Social enterprise needs clearer definition, direction

publication date: Sep 26, 2013
 | 
author/source: David Oyler

Despite having no legal description or structure in Canada, and a broad and varied scope of interpretation, social enterprise (SE) has managed to become entrenched in nonprofit sector dialogue and attract charitable resources and government support.  Grant opportunities, loans, and guides are now being offered (or not offered in some cases) to different types of SEs. David Oyler photo

But many of the self-described SE initiatives and organizations are fundamentally and philosophically different.  We need a clearer definition and direction of SE so organizations can apply the concept to a social initiative, ensure suitable resources are directed towards it, and take advantage of socially conscious consumers and investors. 

Varied and opposing descriptions

Most definitions of SE connect the sale of goods and services with a social or community need.  One organization describes SE as non-profit organizations (NPOs) and community groups operating entrepreneurial activities.  This would appear to exclude for-profit businesses.  Conversely, another organization describes SE as a business which would appear to limit SE primarily to for-profit entities (NPOs and registered charities can only operate business activities in specific circumstances).  Another definition includes any organization created to pursue social missions or purposes, not necessarily through the sale of goods or services.

With such wide-ranging characterizations of SE it is not surprising that initiatives described as SE are quite diverse.  Examples include fee-for-service charitable programs, businesses, co-operatives, NPO fees and memberships, employment-based charitable programs, and fundraising.  Each of these activities is distinct, requiring different types of strategy, infrastructure, governance, financing, management, and staffing.  They also differ philosophically, thus the need to operate under different regulations and policies.  

This has led to a number of developments that are puzzling and serious:

The puzzling

  • SE grants are offered to registered charities to fund a business but not to launch a charitable employment or fee-for-service program.
  • A government SE loans program is offered to for-profit businesses and NPOs but excludes NPOs who are registered as charities.
  • Calls are being made for changes to the regulatory environment governing NPOs and registered charities to enable SE, while citing activities that already operate within current regulations as examples of SE.

The serious

  • NPOs and registered charities are operating activities that are offside of Canadian Revenue Agency policy.
  • Registered charities are risking their charitable status by transferring resources to non-qualified donees.
  • Support from government and foundations may switch from program funding to SE to the detriment of the nonprofit sector.

Reducing ambiguity

Identifying key SE concepts is the starting point of a clearer definition. Articles and advocates of SE cite these common qualities:

  • There is a need for NPOs and registered charities to charge fees to deliver their programs and services.
  • There is an opportunity to leverage the products and services produced in the course of employment training programs or social businesses for persons with disabilities.
  • There is consumer and investor interest in supporting businesses that have a social component.

The second step is to recognize the distinction between operating a for-profit business and delivering a social program or service on a not-for-profit (or nonprofit) basis.  The principal difference is that businesses have financial goals, risking capital to meet them, while not-for-profits exist to serve social purposes.  Some important points to appreciate:

  • Not-for-profit is not a restriction on, but rather a characteristic of, the delivery of a social initiative and is not a hindrance to sustainability.
  • Charging fees or selling goods or services in the context of delivering a social program does not open the door to capital and profit unless it is done on a for-profit basis, risking capital as businesses do.
  • Regulatory changes that would allow NPOs and registered charities to operate business activities without restriction would likely create an unequal playing field with for-profit businesses.

Unlike businesses, NPOs and registered charities benefit from social capital (grants, donations, tax-exempt status, and volunteers) that help them deliver their programs and services.  Regulatory changes that allow NPOs and registered charities to expend social capital in business operations would give them a competitive advantage.  

Adding business to social, or adding social to business?

In my opinion, SE is best served by the former: adding a business-like element, in the form of a sale of a good or service, to a social initiative, within the context of a charitable program.  Many social needs such as health care, employability, and affordable housing can be delivered as a charitable program.  Trying to meet these needs through a business option introduces risk of capital (social and financial), higher costs, competition, and the potential conflict between financial goals (or more likely, financial realities) and social outcomes. 

Executing SE as a charitable activity also allows for a more targeted and risk-free distribution of resources directed towards it.  Accountability for social outcomes is established, social capital is invested to its fullest potential, and with fees and sales complementing revenues, program funding could be used more effectively on infrastructure and operational efficiency. 

Untapped potential of SE

Goods and services produced in the course of employment-based charitable programs are already available in the marketplace, but I believe the untapped potential of SE is in mutually beneficial partnerships between for-profit businesses and registered charities. These partnerships would create socially responsive purchase and investment opportunities, opening the door to unrestricted capital and profit, limited only by the size of a social need.   

For example, persons with disabilities could provide labour to a company as part of a charitable employment program which would lower the charity’s operational costs (already happening in Nova Scotia); or a charity could arrange to have their services delivered via a company, lowering the charity’s investment in program infrastructure.  From a company’s perspective, a partnership enables them to make a commitment to the community without affecting their operational efficiency and possibly to benefit from consumer and investor goodwill. 

Partnerships also present opportunities for other types of support traditionally unavailable for social programs.  Governments could develop targeted finance, funding, and tax incentives for companies taking on a charitable partner.  Tax incentives could also be offered to investors.

Oyler Consulting works with organizations to increase their effectiveness and capacity to deliver their programs and services. Oyler Consulting specializes in helping small to medium-sized organizations build successful fundraising programs, and provides practical guidance on Canada Revenue Agency policy for registered charities, and on social enterprise development. Visit www.oylerconsulting.ca; contact David Oyler by email.


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