Can social enterprise revive the third sector?

Published: 16 June 2016 at 18:00

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VIEWPOINT: Anglia Ruskin expert looks at whether B Corps and Community Interest Companies could be the answer

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by Andrew Brady, Anglia Ruskin University

Charities today are in stormy waters. The banking crisis of 2008, the subsequent recession and repeated rounds of austerity have hit hard. On the one hand, there is increased demand for charities' services, while on the other, less funds are available to provide them.

In the UK, charitable giving by individuals declined in real terms by £3.4bn (12.7%) between 2010 and 2015, and in the decade to 2013, government grants to charities fell by almost two thirds. Yet in 2014, around 90% of charities reported that demand for their services had increased, and that they expected it to continue to rise.

What’s more, the charity sector has recently been beset by a number of scandals, from the Olive Cooke affair – where a pensioner died after being distressed by requests from charities – to the shambolic demise of Kids' Company. This led government officials criticising charities for their over-reliance on grant funding and “outdated operating models” and the launch of a crackdown on unethical fundraising practices.

A new hope

But in a gloomy third sector, there are glimmers of light. In the north-west of England, one socially-minded company has increased its turnover by more than £3m in the last two years. It has donated (or sold at a discount) thousands of items of secondhand furniture to people on low incomes. All this, while providing training programmes to 25 unemployed people, 75% of whom later went on to paid employment. Perhaps the most surprising part of this success story is that only 1.4% of the company’s income came from government or charitable grants.

The Furniture Resource Centre (FRC) makes almost all its money through sales to local authorities, housing associations and individuals. It employs 70 people and made a pre-tax profit last year of more than £600,000. But this profit is not distributed to private shareholders through dividends: instead, they are invested in building up reserves, which will enable the company to survive should it enter a particularly challenging time.

This is because the FRC is a social enterprise, which means private shareholders are nowhere to be seen. Social enterprises are businesses which trade in goods and services, and compete with mainstream private sector companies, in order to serve one or more social or environmental purposes. They are similar to charities in their mission, but more like businesses in their approach to the market and belief in profit.

While some social enterprises, like FRC, reinvest their profits back into their business, others direct their surplus toward organisations which have a similar social purpose. For instance, the health and social care enterprise Provide donated around £180,000 of its profits in 2014-15 to local charities, university bursaries and grant schemes.

Social Enterprise UK – the sector’s trade body – paints a picture of a thriving social economy. An estimated 70,000 social enterprises, around half of which were founded in the last five years, employ a million people and contribute £24 billion to the economy. According to the organisation, social enterprise is “outperforming its mainstream small and medium-sized enterprise counterparts in almost every area of business: turnover growth … job creation [and] innovation”.

A sector like this – thriving, innovating and expanding – would normally be a prime target for investors, eager for a piece of the action. Yet these investors are often excluded from social enterprises. Their structure may prevent it (many are, confusingly, also charities), or their directors may have a principled objection to private profit being made from socially beneficial activity. If it remains principled but undercapitalised, the social enterprise economy could risk being sidelined.

Introducing … the B Corp

Enter, from stage left, the brash American cousin of social enterprise: the benefit corporation – or B Corp, for short. B Corps are for-profit companies which are certified by an independent process for having high levels of environmental and social performance, transparency and accountability. B Corps are hungry for private and corporate investment, and able to win it. For instance, child-centred education platform Altschool recently raised US$100m from Mark Zuckerberg, among others, as it aims to scale up its service.

B Lab – the certifying body – has driven changes to legislation in 30 US states to allow companies to formally establish themselves as B Corps. B Lab also continues to certify what it calls social enterprises – but which people in the UK would see as private sector firms – in the US and internationally, regardless of their legal structure.

Now the B Corp is starting to make an appearance in the UK, too. Since B Lab UK launched in September 2015, they have certified 90 companies across 13 industry sectors, embracing the stalwarts of the social enterprise sector such as the Big Issue and Charity Bank. These appear alongside interesting brands including Lily’s Kitchen, a manufacturer of “proper food for pets” which is firmly in the for-private-profit camp.

Social Enterprise UK is cautiously supportive of B Corps, while pointing out that they are not all social enterprises by the UK definition. Furthermore, the global count of certified B Corps (around 1,600) is dwarfed not only by the 70,000 social enterprises in the UK, and the 160,000 registered charities in England and Wales alone. They’re even less common than Community Interest Companies, a legal form for the sector which was only launched in 2005.

As the Economist pointed out as far back as 2002, there’s a certain appeal to a concept which combines “the comforting European savour of ‘social’, plus the sharp American tang of ‘enterprise’”. The best way to combine these elements is still disputed, but as charities come under ever greater pressure to do more with less, social entrepreneurship has the potential to breathe new life into the third sector.

The Conversation

Andrew Brady, Senior Lecturer in Leadership and Management, Anglia Ruskin University

This article was originally published on The Conversation. Read the original article.