Each to his ownership

September 19, 2011 by
Filed under: Public policy, The RSA 


Much to the dismay of my colleagues who have actually to deliver events and projects, I occasionally develop a hunch that the RSA should develop an interest in a debate raging somewhere in the wider world. The current hunch focuses on enterprise and governance.

My interest was prompted by two events last week. First, I chaired a dinner with Cabinet Office Minister of State, Francis Maude. The Minister’s enthusiasm for the minutiae of efficiency savings is commendable and his stock of stories about Whitehall profligacy reminded me of what a disaster it was when Gordon Brown blocked Tony Blair’s attempt – near the end of his Premiership – to undertake a proper review of the scope to reduce public spending. But Maude was even more enthusiastic about floating off parts of the public sector as mutuals. He has great hopes for the work of Julian Le Grand, who is chairing the Cabinet Office mutual task force.

Then on Friday I met someone from the Community Interest Company Association. Many people are dismissive of CICs saying that too few have been created since the status was created in 2005 and that the rules for CICs are too restrictive in some areas and too lax in others. Yet, thousands of CICs have been established, some are quite large businesses and, as they evolve, new ways of combining this governance form with incentives for entrepreneurship and growth are being developed.

There is a lively if somewhat nerdish debate between the advocates of mutuals, co-ops and CICs and also those who say that mission, goal and impact matter more than governance so there is no reason why social enterprises can’t have a conventional ownership model.

My own take on this – which may only go to reveal my ignorance – starts from the question: what is the overall objective of new forms of enterprise? There seem to be three sets of motivations:

Political: for a Government seeking to break up the state, ‘mutualism’ is more politically palatable as an alternative to state ownership than privatisation.          

Fitness for purpose: certain governance forms are better suited to certain forms of activity. For example, the asset lock on CICs ensures that those who donate to, or invest in, CICs can be sure the benefits will go to the intended recipients. Both Maude and Le Grand argue that mutuals are a good way of balancing public interest with the need to motivate and reward staff.

Pluralism: (for me the most important argument but also the one I hear least often). There are major problems with the predominant forms of capitalist ownership and governance. If companies are owned privately or taken over by an investment fund, all the power is concentrated in a few pairs of hands. If they are listed companies owned by many different funds, investing on behalf of millions of people, there is a stewardship deficit (an issue which Vince Cable is trying to address today in relation to executive remuneration). In addition to their specific virtues, promoting mutuals, co-ops and CICs is part of trying to create greater pluralism in the capitalist economy.

But before I ask my hard pressed colleagues to work up proposals for an RSA debate is my summary of the issues right? And could anything useful come out of a debate which explores the relationship between wider socio-economic objectives and the specific forms of ownership and governance that should be encouraged?

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13 Comments on Each to his ownership

  1. Tim Cooper on Mon, 19th Sep 2011 12:27 pm
  2. I think your summary of the issues is spot on, although I would add something around pragmatism – some of these forms of governance do seem to improve organisational outcomes such as productivity, innovation and motivation.

    However where I think where there is really scope for an interesting (and helpful) debate is getting into the detail of how these new forms of enterprise will work in practice. It seems to me that the policy is ahead of the practice at the moment and there are a number of questions that remain unanswered. For example, is the mutuals agenda compatible with a cost reduction agenda? Spinning out public services is going to require a lot of support if public workers are suddenly going to operate as a business – plus significant up-front capital investment will often be needed, particularly where the sale of public assets is involved. My concern is that while we might lighten the government balance sheet in the short term, the longer term net economic cost could actually be higher. And that’s not even starting to ask the question around what happens if a mutual fails!

    I think we also need to explore the role of the private sector in all of this, but the mutuals agenda in particular. It seems that business support is critical to developing the capabilities a mutual needs to succeed, but how can businesses be incentivised to participate in a way that is not simply privatisation by the backdoor?

