The Governance of Social Enterprises - Managing Your Organization for Success


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The Governance of Social Enterprises - Managing Your Organization for Success

  1. 1. SCHWAB FOUNDATION FORSOCIAL ENTREPRENEURSHIPThe Governance ofSocial EnterprisesManaging YourOrganization for SuccessJune 2012
  2. 2. Authors Mirjam Schöning, Head of the Schwab Foundation for Social Entrepreneurship, joined the Foundation in August of 2000 at its inception and has been shaping the strategy and activitiesTUM School of Management of the Foundation as a pioneer in the field of social entrepreneurship.Ann-Kristin AchleitnerJudith Mayer Abigail Noble, Head of Latin America and Africa for the Schwab Foundation for Social Entrepreneurship, joined the Foundation in 2010 and is a World Economic Forum Global Leadership Fellow. Andreas Heinecke, Founder of Dialogue Social Enterprise, and was named Social Entrepreneur of the Year 2007 by the Schwab Foundation for Social Entrepreneurship. He holds a PhD in Philosophy and is a Professor for Social Business at the European Business School in Germany. SCHWAB FOUNDATION FORSOCIAL ENTREPRENEURSHIP Ann-Kristin Achleitner holds the Chair in Entrepreneurial Finance and is Scientific Co-Director at the Center for Entrepreneurial and Financial Studies (CEFS) at Technische UniversitätSchwab Foundation for Social München. Her research focus is in the areas of venture capital, private equity, family firms andEntrepreneurship social entrepreneurship.Mirjam SchöningAbigail Noble Judith Mayer is research assistant at the chair in Entrepreneurial Finance at the Technische Universität München . Her research focuses on the relationship between social investors and social entrepreneurs and protection of double bottom line in mission focused businesses.European Business SchoolAndreas Heinecke © World Economic Forum 2012 - All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. The views expressed are those of certain participants in the discussion and do not necessarily reflect the views of all participants or of the World Economic Forum. REF 070612
  3. 3. Contents Foreword3 Foreword This document was conceived by social entrepreneurs for social4 1. Introduction – Creating Your Board entrepreneurs and those contemplating to start a social enterprise. Two years ago, a group of social entrepreneurs from the Schwab 4 1.1 What is governance? Why is Foundation community came together to identify the issues on it important for social which they wished someone had provided guidance when they enterprises? were embarking on their social enterprise journey. 4 1.2 Why create a board? In 2010, the first challenge they took was social investment. Many 4 1.3 How should boards evolve had struggled with questions such as if and how to raise capital over the lifespan of a social from social investors, whether they should sign a non-disclosure enterprise? agreement or not and simply which social investors to approach. 6 1.4 How do I choose the right The experience and questions of the Schwab Social Entrepreneurs governance structure? Hilde Schwab were taken up in the first publication of the task force, called the 11 1.5 What is the right size for my Chair, Schwab Social Investment Manual. board? Foundation for Social Based on the success of the Social Investment Manual, Andreas 12 1.6 How do I recruit the right Entrepreneurship Heinecke, Founder of Dialogue Social Enterprise, convened the board members? task force during the World Economic Forum Meeting on Europe 13 1.7 How should I appoint board in Vienna in June 2011 to discuss the next logical step after social members and for what term of investment. The task force identified Corporate Governance of time? Social Enterprises and, in particular, Boards. Many investors14 2. Managing Your Board for Optimal demand a change in governance structures as a result of investing Performance in an organization. This requires social entrepreneurs to think about creating a board if they do not already have one and managing it in 14 2.1 What are the rights and an optimal way. duties of my board members? 15 2.2 What are the roles and Boards bear the potential to greatly enhance the mission of a social responsibilities of the board enterprise, if careful thought goes into the right composition and chair? management. Governing boards also have significant influence and can take social enterprises into different directions than intended 16 2.3 How do I create a board culture? by the founders. Many entrepreneurs of social businesses which Mirjam Schöning generate attractive financial returns find over time that their boards 17 2.4 How should management Head, Schwab might be tempted to choose higher profitability over deeper social report to the board? Foundation impact. Overruled by investors’ priorities, many founders have left for Social their organizations. Among others, this document addresses the 17 2.5 How do I evaluate the work of a board? Entrepreneurship question of how social enterprise leaders can protect the social mission of their organization through the governance structure.18 3. Conclusion20 4. Appendix While this is a manual by social entrepreneurs, it