3.1.1.1 Governance of social enterprises

The international academic society has agreed that social entrepreneurship applies to a broad range of diverse organisations which do not share one, but rather various organisational and legal characteristics. From a legal point of view, social enterprises are institutionalised economic entities with a social purpose. They use existing legislation to promote their commercial activities and transactions aiming at achieving social goals as opposed to ordinary commercial enterprises which aim to fulfil solely financial objectives. However, social enterprises constitute a ‘facet’ of social entrepreneurship.1 They use existing or tailor-made legal forms to promote their mission-based entrepreneurial activities and commercial transactions to achieve a social impact.2 Social enterprises do not share unique entrepreneurial or legal characteristics but they are rather hybrid entities using various legal forms that combine for-profit with non-for-profit characteristics.3 The organisational and legal differences between the various types of social enterprises make ‘governance’ in social enterprises a complicated concept. Furthermore, due to the diversity of the organisational and legal forms of social enterprises, research regarding governance in social enterprises has been segmented. It focuses either on the examination of governance in particular legal forms, for instance concerning the cooperative legal form or the UK corporate legal form (hereafter ‘CIC’),4 or on the organisational forms of social enterprises, such as work integration social enterprises (hereafter ‘WISE’).5 Moreover, various governance theories apply to organisations that belong to different sectors including the for-profit sector and the non-profit sector.6 Finally, in some studies a specific national context is examined, e.g. the UK national context of social enterprises.7 However, Low – elaborating on the governance of social enterprises – emphasises that we need to conduct research on the aspects of governance which at least transcends the discrepancies of social enterprises that belong to different sectors (i.e. for-profit, non-profit, social economy sector).8

The issue of corporate and organisation governance has been significantly elaborated in academic literature on social enterprises. Pestoff emphasises the importance of researching the governance of social enterprises in Europe and the underlying values of the social economy sector, which tend to be characterised by a ‘quest’ for democracy.9 Ebrahim et al. note the importance of research on the challenges of governance that social enterprises encounter when striving to achieve a trade-off between their commercial activities and the fulfilment of their social mission.10 Spear et al. aiming at generating theoretically grounded foundations for the discussion on governance of social enterprises, suggest a typology of governance structures, including: (i) self-selecting governance models for social enterprises in which the board of directors is the most powerful organ and its members have no ownership rights; (ii) governance models in which the decision-making organs are selected by the members following the principle of democracy; and (iii) hybrid governance models in which self-selecting governance and membership governance schemes are combined.11

Governance of social enterprises is also characterised by the ‘internalisation’ of stakeholders in the decision-making processes and their active participation as internal components of the social enterprise, which ultimately lead to more open and democratic decision-making processes.12 Stakeholders can either participate in the organisational decision-making processes as formal members and co-owners of the social enterprises, or they can influence informal processes of decision-making.13

The stakeholder theory elaborates on the influence of various stakeholders on the decision-making processes of a social enterprise. Stakeholders have been widely defined by Freeman and Reed, to contain any group or individual who can affect or is affected by the activities of an organisation to achieve its purpose.14 Di Domenico et al. emphasise the active participation of stakeholders in the social enterprises’ governance and management as a prerequisite for social enterprises to generate social benefits such as social capital.15 Spear et al. stress that it is an advantage for multi-stakeholder organisations to bring together and balance different perspectives and interests, however, there are also disadvantages towards achieving a clear purpose and coming to an agreement.16 Campi et al. finally, elaborate on the advantages of multi-stakeholder governance such as ensuring organisational stability, providing better access to resources including legitimacy and reducing external constraints.17

However, the use of the stakeholder theory has been criticised to have direct implications in the governance of social enterprises. The underlying foundation of the stakeholder theory is the responsibility of the decision-making organs to give attention to the legitimate interest of stakeholders and to reconcile the conflicts of interest that occur between the organisation’s interests and the interests of the various stakeholder groups.18 Thus, directors and managers become accountable to a large variety of stakeholders with diverse interests that need to prioritise.19 However, Mason et al. argue that the stakeholder theory is incompatible with corporate governance of social enterprises because the theory envisages accountability of directors towards multiple stakeholder groups which might not directly relate to social enterprises.20 Furthermore, Mason et al. point out that the inclusion and participation of stakeholders in the decision-making processes of social enterprises can be doubtful if it is not transparent, well- established and subject to external scrutiny.21 In this respect, the Lambooy and Argyrou study, which elaborates on tailor-made national legislation for social enterprises in Belgium, the UK and Greece, showcases that legal concepts such as governance, transparency and accountability have been addressed and regulated differently from legal regimes available for ordinary companies.22 Tailor- made legislation for social enterprises in various national contexts, i.e. in the UK and Belgium, imposes legal duties on the directors of social enterprises concerning the fulfilment of the enterprises’ social purpose. Particularly, the Belgian legislation for social enterprises provides legal rights to stakeholders to that end. They can request the dissolution of a social enterprise by court decision if the social enterprise’s Articles of Association (hereafter ‘AoA’) do not comply with the applicable legal obligations that protect the social purpose of the enterprise. Another example is the tailor-made legislation in the UK for social enterprises which imposes obligations on CIC directors to adopt formal stakeholder consultation processes. Annually, they must report on this in detail in a social report. The social enterprise is obliged to submit the social report to an external institution. Thus, the examination of tailor-made legislation for social enterprises, and the examination of the legal rights and duties that such legislation confers to the governing organs of social enterprises, can contribute to the academic discussion, as well as to the effective and efficient implementation of stakeholder governance in social enterprises.