Social enterprise: governance, impact and measurement

This special issue of Education, Knowledge & Economy focuses on the potential for social enterprise to reduce poverty and social exclusion. This was the broader theme in an earlier article by Toner, Lyne, and Ryan (2008), in which the evidence base on social enterprise activity was explored. In their article, Toner and colleagues asserted that whilst policy makers and agencies promote a vision of social enterprise as harnessing the power of the market to generate social development, the impact of social enterprise is highly uncertain particularly in relation to reducing social exclusion and poverty. In fact, evidence from the International Development field suggests that rhetorical claims for the success of social enterprise, as an alternative to the public and voluntary sectors, are overstated. It is frequently the case that the scale and professional capacities provided by local ownership are questionable and that equity for the least capable members within a community often fails to materialise under these circumstances.

A conclusion drawn from the article by Toner and colleagues is that a common assumption that civil society relationships will equitably balance competing interests is dangerously misguided. Furthermore, it was concluded that a lack of public ‘social capital’ is less likely to be at the heart of community dysfunction than structural deficiencies in civil society – institutional relationships. There are significant dangers inherent within a movement towards ‘polycentric governance’ and the self-dependence of civil society for service provision. These are underlined by Houtzager (2005, 12), who expresses that:

One cannot create a politics of inclusion solely, or even primarily around civil society. The very strength of civil society, its lack of coordination and pluralism, is also its weakness.

In this issue, we bring together a collection of articles to address these and related issues in more depth, and make the following assertions.

Firstly, social enterprise does not lead easily to the inclusion of deprived communities because they are complex and diverse, their voice mechanisms are rarely strong enough to ensure that distinctive needs are taken into consideration, conflicting interests and power are not always mediated by local ownership and participation and the ability to pay for the resources that are required to achieve social inclusion on a meaningful scale is seldom evident. This assertion is borne out in the articles presented by Nelarine Cornelius and Myfanwy Trueman and by Melvyn Evans and Isaac Lyne.

Secondly, what emerges from the research conducted by these and the other contributors is that social enterprise activity requires safeguards and accountability mechanisms to assess the social impact of these organisations. The assumption that social enterprise governance is characterised by democratic principles and accountability to stakeholders may be naïve. Crucially, the work of these scholars suggests the social impact of social enterprise does not necessarily generate positive outcomes for their client groups. These views are articulated more fully by Chris Low and Chris Chinnock's article on social enterprise governance and by Anna Mdee and Richard Emmott's work on the need for fair trade labelling in social enterprise volunteer tourism.

Thirdly, comparable and reliable mechanisms to value social impact are required. In countries such as the United Kingdom, social enterprise is not only increasingly involved in the provision of public services but also receiving income streams as part of procurement decisions as part of the regeneration efforts and the ‘social investment’ of public funds. The need to assess the impact and social outcomes of social enterprise activity in these contexts is addressed first in the article authored by David Potts, which discusses regeneration spending, secondly by Patrick W. Ryan and Isaac Lyne in their discussion of how best to develop robust methods of measurement of social enterprise effectiveness and also in the first article in this special issue presented by Nelarine Cornelius and Myfanwy Trueman.

Issue papers

Nelarine Cornelius and Myfanwy Trueman investigate the challenges of social regeneration facing post-industrial cities in the developed world. They draw on the capabilities approach developed initially by Amartya Sen, as well as conceptions of corporate social responsibility and their integration with corporate governance to express the necessity of a ‘capabilities informed perspective’ to regeneration efforts. This approach emphasises the involvement of the urban poor and assertion of their agency and true voice in order to address their distinctive challenges and how best to improve their well-being and quality of life. These issues, of capabilities and responsiveness, are critical because despite the regenerative objectives of political society to improve life for the most disadvantaged, such communities are frequently left behind by the attraction of regeneration planning towards short-term ‘economic rewards’, which often prevail over long-term programmes of social inclusion which tend to be regarded as ‘economic costs’. It is proposed that certain processes of corporate social responsibility accounting which have been developed over time using considerable resources can enhance and respond to the development of capabilities and allow social enterprises to account for the ways in which they deliver equitable regeneration benefits.