  3. Indy Neogy on Mon, 19th Sep 2011 12:33 pm
  4. I think this is a good line of enquiry.
    I feel that we have a good (but not perfect) range of legal forms in this country.

    For me, one of the biggest questions is developing a philosophy (and perhaps new forms) that can convincingly be and be seen to be successful without “growth.”

    I’d argue that in many areas relating to public services, you often get the challenge of running a service either for a static population or for a declining one. At this point all of the forms (including commercial ones) run into trouble because they have been practised and conceived mainly in environments of growing demand.

    This of course also applies to the taxation and regulation of these forms – winding something down, or even just shrinking it to match a reduced demand often incurs extra costs for changes that are easy to neglect when the organisation is growing in size, but less so when it is shrinking.

  5. Russell Webster on Mon, 19th Sep 2011 1:01 pm
  6. There also seem to be a number of statutory organisations who are creating social enterprises for reasons that they’re not yet clear about – possibly just somewhere to Park funds that they are hoping to get from payment by results contracts which they can spend in the next financial year.

    I would love to know the proportion of social enterprises/CICs who actually employ staff and deliver activities. Sometimes, these imposters get in the way of the proper social enterprises characterised by drive and innovation.

  7. Will Davies on Mon, 19th Sep 2011 1:32 pm
  8. I think there is a crucial distinction between organisations which are ‘for profit’ or ‘profit-maximising’, and those which are ‘for something else’, though possibly also ‘profit-making’. Much of the motivation for establishing a mutual or co-op is unique to the founders, other than the shared motivation that it isn’t about making as much money as possible. Many have been burned in the past, by predatory investors or careless owners, and want to find a way of ensuring that this doesn’t happen again. As John Kay has argued for years, any successful entrepreneur or businessman must ultimately have some guiding vocation or goal, beyond making money (this is not unlike Weber’s ‘spirit of capitalism’).

    Escaping the tyranny of private equity or capital markets is thus a motivation, albeit a negative one. So any project that the RSA did would have to also consider how new financing arrangements could be developed, which offered credit and/or equity to non-profit-maximisers. The ‘social venture capital’ model doesn’t seem adequate.

  9. Russell Webster on Mon, 19th Sep 2011 1:35 pm
  10. For me, this means a real interest in social impact bonds but complete dismay at the prospect that these are already being considered as potential derivatives to be traded on the markets. It is very difficult to retain a focus on profits and social well-being – at least once any initiative is scaled up to a reasonable size.

  11. Dave Boyle on Mon, 19th Sep 2011 2:24 pm
  12. Mutuals, co-ops and social enterprises often get lumped together as alternatives to the dominant strain of capitalist organisation, but there are quite important differences beyond the nerdy, which relate to one’s views about ‘human nature’, ‘society’ and ‘benefit’.

    The mutual view is essentially that by not being owned by investors pushing to extract their dividend or sell on and out, the business offers a better service to customers; profits are used to keep prices down next year. Mutual enterprises essentially seek to be better forms of capitalism for consumers than the competition.

    Co-ops take this and add a twist, that the effect of democratic participation in the enterprise is a better way to run a business and is better for society – there’s plenty of research about the role co-ops can play in development because they’re democratic, not just equitable. Co-ops seek not just to be better businesses, but to be better for those who are members of them and for society at the same time; that can be through employee co-ops being ‘better’ for people to work at, both financially and emotionally/physically.

    Social enterprises have a different philosophical basis. If I might caricature slightly, I’ve seen a lot of social enterprises which are clearly working to a standard start-up model of sweat equity leading to a buy out at a later stage for the founding investors. The enterprise will do good things, making decent profits and putting some back. It sounds perfect. But too perfect. It assumes essentially that the model of capitalism it exists within is fine, and the only that needs to change is the motivations of the capitalist entrepreneur-managers. It’s a very rosy, american view of capitalism; there’s nothing inherently wrong which a few nicer people being nicer won’t solve.