would not have been written without the crucial support of Professor Ann-Kristin 20 4.1 Board composition and tasks Achleitner and Judith Mayer from the Technical University Munich. over the lifecycle We are greatly thankful to Professor Achleitner for providing her 21 4.2 Link of financing instruments deep expertise gathered over years as Chair of the Institute of and governance requirements Entrepreneurial Finance on governance in small and medium enterprises. We would like to thank Judith Mayer for her close 21 4.3 Conflicts of interest collaboration with the social entrepreneurs of the task force through 22 4.4 Template for a quarterly regular calls, interviews and a survey to compile this manual. update 23 4.5 Example of impact value We hope this manual will serve as a practical tool for social chain entrepreneurs and will find its way into university courses. However, it is only as useful as you find it. We hope, therefore, to hear your 24 4.6 Reporting cycle feedback to incorporate into subsequent versions. 25 4.7 Example of a board self- assessment questionnaire 32 4.8 orporate governance guidelines and codes of best practice 34 4.9 Rules of procedure for boards37 5. Task Force Members of the Schwab Note: This is a “living document”. Please help us to strengthen it with your feedback Foundation Community and comments. Contact us at: and judith.mayer@wi.tum.de38 6. Sources The Governance of Social Enterprises 3
  4. 4. 1. Introduction –Creating Your Board1.1 What is governance? it demonstrates the lack of understanding – Ensure the vision and legacy: Boards of how boards can facilitate an enterprise’s include and empower carefully selectedWhy is it important for success and make the management team’s individuals to guide the enterprise. work easier. Furthermore, of those social This ensures the organization’s visionsocial enterprises? enterprises that have a board, many fail to succeeds beyond the efforts of theGovernance is formally defined as “systems engage their board actively in the strategic founder or management team.and processes that ensure the overall guidance and oversight of their organization. This represents a lost opportunity. – Signal credibility to externaldirection, effectiveness, supervision and stakeholders: Investors, contractors andaccountability of an organization” (Cornforth, Most countries have developed guidelines customers may trust the organization2003). Governance mechanisms can around governance and boards for the more if it has well-regarded boardinclude governing boards, monitoring corporate and often also for the non- and signalling mechanisms like profit sector. See Appendix 4.11 for areporting or codes of conduct. comprehensive list of national governanceThe focus of this document will be on guidelines and codes of best practice. 1.3 How should boardscreating and managing boards, whileacknowledging that the governance of evolve over the lifespan ofsocial enterprises covers a broader field 1.2 Why create a board? a social enterprise?than governing boards. For social enterprises, governance is key to No single governance structure fits all socialSocial enterprises address the most both overseeing compliance with policies enterprises or even fits the same enterprisepressing problems societies face through and regulations and to safeguarding the over time. Rather, governing boardsemploying scalable, self-sustainable and organizational mission while meeting should be tailored to the organization andinnovative business models. They must the demands of various stakeholders. be dynamic to the changing needs ofbalance financial responsibilities and Social enterprises limit their potential and the organization over its lifespan. Socialsocial impact and must coordinate among undermine their mission when they do not enterprises should evaluate and modifymultiple stakeholder groups, including invest appropriate effort and thought into their governance structures regularlyinvestors, employees, regulators, clients and creating a well-functioning board. In short, and in particular during the followingbeneficiaries. As a result, social enterprise if applied correctly, a board strengthens, circumstances:leaders manage complex trade-offs. not weakens, the leadership and helps to ensure the success of the social enterprise. – The enterprise reaches the next lifecycleA carefully selected, well-designed and stagewell-managed board will help the social Boards can help management teams reach – The legal structure of the enterpriseenterprise reach its goals. Yet many social their enterprise’s goals and mission in changesenterprise leaders are reluctant to set up several ways:a board.1 They express concern that a – The financial structure of the enterpriseboard will limit their management team’s – Provide strategic support and expertise: changes, most commonly related to theeffectiveness. While this is a valid concern, Organizations can compensate for shareholder base a lack of in-house competencies or – The external environment changes (e.g. expertise through board members.1 new government regulations) Remark to legal regulations: While some legal forms require theinclusion of a supervisory board or non-executive board members, – Provide access to networks: Board – The founder steps downothers do not. As shown below there are several reasons toestablish a board even if it is not legally obligatory. There are two members open doors to valuabletypes of voluntary boards: informal boards without any regulations external networks (e.g. fundraising,and boards formally organized by documents like bylaws or rulesof procedures. All aspects within the manual should be considered advocacy and the recruitment of highas recommendations. It is important to obtain applicable laws and talent).make sure to comply with them.4 The Governance of Social Enterprises
