Governance and social enterprise

• Spear, Cornforth and Aiken Open University, Milton Keynes, UKSERConference July 07 at Southbank University

• Spear: Founder member of EMES network• EMES Network Projects and Books• Social entrepreneurship projects• Aiken: EMES: Work Integration - PERSE Project• Cornforth, C. (ed.) (2003) The Governance of Public and

Non-profit Organizations: What Do Boards Do?, London: Routledge.

• The Researchers would like to gratefully acknowledge the support of the Governance Hub in this ongoing research, and the support and well-considered guidance of the Steering Group for the research

Overview of presentation

• Background• characteristics of the social enterprise sector• the nature of governance challenges and

problems– theoretically and from policy/practice perspective.

• review the evidence in different types of social enterprise,

• new framework for analysing governance issues

Background: main/typical governance problems and challenges

• board recruitment: such as problems ‘recruiting/electing’ people with the right skills and experience; and areas of expertise that are commonly lacking

• board roles: some roles may be problematic for the board to fulfill (safeguarding values and mission; shaping strategy; risk assessment; ensuring effective performance; ensuring board operates in responsible and accountable manner; maintaining an effective board; compliance with external (government) demands and measures;)

• problems in managing relationships with management –boards becoming a rubber stamp or conversely interfering too much

• problems in managing relationships with funders (e.g. funders in public contracts)

• managing the tension between social and business goals• managing member relations and involvement• managing the demands of different stakeholders and regulators.

Approach

• Commonly recognized types of social enterprise • trading voluntary and community organisation• Community businesses• Co-operatives• Credit unions• Development Trusts• Fair trade companies• Work integration SEs• Social firms, etc

• Legal Structures

The social enterprise field

• 2005 statistics (research conducted in 2004)

• 15,000 social enterprises in the UK • 2006 statistics (research conducted in

2005)• This revealed at least 55,000 social

enterprises in the UK • Sole traders excluded• Legal and Regulatory frameworks

Relevant research in the field

• Context: globalization and deregulation; market for corporate control; business ethics + CSR

• main thrust of reform in the corporate sector :– strengthening the position of owner/shareholders in

relation to senior managers (mainly drawing on principal/agency theory), via financial incentives for chief executives, better monitoring and reporting practices,

– emphasis on strengthening the market for corporate control; or at least ensuring it is unrestricted (for mergers and acquisitions).

Making sense of corporate governance and the role of boards

Main theories (often developed wrt the private sector):

• Managerial hegemony theory• Agency theory• Stewardship theory• Stakeholder theory• Resource dependency theory

(all have their advocates, detractors and variants)

THEORY Assumptions Board member role

Main board function

Key issues

Principal-Agent theory Owners’ interests may differ from managers’ interests

Supervisor(Chosen to represent owners interests, and be independent of management)

Conformance:- Safeguard owners resources and interests- Supervise management/staff

Emphasis on control may stifle innovation and risk taking, and reduce staff motivation

Stewardship theory Owners and managers have similar interests

Partner(Chosen for expertise)

Improving Performance:- add value to top decisions/strategy- partner management

Management proposals and systems may not be given adequate scrutiny.

Stakeholder theory Different stakeholder have legitimate but different interests in the organisation.

‘Represent’ different stakeholder views

Political:- represent and balance different stakeholder interests- make policy- control executive

Board members may promote stakeholder interests rather than the organisation’s. May be difficult to agree objectives.

Resource dependency theory Organisational survival depends on maintaining coalition of support to obtain resources and legitimacy

Supporter (Chosen for influence or resources they may bring.)

External influence:- secure resources- improve stakeholder relations- bring external perspective

External focus of board members may mean internal supervision is neglected. Board members may lack expertise.

Managerial hegemony theory Owners and managers have different interests, but managers control main levers of power.

Symbolic Legitimacy:-ratify decisions-support management-give legitimacy

Management may pursue own interests at expense of ‘owners’, managers gain little of value from board.

Key governance paradoxes:

• Who governs – ‘experts’ vs ‘stakeholders’

• Board roles – ‘conformance’ vs ‘performance’

• Relationship with management – supervision vs support

• Multiple or ambiguous accountability

Research Findings

• Trading charities– Cautious care vs risky entrepreneurship

• Social Firms– Charity people usually don’t recognise a SF is a

business; they often treat a SF as ‘just another project’

– contrasting views on paying board members – board/manager poor performance are often

interlocked - avoid rocking the boat– issues about supporting board members with

disabilities

Research Findings

• Health social enterprise– Board diversity rules KO (users, M-S,etc)– Issue of clinicial governance + clinicians– Transitions: constructing a field; constructing

markets– Scale/partnership issues: Gershon– accountability issue -- it appears that the

board is only accountable to itself – pensions -- transferring of NHS pensions

Research Findings

• Small business social enterprise• transitions -- small businesses moving into

social/community service sectors• ‘Governance for busy entrepreneurs’ -

commercial people often come from situations where little in the way of governance structure. ‘They only realise they need governance when applying for grants’

• ‘The more enterprising don’t want to be hampered with all that (governance stuff).’