    It seems to me not unconnected that it came to the fore at a time when the left was seemingly making its peace with neo-liberal capitalism. Intellectually, the message that capitalism can change the world without needing to change much itself was reminiscent of Julie Burchill’s quip about Girl Power , namely that men must be quaking in their boots at this antagonism from women wanting to wear hot pants. Ditto social enterprise, which saluted capitalism and looked to give it a little twist and in so doing change the world.

    Co-ops and mutuals by contrast seem to have a much harder edge about them, seeing ownership not as a geeky dimension for the back office but a central reality that determines the strategy, policy and practice of a company; anyone looking at News International would have to agree.

    Your debate, by the way, should feature Stephen Lloyd – the lawyer behind CICs – vs Cliff Mills, who does a similar function for mutual and co-operative enterprises. Both can set the argument out of the nerdy and geeky and into the more political/social/philosophical contexts it actually exists in.

  13. Edward Harkins (FRSA) on Tue, 20th Sep 2011 9:35 am
  14. Matthew might I suggest that your take on the ‘Political’ motivation for new forms of social enterprise is too contemporaneous and too close to the present Conservative Coalition’s ideological imperative to ‘reduce the state’.

    The current search for ‘new models’ may be a function of the present Conservative Coalition’s political intentions. But that search is only a latter part of what has been an ongoing search for many, many, decades by many protagonists – I’m pretty certain that the players in the Arts & Crafts movement in the latter 19th century had long and wearying debates in the ale-houses around such issues.

    It could also be reasonably argued that the search was not for new models, but for new permutations around a broad concept – something that venture capitalists and conventional institutional funders alike might be uncomfortable with.

    I also wonder, moreover, if there is uncertainty on where the ‘Political’ motivation for the Conservatives does lie with regard to social enterprise. I’d suggest that for Conservatives the political motivation is actually akin to your ‘Fitness for Purpose’ one; in other words social enterprise is a malleable yet inoffensive concept that can be utilised (exploited?) for the pursuit of prior-existing political motivations.

    Incidentally, a much over-looked milestone in the early and highly controversial early deregulation and privatisation phase of the Thatcher Government, was the privatisation of the old BRS (the road transport adjunct of public-owned British Railways). This neatly illustrates the great potential power for facilitating economic change (for good or ill) that lies in the ‘social enterprise’ model. The-then senior management of BRS went to Thatcher with the argument that outright privatisation was precipitate and too political risky at that stage – but that transferring the ownership to an employee-owned company would be a more palatable option, with the advantage of smoothing the way for the outright privatisations that followed. As the man in the film said, the rest was history.

    I know from personal experience that some relatively junior, transport depot staff got seriously wealthy out of that knock-down transfer of public assets. A transfer that included large prime development sites in every major city and town in the UK.

    A final point that occurs Matthew; I’m not clear that in your very respectable go at summarising the motivations, that the ‘democratising of economic life’ is in there? A strong strand of motivation in the social enterprise field is for the bringing about of greater levels of employee participation both with regard to the internal governance of their own employer-company, and with regard to the conduct their company in wider society (CSR to some). But maybe that’s part of what you described as the ‘Pluralism’ motivation.

  15. Patricia Kaszynska on Tue, 20th Sep 2011 3:11 pm
  16. The co-op model is interesting in that it highlights a co-dependence of governance and ownership. (There is an analogy here, I think, to the way proceduralist and re-distributive accounts of fairness are entangled together). It seems that, whereas the ‘establishment’ has been warming up for some time to a serious discussion concerning the benefits of democratising governance structures – mutualisation of assets remains more of a taboo. Perhaps for this reasons very few people (there are some good exceptions:
    http://respublica.org.uk/documents/rri_To%20Buy%20To%20Bid%20To%20Build.pdf ) seem to be asking in a loud voice whether the objective of setting up co-ops is not, by any chance, to re-capitalise the poor.