  5. 5. Introduction – Creating Your Board1.3.1 The enterprise reaches the Figure 1: Exemplary board composition and main tasks over the lifecycle;next lifecycle stage: governanceneeds to adaptDuring the start-up stage whenexperimentation and innovating isnecessary, social enterprises may rely onadvisory committees or informal boards(i.e. boards without any legal obligationsor decision-making authority) giventhese allow for more flexibility. As socialenterprises scale, they should establishmore formal governance structures.During transitional stages, governance – Create mission & vision – Increase visibility – Detect further businessmechanisms are crucial, especially when – Approve business plan – Enhance and preserve opportunitiesthe social enterprise’s brand is well – Consult key stakeholders culture (quality control) – Prove system changeknown, the environment is complex and – Define performance – Provide resources achieved (advanced impactimportant decisions must be made. When indicators & benchmarks & network access measurement)the social enterprise’s business model is Plan successionmature, governance may evolve into a more participative structure. A participative See Appendix 4.1 for a more comprehensive description of board composition and tasksstructure ensures that the well-established over the lifecycleenterprise remains in touch with itsstakeholders and true to its vision, missionand goals.1.3.2 The legal structure of 1.3.3 The financial structure 2. Equity, grants, non-repayable hybridenterprise changes: governance of the enterprise changes: capital: Limits the decision-rights on how funds are used as equity investorsneeds to adapt governance needs to adapt and donors require active involvement in those decisions. However, equity stakesWhile the governance of a non-profit Capital providers are an influential do not require continuous repayments,enterprise is mainly concerned with stakeholder within governance, and can and therefore can be more financiallyachieving its mission, the governance of therefore play an important role in the attractive for growing enterprises.a for-profit enterprise focuses primarily on success of the social enterprise’s mission.shareholder return. If a social enterprise is Equity investors, for instance, often strongly See Appendix 4.2 for a link of financingorganized as a for-profit entity, mechanisms influence the operations of an organization. instruments and governance requirementshave to be put in place to safeguard the Thus, it is important that the interests of themission while controlling for a reasonable investors be aligned with the mission of the A recent study found that social enterprisesshareholder return. social enterprise. use multiple capital sources to be financially sustainable and to grow (Monitor Group,Some governments have recognized this This alignment might not be problematic 2012). Often traditional investors want toneed and established legal structures at the early stages of a social business or mitigate their risk by having philanthropicthat protect the social mission as well as when profits are achieved at the same time capital committed to the obligations of the enterprise, such as a strong social impact. However the Philanthropists solely focus on the socialas Benefit corporations (B-Corps), low- interests of the founder and equity investors return and do not require a financial returnprofit limited liability companies (L3Cs) and may diverge when the organization takes while investors mandate a healthy financialCommunity Interest Companies (CICs). decisions that require a trade-off between return in addition to a positive social return. the founding social mission and achieving Governance is key to balance the differentIn the countries that do not recognize a financial return. These often lead to capital providers’ interests as well as tothese legal structures, social enterprises cumbersome board struggles. ensure the enterprise remains true to itsmay create a hybrid legal structure, which mission.consists of both a for-profit and a non-profit During the discussion and negotiationentity. In many cases, the non-profit entity process with investors, social enterprises There are two solutions to mitigate thewill hold a golden share in the for-profit should therefore look beyond the cost of influence of investors in creating mission drift:entity, allowing the profits to be used to capital to the non-financial terms in whichrun the non-profit activities. Some have a the financing is provided. Funding sources 1. Create non-voting shares for equitycentral board or ensure that 50% of the for- can be categorized in two groups: investors that are content with a moreprofit ownership is with the board members passive role. This allows key actors (e.g. 1. Debt, repayable hybrid capital, the founders) to keep the organization onof the non-profit entity. mezzanine capital: Offers the social mission. enterprise more decision-rights on how the funds are used. However, they limit 2. Retain the right of social entrepreneurs the cash-flow available for operational (written into the constitution or charter of investments, and therefore can limit the their organization) to select a set number growth plans of the enterprise. of board members. The Governance of Social Enterprises 5
