As companies grasp for ethical credentials, the social-enterprise tag is being abused. But some ethical-business leaders are striving to clarify this misunderstood term

Fairtrade chocolate company Divine is co-owned by the cocoa farmers' cooperative Kuapa Kokoo in Ghana. The farmers not only receive a fair price for their cocoa, but also, through their 45 per cent holding, they share in the company's profit. It's a system that seems to work: profits last year were nearly £426,000 on turnover of £10.7m, and the company employs 14 full-time staff.

Divine is one of the UK's best-known social enterprises—that is, companies set up specifically to tackle a social or environmental need. Other high-profile examples include The Big Issue, the Eden Project, Jamie Oliver's restaurant Fifteen, the Co-operative Bank and Fairtrade coffee company Cafédirect.

But government data suggests that there are more than 55,000 social enterprises in the UK with a combined turnover of £27bn. They account for five per cent of all businesses with employees and contribute £8.4bn every year to the UK economy.

And these numbers are rising, driven by the growing tendency of employees to seek out work that allows them to "do good" while earning a living, and by encouragement from the government, which sees them as a solution to societal problems that neither they nor charities have been able to solve.

But, in a sense, social enterprise has become a victim of its own success. Many businesses and charities are attempting to climb aboard the bandwagon and adopt the social-enterprise tag for marketing and financial gain, without meeting the qualifying criteria.

"I've lost count of the number of meetings I've sat in where charities talk about rebranding themselves as social enterprises in order to get access to new funding streams, and where businesses talk about using it as a tool to boost their social credentials," says Lucy Findlay, chief executive of RISE, the network for social enterprises in the south-west of England.

This carpet-bagging threatens to undermine all the good that the genuine social enterprises are doing, and it concerns even the established players such as Divine. Chief executive Sophi Tranchell explains: "If charities and non-social enterprise companies are being perceived as social enterprises, that affects the ability of the whole sector to raise money, trade, raise funds and so on."

Unlike Fairtrade, a term that is generally understood by consumers, social enterprise is not yet "a consumer proposition", believes Tranchell. "People buy goods and services from social enterprises because they are excellent (Divine chocolate and Cafédirect coffee, for example) or because they are there (Hackney Community Transport or Greenwich Leisure swimming pools, say). So I don't think there is really a huge marketing opportunity for social enterprises yet. But when you are tendering in the public sector, being a social enterprise does give you a distinct advantage."

So while it is "not useful for us to be lumped together with charities", she continues, having their advantage stolen by social-enterprise pretenders is even worse. "Purchasing people need to understand the difference between true social enterprises and companies that do a bit of corporate social responsibility (CSR)," she says.

Organisations such as the Social Enterprise Coalition (SEC) and Social Enterprise London are raising awareness of what social enterprises are and aren't, as are the government's 30-odd recently appointed social-enterprise ambassadors, one of whom is Tranchell.

One of the biggest challenges these educators face is the diverse range of organisations that come under the social-enterprise umbrella. They include development trusts, community enterprises, co-operatives, housing associations, social firms and leisure trusts. As well as varying enormously in size, from a company such as the John Lewis Partnership to a one-man band, they operate across a wide range of industries and sectors, from health and social care, through renewable energy and recycling to Fairtrade products.

What unites this disparate array of businesses—"the golden thread," as SEC chief executive Jonathan Bland puts it—is that they trade for a social or environmental purpose, rather than to maximise shareholder value. Most of their income has to come from trading, and they have to plough more than 50 per cent of their profit back into the cause they were set up to serve.

With their private-sector efficiency and public-sector ethos, they combine the best of both worlds. They are more-than-profit businesses, not not-for-profit organisations. The more profit they make, the more they can benefit the cause and the better able they are to compete in the market and survive in the long term.

But as if this message weren't in itself complicated enough, those banging the drum for social enterprise face the additional challenge that not everyone working in the sector agrees on what exactly a social enterprise is. No wonder charlatans are slipping under the radar.

Cliff Prior is chief executive of UnLtd, a charity whose remit is to support and develop the role of social entrepreneurs in the UK. But similar though they sound, and despite some overlap, social enterprise and social entrepreneurs are quite distinct things. Some social entrepreneurs set up social enterprises, but not all social enterprises are run by social entrepreneurs. Also, Prior uses the term social entrepreneur to describe individuals who set up a range of different social, charitable or philanthropic ventures.

These include the people Charles Handy describes in his book The New Philanthropists—entrepreneurs who have made fortunes at a relatively young age and are now channelling their energy and talents towards social or environmental ends. Prior also uses the term to describe people who are running traditional businesses with a strong CSR or charitable aspect to them—a form he describes as a social business, rather than a social enterprise. Thus the Body Shop is a social business, but the Big Issue, which it helped set up, is a social enterprise. "The boundaries between all these things are increasingly blurred," says Prior.

But others believe the boundaries need to be kept distinct because the value social enterprises bring far outweighs the value of other business models.

"Social entrepreneurs like Bill Gates are doing wonderful things with the fortunes they've made, but look at the damage they've done while making their money," says Kim Stoddart, managing director of social enterprise Green Rocket, a media agency dedicated to helping businesses that are committed to environmental change. "The traditional bottom-line focus relegates ethics to second place. Embedding ethics in what you do from the outset is a much more rounded approach to solving social and environmental problems."

