Social Enterprise – definition, perception and what is ahead

Louise Aitken, CEO Ākina Foundation

Over the past month, there has been a lot of discussion in the media, print & social, regarding social enterprises. This is great to see and at the Ākina Foundation we fully support, embrace and celebrate conversations and discussions on our important, growing sector.

While the public understanding of social enterprise grows, there’s always the potential for confusion. Particularly around the mechanics of how a social enterprise can operate, and what gives an organisation the right to call themselves a “social enterprise”. We’ve seen misunderstandings or assumptions that have lead people to question an organisation’s impact, structure, transparency or how they fit into what can often be a very complex social or environmental systemic issue.

As we have seen, there is a risk associated with ongoing perceptions that are associated with social enterprise, the lack of a formal definition and the types of legal entities used for undertaking social enterprise activity currently available in NZ.

We believe that there are around 2,500 social enterprises currently operating in New Zealand, with around 60% registered as businesses, operating mainly as limited liability companies. As a sector, there are some big questions we need to tackle about how we classify ourselves. For example, Is there an expectation that these businesses need to act in the same way as registered charities do? Do we need to have access to the same information that historically charities have provided or should we be focused only on the impact that these businesses generate? If transparency is the answer, what actually is the question? As a consumer, shouldn’t the impact be the primary driver when deciding how to spend or give my money?

All of these questions are valid, but getting to an answer is complex, especially given the current legal entities available for social enterprises.

And let’s also remember, social enterprise is nothing new to Aotearoa. For centuries, traditional Māori enterprise always had whānau, society and the environment at its’ heart. The term social enterprise may be new, but since trading began in our country, the social & environmental impact from that trading was the primary driver. The thought that Te Ao Māori is the foundation of our growing social enterprise sector is exciting, important and allows us to learn from our past, honour those who went before us, and commit to a vision of a sustainable, equal prosperous Aotearoa New Zealand.

So, how can Ākina help with the understanding of what a social enterprise is? And what activity is underway to help address some of the real barriers for social enterprises to grow, scale and co-exist in our business, charity and community sectors?

First, the definition question.
This is a tough one as currently in Aotearoa, there is no legal definition for what is and what isn’t, a social enterprise. Social enterprises can take many forms and span between charities and for-profit enterprise on the business spectrum. They use a business model as a tool to help solve social and environmental issues. Basically, they are purpose-driven organisations that trade to deliver social and/or environmental impact. Think – the heart of a charity with the mind of a business.

In the absence of a formal legal definition, Ākina uses the following three key areas to define what is a social enterprise:

  • That the social, cultural and/or environmental mission provides a public or community benefit and that is the primary purpose of organisation;
  • That the majority of income is from trading a good or a service;
  • That the majority of either expenditure or profit is spent in the fulfilment of the purpose of the organisation.

This third one can be a little complicated, but can be explained through two common models of social enterprise; one where the impact is delivered through the goods or services produced by the organisation, and the other whereby the surplus or profit generated delivers the impact.

The first example could be an organisation that provides training and employment for people marginalised from the mainstream workforce. This could mean that the organisation has increased expenditure, with the impact delivered within their day-to-day operations. The next example could be when the profit generated by a social enterprise is distributed to a charitable partner who delivers the impact. The social enterprise generates a surplus through the delivery of goods and services, and this surplus is utilised to deliver impact.

But there is still confusion and questions, and it is important to look at some of the common perceptions from the for-profit and from the for-purpose side.

From a business perspective, there is a common misconception that social enterprises are not legitimate businesses (i.e. for-profit) in their own right, given their role in delivering outcomes associated with not-for-profits. A social enterprise is a trading entity that sells a good or service and as stated previously, the revenue from trade makes up the majority of income. As such, the entities share the needs of a traditional business, including defining customers and markets, gaining market access and maybe sourcing capital. More and more we are seeing “business for good” where traditional businesses start to increase their positive impact on society through partnerships, corporate social responsibility and social procurement. This is great and important to see, but does not mean these businesses are “social enterprises”. A social enterprise exists for impact; it is their primary purpose, with a more traditional business generally having return for shareholders as their primary purpose.

From the not-for-profit side, social enterprises can be perceived as competing with charities to contribute to the solving of social or environmental issues. While this is often a personal perspective, it can deter organisations or individuals from pursuing social enterprise. As discussed previously, a social enterprise often can deliver the same impact that a not-for-profit does using a different source of revenue – allowing a market to hopefully provide a sustainable source of income.

Yes, a financially sustainable social enterprise can make profit, and depending on their business structure, there can be distribution of this profit to investors. Access to capital is important for social enterprises to grow and scale, and impact investment can provide the opportunity for increased impact through this growth.

At Ākina, we firmly believe that social enterprises offer another set of solutions to solving some of our complex social and environmental problems in Aotearoa. Charities have for many years used social enterprise models in adding additional revenue streams to their organisations and increasing their ability to make considerable impact. The SPCA and the Red Cross have been trading through stores for decades, and the creation of the SPCA Blue Tick has not only allowed people to choose food products that treat animals humanely, it is also a revenue stream for the SPCA to continue their great work. It also is fantastic to see charities and social enterprises working together to help solve social or environmental issues, and to share and learn from one another.

So, what’s next?
It is exciting that we can announce that a significant piece of legal research is about to start, with the support of three law firms and the generosity of the Law Foundation. Following the submission of our discussion paper ‘A New Legal Structure for Social Enterprises in New Zealand’ last year, the Ministry of Business, Innovation and Employment advised us that they understand that Non-For-Profit structures are not suitable for social enterprises, but would like more examples of why the Limited Liability Company structure is inappropriate. We are therefore going to complete anthropological interviews with social enterprises to understand their experience within the available legal forms. Many social enterprises have told us that structures currently available are not suitable, and the complication of variable legal structures can also limit the availability of support services and funding, and overall inhibit the development of the sector as a whole.

We also realise that all legal structures, by their very nature, have downsides and implementing something new will not be without friction for government, enterprises who are already established, and those who for any reason cannot be a new structure, so we will be considering broader solutions that help solve problems the existing structures create for the sector, including accreditations or other statuses also. We hope by February to be able to share the findings of this research and continue the important conversations with government on the potential solutions that can be found to reduce or remove these barriers.

In October, we will be launching, in partnership with NZ Post, a social procurement online marketplace. For the first time, government and corporate buyers will be able to access and purchase from certified social enterprises, enabling the growth of markets, but importantly growth in the impact that social enterprises can achieve.  We look forward to announcing more about our certification model and celebrating the organisations that are going to make up our Foundation Buyers and Suppliers.

If any of this is interesting, exciting or challenging to you, why not get involved? We have launched The Impact Initiative, as a platform for engaging with our partnership programme with the NZ Government, to bring together our sector, to have the hard & complex discussions about what we need and to help people understand more about how social enterprise can transform our economy. We need, and want, your involvement and voice. Whether it be about legal structures, marketplaces, impact, transparency, or anything else, please join us today in the discussion. Our sector has impact at its heart, and we hope we can support a positive, constructive and empowering conversation where all social enterprises support each other, regardless of their businesses models or legal structures.