4.1 Introduction

International scholarship regarding social enterprises suggests that the engagement and involvement of stakeholders in the functioning of social enterprises is a pivotal activity.1 Stakeholder engagement is a central concept for social enterprises, as has been noted in various mapping and country studies conducted in the EU.2 Stakeholder participation and engagement in the affairs of social enterprises is also considered essential to the success of social enterprises.3 Scholarship notes that the stronger the engagement with stakeholders is the higher is the chance for success of the social enterprise in a multilateral relationship in which stakeholders are simultaneously beneficiaries and contributors to the social enterprise.4 Stakeholder engagement is a type of strategic innovativeness exercised by social enterprises in managing the demands and the interests of various types of stakeholder categories.5

Social enterprises are hybrid organisations. In the literature developed according to institutional theory, social enterprises as hybrid organisations combine dual logics, i.e. a market logic and a social welfare logic that may also include ecological, environmental and human rights purposes. The dual logics result in social enterprises encountering conflicting demands – that emerge from complex and different regulatory, cultural and social environments – from various types of stakeholders.6 The hybrid character of social enterprises, which comprises both a commercial and a social character, generates internal and external tensions for the decision-making bodies of social enterprises. As such, social enterprises’ decision-makers encounter dilemmas. Such dilemmas regard the prioritisation of the social enterprises’ objectives, i.e. the social objectives over the financial objectives and/or vice versa, in decisions regarding the operation of social enterprises. They also regard accountability issues towards various categories of stakeholders, e.g. resource providers over beneficiaries and vice versa.7 Accordingly, scholarship notes that these tensions may produce certain negative results in the functioning of social enterprises. They may produce governance challenges, such as: (i) the risk of a mission drift, in which social enterprises may sacrifice their social mission in order to achieve financial sustainability;8 (ii) tensions and disagreements in the governance level among managers and administrators;9 and finally (iii) the loss of support and legitimacy from crucial stakeholders.10

Accordingly, literature has started examining how the managers and decision- makers of social enterprises can resolve these internal and external tensions to the extent that the negative results can be avoided.11 For instance, as Battilana and Lee mention, ‘social enterprises exhibiting different levels of integration between their social and commercial activities may require different types of engagement from the board to help them maintain their hybridity’.12 Such a hypothesis is examined in other studies, which claim that the involvement and participation of stakeholders, as well as the scrutiny of stakeholders over the social enterprises’ boards, may provide a significant increased level of ‘downward’ accountability and legitimacy from the beneficiaries of social enterprises.13

In addition, literature demonstrates how the external resources of organisations affect the behaviour of social enterprises. It notes that it is important for social enterprises to manage and leverage issues and the scarcity of (financial) resources. In doing so, they can advance social embeddedness, relationships and ties with stakeholders in order to attract capital for opportunities and activities which pursue their social mission and objectives.14 To that end, other scholars add that engagement with stakeholders can foster stakeholder support and resources for the fulfilment of the social purpose.15 In this manner, stakeholder engagement and participation is becoming a means for social enterprises to acquire resources, support and legitimacy for activities based on the pursuit of the social purpose and accordingly for the execution of their strategies and projects.16 Stakeholder engagement, therefore, entails the involvement and participation of stakeholders in the decision-making processes of social enterprises, which support the fulfilment of their social purpose.

Empirical research demonstrates that social enterprises use stakeholder participation in their governance as a means to engage stakeholders and stakeholder representatives who have valuable resources and expertise, which are beneficial to the enterprise.17 In the management and governance research domain, building, maintaining and nurturing ties with different groups of stakeholders, as well as managing their conflicting needs, demands, and expectations in order to maintain legitimacy and access to resources, is the essence of stakeholder engagement and management.18 In other words, stakeholder management is the process of combining and balancing different interests from multiple stakeholders in the management and administration of the social enterprise and thus in decision-making and governance.19 It entails: (i) the identification of stakeholders; (ii) the understanding of their expectations, aspirations, resources, perceptions, and attitudes toward the organisation and its activities; and finally (iii) their engagement in the pursuit of the organisation’s social purpose, while simultaneously meeting their needs.20

