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Is social enterprise the future of business?

Author: ICAEW Insights

Published: 26 May 2023

The world of business may sometimes have a bad rep, but it is possible to create a business that is both successful and does good. Patrick Nash offers advice on turning the social enterprise theory into practice.

We live in a time where business has a bad name. Many of the UK’s largest companies are driving inequality, greed and the climate emergency. The public’s faith in these businesses is declining rapidly. 

While we have seen a significant growth in companies that seek solutions to the climate emergency, most investment goes to those that can demonstrate fast returns – all too often accompanied by low wages, excessive profits and damage to the environment. Even good corporate intentions can quickly become greenwashing.

Social enterprises are businesses that are changing the world for the better. They all share a vision for an equitable, inclusive and regenerative economic system for all people and for the planet. Many economists and climate scientists accept that business needs to address the climate crisis head on if we are to have a chance of meeting the UN’s Paris Agreement target of limiting the temperature increase to 1.5°C above pre-industrial levels.

However, they need to become mainstream if we are to find solutions to the multiple problems the world faces. Fortunately, increasing numbers of entrepreneurs, managers, directors and shareholders want their company to share a version of this vision. Typically, they rely on accountants, auditors and lawyers for advice on the best corporate structure and governance to meet their objectives. 

Setting up a social enterprise

There are a range of corporate structures for social enterprise and the following are among the most common.

  • Co-operatives are businesses owned and controlled by their members, who can be customers, employees, residents or suppliers. Profits are shared between people who have a stake and a say in how the co-op is run. In 2020 there were 7,063 cooperatives in the UK with 14 million members and £38.2bn turnover. Best known and largest include The Co-operative Group and John Lewis Partnership.
  • Community interest companies (CICs) follow a structure designed for social enterprises where there is a wish to use their profits and assets for the public good. There are more than 26,000 CICs in the UK. Most are start-ups, but the biggest tend to be spin-outs, especially from the NHS and local authorities. Larger CICs include Charity Bank, an ethical bank that uses its savers’ money to lend to charities and social enterprises, and Bethnal Green Ventures, Europe’s leading early-stage, tech-for-good venture capital group.
  • B-Corps. The growth of the B-Corp movement has galvanised a form of social enterprise in the private sector of the economy. Existing companies can become B-Corps by going through a rigorous assessment process that ensures they meet high standards of social and environmental performance, transparency and accountability. Successful B-Corps include ethical toilet paper company Who Gives a Crap, clothing company Patagonia and London law firm Bates Wells.

Common mistakes and how to avoid them

Most of the mistakes social entrepreneurs make are no different to those of any other business. All businesses need good financial management, should make a profit, provide a quality product or service, treat their employees well – and more. However, there are also some issues that are specific to social enterprises.

Are values in conflict with profit? The challenge for many is to remain true to the values of the business while making profits. Growth requires investment and investment requires profitability. But many social enterprises are categorised as ‘not-for-profit’ organisations. This technical definition can be misleading as what it means is no distribution of profits to individuals. I have heard some social entrepreneurs saying that they don’t need to ‘make a profit’ as they have no shareholders. This is simply not true.

Raising investment. Choosing the right corporate structure for a social enterprise must include an assessment of investment requirements. A company that does not issue shares – for example, many co-operatives and CICs – will find raising equity investment hard, if not impossible. Some debt finance will require shareholding too. 

Starting up a social enterprise requires a business plan that includes an analysis of investment requirements at the beginning and beyond, and this may drive the chosen structure. Some will be reliant on public sector contracts and a CIC will often be the best structure for this.

My top advice for creating a successful social enterprise.

Live by your values. Be clear about your social and environmental mission and values then stay true to them by making sure that every key board and management decision is assessed against them. What will the impact of this decision be on the environment? How will this impact our ability to create more and better paid jobs? Such questions are as important as those concerning profits and other financial targets.

Surround yourself with great people. My experience has been that the success of the enterprise is in direct relation to the quality of the people I work with; so consider your employees, those you work for and those who advise you. Always employ people who share the values of the enterprise. And make sure you have great accountants as well as lawyers, PR consultants and others who ensure you always make great decisions.

Lead with compassion and clarity. Often you have to make difficult decisions to protect the enterprise, that will affect people’s jobs and livelihoods, customers’ services and more. Explaining these honestly and with empathy to those most affected will earn you respect.

Today’s products for tomorrow’s world. The most successful businesses provide something that the world of tomorrow needs. Who knew that we all needed the smartphone? And renewable energy was not really an industry back in the 1980s when I started. Always focus on the future and the business will thrive.

Patrick Nash is a lifelong social entrepreneur and has advised many clients including caba, the Chartered Accountants Benevolent Association. His new book, Creating Social Enterprise: my story and what I learned explains tells how he set up, grew and led 12 successful social enterprises.

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