2013

EUROPEAN COMMISSION -GROUP OF EXPERTS ON SOCIAL ENTREPRENEURSHIP (GECES) Ioannis Nasioulas

[REPORT #7: DEFINING SOCIAL ENTERPRISES] We need a definition of social enterprises that would cover all existing and emerging types of social enterprises found throughout European Union member-states, be fully and readily operational and being compatible to economic regulations currently at force.

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Methodological Considerations

A European Union Social Economy Single Market is emerging. In light of

facilitating the development of social enterprises and supporting the

structuration of viable social economies in all member-states it is imperative that

we proceed to a solid identification of the term “social enterprise”. A definition of

social enterprises is a prerequisite in deploying universal policies of institutional

recognition, regulation, statistical identification and funding. We need a level

social economy horizon for all member-states, peripheries and stakeholders.

Employing a common definition is the least we can do in order to avoid

information asymmetries, market failures, competition distortion, misuse of

public funds and potential isomorphic effects regarding the essential elements

social entrepreneurship should upkeep.

A. A European definition of social enterprises should be able to account for all existing and emerging types of social enterprises throughout the member-states. This is a highly complex task since historical trajectories, institutional arrangements and socio-market dynamics are ever-evolving, plural and in many cases divergent. “Being able to account for emerging types” means that an eventual definition of social enterprises should be also able to identify types of organizations that are not provided by national legislation already at force. Already applied national laws may not recognize organizations that are considered social enterprises in other national contexts or eventually be considered social enterprises by the European definition.

B. A European definition of social enterprises should be ready to use and not create obstacles to policies already in place, such as the Social Business Initiative. “Ready to use” means that it does not require the passing of a special law in member-states where no such laws exist. It also means that it does not conflict with the existing legislation.

C. A European definition of social enterprises should be precise and technical enough so as not to create ambiguities and double interpretations.

D. A European definition of social enterprises should be compatible with the existing European System of National Accounts (ESA 95) which forms the common technical basis for the identification of economic activity in member-states and the European Union. ESA 95 is compatible with the System of National Accounts (SNA 93) at an international basis.

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Definition

“Social enterprise is an institutionally separate from the government corporation

with binding social goals and democratic function: (a) having the primary

objective of serving its members, the community or society at large, (b) allowing

the distribution of profits to its owners only to the extent that this does not

undermine its social orientation, (c) functioning democratically with every one of

its owners having one vote and (d) with any amendment made to its primary

social goals or democratic function directly leading to its disqualification as a

social enterprise” (Nasioulas, 2013, 35).

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Discussion

Let us consider all the elements of the proposed definition in detail.

Social enterprise is an institutionally separate from the government entity.

We define social enterprises as “institutionally separate from the government”

and not “private” because there exist Private-Law Juridical Entities under

government control. “Control of a corporation occurs when a single institutional

unit owning more than a half of the shares, or equity, of a corporation is able to

control its policy and operations by outvoting all other shareholders, if

necessary; similarly, a small, organized group of shareholders whose combined

ownership of shares exceeds 50 per cent of the total is able to control the

corporation by acting in concert; in practice, when ownership of shares is widely

diffused among a large number of shareholders, control may be secured by

owning 20 per cent or less of the total shares” (SNA, 4.27, 4.28, also UN, 2003,

2.17).

Social enterprise is a corporation. “A corporation is a legal entity, created for the purpose of producing goods or services for the market, that may be a source of profit or other financial gain to its owner(s); it is collectively owned by shareholders who have the authority to appoint directors responsible for its general management” (SNA, 4.23). “In general, all entities, however they may describe themselves or whatever they may be called, which are set up for purposes of engaging in market production, which are capable of generating a profit or other financial gain for their owners and which are recognized at law as separate legal entities from their owners who enjoy limited liability, are treated as corporations in the System” (SNA, 4.47). As institutionally separate from the government corporations, social enterprises can only belong to the following two ESA 95 Institutional Sectors: S.11 Non-Financial Corporations and S.12 Financial Corporations. They cannot belong to the ESA 95 Institutional Sectors: S.13 General Government, S.14 Households and S.15 Non-Profit Institutions Serving Households (NPISHs) (SNA, 2.17). In case where an entity is in national-accounting terms attributed to other Institutional Sectors than the S.11 and S.12, it is disqualified as a social enterprise. Nevertheless, there might be social enterprises into which NPISHs are members/owners and whose main source of income is derived out of grants made by that NPISHs; these should retain the denomination “social enterprise”, disregarding the fact that in national-accounting rules they are considered NPISHs. Yet, this could not be allowed for social enterprises whose main source of income is one or more regular for-profit enterprises for ethical reasons. Such an understanding poses the matter of independency and market viability of social enterprises. In many cases, social enterprises are heavily dependent on public funding. In conjunction with special,

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preferential treatment and social clauses in government contracts, the field of dependent social enterprises calls for further research (Nasioulas, 2012). Social enterprises have binding goals and functions. There may be entities

being democratically governed and featuring social goals only in an ergo-variable

manner. They may be allowed to deviate from the given social goals by amending

their legal charters of incorporation or be partially engaged in non-social goals

right from the start, e.g. civil cooperatives. They may be considered as social

enterprises if official, standardized processes of identification are in place so as

to verify the persistence of goals, structure, and activities of the organization:

any amendment made to their primary social goals or democratic function

should directly lead to their disqualification as social enterprises.

Key Considerations

Financial Independence and Viability. Should social enterprises be financially

independent, deriving the majority of their income out of own market activity,

undertaking substantial economic risks and not by direct, third-party funding?

Identification and Verification. Both national-accounting methodologies and

the institutional reality call for the establishment of official procedures through

which social enterprises would be regularly monitored for non-deviation out of

their primary social goals and democratic functioning. In fact, such a policy

would facilitate the enrichment of the social entrepreneurship field with

cooperative enterprises wishing to act as social ones for a limited period of time,

with proper transparency, accountability and legitimacy.

Bibliography

1. European System of Accounts 1995. (Find it here) 2. Nasioulas I. (2012). Greek Social Economy Revisited. Voluntary, Civic and

Cooperative Challenges in the 21st Century. PETER LANG VERLAG. (Find it here)

3. Nasioulas I. (2013). Social Enterprises, Clusters and Networks in the Social Economy. Theory, European Experience and the Greek Case. Social Economy Institute. [In Greek]. (Find it here)

4. System of National Accounts 1993. (Find it here) 5. United Nations. (2003). Handbook of Non-Profit Institutions in the National

Accounts. (Find it here)