Governing social enterprise

Social enterprise is a relatively new business concept to emerge in Australia. Alexandra Cain asks whether governing such a business structure is any different from longstanding business models.

There has been an explosion of a new type of business structure known as a social enterprise in Australia in recent years. An easy way to think about these ventures is that they sit between regular for-profit entities and not-for-profit organisations; they are almost a hybrid of the two. As a relatively new type of initiative, there are still questions surrounding the best way to govern social enterprises. Like every organisation, good governance starts at board level.

Hishara Fernando MAICD sits on the board of Picture the Coast, a social enterprise whose business purpose is to take the world’s longest pictures. Its social purpose is to create tourism and digital opportunities for Australian communities.

Fernando explains that a social enterprise is an entity that conducts its business for a socially beneficial outcome. So it can be defined as a for-profit venture, whose purpose benefits the community. Usually, profits are re-invested back into the business to further its social mission.

“Picture the Coast is structured as a trading unit trust. This is primarily to provide a return to angel investors who funded the concept, as well as to trade as a business that invests its profit into projects with a socially beneficial outcome,” he explains.

Many businesses also choose to be structured as a social enterprise so they don’t need to comply with the demanding requirements that entities structured as a charity need to meet. Meeting the definition of a charity – which offers tax-exempt status – requires an organisation to adhere to a rigorous set of obligations. Steven Bowman FAICD, managing director of Conscious Governance, which offers consulting services to social enterprise boards, explains that such structures may be established to tackle issues including employment, homelessness or disadvantage.

He explains they can be incorporated either as a company limited by guarantee, an association under the Associations Incorporations Act 2009, a partnership, a co-operative, or any other structure that suits the purpose of the enterprise. “The key is they must be formed to create a difference through the medium of a business and use the profits from their business to further these purposes,” he says.

There are no specific legislative requirements for whether an enterprise is called a social enterprise. The key is that the business is focused on a specific social, environmental or cultural purpose. Additionally, says Claire Maloney, these organisations need to adhere to the usual legal requirements set out by regulators such as the Australian Securities and Investments Commission and the Australian Taxation Office. Maloney sits on the board of social enterprise One Girl, which educates young African girls, and runs her own business, The Bravery, which specialises in social cause communications.

Fernando says choosing to be a social enterprise can avoid any negative connotations of being structured as a charity. In his experience, people can be guarded when engaging with charities because they baulk at being approached for donor requests. “When we state we’re a commercial business with a positive social outcome, I have found less resistance.”

Governance requirements

The basic governance requirements for a social enterprise are no different than for other organisations, be they for-profit or not-for-profit. Depending on the structure of the organisation, governance is determined by its constitution and policies.

In terms of an overarching governance structure, Picture the Coast has a management team and a four-person board, which includes an accountant and a lawyer. Fernando explains board members were selected based on commercial acumen and experience in social entrepreneurship. They are remunerated based on business performance and group key performance indicators for the board.

As Bowman explains, typically these structures will have a paid, unpaid or advisory board that provides strategic guidance and ensures the enterprise is focused on both its mission and making a profit. He points to academic research in the UK by Chris Mason and Bob Doherty that shows a focus on the business’ mission is necessary for the board to add value to operations. He says the board should comprise people who are able to ask the right questions to develop innovative strategies to help the organisation achieve its goals.

One of the challenges of running a social enterprise is striking the right balance between the business’ social purpose and its obligations to make money. To this end, Picture the Coast is run on a project-by-project basis. “Our goal is to make each project profitable, but the core values of the project must be for a socially beneficial outcome,” says Fernando. For example, the business recently photographed an 18-metre picture of the Corio Bay in Victoria, commissioned by the National Wool Museum.

Bowman acknowledges there is a constant balancing act between profit, purpose and stakeholders’ needs. He says developing a business that trades successfully as well as makes a difference in the world is a relatively new challenge for most entities. So the composition of the board is critical, and requires a mix of entrepreneurs, business specialists and social purpose experts. Ideally, these people should be visionaries who can picture a different world created through the work of the social enterprise.

From Maloney’s perspective, how the board balances making a profit and tackling social problems is tied to the aims, goals and objectives of the enterprise.

“That said, if you are a for-profit organisation tackling a social issue, you’ll want to try to generate as much income as possible to scale and grow your program within the social need you are trying to meet or solve. Predominately the board will be focused on the purpose-driven aims of the enterprise, over generating a profit, to deliver the operational outcomes of the organisation.”

Despite this balancing act, Maloney says social enterprises are not necessarily more challenging to govern than traditional not-for-profits or indeed for-profit structures.

“How challenging an enterprise is to govern is often related to how complicated the structures or strategies of the enterprise; every organisation can experience governance challenges.

“The key thing to focus on is the purpose at hand and to make sure individuals, directors and the board are focused on the greater objectives and meeting social needs.”

Social enterprises: the future

Although a social enterprise arrangement isn’t suitable for every business, Fernando says this structure gives Picture the Coast an edge, in a world where there’s a growing movement of purpose-centric rather than profit-centric businesses.

Says Maloney: “There are many signs pointing to the rise of mission and purpose-driven social enterprises, you just need to look at the rise of ‘B Corporations’ [the US equivalent of social enterprises] or the number of traditional businesses that are now integrating social or environmental practices and initiatives with their usual activities to know that this is a growing sector.”

While it’s unlikely that social enterprises will take over from traditional for-profit businesses any time soon, they are certainly a growing part of the commercial landscape. While their governance requires considerations other businesses need not make, they do provide an interesting avenue for directors who wish to contribute to the greater good and at the same time ensure businesses with a social purpose still maintain a business mindset.

What makes a social enterprise?

• A clearly defined public purpose.
• A trading business that derives its funds from commercial activities, rather than donations or grants.
• Any profits re-invested back into the business to help achieve a social purpose.