Friday, April 29, 2011

To Profit Or Not To Profit

Today's columnist is Julian Egelstaff from Freeform Solutions. He writes:

To profit or not to profit, that is the question. In fact, it's pretty much the only question (or maybe just the biggest one) when you're going through the legal process of setting up a social enterprise. In Canada at least, there's no middle ground. You're either a for-profit business or you're a not-for-profit (or charity) without share capital.

When we incorporated Freeform Solutions, there was never any debate about this. We literally weren't in it for the money, and one of the other co-founders, Jason Côté, had already successfully started another national not-for-profit organization (now called Actua).

Although Freeform has been pretty successful, there are times when access to capital sure would have been nice. Our legal status certainly precluded any traditional sorts of financing. And, as altruistic founders, we have forever forgone the opportunity to "cash out" in the future.

So it was with great interest that I read Stephen Huddart's column last week, in which he discussed the Social Venture Exchange being incubated at MaRS. As Huddart writes, social enterprises "are hampered by a lack of access to investment capital." (And I could share ample anecdotal evidence to back this up.) So it's not surprising that an enterprising group of folks faced with the same situation are trying to find a way around it.

This is what "collectives" in our sector do very well: they identify issues and cluster around them with solutions, trying to find one or more that "sticks." Tonya and Mark Surman wrote about the organizational and governance aspects of this behaviour in the September 2008 issue of the OSBR.

It would certainly be fantastic if for-profit social enterprises had a specialized market that catered to their needs. But given the current legal structures we're all stuck with, I can't imagine how this would help organizations that are legally not-for-profit. It is enshrined in the legislation that no one shall profit from the operations of a not-for-profit corporation. Why invest in it then?

While the Social Venture Exchange is working on the financing side of this problem, I believe that we need some parallel work in the legal and political aspects of this problem. There may be all kinds of reasons that people creating a social enterprise may not want to set it up legally as a for-profit corporation. The most basic philosophical reason is that they may want something other than majority shareholder rights to control the direction of the organization.

Yes, that diminishes the attractiveness of the venture to investors. If you can't own it and control it, are you going to be as eager to invest in it? Frankly, that lack of control is a risk to you as an investor. But it might be critical to the social entrepreneurs behind the organization.

Our binary for-profit/not-for-profit legal structure reminds me of copyright law before Creative Commons came on the scene. In the old days, things were either public domain, or they were "all rights reserved." But Creative Commons recognized that some creators may want to find a middle ground. "Some rights reserved" is the phrase used to describe this, and Creative Commons licensing gives creators control over which ones they reserve and which ones they give away.

We need the same thing in the social entrepreneurship space. Some innovators may want to keep all control in their own hands and follow the not-for-profit model we have right now. Some may be perfectly happy to give up some of the legal rights and the control they have over their organization in order to make it more attractive for certain kinds of investments, but not go completely down the for-profit road we have now.

One simple example. Governance by a volunteer board of directors is pretty much universal among not-for-profits. The board is often elected by the members of the organization, not shareholders, because there are no shareholders. Many social enterprises may wish to keep that part of the legal structure.

But at the same time, they may want to get rid of some of the financial restrictions, mainly the one that prevents anyone from profiting from the organization. If you want people to invest, they need to have some way of making money from the investment. So perhaps a social enterprise could offer something like a bond, or a dividend-paying share that had no voting or control rights.

There are all kinds of dimensions on which an organization might want to tweak its legal structure, just like Creative Commons licenses give you specific control over attribution requirements, separate from the right to create derivative works, separate from the right to use a work commercially.

I won't trot out the cliche and say that with an election on, it's the perfect time to raise this issue with your MPs. Personally, I agree with the misquoting of Kim Campbell, that an election is not the time to discuss serious issues. Sadly, our elections are all about marketing, advertising, and spin. But through ongoing work all the rest of the time, organizations like the Ontario Nonprofit Network and Imagine Canada can effect changes and we should all support them doing it.

It's a long road, and change doesn't happen overnight, as any social entrepreneur will tell you. But like I tell my daughters, nothing worth doing is easy, and this is one kind of change that all of us "changemakers" have a vested interest in seeing happen.

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