We’re defining a social business model for Arkitrek. I want to go down this line because I believe that in pursuit of continuous economic growth, business is doing its fair share of damage in terms of consumption of natural resources, unequal distribution of wealth and changes to our ecosystem?
The key difference of a social business is what you do with the profits. This blog is a summary of what I’ve learned so far about setting up a social business and it goes into financial stuff that I’m only beginning to understand. It does not purport to be authoritative. Read on if you’re interested and if perhaps you have some advice to give.
I have learned that a social business is driven by social objectives rather than an obligation to return money to shareholders. Any element of personal gain, other than a fair wage for employees, must be capped or abandoned all-together. In addition to the social objectives the business must also behave responsibly toward society and environment.
This chimed well with my thoughts about growth and also with the direction that Arkitrek was already taking. Prior to Arkitrek I was dissatisfied with practicing architecture on projects which valued ‘yield’ and £/ft² as the most important measures of success. My response was to follow my love of the outdoors and from there build a business whose principal objective is nature conservation.
Over the last 6 years Arkitrek has engaged with clients who have a direct link to nature conservation; predominantly ecological research and responsibly operated nature tourism.
Arkitrek also engages with rural and coastal communities who through agriculture, hunting and fishing activities have a direct bearing on nature conservation. This is an area where architecture can realise its potential to positively affect individuals’ daily lives. It has a purpose higher than returning a profit to a developer. As both motivation and a measure of success this is especially rewarding.
Nature conservation is a grand social objective because the ecosystem services that it provides are of benefit to everyone. Links between Architecture and nature conservation can also be found in the practice of green building design. Our sphere of influence can be expanded by creating training and learning opportunities.
The next step for Arkitrek is to formalise our business structure and objectives so that we can continue to deliver social gain.
A successful business must earn enough money to cover overheads and make a profit (or a surplus as social businesses prefer to call it). The difference between a social business and an avaricious business is what is done with the profit.
By capping or eliminating financial returns to shareholders, the social business can be comfortable that decisions about how to use a financial surplus are not influenced by thoughts of personal gain. Muhammad Yunus, author of ‘Building a Social Business’ argues that for this reason, elimination is better than a cap.
In a social business, a surplus can be either reinvested or given away. Reinvestment will allow the business to grow. Giving it away could be in the form of donations to social causes, investment in other social enterprises or pro-bono services. All options can deliver social gain and contribute to the measurable success of the business.
To summarise so far, it looks like there are 3 key bits of a social business:
1: The social objective/s
2. Rights of shareholders
3. Measure of success
The Social Objective
Arkitrek’s social objective is nature conservation. How we deliver social gain on this objective is open to interpretation but having a clearly defined objective is the key to business strategy and measuring success.
The rights of Arkitrek’s shareholders are still being debated. Choosing the appropriate corporate structure is not easy and will depend on where the business wants to sit on the scale from ‘social capital’ as advocated by Muhammad Yunus at one end to ‘avaricious capital’ of traditional for-profit capitalism at the other.
There is a general consensus about rights of shareholders on some issues (such as liquidation rights) but considerable divergence on others such as income, appreciation and voting rights. A Community Interest Company (CIC) as regulated by the UK government has shareholder rights that tend towards the social end of the scale.¹
In a CIC the income rights of shareholders (dividends) are limited at x% of net profits or personal gain on investment at x% above base rate. The exact formula and pros and cons of each option are a little complicated for non-corporate types like me, although the principles seem clear enough.
Where things get murky is on appreciation rights if shares can be traded. If share capital is non-withdrawable then it is reasonable for investors to expect to have the right to transfer (sell) their shares. It is possible that as a business grows so too will the value of its shares, leaving the way open for an investor to gain by selling at a premium on the par (face) value of the share.
A social business may seek to limit appreciation rights by enforcing share trading at par value of the share. This risks artificially depressing the value of the shares, the consequences of which might be that if restrictions were lifted the price would assume market value and shareholders could then realise gains.
This scenario could happen because shareholders typically have voting rights giving them some control over the business. These rights may include voting on the articles which define the social business. In other words the social business may revert to an avaricious business. To prevent this happening voting rights may be restricted or there may be different classes of share with different rights.
In reality, share prices might not need to be fixed because if income and voting rights are restricted the shares might not be very tempting to buy and may trade at par value anyway. Why would an investor put money into a business with no return or limited return and where they have limited power to protect their investment? In the event of company insolvency the investor would loose their money so there must be some gain to make the risk worth taking.
The answer is social gain. Yunus’ philosophy is that there are elements of both the greedy and the do-gooder in most people. People ‘gain’ by doing good. Capitalism caters to the greedy part of us but at present social business offers the only complementary corporate structure for the do-good part.
Core Value or Spurious Public Relations Excercise?
Do-gooders within business currently find an outlet in donations to charity or through Corporate Social Responsibility (CSR) programs. Great though these benefits may be, the flipside is how can we be sure that CSR is not a mere public relations exercise, a cynical attempt to boost a brand image, justify fat dividends or to divert attention from social and environmental injustices?
Writing in the New Statesman, William Davies levels a similar criticism at the principal of CIC’s themselves “…the [CIC] policy seems less concerned with improving social outcomes than with propping up public confidence in social enterprise.”
Davies’ critique is based on the fact that the definition of ‘community interest’ is vague and measurement of improved social outcomes imprecise. Against the certainty of a for-profit company the social business concept is a bit woolly.
The objective of a for-profit company is simply to make a profit and to share the spoils with its shareholders. The measure of success is how much profit it makes and how many spoils are shared.
Whereas a Social Business has entrenched in its articles of incorporation that its objectives are social and the rights of shareholders to personal gain are limited. These values must therefore be inherent in all of the business activities, especially in crunch times when the CSR program of a for-profit might be scaled back or stopped?
Social businesses may be used as a PR tool and they may be abused (See controversy surrounding Network Rail, a British “not for dividend” entity). There may also be degrees of social business which need to categorised and regulated. I don’t think these are good enough reasons to dismiss the concept. I do accept however that measuring outcomes may be difficult, especially as in our case our link to the social gain may be indirect.
Wherever Arkitrek ends up on the social business spectrum it is likely to be somewhere in the CIC–Yunus bandwidth and be driven by the belief in growth towards social goals and stability rather than ever increasing consumption. I think that this itself is a fine social objective for any business.
¹ Information in this and subsequent paragraphs about shareholders’ rights may be taken from Equity finance for social enterprises by Baker Brown Associates