Social enterprises don’t get tax advantages and can’t get the same kind of funding as businesses. This needs to change, says the co-author of a new report.
Current company law is hampering the development of New Zealand’s social enterprise sector.
This is the bottom line finding of a new report on whether existing regulatory frameworks are enhancing and empowering our burgeoning sector of purpose-led organisations, or putting up barriers in front of it.
We began researching and writing Structuring for Impact: Evolving Legal Structures for Business in New Zealand following a request from MBIE (Ministry for Business, Innovation and Enterprise). Its starting point was that the 1993 Companies Act provides adequate support for the new generation of entrepreneurs creating businesses that not only make money, but have a wider social purpose.
Rather than a quick reply which lacked substance, a team of us spent months conducting in-depth interviews and consulting with many social enterprises across the country. We concluded that the structures available now were created in the days when the primary driver for business success was defined by profits, with dividends going to happy shareholders.
The world has moved on since 1993. The old concept that ‘doing good’ is primarily achieved through setting up a charity while ‘private profit’ and being an entrepreneur is the domain of business has shifted, and a new middle ground has emerged. Social enterprise is the term currently used to describe this blending of the two, based on the idea that both profit and purpose can be explicitly combined.
The concept dovetails nicely with the focus in Treasury’s Living Standards Framework. The growth and rising interest in this area (explored more here) has been quick, with many of today’s entrepreneurs seeing it as a viable option. Eat My Lunch, which supplies lunches to children in need via a buy-one, give-one model, is an example of the new breed of purpose-led business.
It is estimated that social enterprises contribute around $1 billion to our economy every year, and this is without putting a value on the impact of their work. Living proof of this enthusiasm was the Social Enterprise World Forum held in Christchurch in 2017, which saw 1,600 people gather to explore these ideas further.
The authors spoke to a diverse group of people representing 20 social enterprises. They ranged from startups to Māori enterprises and decades-old business, with different operating models, forms of entity and charitable status. Some use volunteers and others do not. We also spoke to the IRD, Charities Services, accountants and lawyers.
We found that existing legal structures are not sufficient to support this new sector. The key point is that social enterprises have a trust issue – they are often set up as traditional companies which do not require mission to be front and centre or that it be reported on. As we move into a new age of doing business where profit and purpose are increasingly combined and our greatest challenges are addressed by innovative thinking, a different approach could help to empower these people in new ways.
The report breaks down the hurdles we identified into three key areas:
- Mission – lack of clear signals regarding trading with impact (which is the key distinctive factor which sets social enterprise apart as they often priorities purpose over profit);
- Funding – it can be difficult to access funding for purpose driven organisations given their unique drivers;
- Innovation – with the combined impact of the difficulties faced innovation is hindered due to lack of funds and clear statement of mission.
The final part of the report offers thoughts about potential solutions so that these entities are empowered to achieve the social and environmental purposes they have been set up to advance. Rather than an entirely new legal structure what is suggested is a modification of what we already have, so that limited liability companies can be registered as impact companies. That status would come with certain criteria that need to be met. The key here is that an impact mandate is specified in the constitution and reporting on that impact would be required.
Let’s not think that this is a unique issue for New Zealand. Jurisdictions around the world have wrestled with the problem and new forms of entity have been emerging in the last decade, including the Community Interest Company in the UK and different forms of Social Benefit Corporations in the United States.
What we have proposed isn’t actually some novel world-leading idea. If anything, we are playing catch-up, but with that comes the chance to learn from others and jump to a second (or even third) generation model that takes the best from those other structures. That chance for innovation based on others’ mistakes is what would truly be world leading as we explore what business of the future looks like and what it requires to thrive.
In the report we don’t articulate all the possible answers, such as to how to define impact or the amendments needed to the Companies Act or how it would be enforced, as more consultation and thinking would be needed on that. What we have laid out is a blueprint for what a framework empowering businesses of the future might look like. Part of that blueprint involves recognition of te ao Māori and the rich wealth of knowledge that could be drawn on and more explicitly woven into our approaches.
It is our hope that this report will challenge the old ways of thinking, and promote wider discussion about how the power of business to do good can be harnessed to achieve even greater impact.
The report was enabled by the Law Foundation and is part of the Social Enterprise Sector Development Programme, a three-year initiative between the Department of Internal Affairs on behalf of the government and the Ākina Foundation as part of The Impact Initiative.