  6. 6. Introduction – Creating Your Board1.3.4 The external environment 1.4 How do I choosechanges: governance needs to the right governanceadapt structure?When a government implements newpolicies and regulations and the social There is no “one size fits all” for socialenterprises must change the way they enterprises. Specific organizational factorsoperate, such as new reporting standards like size, complexity or maturity influence thefor enterprises or new regulations optimal governance structure. The followingfor a particular industry (disclosure table explains how the circumstancesof microfinance terms or educational of a social enterprise lead to specificenterprises requiring additional certification considerations the enterprise must addressand approvals), the social enterprise must to create a well-functioning governanceensure it has within its own organization structure.and board the means with which to managethese new requirements and hold itselfaccountable. Table 1: Choosing the right board structure; own illustrationSocial enterprises can adapt to the changes Instructions: Social entrepreneurs should consider all circumstances mentioned and thenin the environment by institutionalizing combine the practices and policies that automate If none of the statements below applies, social enterprises should consider Option 1 and “keep itcompliance with new regulations and simple”.policies. It is also a best practice to make CIRCUMSTANCE CONSIDERATION RECOMMENDATIONsure someone on the board is able tooversee and hold accountable compliance Organization operates in Governance is needed towith these new regulations and norms. one country with a clearly provide overall “good health” Option 1: Keep it simpleThree possibilities exist to ensure this: executable strategy checks on the enterprisean existing board member develops thatexpertise, the board recruits a new member Organization operates across Governance must include Option 2: Several boards; several countries or regions local knowledge refer to box 01with that expertise, or the board develops acommittee dedicated to those compliance Organization has several The work of the boards must Option 2: Several boards;issues. boards be well coordinated refer to box 01 Option 3: Board commit-1.3.5 The founder steps down: Board faces a high workload Current board’s capacity is tees and task forces; refer togovernance needs to adapt or specialized tasks insufficient to fulfil tasks “Committees”The start-up and scaling stages. This often Option 4: Advisory council Organization cannot insure People might be reluctant toensures the founding mission and vision plus legally binding board; board against lawsuits join the boardare woven into all strategic decisions but it refer to box 02also means that the power and influence of Target group cannot assume Option 4: Advisory councilthe enterprise rests in one person. When Target population should be legal liabilities due to a lack plus legally binding board;a founder steps down, the governance represented on the board of experience refer to box 02structures must step in to fill the void. Theboard itself can replace the founder as the Organization has a hybrid le- Governance is a mechanism Option 5: Hybrid organization-key decision-maker during the transition gal structure (mix of for- and to coordinate actions and al structures; refer to box 03period as well as institutionalize the mission, non-profit) safeguard the missionvision and values into the culture of theenterprise and into the operations.The board as well as management should 1.4.1 OPTION 1: Keep it simple system where the management board andplan the succession a long time ahead the supervisory board operate in paralleland include it within the strategy. Actions The simplest structure is a single governing is often seen in continental Europe (e.g.that could be taken by boards include the board, with either a one-tier or two-tier Germany and the Netherlands).following: structure. In Anglo-Saxon influenced countries, (e.g. the USA and UK) the one-– The board could select a new chief tier system, where there is a single board executive officer (CEO) from its own composed of both the management team members who is already familiar with and external non-executive members, is the operations and the strategy of the more common. The one-tier system usually business. refers to a board of directors.2 The two-tier– The board could provide support to a new external CEO. The board may also find a suitable mentor for the CEO. 2 For reasons of simplification, we will mainly be talking about boards and board members in the manual, referring to supervisory boards, advisory boards or non-executive board members.6 The Governance of Social Enterprises
