Governance, legitimacy and performance in UK social enterprises

1. Governance, legitimacy and performance in UK social enterprises Chris Cornforth Open University Email: c.j.cornforth@open.ac.uk

2. Overview • The social enterprise sector in the UK • What is governance? • Governance and legitimacy • Governance and performance • The challenges that boards of social enterprises face • Conclusions

3. UK Social Enterprise Sector - definitions “A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or the community, rather than being driven by the need to maximise profit for shareholders and owners” (DTI, 2002). Main criteria: • Primacy of social and/or environmental goals • Enterprise orientation, (but how much?) • Use of assets and surpluses for social rather than private gain (but how guaranteed?)

4. Size of sector in the UK • Depends on how defined (see Dart et al, 2010) • Annual Small Business Survey using data from 2005-7 estimated 62,000 social enterprises • Previous surveys in 2004 and 2005 varied between 15,000 and 55,000 depending on definition • High estimates include many sole traders and partnerships • Many different legal forms with varying degrees of safeguards for social mission

5. Origins and types of SE

6. What is organisational/corporate governance? ‘the structures, systems and processes concerned with ensuring the overall direction, control and accountability of an organization’ (Cornforth, 2004). • Boards arose because of separation of ‘ownership’ from control • Boards - way for ‘owners’ or ‘mandators’ of an organisation to try to ensure it acts in their best interests • Board has main responsibility for governance at the organisational level, BUT • Governance system broader than this involving other actors (e.g. members, regulators) and processes (e.g. regulation, audit).

7. Board role in maintaining legitimacy Types of legitimacy (Dart, 2004) : • Moral – values and norms • Pragmatic – exchange • Cognitive – taken for granted (e.g. charity?) Board role in maintaining legitimacy: • Maintaining effectiveness – meeting needs (pragmatic legitimacy) • Safeguarding values and mission (moral legitimacy) • Ensuring ethical behaviour (moral legitimacy) • Composition of board - e.g. elected (democratic legitimacy); great & good BUT

8. Challenges to legitimacy Danger of mission drift through for example: • Market and institutional pressures (degeneration thesis) • Selection of board members and staff not committed to values • Unethical behaviour e.g. rewards/benefits being unfairly distributed to staff Conversely: • Being seen as worthy but uncompetitive or inefficient

9. The governance system is more than the board National and sector level: • legal and regulatory requirements e.g. reporting, audit, inspection • voluntary requirements e.g. codes of practice, standards and certifications

10. Legal forms and safe-guarding social mission

11. Other ‘voluntary’ safeguards • Codes of practice e.g. for good governance • Certification schemes e.g. – Social enterprise mark http://www.socialenterprisemark.org.uk/ – Fair-trade mark • Various forms of measuring and reporting social performance e.g. social audit, SROI. • Likely to be important for maintaining long-term legitimacy, particularly where other forms of regulation weak

12. Governance and performance • Does board effectiveness influence org. effectiveness? • Various studies on non-profits suggest an association, but research problematic (Ostrower & Stone, 2006):– difficulties measuring effectiveness– most research cross-sectional, hence difficult to attribute causality– board effectiveness may vary depending on the context - many other variables can influence effectiveness e.g. quality of management • Is this a holy grail?

13. How governance ‘mechanisms’ can influence performance Positive: • Monitoring to address performance problems and keep management on its toes • Adding value to strategic discussions • Helping access external resources and expertise • Managing risks, stepping in during crises Negative: • Be too trusting or too critical of management • Be too risk averse or conversely not manage risks • Lack competence or give insufficient time

14. Common governance challenges in social enterprises Spear et al (2009): • Choosing appropriate legal and governance structures • Recruiting board members with the right skills, experience and time • Balancing social and financial goals • Balancing demands of different stakeholders • Sustaining member involvement • Lack of clarity over board and staff roles • Attitude of senior management

15. Particular governance challenges Mutuals and membership associations • Maintaining member participation • Elected boards that may not have necessary skills • Danger of domination by professional staff as grow Trading charities • Governing trading subsidiaries, multi-level governance • Tension between charity culture and enterprise culture e.g. attitude to risk, new forms of funding • Problems with public contracting e.g. full-cost recovery, over-dependence

16. Particular governance challenges Public sector spin-offs • Multi-stakeholder boards and ‘delegate’ syndrome • Culture change • Developing boards & managers for challenges of market/contracts • User and staff involvement New start social enterprises • Neglect of governance arrangements • Founder syndrome

17. Conclusions • Boards are potentially important for maintaining legitimacy and performance, BUT • Depends crucially on skills, experience and time of board members, AND • Willingness of managers to empower their board, HOWEVER • Boards face complex challenges which vary depending on type of social enterprise, life stage and context • While boards are important governance involves more than this • The wider governance system is also important in maintaining legitimacy and performance e.g. legal form, regulation, certification

18. References Cornforth, C. (2001) 'What makes boards effective? An examination of the relationships between board inputs, structures, processes and effectiveness in non-profit organisations', Corporate Governance: An International Review, 9, 3, pp 217-227. Cornforth, C.J. (2004) 'The governance of co-operatives and mutual associations: a paradox perspective’, Annals of Public & Co-operative Economics, 75,1,11-32. Cornforth, C., Harrison, Y. and Murray, V. (2010) What makes Chairs of Governing Bodies Effective? A report prepared for the National Council for Voluntary Organisations and the Charity Trustee Network Dart, R. (2004) ‘The Legitimacy of Social Enterprise’, Nonprofit Management and Leadership, 14, 4, 411-424. Dart, R., Clow, E. and Armstrong, A. (2010) ‘Meaningful Difficulties in Mapping Social Enterprises’, Social Enterprise Journal, 6, 3, 186-193. Ostrower, F. and Stone, M. M. (2006) ‘Boards of Nonprofit Organizations: Research Trends, Findings and Prospects for Future Research’ in W. Powell and R. Steinberg (Eds.) The Nonprofit Sector: A Research Handbook (2nd ed.) New Haven, CT: Yale University Press. Spear, R.G., Cornforth, C.J. and Aiken, M. (2009) 'The governance challenges of social enterprises: evidence from a UK empirical study' Annals of Public and Cooperative Economics, vol. 80, no. 2, pp. 247-273