Governance, legitimacy and
performance in UK social enterprises
Chris Cornforth
Open University
Email: c.j.cornforth@open.ac.uk
Overview
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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
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?)
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
Origins and types of SE
Type of SE
Origins
Examples
Mutuals
Meet member needs thro’
trading
Consumer and community co-ops, credit
unions
Trading
‘charities’
Vol. & Community sector
1. Primary trading e.g. charging for services
2. Trading to raise funds e.g. charity shops
Public sector
‘spin-offs’
Public sector
Some housing associations; leisure trusts,
social and healthcare SEs
‘New-start’ SEs
Activities of social
entrepreneurs
New environmental businesses
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).
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
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
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
Legal forms and safe-guarding social
mission
Legal form
Constitutional
Asset lock
Regulatory
CLG
Possible
Usual
CH - mainly financial
CIC
Required
community interest
Yes
CIC - ‘Light touch’
community interest test
IPS – CBS
Yes
Yes
FSA – monitors compliance
IPS – co-op
Possible
Demutualisation
requires vote by
majority
FSA – monitors compliance
Charity
Yes
Yes
CC – monitors compliance
CLS
Possible
No
CH - mainly financial
Others
Varies
No
None
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
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?
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
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
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, overdependence
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
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
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