  7. 7. Introduction – Creating Your BoardFigure 2: Two-tier vs one-tier structure; own illustration1.4.2 OPTION 2: Several boards There are two ways to structure relations and greater risk of mission drift of the among several governing boards. One, enterprise. On the other hand, a verticalOrganizations that operate across several all boards have equal rights (horizontal board structure, which puts more effort intocountries or with several subsidiaries might structure). Two, the boards have a ensuring alignment across all units, restrainshave several governance boards. Here, the hierarchical or vertical structure. While a the independence of the units and thereforeenterprise can differentiate according to local horizontal structure is more democratic and is less likely to be effective within enterprisescircumstances and align across geographies facilitates autonomous decision-making that thrive on the diversity of operationsand sectors. The disadvantage with this among the units, enterprises with horizontal and practices as well as on continuousmodel is increased coordination efforts and boards are more likely to have divergence of the boards. in strategy and practices across the unitsSeveral boards, vertical structureCase study: Lumni designs and manages social investment funds that invest in the education of diversified pools of students across Colombia,Chile, Mexico and the USA. Students who graduate pay a fixed percentage of their income for 120 months after graduation. Lumni has a separateboard for each region and a member of each regional board is represented on the board of Lumni’s head office. The Governance of Social Enterprises 7
  8. 8. Introduction – Creating Your BoardFor social enterprises that are expanding Committeesinto new markets and scaling into new Table 2: Board committees: Purposes and membership; own illustrationgeographies, vertical governance structurescan help ensure the centralized coordinationof strategy and operational alignment. Task/Purpose Proposed MembersHowever, for social enterprises that prefer toscale using a decentralized approach (e.g. Audit and finance committeefranchising) a vertical governance structuremight limit local autonomy for growth - Finance: Help with the preparation of the annual Finance expertsdecisions and a horizontal governance budget; review performance against budget;structure empowers local decision-making scrutinize major capital expendituresand differentiation. - Investment: Appoint and oversee investment Experts with investment andSocial enterprises with several boards can advisers; advise on investment strategy valuation know-howalign and coordinate across boards by: - Audit: Oversee the annual audit; review the Audit experts adequacy of internal control systems; oversee risk– Requiring all its boards to use a uniform management; oversee the accuracy of financial reporting template across all entities statements and reports– Ensuring one representative of each - Compliance: Ensure compliance with agreed Legal experts board participate in an annual cross- structures and law; deal with breaches entity meeting - Fundraising: Oversee the fundraising strategy; Board members with a wide– Encouraging the transparency of contribute ideas and contacts; provide governance network and fundraising skills performance metrics and creating a oversight of fundraising activities* “positive competitive pressure” among the entities on shared enterprise goals Human resource/nomination/remuneration committee and practices - Compensation: Advise board on remuneration of Senior board members;1.4.3 OPTION 3: Board the CEO; advise on overall remuneration policy independent board memberscommittees and task forces - Nomination: Plan board and committee Independent board members succession; manage search and selection process;Some organizations establish committees oversee election process and the induction of newwithin the board to delegate ongoing board membersfunctions and to leverage members’capabilities. As committees lead to increased - Human resources: Oversee employment policy Well connected boardworkload, they should be created only for and procedures; hear disciplinary appeals and membersspecific work streams and when specific complaintsskills sets are required. Examples are: Service and research committee– Audit and finance committee: Scrutinizes capital expenditures, oversees financial - Provide advice on issues regarding main services, Members with specific know- and support research and development of new how and background in the statements concepts organization’s industry– Human resource committee: Focuses on key senior appointments and *It is not common to have fundraising committees in the corporate world. However, when boards should help with fundraising, such a committee might be relevant. compensationTask forces of a temporary nature andinvitations of external experts are an optionwhen the work content is more dynamic andbenefits from external perspectives.8 The Governance of Social Enterprises
