Social Enterprises are of special significance to the legal theory of business and human rights. As enterprises which pursue the common good under a commercial strategy, they create an insurmountable bond between business and human rights.
However, social enterprises remain largely legally undefined and this vacuum creates an interesting opportunity for legal and moral speculation: Is it possible that SEs hold greater human rights responsibilities than other types of enterprises? How do SEs contribute towards the betterment of society? And most importantly: Can SEs combine good and greed?
Two opposing views
“The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”
Gordon Gekko , Wall Street: Money never sleeps
“Greed is the inventor of injustice as well as the current enforcer.”
Legal definitions and regional understandings
There is no global legal consensus on the definition of a social enterprise (SE). There are however two dominant conceptions of SEs (the European perspective and the North American perspective), and a definition provided by the Organization for Economic Cooperation and Development (OECD).
The OECD has made efforts to clarify the term SE and associated notions such as social entrepreneurship, social entrepreneur and social innovation. It classifies social entrepreneurship as a movement that responds to social challenges with innovative commercial solutions. SEs reject the traditional exploitation of the market opportunities for financial profit. But, rather capitalize it for the improvement of social conditions and local communities.
According to the OECD, the social entrepreneur, aims for the creation of social currency rather than financial currency. However, it states that social entrepreneurship attitudes can be found in the for-profit and public sector under corporate philanthropy and governmental social projects. The difference between a social entrepreneur and a commercial entrepreneur is that “social entrepreneurs create social value, but are not motivated by the appropriation of this value”.
The European consensus on SEs is set out by the European Commission in both the Social Business Initiative and Guide to Social Innovation reports. While the documents do not provide a legally binding definition of SEs they are a good summary of European understandings.
Within Europe, SEs are enterprises created to eliminate or reduce a social problem. This concept excludes for-profits whose economic activities unintentionally benefit local communities. The European Comission states that “The common good is the reason for the commercial activity”. Social impact is the primary goal, therefore SEs are expected to remain non-profit by reinvesting their financial gains in the project or in the community.
The American conception of SE disregards whether social impact is the primary goal. Additionally, it is irrelevant whether the profits are reinvested in the social goal. Its bottom-line is the assertion that the commercial activity improves a social issue. In practice, most SEs in the US come in the form of nonprofits with income generating commercial activity. As nonprofits are exempt from federal tax, the US has a rigorous 5 part test to ascertain whether an organization is nonprofit. Insubstantial commercial activity is allowed as long as it enhances the primary social goal of the nonprofit. However, what constitutes an insubstantial or substantial commercial activity is not legally defined.
In both regional understandings, the social impact goal, remains the defining characteristic of an SE. One might even advocate that SEs contribute towards the advancement of human rights by facilitating their full realization.
Distrust of the morality of SEs
It might be difficult for SEs to combine the greed of a commercial/capitalist approach with the good of charitable organizations. Critics of SEs, cite three main reasons for the distrusting their morality:
- Altruism or branding?
Public reputation weighs heavily on enterprises’ profitability. Nowadays, enterprises profit from being perceived as being socially responsible or even socially innovative. Having a good reputation is crucial for customer acquisition and retention. As such, there is the danger that some enterprises seek the SE label with the sole intent of increasing their social branding and consequentially their earnings. This concern seems especially relevant in the American context where social enterprises might be for profit organisations.
- The Financial growth of non-profits inciting the abandonment of the social strategy
There are cases in which a non-profit SE’s success seems to propel it to change its legal status to for profit enterprise. Even the Grameen Bank, which popularized the use of microcredit, as shifted from being a non-profit to a for-profit bank. Other community development banks, such as the SKS Microfinance have also made this switch. This trend is worrying for a couple of reasons. Firstly, using the notoriety gained as a nonprofit, including connections and public support, to benefit a later on for-profit enterprise seems morally questionable. Secondly, this switch implies the assumption that for-profit SEs work more efficiently than non-profit SEs, which is incorrect.
- The correct administration of public goods or services by SEs
The State is the only entity that holds the responsibility to ensure the welfare of all its members within a specific territory. Therefore, there can be dangerous consequences of allowing the administration of public goods by private entities. Private Prisons are a prime example of a current hot topic in the realm of business and human rights. On one hand, many private prisons offer better housing conditions to prisoners than governmental prisons, due to their customer service logic. On the other hand, the fact that prison guards are enterprise employees rather than governmental employees leads to various concerns with regards to prisoner safety. Furthermore, the legality of prison labour becomes blurry within private prisons as in this case, the prisoners minimal wages would benefit a private entity.
Should we trust the morality of SEs? How can we trust them more?
It is inadvisable to trust blindly the morality of any entity. In fact, this is what propels the creation of laws. However, there have been hundreds of excellent examples of how SEs can contribute for the improvement of social conditions and the advancement of human rights.
The first step to reduce the danger of the corruption of SEs’ social impact is to create tighter legal parameters. There must be a clearer judicial definition of SEs and prescribed legal remedies.
One great avenue for the regulation of SEs behaviour is through the mandatory upkeep of the voluntary commitments they assumed. Codes of conduct and due diligence processes, which are voluntary commitments about an enterprise’s social impact, may become judicially enforceable within the scope of contractual law and advertisement law.
Extending these voluntary commitments into judicially remedied obligations would sets off a more powerful legal doctrine of business and human rights and increase trust in SEs.
- Doeringer, M.F. (2010) Fostering social enterprises: A historical and International analysis In Duke Journal of Comparative & International Law, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1581525
- European Commission (2011) Social Business Initiative. Creating a favourable climate for social enterprises, key stakeholders in the social economy and innovation. COM(2011) 682 final.
If you are interested in this topic I also recommend watching the documentary The Corporation by https://www.youtube.com/watch?v=jheIz0gl5Zs by Jennifer Abbott et Mark Achbar. Additionally,I would also recommend getting acquainted with the work of some phenomenal social enterprises such ZHL Ziquitza and +Acumen.