From a corporate governance perspective, various studies seek to identify the most appropriate theoretical foundation for the governance model of social enterprises, i.e. a democratic model, a stakeholder model, a stewardship-partnership model etc.21 They do so to identify a governance foundation, which can address all the governance issues and challenges that occur due to social enterprises’ hybridity and complexity in structures, processes and environments.22

In social enterprises without share capital, such as – for example – foundations and charities, literature notes that various types of stakeholder groups (but not shareholders) may have legitimate tangible or intangible stakes in the organisation. It is then common, in these types of organisations that stakeholders are often democratically represented in the decision-making processes of the organisation.23 The democratic representation of stakeholders is also common phenomenon in cooperative organisations.24 Such stakeholder groups may be members, beneficiaries, clients, and financiers, for example. The involvement of various stakeholders and stakeholder representatives in the decision-making processes of social enterprises results in different perspectives being applied in decisions. It also safeguards a balance between the different interests of the different stakeholder types at the board level.25

Literature also considers emergent and contemporary types of social enterprises, which belong to the tailor-made legal forms for social enterprises. Such legal forms are designed either with or without share capital.26 The involvement of stakeholders in the decision-making processes of this type of social enterprise may result in the legitimate participation of stakeholders on the basis of ownership of shares and membership.27 As such, several types of stakeholders that belong to the external environment of social enterprises are therefore ‘internalised’ into the decision-making processes as members, co-owners of shares, and decision-makers of the social enterprise.28 Such a process results in the development of a more sophisticated participation strategy that it may be perceived by society as more accountable and legitimate.29

Stakeholder participation and involvement in the governance of social enterprises based on empirical evidence can be achieved through various stakeholder participation mechanisms. Such mechanisms provide to stakeholders access to various formal/informal, direct/indirect, and regular/ad hoc means of involvement through: (i) ownership of shares and membership; (ii) the governing bodies, i.e. the board of directors; (ii) voting, consultation processes, monitoring and evaluation processes (membership, advisory groups etc.); (iv) direct participation or indirect representation in the decision-making processes of annual meetings; (v) stakeholder feedback mechanisms; (vi) complaint and response mechanisms; and finally (vii) social media platforms.30 Accordingly, these stakeholder mechanisms may be: (i) formal or informal, by having a binding legal basis in legislation or in the constitutional documents of the social enterprises, i.e. their AoA and SoA for instance; (ii) direct or indirect, by allowing or not allowing stakeholders to physically participate in the decision-making processes of social enterprises, or through representation; and (iii) regular/ad hoc, by taking place on a routine basis or otherwise.31

The possibility of participation of stakeholders formally (through voting) in the decision-making processes of social enterprises was addressed in an empirical quantitative research carried out by Campi et al., who examined stakeholder participation in work integration social enterprises (hereafter ‘WISE’) from multiple jurisdictions.32 In this study, the authors hypothesised that stakeholder participation in the governance of WISE is however characterised by a high level of informality.33

Qualitative case studies elaborate on the implementation of the element of participatory governance in countries where the national legal framework offers a legal form tailor-made to social enterprises.34 These studies demonstrate how the roles and the legal rights of various stakeholders work in practice. However, they indicate that the formal stakeholder participation in the governance and functioning of social enterprises, which is prescribed in legal provisions of tailor-made legal frameworks for social enterprises may not be always fully implemented in practice.35 On the contrary, there are informal mechanisms, which are developed to a great extent by social enterprises to facilitate stakeholder participation.36 These organisational processes are developed to enhance the social enterprises’ accountability and legitimacy towards stakeholders. They are also developed to facilitate the maintenance of the social objectives of the social enterprises and they are embedded in the social enterprises’ organisational functioning and governance structure to extend the contribution of stakeholders in the social enterprises’ decision-making processes. 37

In countries where the national legal framework does not provide for legislation which is tailor-made to social enterprises, such as in the Netherlands, for instance, there are no tailor-made legal forms to safeguard stakeholder participation in the governance and decision-making processes of Dutch social enterprises.38 Neither stakeholders can acquire certain roles in the social enterprises’ decision-making processes in pursuance of the social purpose. Accordingly, the objective of this article is to explore the perceived level and extent of stakeholder participation in the governance of Dutch social enterprises, which do not employ a specific tailor-made legal form.