The Senscot Bulletin

 

The Senscot Bulletin is easily the best source of information and discussion on social enterprise in the UK, but 2 of the links in the latest I think led readers in contradictory directions.

The first was to a recent Guardian article by Andrew Bibby on the Mondragon co-operative group.  I'm old enough to remember well the inspirational 1980 Horizon television documentary on Mondragon which led to much soul searching in the then just blossoming UK worker co-op movement, both because of the spectacular business and social success it portrayed, but also because unlike UK worker co-ops at the time Mondragon demanded equity investment from participants, paid dividends on profits, and was not completely asset locked (or 'common-ownership' in the preferred jargon of the time).

Structurally, Mondragon was and remains a sensible and pragmatic compromise:Mondragon

  • asking for investment but managing this in such a way that no-one, however poor, is excluded
  • paying dividends but only at modest levels, leaving most profit for reinvestment in either business or community*
  • locking up core capital but still able to pay out individual shares from part of the asset base.

I was grateful for Andrew Bibby's update. It seems Mondragon has continued to blossom while UK varieties such as worker co-ops and community businesses have suffered a number of frosts.   Experiments with 'multi-stakeholder' structures – the Eroski supermarket chain, part owned by both customers and staff, for example – have been spectacularly successful, and for me again reflect a pragmatic commitment to making business work with social justice and inclusion, rather than to any particular ideological model.

The other link though was to the Voluntary Code of Practice for Social Enterprise in Scotland.  This code is I suppose Scotland's answer to the English Social Enterprise Mark – and I do agree it represents a better approach.   The Code refers to the fact that 'in England, in particular, there has been a lobby to keep definitions blurred'.   It's just possible that I may have played a part in forming this impression, since I spoke at a Senscot conference on this very subject against using technical structural characteristics as the basis for including or excluding people from the social enterprise movement.   But I am not in favour of any blurring: I want us to ditch the irrelevancies of percentages of profits and the like and get very clear about what really matters: ethical behaviour and social impact.

This is why I found the two links in the Senscot Bulletin so contradictory.  The Scottish Code sets its face against any profit distribution, or stakeholders sharing in assets.  There are of course many reasons for Mondragon's success – it's home base in Basque culture for example – but the question begged by the Scottish Code is this: aren't some of the reasons for Mondragon's success around precisely the fact that it can raise equity and pay dividends – and do this in ways that actually build ethical behaviour and social impact?  And there is a broader question too: isn't the freedom to experiment pragmatically with new forms of ownership and control - guided of course by a clear values base - actually essential to continuing success in a fast changing world?

 

* Called 'interest' but paid only out of profits, so technically dividends in English.

 

Senscot code

The Social Enterprise Mark is quite accommodating to co-ops as it allows up to 50% of profit to be distributed to members – a criterion I proposed when the Mark was devised, as it’s in keeping with the government definition that a social enterprise’s surplus is ‘principally’ reinvested in the business or in the community. We in the co-operative movement had worked hard to get that word ‘principally’ included, precisely so that co-ops weren’t excluded from teh social enterprise tent.

So I agree with your well-made points, Geof and Martin. But I bristle slightly at your insistence, Geof, that we "ditch the irrelevancies of percentages of profits and the like and get very clear about what really matters: ethical behaviour and social impact". Ethical behavious and social impact yes, but the co-operative movement, especially its worker co-operative wing, has always sought to change the balance between capital and labour by limiting the return on capital, and this is explicitly referred to in the 3rd co-operative principle. Incidentally, the 3rd principle also refers to at least part of the co-operative's capital being 'common property', which is not just about what happens on dissolution but also expresses the long term vision of a co-operative in which current members are custodians of the assets on behalf of future members.

John Goodman

Co-operatives UK

Co-operative Principles

For those not familiar with co-op principles the third principle states:

Members contribute equitably to, and democratically control, the capital of their co-operative.  At least part of that capital is usually the common property of the co-operative.  Members usually receive limited compensation, if any, on capital subscribed as a condition of membership.  Members allocate surpluses for any or all of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.

