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4 ways to save a Social Enterprise from Social-washing

Ākina Foundation
Jul 26, 2018 · 6 min read

In this article Seán Barnes (Social Procurement Advisor at Ākina Foundation) and Steven Moe (lawyer at Parry Field Lawyers) reflect on how social enterprises can ensure that their own frameworks and founding documents are not susceptible to accusations of “social-washing” and truly reflect the values of social enterprise.

The social enterprise movement has deep foundations to build upon: the idea of combining profit with purpose is a very strong base to construct this new way of doing business. But there are inherent dangers with any good idea and unfortunately they can intentionally, or unintentionally, be abused.

For social enterprises one of the key problems is that the term itself has varied definitions, can be co-opted without due diligence, and has potential to be used to “sell more stuff” to consumers. Unfortunately, as the sector develops, there is a growing risk of “social-washing”. A term that echoes to “greenwashing” where people use terms like “eco-friendly” and “green” to sell something which is neither of those (and may even damage the environment!).

How do we ensure that this does not occur here in New Zealand, where we are still really only in the opening chapter of exploring and defining what a social enterprise is in our context? This article will outline some of the key hallmarks that truly define a social enterprise and which will go a long way to ensuring that this risk of “social-washing” is reduced.

So, remind me — what is a social enterprise again?

It is always best to start discussions with a common understanding of what we are talking about. Here in New Zealand a good place to begin is the Ākina Foundation definition: Social enterprises are purpose-driven organisations that trade to deliver social and environmental impact.

The word that sticks out to us is purpose. Normally when we think about business we would think about profit. We grew up in the era when everyone knew that a company returns profit to its shareholders — yet social enterprises switch the focus and are concerned with purpose as well as profit.

The key thing is that social enterprises want to trade and be sustainable without grants or funding from other sources. They want to embrace both profit and purpose and achieve good in a self-sustaining way. They take the big heart of charity and meld it with the rational mind of business. Put simply, they use models of enterprise to deliver impact.

What are the options when setting up?

When you’re starting or operating a social enterprise in New Zealand, there are two key legal structures that most people choose between. The first is a Trust and the second is a Limited Liability Company. In the absence of a fit-for-purpose legal structure that combines the best of those two legal structures (more on that outlined by Steven here), we need to do a little “creative lawyering” to make things work and adopt a structure which is truly a social enterprise. Remember, while a social enterprise can take on a number of different forms, the key element is the centrality of purpose and ensuring that is (and remains) central to the business.

We are going to focus here on four key things that are worth considering when you adopt the company structure and seek to meet the true intent of social enterprise. While not intended as a check list, this is a way to give more confidence that what you are doing actually is a social enterprise. It is also offers a way to ask questions of others who are adopting the terminology and holding them to account for how they are operating.

Let’s turn to what these 4 key elements are and how someone who wants to operate as a social enterprise might adopt them.

1. Locked Purpose

A social enterprise operates for a social and/or environmental purpose (and should do so forever!). That shouldn’t be able to be changed on a whim or when the founders leave. Best practice means having:

  • A clear social/environmental purpose — that is, a statement that is public and for all the world to see;
  • A purpose that is locked in as the mission — that is, it can’t be changed easily when new shareholders appear.

A company that is established in New Zealand can either have a constitution that it adopts, or it can default to the rules set out in the Companies Act 1993. For most companies the default position may be fine, but for a social enterprise we strongly recommend you adopt a constitution (which is a public document) with the following special additions:

(A) A clearly stated ‘purpose’ as one of the first clauses: For example; “SocEnt X exists to help young people find a pathway to their true potential, through mentoring and opening up real employment opportunities.”

(B) A clause that prohibits the ‘purpose’ from being changed: For example, “The purpose set out in clause [2] cannot be amended without unanimous agreement of the company shareholders”. This will help the company to hold on to the purpose in the long term and prevent others from taking over and redirecting the company away from your original purpose.

2. Profit Reinvestment

The intent of “profit reinvestment” is to basically ensure that the way money is used and flows through a social enterprise is aligned with the purpose. Unfortunately, using words like “profit” means certain things to accountants, and the being transparent around money gets complicated in a company legal form!. Let’s untangle this a bit…

Social enterprises can generate impact through their day-to-day operations, through things like inclusive employment (e.g. Kilmarnock Enterprises) and just being innovative with their products/services (e.g. Little Yellow Bird). Or Social enterprises can run their operations and generate a profit that is then used to generate positive social and environmental impact (i.e. generating resources to use for good). Some organisations do both!

Being able to show the split of revenue and/or profit towards impact is key. You may like to consider the following in your constitution:

A clause stating that the majority of revenue is directed to impact, AND/OR the majority of your surplus/profit is similarly directed to impact.

This profit can be reinvested into your social enterprise to increase your impact, donated to a social/ environmental purpose or distributed to shareholders who serve a purpose (e.g. if you have a charitable trust that owns your company).

This may be qualified by a safety valve clause that allows the directors to reduce that figure in any year if there is a significant financial risk to the company in maintaining that level of “purpose” reinvestment. You still need to run a financially sustainable organisation of course!

3. Asset Lock

Another consideration for a social enterprise is the future of the assets of a company and what happens to these upon dissolution, or the sale, of the company.

Best-practice introduces some kind of asset lock, stating that the assets are distributed in line with the company purpose.

One option is to direct that all assets (or the proceeds of the sale of these assets) to beneficiaries that align with your purpose. This could be to an organisation that aligns with your social/environmental purpose, or distributed to shareholders who service your purpose (e.g. the trust that owns your company).

4. Telling your story

This last one is not quite the same as the others, as it is not as simply a matter of ‘adding a clause to your constitution’. We feel that reporting your impact, and functionality as a social enterprise, in a transparent way, is a critical part of identifying and trading as a social enterprise. This also includes thinking about how you can integrate your financial reporting in with impact; they are not mutually exclusive.

This speaks to being clear how purpose is front and centre, and will build trust and confidence in your work to your stakeholders, employees, customers and beneficiaries. Keep an eye out for future guidance from Ākina relating to impact frameworks, measurement and reporting.

Summary

Ensuring that a social enterprise takes concrete steps towards enshrining the key elements of its purpose (and the outcomes of that purpose) will ensure that the foundations of social enterprise in New Zealand remain credible. It will also help consumers ask the right questions and probe beyond the use of the term and ensure that there is a protection against “social washing”. We hope that prompting this discussion helps to clarify this issue, and to ‘raise the tide’ for social enterprise companies in NZ. We encourage you to continue this discussion.

For further information or support, we recommend exploring the growing available resources here and that you discuss these options and potential mechanisms with your lawyer or advisors. Remember, simple is always better and that this is a journey. Parry Field Lawyers is also working to provide resources such as “Social Enterprises in New Zealand: A Legal Handbook” (email stevenmoe@parryfield.com for that).