Charities vs Social Enterprises

I’m a big supporter of community activities. Why? Well, like many, I think a community has certain shared values and, harnessed properly, such shared values can create something greater than the sum of its parts.

Charities vs Social Enterprises

By Stuart Thomson, Managing Director, Johnsons Chartered Accountants

I’m a big supporter of community activities. Why? Well, like many, I think a community has certain shared values and, harnessed properly, such shared values can create something greater than the sum of its parts. That’s the definition of goodwill or, as I like to refer to it, the intangible over net assets. It’s a business concept, but the word ‘community’ is often seen as more applicable in the charity or not-for-profit sector. So are goodwill and community compatible? I would contend that they are. 

Charity is defined as helping those in need. But, over time, that laudable aim has been narrowed to a fairly strict perspective. Charity is about giving to those in need. There is no true concept of a charity having goodwill value. I do accept that large charities will argue that their name creates a brand that generates more income in order to assist them in fulfilling their objectives. But that brand is an asset.

Goodwill is about something more than assets. It’s the je ne sais quoi of business. Companies hopefully have goodwill in abundance. In fact, the whole concept of capitalism and trade is that one values one thing more than another. Accountants call this goodwill, and recognise it on a business acquisition. Management consultants seek to quantify it with value analysis. Personally I think the nebulous je ne sais quoi definition is best.

But can this je ne sais quoi concept apply to the third sector? Of course, but not in terms of free hand-outs, as there is no value chain and no perception of greater value in things that are freely given away. Social enterprises operate in the grey area between social good, and full blown capitalism. Some social enterprises are really just like charities but with a profit-generating activity – those profits being deployed in a charitable manner. I call these charitable enterprises. Social enterprises apply their profits for social good – not in a CSR or charitable way, but in a way that tries to create something from nothing. The old Chinese Taoist saying ‘Give a man a fish and you feed him for a day. Teach him how to fish and you feed him for a lifetime’ perfectly explains the difference between charity and social enterprise. True social enterprises seek not to address symptoms, but the root causes of disadvantage.

Assessing performance is always key in the modern, fast-paced world. Charities determine success by how many they have helped, for example. Or what they spent on helping. The actual flow of needy customers may not change, but they can certainly stand proud of how they have helped certain individuals. Social enterprises measure success differently. The accountants may look at spend rates, but true performance is measured by whether the stream of potential customers has reduced or stopped altogether. Has the root cause of the problem been addressed?

Like many industries the success of a social enterprise should ultimately make it obsolete. Or as a capitalist would say, success will mandate evolution of their business model with the development of more routes to market (!). A truly successful social enterprise will act like a capitalist organisation, but with a different set of values. The value scales will balance social good with financial measures.

So what are these values? Values are a set of principles or guidelines which help to frame our decisions. Alfred Nobel is a good example. He was the Swedish inventor of dynamite. He profited from the destruction of lives and livelihoods, and faced criticism for his choice of values. He reacted by creating Nobel prizes for contributions to mankind. The Nobel Institute, which awards these coveted prizes, has promoted and shaped our modern world, applying a set of social values. It is not the issuing of prizes that is its influence, but how mankind has changed its behaviour in pursuit of such recognition. The charity model would be satisfied with the handing out of prizes to those in need of gratitude. But the social enterprise has changed the behaviour of mankind towards a specific set of Nobel values. How do you define that? Again I return to je ne sais quoi!

So to operate a social enterprise one needs values that not only recognise the culture and objectives of an organisation, but also that undefinable je ne sais quoi that makes all its stakeholders strive to pursue what individually must appear impossible. However this combined effort has the potential to change a community. 

Social enterprises operate in the third sector, so transparency and governance are important. But those values don’t change a community – they justify decisions to bureaucrats (and accountants). Social enterprises need to look hard at themselves and try to define their je ne sais quoi. I postulate that if they succeed in defining it, then they are not being ambitious enough. It’s impossible to define the unknown (it’s in the words!). Values are not about defining processes, but defining how decisions are made.

When we choose to buy milk, we don’t go to the counter, pick it up and pay for it. We decide the quantity, the type of milk, the price, the expiry date as well as deciding if we would rather have a bottle of wine! It’s very difficult to define that process, but through your own values and principles we create a framework for decisions. That is how social enterprises can maintain their valuable contribution to society, and avoid being squeezed out by capitalism or charity. Their niche is very focused on everyone’s future!