Melvyn Evans explores the veracity of the assertions by policy makers in the United Kingdom that community participation enhances the social environment of communities. Using regeneration and the activities of social enterprises as the contexts within which to explore these assertions, Evans' critique of a raft of government polices and the extant literature reveals that there are important gaps in understanding which call into question government policy development. Among the overarching implicit objectives of community participation, for example assessing worklessness has only been weakly addressed, and indeed, levels of worklessness appear to have increased in deprived areas. The role of social enterprises, regarded by government as an important vehicle for social regeneration, is a more mixed picture. Only half are based in deprived areas. Given the UK Government's support for social enterprises based on a belief that they are closer to communities than statutory services, their role in addressing social exclusion, Evans argues, needs to be scrutinised, pursued and facilitated more proactively. However, albeit that it might be regarded as an alternative form of public sector outsourcing, social enterprises have taken on a sizeable chunk of the delivery of services traditionally undertaken by the public sector, aided by financial support from specialist voluntary sector funders, and strategic support from central government, and with some degree of success. Evans concludes that we currently need a number of sharper definitions of participation level and type, community leadership, neighbourhood, community and engagement in specific activities such as regeneration effort to properly assess the outcome of community participation policies. As a note of caution, a top-down agenda for community participation, Evans argues, is unlikely to substitute for a more grassroots, democratic approach.

Isaac Lyne's comparison of two social enterprises aiming to improve the lives of children and families in the United Kingdom and Cambodia provides another set of insights into the relationship between governmental policy and the socio-political context of social exclusion and childcare provision in both countries. Evans considers those factors that may be important to communities ‘on the ground’. Lyne contrasts the ‘third way’ direction of social policy and the promotion of childcare social enterprise in the United Kingdom with the credibility of social enterprise as a way of alleviating the social exclusion of deprived children in Cambodia. Lyne then considers a rights-based discourse of social inclusion which entails a broader sense of responsibility, the circumstances necessary for equitable childcare services and the political capabilities that could be useful for a social enterprise with broad aims in deprived communities to enable it to comprehensively fulfil a social mission.

Anna Mdee and Richard Emmott explore a key tension in social enterprise: that of ensuring a commercially viable business whilst fulfilling social goals. They consider the growth of volunteer travel and tourism in this context. The sector has seen huge growth in recent years, and it is estimated that around 800 organisations in the United Kingdom offer overseas placements for paying volunteers. All of these companies would claim that volunteers have a positive social impact on the communities that they stay in. However, there is an increasingly critical debate that suggests that many of these social enterprises are in fact making profits on the back of exploitative relationships with local partners, and exploiting the well-intentioned (but often misguided) aspirations of volunteers to ‘do something’ about global poverty. They consider the potential for a ‘fair trade’ labelling system, similar to the one that has proved successful in food retail products, to be introduced in the volunteer travel market.

Chris Low and Chris Chinnock present an analysis of governance failure in a social enterprise in West Yorkshire. They investigate the claim that democratic governance, where it is assumed that stakeholders are involved in decision making, is a superior model of equity and efficiency. The authors express their principle concern: that the democratic principle can be subverted by people who wish to retain their control over assets. Low and Chinnock's work underlines an important issue: that scant attention has been given to the agency problem faced by a not-for-profit company. Put simply, in the for-profit corporate structure the board (agent) is empowered to make decisions on the principle interests of shareholders who can in turn hold the board to account. By contrast, the not-for-profit board often lacks clarity on the principle interest and, more specifically, in whose name decisions are being made. In some circumstances, meeting these obligations may boil down to a naïve assumption that the board will always deploy resources in the community interest; in other circumstances (with equally bad possible consequences) the board may simply assume that it knows what is best. These concerns are critical at a time when UK Governmental policy increasingly places public resources and contracts for service delivery in the hands of social enterprises. Chinnock and Low conclude by suggesting mechanisms to ensure that social enterprises do act in the best public interest when using social assets rather than being guided by the particular interests of directors or trustees.

