- Geof Cox's Blog
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- Greece, France - making enterprise more social...
- Small is the new big!
- Social impact is no longer an option for big brands
- What on earth is Social Enterprise UK doing?
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- Business models based on greed and exploitation
- Not many jokes...
- NHS Social Enterprise Spin-outs - the real story
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- The number of 'social enterprises' just doesn't add up
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- What is social enterprise?
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- Social Enterprise in Russia – Week 2 - Rybinsk
- Social Enterprise in Russia – Week 2 - Vyshniy Volochek & Ostashkov
- Social Enterprise in Russia – Week 3 - Moscow & Aleksin
- Ostashkov Conference, October 2008
- Selected old blog entries
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- Джеф Кокс, информация на русском языке
Social Firms and the CIC Consultation
Having recently drafted a response on behalf of Social Firms UK to the April consultation on amendments to the CIC Regulations, I'm now thinking about the June consultation on the dividend and interest caps.
While the credit crunch has certainly revealed a problem with tying the caps too closely to Base Rate, my main concern is that from the point of view of Social Firms this consultation in fact asks the wrong questions about the dividend and interest caps.
Social Firms create jobs for people with disabilities and other severe disadvantages in finding employment. In doing so they tackle some of the most intractable cases of social exclusion, for example of people with mental health problems or learning disabilities. Their workers often have high support needs, and for this reason Social Firms often need an element of grant funding, at least at start-up, while still aiming to fulfill their social inclusion mission by becoming financially sustainable from trading alone.
The CIC form was a godsend to Social Firms, precisely because it combines an asset lock – which reassures grant funders - with normal commercial operation. The weakness of the CIC form lies in it's treatment of stakeholders.
The limitation of the Share CIC form for Social Firms, in particular, is that it does not allow the reward of the 'sweat equity' of the founders or on-going workers in the way that an ordinary share company could. Thus while the limitation on dividends is essential for outside investors (to reassure grant funders and therefore maintain the fundamental strength of the CIC form), we do not feel this should apply to shares held by or on behalf of emloyees – many of whom already experience the most severe financial exclusion.
One solution might be to go back to the original CIC idea of divorcing financial participation from governance (allowing non-voting shares to receive uncapped dividends); however, I can see the practical difficulties with this approach. A better solution for Social Firms would be to allow the specification in the articles of an HMRC approved employee share trust (or a specifically defined all-employee benefit trust) as a qualifying asset locked body to which uncapped dividends could be paid. This would enable such a trust to purchase new shares in the Social Firm CIC on behalf of employees, and if indeed significant profits are made and therefore significant share values develop, to act as an internal market, purchasing shares when older staff leave and realising the real value of their 'sweat equity' – tax free if they have worked for the Social Firm 5 years or more. It would also, indirectly, enable the Social Firm to retain profits free of corporation tax.
If this were possible, it would be an easy matter to develop a model Social Firm Share CIC + Employee Trust model that would cost no more than a normal CIC design and registration – and the costs of administering the trust would be tax-deductable too.
While such a model might be a bit less attractive to some grant funders, the Guarantee CIC could be used if necessary in those cases. In fact, I believe this would be a small problem, because most likely funders see developing financial inclusion as indeed a key strength of Social Firms.
It might also be objected that non-disabled/disadvantaged CIC employees might benefit from such a provision. Indeed they might – but is this really a problem as long as the trust is indeed an ALL employee share scheme, not just an executive tax avoidance mechanism?
There is also an interesting governance advantage here: the CIC board would have their clear responsibility, regulated by the community interest test/reports, to act in the community interest, while the trustees as probably a major shareholder would have a clear responsibility to safeguard the interests of the staff. So we might begin to address the CIC stakeholder problem into the bargain...