Social enterprises in the EU (IVOR nr. 111) 2018/2.2:2.2 Definitions of social enterprises

Social enterprises in the EU (IVOR nr. 111) 2018/2.2

2.2 Definitions of social enterprises

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The social enterprise concept has attracted the interest of many academic scholars from a range of disciplines and backgrounds. Their scholarly discussions focus on the pursuit of a common definition for social enterprises that covers the miscellaneous characteristics of social enterprises identified in various EU countries. Scholarly attempts to clarify the social enterprise concept are varied. Some researchers provide narrow definitions and others offer definitions outlined in broader terms.

According to the narrow definition, introduced primarily by academics from the discipline of Economics, a social enterprise is a not-for-profit organisation with an ‘earned income business or strategy’ undertaken ‘to generate revenue in support of its charitable mission’.1 The narrow definition can be contrasted with the broader definitions of the social enterprise concept. According to these definitions, social enterprises engage in a range of economic activities that can be positioned in various economic sectors, i.e. the for-profit sector, the non- profit sector, or an intersection of both, generating a ‘third sector’.2 Nobel Peace Prize winner, Muhammad Yunus, was a pioneer in social entrepreneurship activities in Bangladesh. He provides a conceptual definition of the social enterprise as ‘a company that is cause-driven rather than profit-driven, with the potential to act as a change agent for the world’.3 In the discipline of Organisational Studies, Kerlin notes that social enterprises are organisations which:

Fall along a continuum from profit-oriented businesses engaged in socially beneficial activities (corporate philanthropies or corporate social responsibility) to dual-purpose businesses that mediate profit goals with social objectives (hybrids) to not-for-profit organizations engaged in mission- supporting commercial activity (social purpose organizations).4

Haugh defines a social enterprise as an independent and autonomous organisation with social and economic objectives, which aims to fulfil a social purpose. Such an organisation aims to achieve financial sustainability through trading in order to generate profit, to hire employees and involve volunteers all while seeking social objectives.5 Haugh also notes, ‘social enterprises adopt differing legal formats and abide by different legal frameworks and fiscal responsibilities and duties in different countries’.6

In Europe, research on the definition of social enterprises and its theoretical underpinnings has been carried out by the research network named L’ é mergence de l’entreprise sociale en Europe (i.e. the emergence of social enterprises in Europe, hereafter ‘EMES’).7 The EMES research network developed a definition for social enterprises that was ultimately adopted by the international research community. The EMES definition is based on three groups of uniform criteria that characterise the ideal social enterprise. The criteria were introduced to offer the international academic community a common ground for addressing and researching the activities of social enterprises. The first set of criteria defines the economic and entrepreneurial dimensions of social enterprises. The second set defines the societal dimensions of social enterprises, while the third set defines the participatory governance of social enterprises.8

The introduction of tailor-made legislation for social enterprises into the national legal orders of many EU countries and the emergence of a limited body of legal literature and academic research regarding social enterprises has contributed substantially to the clarification of the social enterprise concept.9 A number of comparative legal and non-legal studies have explained the differences and similarities in the governance schemes and normative frameworks in various countries.10 In addition to country-specific studies, some comparative evaluations of the various legal frameworks have been carried out.11 The existing comparisons indicate that there is no consistent use and understanding of the term ‘social enterprise’ in the domestic legal frameworks of countries in the EU.12 In certain groups of EU countries with tailor-made legislation for social enterprises, there are several indicative examples of how the law treats this concept in disparate ways. For example, in Italy and Belgium, the law describes social enterprises as entities with a socially driven purpose.13 Meanwhile, in Finland, Lithuania, Poland, and Sweden, the legislation views social enterprises as work integration social enterprises (hereafter ‘WISE’) that are designed to alleviate unemployment or to accommodate the integration of the disabled into the labour market.14 The approach of viewing social enterprises merely as a type of WISE is in contrast with another broader approach adopted in the UK. In the UK, a social enterprise is defined in the government’s policy documents as ‘a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners’.15

In its 2011 communication on the ‘Social Business Initiative’ (hereafter ‘the SBI Communication of 2011’), the Commission introduced a uniform definition for social enterprises. The definition demonstrates how social enterprises can be distinguished from mainstream enterprises by way of certain elements.16 According to this definition, a social enterprise: (i) is an operator of the social economy; (ii) has as its main objective to have a social impact rather than to make a profit; (iii) operates by providing goods and services for the market in an entrepreneurial and innovative fashion; (iv) uses its profits primarily to achieve a social mission; (v) is managed in an open and responsible manner; and (vi) involves employees, consumers and stakeholders affected by its commercial activities.

To make the above definition more tangible, the Commission provided various examples of activities and services that can be considered when attempting to qualify an entity as a social enterprise. In the words of the Commission, entities qualifying as social enterprises include:

(A) businesses providing social services and/or goods and services to vulnerable persons (access to housing, health care, assistance for elderly or disabled persons, inclusion of vulnerable groups, child care, access to employment and training, dependency management, etc.); and/or (B) businesses with a method of production of goods or services with a social objective (social and professional integration via access to employment for people disadvantaged in particular by insufficient qualifications or social or professional problems leading to exclusion and marginalisation) but whose activity may be outside the realm of the provision of social goods or services.17

Additionally, the Commission’s definition was included in the European Regulation No. 346/2013 (hereafter ‘EuSEF Regulation’) on European Social Entrepreneurship Funds, in which the generic term ‘social undertaking’ was introduced for social enterprises.18 The EuSEF Regulation was adopted to support the financing of social enterprises in the EU by establishing uniform rules in relation to the ‘European Social Entrepreneurship Funds’ (hereafter ‘EuSEF’), the new label given to investment funds of a social character. By means of this new EuSEF label, investors in the EU could identify those investment funds that focus on investing in social business activities in the EU. Indeed, Recital 12 in the EuSEF Regulation refers to a ‘social undertaking’, which is defined as ‘an operator in the social economy, the main objective of which is to have a social impact rather than to make a profit for its owners or shareholders’.19 The EuSEF definition builds on the Commission’s definition for social enterprises, and on EU case law concerning the concept of an ‘undertaking’.20 According to the definition provided by the Commission and case law respectively, a social undertaking operates by providing goods and services for the market and by reinvesting its surplus into the promotion of social objectives. It is managed in an inclusive ‘accountable and transparent manner, in particular, by involving employees, consumers and stakeholders that are affected by its commercial activities’.21 The above characteristics are repeated in the main body of the EuSEF Regulation, in Article 3(d)(i)-(iv), which defines an eligible ‘qualifying portfolio undertaking’ able to receive funding from accredited EuSEF.22 Since it is not the objective of the EuSEF Regulation to regulate social enterprises, the definition of a social undertaking is not included in the body of the EuSEF Regulation.23 In terms of setting up investment funds, this definition is binding and directly enforceable by the EU Member States. It means that Member States are bound to enforce the uniform criteria applicable to qualifying portfolio undertakings in their national systems. For other purposes, however, EU Member States still enjoy the capacity to regulate the social enterprise concept differently and by means of other definitions that may be better suited to their national systems and jurisdiction.

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