Understanding Social Enterprise

Theory and Practice

Rory Ridley-Duff,Mike Bull

• Publisher: SAGE Publications Ltd
• Year: 2019
• ISBN:
  9781526471574
• Edition: 3
• Topic: Negocios y empresa
• Subtopic: Desarrollo organizacional

This updated edition of Understanding Social Enterprise comes packed with a wealth of learning features to help students understand the theory and practice within this ever expanding field.

Updates to this edition include:

• New case studies and examples throughout
• Considerations of new developments in policy, the economy and legal implications of social enterprise
• A focus on the pathways that social enterprise follow

Part I Theoretical Perspectives on Social Enterprise

Exemplar Case: Innovation, Entrepreneurship and Enterprise

‘In 1941, Father Arizmendi – a Catholic priest – arrived in the civil war-torn town of Mondragon, in the Basque region of Spain. When Union Cerrajera, the largest local employer, refused to open its schools to all children in the community, Father Arizmendi chartered a parents’ association and organised door-to-door collections to fund a new technical school.

In 1955, five of Arizmendi’s graduate engineers began an industrial enterprise. In 1959 it adopted a co-operative constitution that formalised its commitment to democratic ownership and member control. Each worker–member contributed capital and arrangements were put in place to hold this capital in a credit co-operative so that profits and losses from trading could be managed at the end of each year. Members of the community who wished to provide support could open their own credit union account, and 300,000 did so by 1980. Unlike most banks, its workforce received bonuses in proportion to the wealth created for its customers, rather than itself, and shared its own profits with them to spread wealth throughout the entire community. These social innovations enabled the community of Mondragon to eliminate poverty and become a wealthy region in Spain, while raising a steady supply of capital for new co-operative ventures.

By 1980, over 80 ventures had been created, providing employment for 17,000 people, with additional support institutions for primary and secondary schooling, higher education, research, housing and social insurance (BBC, 1980). This success attracted interest from researchers at the London School of Economics. They concluded in 1982 that the Mondragon network not only had a ‘co-operative advantage’ derived from its operational model, but also enjoyed benefits from wage solidarity between managers and workforce members, created by setting a 3:1 ratio between the highest and lowest paid. When workforce members were asked why the co-operatives were performing so well, the response was the quality of the managers. When the managers were asked the same, they responded that it was due to the quality and commitment of the workforce.

By the turn of the century, 24,000 of the town’s 28,000 inhabitants had a stake in one or more co-operative venture, and benefited from profit-sharing arrangements (Long Island University, 2000). The network continued to expand to over 100 member co-operatives with a growing number of overseas partnerships and holdings. Unlike the US, where wage differentials between CEOs and workforce members have grown to 419:1, the members of Mondragon co-operatives continue to limit wage differentials to a maximum of 9:1. To increase the initial wage ratio of 3:1 all account holders have to approve it on a one-member, one-vote basis. In the last 60 years, no workforce has approved a differential of more than 9:1, and the average is steady at 5:1 (Ridley-Duff, 2012).

Growth has slowed during periods of recession, but the trend has been continuous growth for nearly six decades. Between 2006 and 2016, numbers fell to 73,000, partly due to the recent economic crisis in western economies, and partly due to two successful co-operatives deciding to become independent from the group in 2008. However, there is still 85 per cent that are member–owners. In addition, 11,382 students were studying in Mondragon’s co-operative schools, colleges and university. While the recession has resulted in manufacturing job losses at Fagor (domestic appliances), and some stores in Eroski have been sold off, the model still extends ownership and profit sharing to both staff and customers (MCC, 2014). Those affected by the contraction of Fagor have been redeployed, re-engaged in study or supported by Lagun-Aro, a social insurance mutual that provides better benefits than the state (MAPA Group, 2013; Lezamiz, 2014).

Mondragon is the outcome of visionary social entrepreneurship and collective action. Father Arizmendi, who died in 1976, was lauded for the democratic design of Mondragon’s banking and governance systems (Bradley and Gelb, 1980; Whyte and Whyte, 1991). His individual vision was buttressed by the collective commitment of a community of people who wished to build an economic democracy based on social solidarity and co-operative business principles. The result has been to eradicate poverty and create a workforce achieving the best productivity, profitability and corporate social responsibility (CSR) outcomes in Spain.

