March 28, 2018

By Alexandra Ioan, Project Manager at Ashoka Germany and PhD Candidate at the Hertie School of Governance

Civil society organisations have been undergoing transformations in the past decades as a result of changing welfare systems and market economies around the world. One of these changes is the increased focused on combining social and commercial purposes in order to ensure sustainability. Social entrepreneurship has thus become an umbrella term that incorporates organisations which develop their activity by simultaneously following these goals.

The dual focus on the social mission and commercial revenue poses however also challenges for social enterprises – challenges that have been signalled by practitioners and captured extensively by scholars. Accountability becomes therefore a key issue for social enterprises looking to find a balance between these two focus areas. The question arising is how to ensure that social enterprises stay true to their social mission while also operating on the market?

This is one of the questions that the international research team of the SEFORÏS project addressed. The purpose of the EU-financed research project was to understand social enterprises in a comparative international perspective and it did so by surveying 1.030 social enterprises in seven EU countries (Germany, UK, Spain, Portugal, Sweden, Romania, Hungary), China and Russia and by conducting 27 in-depth case studies of social enterprises in these countries. The goal of the project was to move beyond the social entrepreneurship label and to tap into hidden populations of social enterprises based on a respondent-driven methodology. The study included referred organisations that fulfil primarily a social mission, gain a minimum of 5% self-generated revenue by selling services on the market and to the government and have minimum one full-time employee.

Diversity of social enterprises across the board
The diversity of social enterprises is clear and striking, as can clearly be seen in the cross-country report of the study, as well as other articles on the topic. Most are small organisations with fewer than 10 full-time employees. The only exception is the UK where most social enterprises have between 10 and 49 full-time employees. In terms of age, most social enterprises are over 20 years old in Germany, UK, Portugal, Spain, and Hungary. Social enterprises younger than 1 year are the least represented in this sample, with the exception of China where 16% or organisations are so young.

The main social sectors in which social enterprises in this study operate are education and research, social services and development and housing. Their primary beneficiaries are children and youth followed by people with disabilities and citizens more broadly. They work on local, national and international levels.

In seven out of the nine countries the most used operational model by social enterprises is fee-for-service. Fees and sales are also the primary source of revenue, followed by grants in all countries. There is clear variation in revenue amounts as well: in Germany, Spain, Portugal and the UK, most social enterprises in the study have revenues of over 1 million EUR, whereas in China, Hungary and Russia, most of them reported revenues below 80.000 EUR.

As part of the SEFORÏS study, the focus on governance and accountability has been addressed by a research team led by Prof. Johanna Mair, PhD at the Hertie School of Governance in Berlin. The three main topics addressed in this direction were the legal forms of social enterprises, their relation with boards and their reporting practices.

Combining legal forms to avoid mission drift
Most social enterprises in China, Russia and the UK use for-profit legal forms to conduct activities, whereas most of the ones in the other countries adopt a non-profit legal form. In six countries (China, Germany, Portugal, Spain, Sweden and the UK) we also identified organisations adopting a dual legal form – the organisation has both a non-profit and a for-profit entity registered. This allows the social enterprises flexibility and also more clarity around the fiscal separation of the activities. This is a creative way of social enterprises of juggling the regulatory frameworks that can sometimes be constraining for organisations simultaneously pursuing dual goals.

Involving the boards or not?
86% of social enterprises in the study have a board of trustees but 80% of these use it for compliance reasons, rather than substantive reasons. This means that they install a board because they are legally required to do so based on the legal forms that they adopt. Only 20% of social enterprises choose to have a board for reasons such as receiving feedback and input from the members of the board to improve or adapt their activity.

27% of social enterprises interviewed also have advisory boards which do not have decision-making power in the organisation but which function as sounding boards and supervisory bodies for the social enterprises. The in-depth case studies revealed that these advisory boards emerge from personal networks of founders and that they can contribute to acquiring know-how and other resources for the organisations.

Overall, the organisational profile and the attitude of management towards boards play a significant role in how these supervisory bodies get involved in the life of the organisation and how they can increase accountability.

Accountability beyond reporting
65% of social enterprises in the study reported that they measure social performance, with the most common indicator tracked being the number of beneficiaries. Most of the social enterprises report their social performance measurements to capital providers, public authorities or the general public.

The study revealed however an interesting mismatch between accountability and reporting practices: while 40% of social enterprises report to capital providers, only 20% report feeling accountable to them. On the other hand, 40% feel accountable to beneficiaries but only 11% report to them. This raises questions regarding the compatibility of the formal
accountability requirements of social enterprises and the
mission-related accountability that they experience in their work.

As we can see there are a variety of dimensions and configurations in which social enterprises aim to achieve high degrees of accountability, related to legal form registration, board composition and tasks and reporting practices. While there is no recipe that fits all organisations and contexts, reflection on establishing multiple avenues of addressing the issue of accountability in organisations pursuing multiple goals simultaneously can ensure an overall increase of accountability levels.

The present research has been developed with the support of the SEFORÏS Project – “Social Entrepreneurship as a Force for more Inclusive and Innovative Societies”. This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 613500.

Find out more also about other topics from SEFORÏS through the MOOC and the SEFORÏS website.

This post is part of a blog series devoted to Accountable Now’s 10-Year Anniversary.