1.2.3 Stakeholder participation in the governance of social enterprises

This doctoral thesis focuses on the examination of the concept of participatory governance of social enterprises, i.e. stakeholder participation in the governance of social enterprises, which employ tailor-made legal forms. This examination of participatory governance is of a great relevance to the development of social enterprises. International scholarship suggests that the engagement and involvement of stakeholders in the governance of social enterprises is a pivotal activity.1 The participatory governance is one of the key characteristics of social enterprises discussed extensively in both Chapters 2 and 3.2

The participatory governance of social enterprises comprises those processes according to which social enterprises can direct their activities and organise their control structure in a participatory and open way to include stakeholders. Involving stakeholders in the governance of a social enterprise does not only entail the involvement of stakeholders’ interests in the decision-making processes. To a great extent stakeholder participation in social enterprises may accommodate the actual participation and representation of stakeholders in the decision-making processes of social enterprises. The underlying hypothesis for such a participation of stakeholders is that they will uphold and safeguard the social purpose all along the entrepreneurial activity of the social enterprises. Accordingly, the participatory governing and decision-making bodies of the social enterprise will become the custodians of the social purpose, while managing the interests of multiple stakeholders.

The participation of stakeholders in corporate governance has a solid theoretical background in stakeholder theory. At the core of stakeholder theory, a proposition is made concerning the significance of embedding stakeholders’ interest, i.e. from both internal (e.g. employees, managers, owners) and external stakeholders (e.g. customers, suppliers, special interest groups) into decision- making for any company’s survival.3 The term ‘stakeholder’ comprises anyone that could affect or anyone that could be affected by a company’s activity to achieve its objectives.4 Stakeholder theory presumes that a company needs to take into account the interests of various types of stakeholders beyond the interests of shareholders and founding members. It elaborates on the role of organisations as the bearers of the responsibility to materialise in practice stakeholders’ interests. It accordingly entails the existence of an implicit duty for the governing bodies of any company to pay attention to these interests, which are of ‘intrinsic value’ to the company.5 In mainstream corporate governance scholarship, the involvement of stakeholders in formal decision-making processes is conceptualised as ‘stakeholder governance’.6

In the legal scholarship, the premises of stakeholder theory are translated by the school of Law and Economics as the protection of stakeholders from the ‘opportunistic exploitation by the firm and its shareholders, if corporate managers are accountable only to the firm’s shareholders’.7 A normative stakeholder model of governance dictates ways for involving stakeholders in the corporate governance of an organisation.8 Firstly, it involves stakeholders through the extent of the (fiduciary) duties of the decision-makers, i.e. the duty of care, i.e. to take care of the interests of stakeholders and of society. Secondly, it may also involve stakeholders through the substitution of directors with stakeholders and/or stakeholder representatives in the decision-making activities of an organisation.9 Accordingly, the normative foundation of stakeholder theory legitimises such organisations, which consider the multiple interests of their stakeholders and which aim to produce common good and offer justice to stakeholders, their representatives and finally to the community based on ethical and moral principles.10

In the discussion on social enterprises, the propositions of the stakeholder theory entail an implicit duty for the governing bodies of social enterprises to pay attention to multiple stakeholder interests, which are of intrinsic value to the fulfilment and maintenance of the social purpose of social enterprises and reconcile their different and possibly conflicting interest.11 According to stakeholder theory, the decision-making bodies of social enterprises, such as the board of directors or the general meeting, should be devoted to the management of interests raised by various stakeholder groups involved in the affairs of the social enterprises.12 Stakeholder theory also requires the governing bodies of social enterprises to accommodate stakeholder groups in the decision-making process. To that end, the decision-makers of social enterprises also become accountable to a large scope of stakeholders.13

Contemplating on the theoretical background of stakeholder participation in the governance of social enterprises, the extension of the scholarly discussion onto the context of laws tailor-made for social enterprises is necessary and imperative. Harrow and Phillips14 cite the work of Hopt and Von Hippel who emphasise that ‘the national and continental laws’ and the legal scholarship ‘have not kept up with the economic, as well as social importance of the non- profit sector, although incremental reform is advancing in some jurisdictions’.15 Harrow and Phillips then refer to the tailor-made legal framework that was introduced for the Community Interest Company (hereafter ‘CIC’) in the UK.16

To that end, stakeholder theory may constitute a foundation for the examination of participatory governance of social enterprises established in accordance with tailor-made laws.17

The research in relation to stakeholder participation in the governance of social enterprises should keep up with the developments in domestic jurisdictions concerning tailor-made legal forms of social enterprises. Research should also take into consideration the differences that social enterprises possess in the different domestic jurisdictions. However, the extant theoretical and empirical research regarding the governance of social enterprises is already segmented referring to the governance of social enterprises in certain sectors (for-profit and not-for-profit or the work integration sector), certain jurisdictions and in certain legal forms.18 Scholarship focuses, for example, only on the examination of governance in particular legal forms, e.g. concerning the cooperative legal form or the CIC corporate legal form, or on the examination of sectorial organisational forms of social enterprises, e.g. the work integration social enterprises (hereafter ‘WISE’).19 The organisational and legal differences existing between the various types of social enterprise, which themselves stem from different jurisdictions, make the governance of social enterprises a complicated concept to be seen holistically. No baseline theory has been developed to explain the governance of social enterprises in a more integrated way, i.e. a way which considers social enterprises employing different legal forms, from different jurisdictions and originating from various sectors. That is what Chapter 3 will attempt to achieve.