For me, limited return on capital is simply an aspect of ethical behaviour.  The above is appropriate for co-ops, other arrangements that strive for a fair distribution of profit are more appropriate for other forms of social enterprise.  As always with organisational structures, it's a question of 'horses for courses'.

But the International Co-operative Alliance, which safeguards co-op principles, has always eschewed specific percentages - and much to the disappointment of UK purists over the years has also eschewed entirely 'common ownership' or zero dividend positions like that proposed by the Scottish Code.

As for the UK government definition of social enterprise - it's plain daft, so why waste time on it?

Senscot Bulletin

Geof,

I completely agree, and actually emailed Aidan and Laurence at Senscot yesterday making much the same points about the Voluntary Code.

It seems daft to me to say it's OK to pay interest on loan capital (whether or not the social enterprise is profitable) but somehow not OK to pay interest on share capital (which is only incurred if the social enterprise is profitable).

It's even more daft when you consider that shares are a more secure form of capital than loans (which in the case of overdrafts can be withdrawn without notice).

It can lead to crazy situations where, for instance, community energy schemes have been told in the past that it's somehow better to borrow from a faraway bank than to issue community shares (where the interest stays in the local economy). Fortunately attitudes on this now seem to be changing.

It is also worth pointing out that in the case of co-operatives the payment of 'dividend' out of profits is most often a return to members in proportion to their use of goods and services. Terminology in North America and elsewhere is much clearer in referring to this as a 'patronage refund'.

So, for instance, members of The Co-operative Group get a share of the profits based on their volume of purchases (including financial services). In the case of Mondragon, it is based on hours worked (the return of some of the profit reflects in effect that they were not compensated fully for their labour via the wages system - as is also the practice at John Lewis).

What is so perfect about this way of doing things is that it encourages sustainable business practices - and yet it is somehow seen as less ethical than paying higher wages up front and relying on bank loans!

Loans or Equity

Yes - you have a very useful perspective here Martin contrasting the potential local and stable nature of share investment in comparison with loans.

You might be interested in some research I took part in for the recent Joseph Rowntree Foundation report on community assets, which uncovered the experience of Energy4All and others that funding through community share issues also led to higher and more sustained levels of active community particiaption than grant funding.

As other comments have noted - both here and on Linked-In - while the English perspective might be too close to business-as-usual, perhaps the Scottish is too close to the voluntary sector?

Senseless definitions

Interesting post Geof. According to the new Senscot Code the defining characteristic of a social enterprise is that it does not distribute profit to shareholders and the charity clause that assets on windup have to go to another asset locked body. My response would be why would you focus on failure - on what happens when a social enterprise winds up - and why exclude the largest part of the social enterprise movement - coops (as well as 30% of CIC ltd by shares) that pay members a dividend (as it is tax efficient). Interesting that it mentions there is a lobby (I guess that includes my company and the work creating the alternative non asset locked Social Enterprise Brand) that have kept definitions blurred as I would argue that it is the charity lobby that is doing this. According to Senscot 90% of social enterprises in Scotland are charities - what then is the point of social enterprise as something distinct?!

The Senscot Bulletin

Im not sure there is a lobby to keep the definition of social enterprise burred as such, but I would suggest there is popular support  to keep the definition open to many who have regarded themselves as SE for years. How much of the Co-op movement is excluded from signing up to the code?

I agree drift is an issue, but SE as a term is older than 10 years and it has many values and connotations that do fit with attempts to describe it through structural characteristics.

I see there will be CICs which will be excluded from signing up to the code, thats a shame from a solidarity perspective. Its also at odds with the International, European, UK, English and Scottish definitions of what SE is.

The CIC was a custom made legal from for social enterprise, that this code would exclude some seems to be an unessesary confusion, the code doesnt make any mention of CICs but it would be great if anyone can clarify?