising risk, not maximising anything! If the legal responsibility of a charity trustee was to maximise its mission then maybe organisations would be more enterprising...just a thought.