  17. Trevor Lockwood on Thu, 22nd Sep 2011 8:00 am
  18. I’m an elected FRSA, now unable to afford the fees as I’ve spent 20 years working in social enterprises (and now retired-ish) I run a CIC, have been a director of a regional social enterprise association and am now a director of a county association of voluntary organisations, and of a national community media association (that’s retirement).
    Your political stance is broadly correct. We have a problem with fitness for purpose, and that springs from several issues. Too much support in the voluntary sector comes from short-term project funding. Core structure support is invariably disregarded – but how do you pay the rent? Volunteers are hard work, and they have costs. Training and support are required. Social enterprises have not had the opportunity to join together, and the PQQ and administration required to bid for public contracts is daunting, with the result – as we are seeing – that large companies are already dominating the transfer from public management to the community sector.
    Pluralism is fascinating – and there are solutions that can be explored – but not in this short reply.
    At present I’m trying to persuade NHS Suffolk to hand over a convalescent home that was given to them by the local community in 1948, together with £175K in investments. The NHS are refusing to negotiate – preferring instead to obtain planning permission to convert this building to luxury apartments rather than allow the community to use it for its original purpose. A dilemma. The NHS need money – they have a valuable resource – they believe the private sector will look after the social care sector – so why talk to a bunch of local do-gooders?

  19. Alastair Irvine on Thu, 22nd Sep 2011 8:36 am
  20. Turning MegaGlobal Evil Bank plc into a mutual will not solve the stewardship crisis. The size of these organisations means that even as a mutual there would be thousands of members, all feeling very remote from the actual business. Even if you have staff voting, they will feel no more empowered than people do in local/national elections and MultiNational Business is often significantly bigger than a Local Council.

    Large organisations are usually held as being successful due to economies of scale.
    Large organisations sometimes suffer from this stewardship crisis, society often suffers from a stewardship crisis due to the un-accounted for, non-financial losses to the environment etc.

    Have any economists ever attempted to work out at what point the economies of scale etc are outweighed by the societal losses? Is there a Gross Asset value point at which we could sensibly demand the break up of a business into smaller components?

    Or maybe business needs direct incentivisation to look after the world in a measurable way, using the indice they understand – Profit After Tax? http://inspiratecic.wordpress.com/2009/11/26/social-value-tax-credits-the-concept/

  21. Jake Rigg on Thu, 22nd Sep 2011 12:41 pm
  22. the Institute for Family Business and Tomorrow’s Company have been working on this for a while now and have just published a report. There is a growing body of work that suggests that firms do best by focusing on stewardship of assets. The question is – who are the assets stewarded for? In a public company as you rightly suggest the stewardship is too short term, an inevitable result of the ownership structure and the principal-agent problems so well known.

    However, other forms of for profit organisation often get overlooked in this debate. Family businesses employ 9 million people and have a turnover bigger than the EU’s trade with India. What is more, there is evidence that they do grow over the long term and plan accordingly. This includes working with staff, management, owners and society at large.

  23. Jeff Mowatt on Tue, 27th Sep 2011 11:14 am
  24. For us it began with a critique of free market capitalism, as an economic paradigm which by imagining money into existence as debt, disenfranchising people to the point of threatening their existence.

    This was a paper delivered to the White House by the steering group of the Committee to Re-Elect the President in 1996. Around the same time as Brooksley Born took on Alan Greenspan, Robert Rubin and Larry Summers over OTC derivatives.

    In the core argument, it is reasoned that people should be the central focus of economics:

    http://www.p-ced.com/1/about/background/

    The community investment business model suggested was an antecedent to the CIC and in 2009/10, founder Terry Hallman delivered the story in his seminars on Economic In Transition.

    http://www.p-ced.com/1/projects/ukraine/sumy/

    [...] issues have been well summed up in two recent blogs I came across by Craig Dearden-Phillips, and by Matthew Taylor from the RSA. They’re worth a read. LD_AddCustomAttr("AdOpt", "1"); [...]

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