Research Findings

• Leisure Trusts– multi-stakeholder boards: the different ‘hats’ people

wear >> the board team – tensions around managing the social mission: one

very clear line is that taken by one LT ‘Our principle is that you can’t give away what you don’t have”

– Board advise but CEO needs the power to act; – ‘having an effective chair to the board is very

important.’ – sustaining core values: expansion can cause

tensions, especially around core democracy

Member-based structures

• pragmatic advice, for example on best methods of voting; how should they manage their AGM/members

• complexity of institutional choice, and poor or misleading advice which comes back to haunt the governance structure eg find they can’t be on the board

• good provision for rotation/removal - “founderitis” where founders won't move on, and “sitiritus” where people like sitting on boards

• drawing the boundary ‘deciding what is and what is not a board issue’

Credit unions• Getting required skills and competencies on boards, (this could be through

requiring more formalised training as in other countries). This applies particularly to financial management and strategic management skills. Many on the boards don't have financial skills.

• The struggle between different models of board operation ie representing members versus providing expertise.

• The development of a more professional sector - including succession planning for the board.

• Transitions, and problems with management -- some boards rubber stamp decisions. This is a particular problem with grassroots driven types of credit unions, where directors used to be hands-on; where the credit union was informal with volunteers carrying out operational duties. As they grow and evolve boards are moving to more formal arrangements, where some find it difficult to allow staff to manage

• Two Models: vol/informal vs larger professional• Government policy: to encourage prioritisation of financial inclusion and

poverty goals, rather than normal business development.

Football Supporters’ Trusts

• From the perspective of this research they are hybrid structures for enhancing user involvement, ownership and participation; they represent a self-organising model for involving one type of stakeholder – in this case users of the clubs services (football supporters) – moving them beyond mere consumers of services (albeit often passionate and committed ones!), to more active stakeholders.

Towards a new framework for understanding governance

• the paradox of entrepreneurs driving improved governance

• small organisations boundaries between governance, management and operational matter can be very blurred. Often advice and support materials are not so appropriate for these organisations

Towards a new framework for understanding governance

• Member-led/mutual organisations• Often problems in attracting people with appropriate skills to serve

on board, people get involved because they are interested in the ‘cause’ rather than governance

• Election process can mean boards to not have ‘appropriate’ skill mix• Problem of maintaining membership involvement and commitment,

particularly as the organisation grows and becomes more professionally led.

• Public sector spin-offs/hybrids• Managing multi-stakeholder boards• Managing staff involvement and control• Managing tensions between staff who are members and those who

are not• Developing appropriate mechanisms to involve users• Managing contracting relationships

Towards a new framework for understanding governance

• Social enterprises with charitable origins• Problem of moving away from ‘charity’ culture – may not

be sufficiently business like e.g. may lack sustainable business model, be risk averse

• May find it difficult to ‘recruit’ board with business skills• Can be problems with contracting e.g. over full-cost

recovery; over dependence on key sources of funding.• Social enterprises with small business origins• business people moving into SE sector, not always

recognising need for transparency and accountability; getting pressure from funding requirements, and concerns about Governance.

Towards a new framework for understanding governance

• * A common theme is: the range of governance structures goes from: Small informal to larger more formal professional, with different issues associated. Eg some issues of insularity with small informals

• * Multi-stakeholder structures – issues about how to manage different interests• * Influence of regulatory structures on boards: can be quite demanding, requiring a

number of changes• * Involving users: a wide variety of ways of addressing this including users on boards• * Location and expertise? Eg Few inner city accountants ready to sit on SE boards?• * A lot of specific issues that can arise around different types (see types below):• eg1 business people moving into SE sector, getting pressure to shape up through

Governance requirements• eg 2. Charities overdoing governance and procedural stuff, and so hampering

entrepreneurial activity • * contracting issues – not just public sector, but also subcontracting with private

business• * Policy frameworks shaping/constraining business choices eg CUs focus on inner

city financial exclusion.• * Transitions: a lot of trends eg towards increasing emphasis on governance; but also

organisations in transition – moving into contracting, moving from small business, spinning off from public sector

Theoretically based Governance Differences

• Member based boards (user/producer controlled) insular, weaker expertise?

• Community controlled (multi stakeholder and democratic)

• Hybrids (particularly combination of member based and trust based structures)

• Multi stakeholder boards may have greater social capital, but are potentially more conflictual;

• Trust based: with strong missions, and self appointing boards; less accountable

Towards a Multi-stakeholder theory of governance

• Efficiency costs: Transaction costs internalised and potential for goal conflicts, etc

• But social effectiveness: • Strength of community linkages (legitimacy)• Incorporation of external stakeholders• User involving structures• Economic advantage: Better link to multiple

resources (incl. social capital)• Greater legitimacy for redistributive resources• Stakeholder involvement at municipal level

governance vs corporate governance level

Diagram: 1

Governance Structure

Vs origin of org/culture (include NSM)

Mutual Public sector spin offs

Charity New social movement

Small firms

Members

Hybirds

Trustee

Conclusions:Towards a new framework for understanding governance

Critique of theories and possible way forward

Critique:• one dimensional only illuminating a particular aspect of

board’s role• need for integration

One way forward - a paradox perspective:• Morgan (1986) – need multi-paradigm perspective to

understand organisational realities• Many management problems require managing tensions

and differences rather than choosing between them• Contrasting theories or perspectives can act as ‘sensitising’

device to highlight potential paradoxes (Lewis, 2000)