(Case updated after face-to-face conversations with Ander Etcheberia, Mondragon Director of Communications, on 14 Sept 2017.)

Introduction

Those who opt to make history and change the course of events themselves have an advantage over those who decide to wait passively for the results of the change. (Arizmendi, n.d., Co-founder of Mondragon Co-operative Corporation)

The MONDRAGON Corporation, which integrates innovation, entrepreneurship and enterprise, is an excellent starting point for a book about social enterprise. In this exemplar case we see resilience, self-help, social innovations and the emergence of an equitable and co-created eco-system. Social entrepreneurship, and its connection to social enterprise creation, is still the subject of definitional debates (Brouard and Larivet, 2010; Defourny and Nyssens, 2017; Bull, 2018).

In this introduction, we will start by problematising four ‘schools’ of social entrepreneurial thought that have come to dominate the academic literature. We set the scene for an exploration of their socio-economic origins to identify the challenges that arise for those engaging directly in social entrepreneurship.

The first school, linked closely to the field of social entrepreneurship, focuses on social innovation (Austin et al., 2006; Perrini, 2006). At Mondragon, the system of entrepreneurship was quickly recognised as an innovation that improves community well-being (Ellerman, 1982). As Turnbull later stated:

None of the existing theories of the firm were used to provide the criteria for designing the structure of the Mondragon co-operatives in the mid-1950s. These co-operatives introduced a number of ‘social inventions’ (Ellerman, 1982) which have proved to be outstandingly successful (Bradley and Gelb, 1980; Thomas and Logan, 1982). One of the design criteria for developing the Mondragon inventions was based on Catholic social doctrine, which believed in the ‘priority of labor over capital’ (Ellerman, 1982: 8). People, rather than money, became the fundamental unit of concern. This approach … is at variance with the Coasian/Williamson theory of the firm, which is based on transactions … (Turnbull, 1994: 321)

In the social innovation school, entrepreneurs are presented as heroes and innovators. In the case of Mondragon, Father Arizmendi – despite his best efforts at humility – has been identified as the person most responsible for the ‘social inventions’ behind Mondragon’s success. Researchers in the social innovation school identify ‘weak’ and ‘strong’ trends in the literature. The weak trend examines only the social by-products of any innovation (e.g. the social benefits from a technology change), whereas the strong trend examines changes to social relationships, power and structures in organisations and institutions (Ayob et al., 2016; Tracey and Stott, 2017). He is now revered as a teacher and founder even though he never held a formal position. His book of sayings is given out to visitors. A museum has been created to tell the story of his role guiding young ‘cooperateurs’. A statue sits in the heart of the Mondragon University campus. A square has been named after him in the town of Mondragon.

The second school of social entrepreneurship is linked to the first in its emphasis on understanding and developing social entrepreneurs. However, here the emphasis is on their value propositions and social missions (Nicholls, 2006; Martin and Osberg, 2007). Value in social enterprises is not solely couched in economic terms, as value is more than price or profit. Liberal economics privileges the economic at the expense of non-financial aspects or crudely converts all forms of value to economic capital. Understanding social enterprises in this school of thought is to appreciate an economy of enrichment (Boltanski et al., 2015: 76); value is thus a broad church of opinions, depending on who is doing the valuing (Kornberger, 2017). Value propositions in this school of thinking are translated into social purposes, and the definition of purpose becomes the basis for agreeing social objects. The Eden Project, in the south-west of England, is a good example of how social innovation and social purpose can be integrated (see Part III, Introduction). In this world, the fulfilment and achievement of social objects is the basis for a new system of measurement aimed at gauging the entrepreneur’s (and their enterprise’s) non-financial – social and environmental – impact.

Mondragon’s corporate management model does have a clear concept of value and its social mission: the achievement of social transformation through the education of its members (both politically and technically) so that they can subordinate the interests of capital to those of labour. This is one of ten principles that make up its corporate management model, which also includes open membership, democratic organisation, participatory management, wage solidarity, co-operation between co-operatives and support for social movements committed to economic democracy (Whyte and Whyte, 1991).