Some people think that a way of distinguishing social enterprises from, for example, social entrepreneurs and social businesses, would be to regulate the sector by means of some sort of kitemark, much like the Fairtrade mark. RISE is currently trialling a social-enterprise mark scheme in the south-west, with a view to nationwide launch in 2010.
"We have strict criteria because we don't want the notion of what a social enterprise is to be diluted, even among the big, established players," says RISE's Findlay.

But though it was launched in November last year, just four social enterprises in the region, including the Eden Project, currently hold the mark. The criteria were developed in conjunction with the SEC, but SEC chief executive Bland admits there is a danger of appearing to be exclusive and "holier than thou". "There are some fantastic ethical businesses out there that aren't social enterprises," he says.

Divine's Tranchell also believes the social-enterprise mark is problematic. "Given the range of legal structures, what does it measure, who measures it, who is paying for it and does it have the budget to sustain it for the long term?" she asks. "With Fairtrade, the costs of maintaining the mark are built into the cost of the products, and the Fairtrade Foundation provides a robust auditing tool, as well as raising awareness. Also, who is the mark for? Consumers or procurement people? And it needs to be meaningful. For example, why would we need it when we are a recognised Fairtrade player?"

But Nigel Kershaw, chairman of Big Issue Invest, part of the Big Issue group of companies founded by John Bird and Gordon Roddick, takes a pragmatic approach. "Discussions and debate are inevitable in such a fast-moving market, and you can't be too rigid or judgmental about it," he says. "We should be getting less hung up on the semantics and focus more on ensuring that social enterprises are creating real social value."

A far bigger threat to the sector's growth than potential exploitation by ignorant or unprincipled pseudo-social enterprises is, he believes, lack of investment. Big Issue Invest is a specialist provider of finance to social enterprises, with £4bn of loans disbursed over the past two years and a new-venture fund about to be launched.

Kershaw believes that the government is paying lip service to the sector, and needs to put its money where its mouth is by encouraging investment through some sort of tax break. He points out: "If you give to a charity, you get gift-aid tax relief, and investors in small and private companies get all sorts of reliefs, too. Because there are very few tax incentives to invest in social enterprises, coupled with the lack of the traditional exit route, the sector can't compete for risk money in the market, which puts it at a disadvantage."

Financial initiatives are being set up in order to help social enterprises. For example, legislation is going through parliament to establish a "commission for unclaimed assets", which would be used to set up a wholesale bank for the sector. The government is also about to launch a £10m social-equity fund that will get matching funding from the private sector, and the idea of setting up a social stock exchange was recently mooted. But none of these address the thorny problem of how to reward investors, points out Kershaw.

Peter Madden, chief executive of sustainable-development charity Forum for the Future, agrees that lack of investment in social enterprise could arrest its momentum. The biggest problem is scalability, he believes. "We worked with the NHS recently to try to get them to source more from social enterprises, but found a lack of capacity and depth to service such big contracts," he says. "Taking them to scale is a major problem, and it is also a philosophical problem for many of the social enterprises, which are often reluctant to expand or take in more capital. There is lots of hype and over-promising around social enterprises, and we need to be careful."

So is social enterprise here to stay or is it an issue of the moment, soon to be relegated to the recycling bin? Neil Crofts, who founded the Authentic Business movement, thinks social enterprise "could be a passing fashion", but argues that it doesn't matter because it's just part of the process in a bigger healthy trend. "What we are seeing is a continuum of development toward a more connected society, driven by climate change, the internet and growing social problems," he says.
While social enterprise is unlikely to be a panacea for all social and environmental ills, some of its characteristics are "essential to the new organisational forms we will have to develop to cope with the challenges of a shrinking world," according to Tomorrow's Company chief executive Tony Manwaring.

And it's very difficult for existing businesses to become social enterprises, of course. Some set up social-enterprise spin-offs. Social ambassador Sam Conniff, co-founder of socially responsible youth-marketing agency Livity, set up LIVE, a magazine put together by disadvantaged young people for other disadvantaged young people, as a social enterprise in 2004. While performing an important social function—"I think 95 per cent of at-risk kids would take a job if they were offered one," says Conniff—the enterprise also delivers useful ethnographic research to the agency.

But there are many ways for established businesses and their directors to work with social enterprises. These include setting up joint ventures, incorporating them in their supply chains, and redirecting their philanthropic capital and time into them, arguably for a greater return than they achieve through the more common route of charitable involvement.

Reed Paget is founder and managing director of social enterprise Belu Water, the UK's first carbon-neutral bottled water, all the profits from which fund clean-water projects round the world. He believes one of the biggest benefits of social enterprises is that they challenge the market to come up with environmentally or socially friendly alternatives. As traditional businesses increase their social involvement, that encourages social enterprises to raise the bar even higher.

"The continuing development of social enterprise will be a battle between big business and entrepreneurs, and let's encourage the battle," he says. "If big business invests in research and development for this, it will benefit society and the environment enormously."