The Social Enterprise Company in Europe: Policy, Theory and Isomorphism

Corporate organisational constructs facilitating social enterprise have proliferated for the last decade across many European jurisdictions. In a recent paper (forthcoming in the Journal of Corporate Law Studies), I investigate this phenomenon and provide an initial analytical framework through which the social enterprise company can be understood, both on its own terms and with respect to the traditional business organisation.

The paper begins by laying out the political intention for designing the social enterprise company, which focuses on policymakers’ strong interest in scaling the social economy to reduce states’ social policy obligations. Political institutionalisation of the social economy has been ongoing since roughly the 1980s, whereby public sector actors have entered into collaborative partnerships with social economy organisations to lessen supply-side pressures on governments in the areas of, for example, curbing social exclusion and filling gaps in welfare coverage. However, in the run up to the 2008 financial crisis in particular, the relationship between social economy organisations and governments was called into question. Briefly stated, policymakers perceived the existence of strong demands to cut public spending, which included funding social economy organisations’ activities in relevant social policy areas.

The issue then became how the social economy could be further institutionalised to facilitate reductions in public spending, but still act as a functional surrogate for direct state intervention. Policymakers saw impact investing as a viable avenue through which states could transfer social policy responsibility and simultaneously reduce the social economy’s dependence on public funding to make it more financially autonomous. Even though as a default matter impact investors are interested in financing pro-social businesses, it was nonetheless the case that the traditional collection of social economy organisational structures did not contemplate outside equity investor participation.

The solution was to introduce a special organisational construct modelled in part off social enterprises. Social enterprises are not discrete organisational forms per se, but rather represent an organisational category that exhibits stronger inclinations towards commercial and financial risk taking with the aim to be self-financing (see, eg, Smith and Teasdale, p 156). The social enterprise concept was then fused together with specific legal mechanisms and institutional logics associated with both (i) the traditional business organisation (to, among other things, allow for outside equity investor participation); and (ii) public sector and social economy organisations. The result was the social enterprise company.

From this departure point, the discussion turns to theorising the social enterprise company’s organisational architecture. The process of repurposing specific legal mechanisms and institutional logics associated with private, public and social economy organisations and housing them in a single unit resulted in a hybrid entity. Due to the political economy of the social enterprise company, the legal mechanisms and institutional logics were combined and balanced in a particular way. Namely, the social enterprise company is a hybrid organisational construct meant to operate pursuant to the principles and objectives of the social economy, for public interest purposes, through impact investments and other private contributions. Therefore, whilst it is the case that the classic corporate attributes—ie separate legal personality, limited liability, delegated management under a board structure, shareholder participation and transferrable shares—are to some extent observable in the social enterprise company’s DNA, there are other theoretical and practical modifications to be found within the organisational construct that roundly distinguish it from the traditional business organisation. The first is that the corporate objective is to create social value. The second is publicness, which is embodied in legal mechanisms that strengthen the degree to which a social enterprise company is subject to added regulatory supervision vis-à-vis the development and maintenance of the selected social value objective. The third is resource flexibility, of which something will be said below. The fourth is behavioural incentives.

The fifth adjustment has been put in place to counteract isomorphism. When an organisational construct is equipped with resource flexibility, it allows for the participation of outside equity investors, but it also facilitates the involvement of funders from the public sector and the social economy. Whilst the resource flexibility mechanisms embedded in the social enterprise company do provide some legal surety to all capital contributors that their funds will be used for proper purposes, the paper shows that isomorphic threats can still manifest between creating social value and maximising financial returns when actors coming from different sectors—with potentially different interests—are brought into the same firm. It is suggested that a conflict between social value creation and profit maximisation will not generally occur during the early stages of a social enterprise company’s lifecycle. Surveying the current state of the investment landscape illustrates this point.

Nevertheless, the paper identifies an isomorphic threat called the legacy problem that can become problematic at later stages of a social enterprise company’s lifecycle. The investment landscape is again referenced to show how the legacy problem could affect a social enterprise company and the circumstances under which it would arise. The paper concludes by underscoring several theoretical concerns, analysing the regulatory frameworks’ current conversion and winding up legal mechanisms and offers suggestions that could lead to improved functionality, specifically with respect to realising the jurisdictions’ wider policy objectives.

J S Liptrap is a research associate at the Centre for Business Research at the Judge Business School, University of Cambridge.