  9. 9. Introduction – Creating Your Board1.4.4 OPTION 4: Advisory councilplus legally binding boardBoard membership requires significantexperience and knowledge not only becausethat is what the enterprise requires butbecause board members can be held liablebefore the law if they do not perform theirduties diligently. Therefore, it is often hard toinclude certain stakeholder groups (e.g. thetarget group) if they do not possess sufficientexpertise and experience. Furthermore,some prospective board members, such askey customer stakeholders or celebrities,might be reluctant to join a board if theyare not insured against lawsuits. Toaccommodate this, the social enterprise canset up an advisory council in which membersare not legally liable. For some individuals,the prestige attached to serving on a formalboard as opposed to an informal advisorycouncil outweighs the potential legal liability.Note: if a member of an advisory councilhas significant decision-making power forthe enterprise, the courts may deem thismember a “shadow director” and hold him/her liable (see CIC regulations; CommunityInterest Companies, 2005).Advisory council in addition to legally binding boardCase study: Aidha is a “micro-business school” that offers more than 1,000 micro-entrepreneursper year skills training to entrepreneurs at the bottom of the pyramid The Governance of Social Enterprises 9
  10. 10. Introduction – Creating Your Board1.4.5 OPTION 5: Hybrid Hybrid organizational modelsorganizational structures Example: Projeto CIES has created a “hospital in a truck” that has offered over 24,000 people in 15 Brazilian cities advanced technology for 10 medical specialties.Social enterprises sometimes combinenon- and for-profit legal entities within theirorganization. An additional legal entityis often created out of necessity, e.g.investor requirements. It is important thatthe governance of both entities be wellcoordinated and that both be steeringtowards the same mission. The following boxshows case studies on how to coordinateseveral legal entities in order to serve acommon mission. Example: The Homeless World Cup works across 70 countries and uses football tournaments to end homelessness.10 The Governance of Social Enterprises
  11. 11. Introduction – Creating Your Board1.5 What is the right sizefor my board?The optimal size of a board depends on theneeds of an organization. Large boards (>12members) create more administrative andcoordination efforts and include the dangerof ineffective oversight due to some boardmembers free-riding on the efforts of others.Among the social enterprises in the SchwabFoundation network, for-profit socialenterprises tend to have smaller boardsthan non-profit social enterprises.s.Table 3: Median board size; Survey Size = 71; own illustration Organizational model Non-profit model Hybrid model For-profit model Median number of board members 10 6 5 (only non-executives)Especially in the US, donors are oftengranted a board seat and large boards oftenconstitute fundraising boards. In contrast,boards of for-profit organizations are ratherkept small in order to stay manageable.Research on board effectiveness suggeststhat smaller boards positively influenceorganizational performance (Eisenberg etal., 1998). Furthermore, an uneven numberof board members seems favourable tofacilitate the decision-making process.Table 4: Considerations on board size The Governance of Social Enterprises 11
  12. 12. Introduction – Creating Your Board1.6 How do I recruit the Table 4: Skills grid to determine skills gaps, based on Hudson, 2011right board members? Minimum John Ann Daniel Susan SUMMany early-stage social enterprises build levelboards out of their network of family andfriends. While this may reduce the initial Experience in the sector 2 0 0 1 3 2 (e.g. early childhood education)effort, it can be a disadvantage at laterstages if board members do not possessthe relevant skills, representation, network Start-up experience 0 1 0 1 2 2 (e.g. worked for 1+ yr in start-up)and reputation to provide strategic guidanceand oversight to the social enterprise. Finance skills 0 2 0 1 3 4To search for capable board members, (e.g. CFA, CFO experience)social enterprises can: Fundraising skills 0 1 0 0 1 2 (e.g. network of HNWI)– Solicit recommendations from investors, foundations and other social enterprises Legal skills 0 1 2 0 3 2 (e.g. lawyer or barrister)– Search through intermediary platforms (e.g. Accounting/audit skills 0 0 2 0 2 2 (e.g. CPA)– Research, identify and reach out to people with expertise in or passion for Marketing/public relations 1 2 0 0 3 2 the cause– Attend networking events and ask [0= no relevant experience; 1 = some knowledge; 2 = substantial skills; Red lines: skills gaps] intermediaries for support in making contactsIn selecting potential board members, socialenterprises should regard the following: 1.6.2 Representation of beneficiaries in the board with a consulting stakeholders function only, without granting them voting– Alignment with financial and social rights. objectives: Board members who have Governance is not simply about protecting shareholder rights but about safeguarding