The Letter and Spirit of Social Enterprise

There are three main problem areas with Social Enterprises: Social enterprises are not clearly defined, they are confused with civil society organizations, and the issue of ethics and money. The founder of GAYE – Arrange Your Future Institute, and member of Young Optimists Council Eda Bayraktar, The President of Young Social Entrepreneurs Society Erhan Bozkurt, and the founder of, and Eastern Europe and West Asia Director of Dr. Uygar Özesmi came together thru and talked about these main problem areas and tried to find answers.

by Eda Bayraktar, Erhan Bozkurt and Uygar Özesmi

Today we face a system that destroys the life support systems of our planet, and creates social inequalities. Every sane person realizes that this situation is not sustainable. We are happy that there are ways out from these problems. In our rapidly changing world, new needs emerge along with this change and new needs give rise to new models. Social networks and the digital age transforms the system created by the Industrial Revolution. The new social order brings its own concepts and new angles. The concepts such as “personal interests”, “savage competition” are replaced by “win win”, “cooperation”, “synergy” and “sustainable strategies”. People seek meaning in their lives, social consciousness and awareness is on the rise. The capitalist system depending on profit maximization cannot meet social demands and destructs nature. For this reason non-profit social enterprises are emerging. The prevailing capitalist system creates a deep inequality by concentrating wealth in the hands of few. On the other hand, many social enterprises are being established to create sustainable social and environmental benefits to solve this inequality. Today’s developments in the area of social enterprises, defines the way we will live tomorrow.

Today, where social enterprises gain so much importance there are three points that challenge social entrepreneurs and confuse society. First, is the definition of social enterprise; second, how civil society organisations (CSOs) are different from social enterprises and third, whether it is ethical to make money in social enterprises or not.

What is a Social Enterprise?

Although social enterprises have commonalities with classical enterprises, they also have many differences. Classic entrepreneurship creates value, starting or expanding a profitable business, launching a new product or service to the marketplace through organizing either as an individuals or as a group of individuals. Similar to classic entrepreneurship, social enterprises also identify problems and opportunities, take risks and develop solutions through innovative methods.

The most important difference of all among them is, commercial enterprises focus on profit yet social enterprises focus on benefit. Another important difference is that while imitation and modeling are not welcomed in commercial enterprises, modeling is an important and desired tool in social enterprises, because it widens the sphere of influence and impact.

Social enterprises are organizations that aim to be part of the solution, not the problem. They develop opportunities from problems identified by individuals or groups, take local culture as a base with innovative ideas, replace profit with sustainable sufficient income, and creates values for all of or part of society – society defined as including nature and all its living inhabitants including human beings.  Social entrepreneurship requires taking responsibility for planet earth. For that reason social entrepreneurship is also a form of activism…

Social Enterprise and Non-Government Organizations 

Although social enterprises and NGO’s meet at the common denominator of developing solutions to social issues and destruction of nature, there are distinctive differences between their models.

In terms of business model, CSOs are largely dependent on donations and grants, social enterprises should be self-sufficient and should not depend on public donations and grants, since sustainability is important.

Their administrative models are as different as their business models. While CSOs structures are mainly democratic and participative thus more horizontal, social enterprises are open to all sorts of structure in order to respond to dynamic market conditions quickly and rapidly including hierarchical ones. Social enterprises may alter their modus operandi rapidly and reshape their structures if existing ones hinder efficient management.

We have to mention the difference of volunteering and professionalism as well. Social enterprises do not depend on volunteers to meet their needs; on the contrary social businesses are there for more employment. In CSOs it is a must to invest in volunteerism and volunteering opportunities. CSOs that do not have volunteer programs are not exactly considered legitimate.

Lastly, although this is not a rule, generally speaking CSOs are established under the Act of Associations and Foundations while social enterprises are established under the Act of Commerce. CSOs need to convince decision makers and politicians in changing policies and legislation, they demonstrate their asks in projects, or provide social services based on charity. Social enterprises promote value based systematic solutions in the economy, and expand social development and social impact thru commerce, thereby trigger social change. On the other hand, since social enterprises are economically sustainable, able to earn necessary funds, CSOs, who have inherent fluctuations in funding, may include social enterprises as investments in their portfolio.