David Potts considers how we might measure the impact and effectiveness of regeneration spending, underlining a common policy conception in the United Kingdom that it is frequently impractical to value benefits due to the breadth of spending consequences. The UK Treasury does give consideration to aspects of counterfactual ‘additionality’ in the assessment of regeneration planning. However, Potts illustrates through critical analysis that some of this ‘additionality’ is not necessarily negative. He argues that attempts being made to capture the indirect benefits of regeneration spending by the New Economics Foundation, such as developing the Social Return on Investment (SROI) and LM3 frameworks, fall short of a ‘full valuation’ in certain ways. Furthermore, Potts proposes that we can enhance the valuation of regeneration spending by drawing from various techniques deployed for a number of years in the context of International Development. Notably, this includes the selective use of wage shadow pricing, cost–benefit analysis and environmental valuation. The pertinent point is that those involved in planning and implementing regeneration projects are being asked to pay a lot of attention to additionality, and are being given considerable guidance in doing so. Under such circumstances, considering the range of techniques that can be drawn from International Development to evaluate benefits, David Potts asks, why then should similar formal guidance from the Treasury on valuation in regeneration spending not be given?

Patrick Ryan and Isaac Lyne consider another area of increasing debate. Public policy is an increasingly diverse field, with service delivery contracted to the best providers from the public, private and third sectors. Consequently, social enterprises will need to be able to prove the ‘added’ value of their activities, and contract procurers and investors with a social motive will need to be able to assess the comparative creation of social value from different investments in social enterprise. In their article, the focus is on a particular methodological tool that attempts to measure SROI which has become increasingly promoted in both policy and practice in the United States and the United Kingdom. Ryan and Lyne give a comprehensive overview of attempts to measure SROI accruing to social enterprises but argue that more work is required in order to properly capture social value but also to provide a rigorous methodology that will allow for comparison of different providers.

Conclusion

Social enterprise is an important sector that is increasingly being called upon to provide not only voluntary but, increasingly, statutory services. In our critique of social enterprises, it is not our intention or desire to dismiss the importance of the work of this sector. However, we are concerned that government policy may be placing too heavy a burden of responsibility on social enterprises, and, we argue, there is a need for a more balanced consideration of the value of the sector as a tool for reducing social exclusion. It is of the utmost importance that if social enterprise is to provide meaningful solutions to social need within ‘hard to reach’ communities, it should possess the capacity to overcome fundamental structural inequalities both within these communities and also in terms of community relationships with institutions. It is our contention that this may more properly be the direct responsibility of government. Furthermore, the innovation that in certain circumstances social enterprises may be more able to deliver may be compromised by funding streams, from central government, which have the merit of potentially aiding the financial security of social enterprises but may, coincidentally, reduce their independence and their capacity to innovate because of a need to comply with the needs of government.

We are concerned that social enterprise may be one vehicle for a form of soft privatisation as part of a ‘third way’ to achieve social policy objectives which is politically more acceptable through third sector delivery than by the private sector. Despite claims that could be made about non-state solutions to social exclusion being necessitated by stretched public budgets, social enterprise can in fact be viewed as part of an ideological direction towards New Public Management, which places its faith in the fact that markets and choice will drive efficiency, and also towards a contractarian ideal that is imbalanced in an insistence upon civil obligation in return for governmental support.

We argue that the social enterprise sector needs stronger regulation whilst recognising also that enterprise is about risk taking. The appetite for risk may be suited to certain types of social enterprise, but we must consider the consequences of taking risks with essential public services. Indeed there can be an argument made for regulatory support on the basis that if community organisations are to be weaned off grants and encouraged to become financially independent and sustainable, there is a need for safety nets. Risk taking with a community service may not be the inclination of those who run it, and their experience of successfully managing risk is unlikely to be a strong attribute. In this sense, we can see a potential problem of incompatibility between many service providers and social entrepreneurship. Furthermore, as government policy tries to push social enterprise forward, there are likely to be many challenges remaining at the community level, including unresolved cultural tensions and disharmonies which are in need of careful attention if the consequences of social unrest and community fractures are to be mitigated. Moreover, it is usually the case that when there is risk aversion amongst service providers, they will either withdraw from risky ventures in deprived communities where business success is less likely or simply not enter into such ventures in the first instance. Finally, we must also consider that the governance of social enterprise requires a much higher level of scrutiny, not only as a matter of the management of public assets but also in relation to pressures that help to ensure subsequent outcomes for the social good within communities.