CCE Discussion Event with Professor Ernest Lim, Vice Dean of the Faculty of Law, National University of Singapore
13 November 2023, Hughes Hall, University of Cambridge.
The presentation explained that social enterprises are a neglected business model. The emphasis is currently on listed companies to embed and deliver against environmental, social and governance (ESG) standards and practices. At the other end of the spectrum are charities which work to pursue social and environmental good. Social enterprises strike a middle ground, constituting a ‘hybrid model’ which seeks to solve social and environmental problems through a business model:
“The raison d’etre of social enterprises is to deliver social or environmental benefit by identifying and solving social or environmental problems through the use of business models.”
There is some evidence[1] that existing social enterprises and their business models can be economically viable.
However, Professor Lim points out that social enterprises suffer from three types of conflicts of interest, and the question is whether the law is effective in addressing them:
- The first conflict is between social entrepreneurs and pro-social investors (pro-social investors may be concerned that social entrepreneurs are using social impact as a mere marketing tool).
- The second conflict is between pro-social investors and for-profit investors (for-profit investors may take a different view on the objectives of a social enterprise than the pro-social investors).
- The final conflict is between social entrepreneurs and consumers (pro-social consumers may not be willing to buy products that are above market price if they believe that the company is only using the term ‘social enterprise’ for PR purposes).
There is varying and contested understanding of social enterprises in different jurisdictions. Many Asian jurisdictions do not have legal definitions for social enterprises.
In the UK, the legally defined form for social enterprises is the Community Interest Company (CIC). There are more than 26,000 registered CICs in the UK. CICs are only required to show how their activities have benefited the community, but not how much they have spent on these causes.
In the US, the Public Benefit Corporation and Social Purpose Corporation (SPC) are defined under state law. The legislation states that a PBC is a for-profit corporation that is intended to produce a public benefit. The definition of ‘public benefit’ is extensive and the law does not dictate the balance that should be struck between shareholders’ financial interests and the public benefit.
Professor Lim argues that the corporate purpose of social enterprises should be reformed to legally require the pursuit of social or environmental benefit to be prioritised over profit, which is currently not a requirement under the CIC, PBC or SPC statutes. He also argues that directors’ duties to act in good faith in the company’s best interests and to exercise powers for proper purpose should be aligned with his proposed corporate purpose for social enterprises. Further, he argues that we should consider giving decision-making powers to the beneficiaries of social enterprises.
Professor Lim also argues that reporting should be comparable and monitored. Consumers want to see evidence that the social enterprise is achieving its desired impact, however many social enterprises rely on measuring the number of products produced, rather than the impact that their products or services have on communities. He also adds that the restrictions on dividends should be based on a range (rather than a fixed cap) and tax benefits should be granted to social enterprises or social enterprise investors.
Members of the audience were invited to discuss these ideas.
Attendees cited the impact of the Bill Gates Foundation on malaria, and asked whether social enterprises can have as much impact as large corporations. Others referenced B Corp Certificationand identified that profit is key to social enterprises in order for them to be self-sustaining, as opposed to charity models.
Guests also referenced the conflict between profit and purpose. Professor Lim listed other options such as having a beneficiary advisory panel with whom the board could consult, or appointing a Non-Executive Director to represent the interests of the beneficiaries.
One attendee posited that social enterprises were filling a niche that the public sector was failing to provide for. Professor Lim agreed that they are filling a niche, providing the example of Grameen Bank as lending money to destitute individuals in developing countries whom large banks would never lend to. Highlighting the potential of social enterprises in providing a hybrid business model to drive positive impact, this thought-provoking discussion with Professor Lim provided insight into some of the complex challenges with social enterprises including conflicts of interest and the need for legal reform. The discussion emphasised the need for further discourse and research to design effective solutions that can help such models deliver social and environmental good with transparency and accountability
[1] A recent survey of more than 1000 social enterprises found that they generated more than 6 billion euro in revenue, impacted more than 870 million beneficiaries, employed more than half a million people and benefited about 5.5 million people: Marieke Huysentruyt et al., “Market-Oriented and Mission-Focused: Social Enterprises around the Globe,” Stanford Social Innovation Review (October 19, 2016) According to the European Commission, there are more than three million social enterprises, employing around 40 million people, engaging more than 200 volunteers, providing more than 14 million jobs and accounting for at least 8% of the EU GDP: Richard Summerfield, “The Impact of Social Entrepreneurship on Economic Growth,” Financier Worldwide Magazine (May 2020).
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