Note: When selecting board members, social worked with double bottom lines or and balancing the interests of all enterprises should be aware of potential have deep commitment to social stakeholders. conflicts of interest. responsibility are more likely to ensure the organization remains true to its Stakeholders include investors, customers/ See Appendix 4.3 for further information on goals. beneficiaries, employees, government conflicts of interest– Complimentary personality: Dominant officials or relevant community members (e.g. Research by the Schwab Foundation personalities can influence day-to- people who reside in the neighbourhood of showed the following in relation to board day business for their personal goals, the social enterprise). Boards with members membership: which can put the whole enterprise from various stakeholder groups represent a at risk. Furthermore, powerful people larger variety of perspectives, which serves – Overall, there is a strong focus on could intimidate other board members. to legitimize the operations of an enterprise expertise within board membership: Thus, the ability to work in a team is in front of these stakeholders. However, experts from business are the largest an important characteristic of board multiple stakeholder boards may require represented group (included in over 70% members. more active management when stakeholders of all boards). are resolute in defending narrow interests1.6.1 Expertise instead of the interests of the whole – Investors were mostly included in boards organization (Spear et al., 2007). of for-profit social enterprises (>60%) butBoards benefit from having members with quite seldom in boards of non-profit ordiverse areas of expertise and experience as Some social enterprise boards seek hybrid social enterprises (<30%).they provide new insights and perspectives representation from target populations.(Siciliano, 1996). Some areas of expertise Several cooperatives and microfinance - Vice versa, the target group was moreare needed by all social enterprises, such institutions, for example, opt to include frequently represented in non-profit socialas legal, financial and accounting expertise. representatives of their clients or beneficiaries enterprises (>60%) than in boards of for-An organization should consider the current on their boards. One caveat with this profit or hybrid models (<30%).skills set of its senior management team and approach is that the beneficiaries might notboard when selecting new board members. have relevant expertise and experience as aA skills grid may help a social enterprise board member to provide strategic oversight.evaluate where there are gaps in its skills. Alternative approaches are to create a supplemental client advisory council, to include advocates of the interests of the beneficiaries on the board or to include12 The Governance of Social Enterprises
  13. 13. Introduction – Creating Your BoardFigure 4: Background of board members; Survey Size = 71; data was obtained by sending asurvey to the social entrepreneurs of the Schwab Foundation; own illustration1.6.3 Network access and – Where do you see the enterprise and thereputation sector within the next 5-10 years? – How much time can you devote toA social enterprise can raise awareness attending board meetings?or legitimize its work by choosing boardmembers with esteemed reputations. – Which skills or other benefits (likeWell-regarded board members can facilitate networks) can you provide to ourexternal connections and attract similarly enterprise?talented and respected people to join theboard. Yet, they can also weaken board Most boards limit terms to 2-3 years andfunctioning if they yield disproportional allow for up to four terms. Advantages ofinfluence in decision-making or if they limited terms are that it is easy to get rid ofare highly risk averse to protect their own certain board members. However, it alsoreputation. induces additional efforts to recruit and elect new board members. Boards should predetermine its rotation process. It is good1.7 How should I appoint practice to have staggered terms to ensureboard members and for both the retention of valuable skills and the infusion of new ideas, expertise andwhat term of time? perspectives. Board members should ask themselves regularly whether they are stillNomination and election of board members adding value or can no longer provide anyfrequently differs among for- and non-profit benefits for the enterprise. When electingorganizations. While, shareholders of for- new board members, social enterprisesprofit organizations often maintain the right should rethink the size of their nominate/select a significant part of boardmembers, nomination and election in non- In the short term, a well-run board canprofits is often based upon a wider range provide valuable and time-saving guidanceof stakeholders or upon the members of a to the management team. In the long term,membership organization. it can ensure the success of the social enterprise. On the flip side, a poorly runRelevant questions to ask potential board board can make the management team’smembers before selecting them include: work more difficult.– What is your understanding of the This chapter focuses on how management mission and vision? teams can create the optimal performance– How would you measure the success? of the board through addressing key board (expectations of social, financial return) tasks, responsibilities and communications procedures as well as building a high- performance work dynamic. The Governance of Social Enterprises 13