The third school of social entrepreneurship emphasises the creation of social enterprises that have socialised ownership and control. This is seen as crucial to meet the commitment to democratic principles of organisation and participation in decision-making (Borzaga and Defourny, 2001; Defourny, 2010). In the case of Mondragon, this is achieved through the deployment of a co-operative model that ensures that the bigger the decision, the more likely it will be taken in a general assembly of worker and/or consumer members. In contrast to the unitary boards of multinational corporations (MNCs) with appointed directors, Mondragon is controlled by over 1,000 local boards made up of elected audit committees, governing council and social council members who interact with each other to co-ordinate a complex network of productive activity (Turnbull, 2002; Forcadell, 2005).

This ‘socialisation’ school is strongly influenced by the concept of a European social solidarity economy and sees a clear distinction between the reciprocal interdependence that underpins mutual aid and the philanthropy that underpins charity (Ridley-Duff and Southcombe, 2012). Mutuality implies a bi-directional or network relationship in which parties help, support and supervise each other. This is qualitatively different from the uni-directional relationship between owner–manager and employee in a private enterprise, or the chain of control (philanthropist to trustee (unpaid), trustee to manager, manager to worker, and worker to beneficiary) in a charity. While charity can be present in mutual relations, it is normally framed in law and practice as a financial and managerial one-way relationship in which trustees give and direct while beneficiaries accept and obey. This asymmetry in obligations (i.e. the lack of reciprocal interdependence) clearly distinguishes mutuality from charity. Social enterprises pursuing a mission tend to structure themselves as philanthropic ventures (e.g. charities and/or foundations). Social enterprises focused on developing mutual relationships between members and the wider community tend to prefer associative forms, such as co-operatives and mutuals.

Evolution in the politics and practices of associations, co-operatives and mutuals leads us to the identification of a fourth school based on ‘new co-operativism’ (Peuter and Dyer-Witheford, 2010; Vieta, 2010) that draws heavily on the notion of the commons (Ostrom, 1990; Papadimitropoulos, 2018). The commons is rooted in a set of principles for collective action described by Ostrom (1990) in a work that led to a Nobel Prize for Economics. Her work has catalysed the integration of enterprise development with more open forms of co-operation (e.g. P2P Foundation, Commons Transition, The Open Coop, Platform Co-operative Consortium, The FairShares Association/Labs) which explore how to use commons property in multi-stakeholder co-operatives and solidarity enterprises (see Scholz and Schneider, 2017; Ridley-Duff and Bull, 2018).

In Part I, we stress the need to grapple with the distinction between a socialisation perspective that emphasises collective action and mutual principles in the third and fourth schools to develop an alternative economy (Borzaga and Defourny, 2001; Sahakian and Dunand, 2014) and a social innovation/purpose perspective in the first and second schools that focuses on the missions and innovations of individual social entrepreneurs (Dees, 1998; Martin and Osberg, 2007). The social innovation/purpose perspective emphasises the philanthropic impulse of the social entrepreneur and the social goals of their enterprise (Scofield, 2011), whereas the socialisation perspective emphasises organisation design and stakeholder governance to educate members for participation in the social solidarity economy (Moreau and Mertens, 2013; Laville, 2015; Utting, 2015). As the Mondragon case shows, these schools are not necessarily in opposition to each other because each of the following are apparent:

• social innovation
• social mission (purpose and impact)
• socialisation of ownership and control.

However, not all academic and practitioner communities engaged in social entrepreneurship draw on all four schools of thought. For example, Betapharm in Germany provides an example of social innovation, purpose and impact, but retains a private sector model of ownership and control (Laasch and Conway, 2015). Organisations in the social economy, particularly Italian worker co-operatives and employee-owned businesses in the field of engineering, have innovative approaches to ownership and control but do not necessarily specify social missions beyond meeting their members’ needs (Arthur et al., 2003; Restakis, 2010). Charities and non-profit corporations may develop trading strategies to support their social mission, but this does not imply a commitment to democratising ownership and control (Low, 2006; Ridley-Duff and Southcombe, 2012). Social enterprise is therefore different things to different people; for those of us trying to understand the theory and practice, gaining a multi-perspective understanding is key.

Recognition of this diversification in understanding social enterprise has not gone unnoticed in recent years, as it is embraced by the EMES International Research Network....