Ethical Dimension of Making Money in Social Enterprises

Money, as it causes emotional complexity thru its ethical dimension, is usually a topic not openly discussed in the social enterprise circles. Social enterprises ought to operate by a business model that is self-sufficient; carefully considering returns and investment needs in order not to prevail for only a couple months or a year the most, in order to create a sustainable impact. It may be beneficial to get grants from individuals or institutions, or use government supports and tax subsidies at the start-up stage. However, social enterprises are expected to be able to generate their own funds without needing external support, and if possible make a profit to expand their services. For that reason social enterprises have to create income to cover their expenses and pay their staff.

How do social enterprises make money?

The source of income in a social enterprise varies according their field of operation. The income is generated either from the sales proceeds of products created by the members of the workplace, revenues from services provided to customers or membership contributions collected from the members of a distribution system. The crucial point is to have a clear and just link between the social value created and the income generated. Although not preferred, merely in the start-up phase grants may be accepted within a reasonable scale.

Can Social Enterprises Make Profit?

Social enterprises can make a profit provided that the profit is reinvested in the same or another social enterprise. In other words, if the social enterprise is used to obtain personal wealth it loses its legitimacy. In this respect it will be most appropriate to establish a social enterprise as a non-profit company. The critical issue that needs attention here is that such “non-profit” status should not impose limitations to commercial activities and establish undesired enforcements. Some may deny this philosophically if a ”non-profit” status creates advantages. In some cases, based on this or similar reasons regular “for-profit” company status may be more suitable for a social enterprise. In such cases the entire shares of the enterprise can be designated as investment shares thus transforming the enterprise to a defacto non-profit status. Furthermore, enterprises established as regular companies may gain legitimacy through certification systems such as B Corp or similar. As a result, social enterprises can make profit but such profit has to be used for the benefit of society or nature.

What ought to be the monetary expectation of social enterprise founders and employees?

The most important factor that makes a social enterprise succeed is the talented entrepreneurs and employees who are striving to take the organization forward using their creativity, intelligence, hard work and labor. The success of a social enterprise depends on bringing together talented people. Therefore, the social enterprise must provide needs, or in other words a dependable livelihood and social security for its founders and employees. Although the work done serve a higher social and natural benefit, social entrepreneurship is not volunteerism or charity. This approach is reserved for CSOs. However, social enterprises should be accountable and transparent in their expenses and salaries. Otherwise, it will not be possible for the employees to show that they pursue a dignified life and serve a higher social and environmental good. At this point, may be the most important question is how to identify needs and how to define and establish standards.

How are the income of the founders and employees determined?

Profit maximizing enterprises, in determining salaries monitor companies they are in competition with and while they try to attract talent, they try to pay as less as possible. For this purpose the Human Resources Departments of these companies benchmark themselves against similar ones. “Benchmarking” stands for adopting and internalizing best practices, applications, models, methods and procedures existing in the same sector to move forward. In this respect, social enterprises should adopt the maximum salary and benefit structures of the companies in their respective sectors. The founder of the enterprise should not get a salary and benefits higher than an equivalent company’s top executive. The other employees of the social enterprise should get salaries based on same scale that the top executive is on. If this system is applied no one will have the right to judge the social enterprise within the legal framework and criticize the founders and employees for not being ethical. If there is a need of such a criticism and social struggle than that should be made towards the whole sector.

Conclusion and Responsibility

As social enterprises increase due to the zeitgeist and its needs, it is of critical importance for all players and newcomers in this field to adopt distinctive concrete qualifications and basic principles. It is important that these enterprises are build around the qualifications and principles defined in this paper. The newcomers should have transparency, accountability, defined rules for income and salary structure as outlined. If such criteria are not properly followed we will not be able to distinguish the social enterprise from a company solely focusing on profit maximization without any social and environmental benefit concern. And if we cannot distinguish, the ones who would like to grab this window for profit might cast a dark shadow on the image of social enterprises. That in turn will slow down the current development of the social enterprises. To give momentum to the rise of social enterprises we need to keep an eye on these distinctions and rules, while contributing to the development of this economy by prioritizing procurement of raw materials and services from and among social enterprises.

Reference as:

Bayraktar, E., Bozkurt, E., Özesmi, U., 2014 (Translation). The Letter and Spirit of Social Enterprises. Optimist, Girişim, İnovasyon, Yönetim, Year:2, Number:17 Page:110-112, İstanbul.

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