  14. 14. 2. Managing YourBoard for OptimalPerformance2.1 What are the rightsand duties of my boardmembers?The focus of management should beon execution, while the focus of thegovernance body should be on providingguidance and oversight. Boards shouldnot get involved in day-to-day operationsbut should oversee the results of theseoperations. Senior management mustensure that the boards’ decisions areimplemented. Figure 5: Board tasks; see Kreutzer & Jacobs, 2011 for figure and a description of the typesBoards serve two primary responsibilities:support and oversight. While many viewthese as mutually exclusive, they arecomplementary in a high-performingorganization.14 The Governance of Social Enterprises
  15. 15. Managing Your Board for Optimal Performance2.1.1 Support – Succession of the chief executive and In one-tier or voluntary boards, a single the management team person often exercises the roles ofSupport refers to four areas. First, chairman and chief executive. Such a – Decisions about overall strategyboards constitute sparring partners that structure erodes the system of checks andprovide strategic guidance and challenge Organizations should define which matters balances and constrains the independencemanagement. This also includes helping to require board approval to ensure proper between board and management. A jointdevelop innovative and effective business oversight but not to micromanage the leadership structure provides a unifiedmodels. Second, board members provide management team. For example, board focus and communicates strong leadershipaccess to their networks, which can help approval is only needed for investments to the external community, while splittingraise awareness of the social enterprise above a certain threshold. these two functions bears costs andas well as foster fundraising and business administrative efforts. Thus, organizationsdevelopment. Third, boards serve as face a trade-off between effectiveambassadors for the mission of a social 2.2 What are the roles monitoring (the separation of the twoenterprise and thus provide advocacy and and responsibilities of the functions) and strong leadership.legitimization. The fourth area includesaspects of oversight: ensuring cash flows to board chair? If a single person holds both positions,increase the sustainability of the business. the board should appoint another board The roles of chief executive and chairman member to lead on any issue that requires are fundamentally different: while the separation of duties, such as reviewing2.1.2 Oversight responsibilities of the chief executive entail the compensation of the chief executive. running the organization’s business, the Furthermore, if a new chief executive isOversight primarily refers to safeguarding board chair is responsible for running the appointed, it is advisable to pair the newthe mission of a social enterprise. Boards board, which requires broad experience and chief executive with a chairman who is moremonitor the performance of managementagainst benchmarks that reflect the double the ability to process knowledge on several seasoned.bottom line. Thus, monitoring concerns high-level issues. Duties of the chair includesocial as well as financial performance. determining meeting dates, addressingWhile financial indicators are easy to conflicts among members, representingmeasure and compare, social performance the organization at public events as wellis often hard to seize. To avoid an inordinate as boundary spanning between board andfocus on financial performance, social should pay attention to definingperformance indicators for the socialmission. Furthermore, boards shouldemphasize the need for external audits aswell as accountability measures to increasetransparency towards external stakeholders. Figure 6: Board vs Management; own illustrationIn addition, oversight also refers tocompliance. It is the duty of the board toensure that management complies with itsown governing document as well as withlegal requirements. Ideally, boards shouldhave a list of compliance requirements andcheck periodically if they are being met.Furthermore, the board is responsible forappropriate risk management.2.1.3 Approval of managementdecisionsA task amid support and oversight is theapproval of certain management decisions.Board approval should serve to guaranteeconformity with the overall mission.Furthermore, board approval constitutes aform of legitimization to communicate certaindecisions in front of the team. Topics thatrequire board approval include the following:– Decisions related to the annual budget– Decisions on financing– Changes in ownership structure– Remuneration of the chief executive and the management team The Governance of Social Enterprises 15
  16. 16. Managing Your Board for Optimal Performance2.3 How do I create a Board decisions require a quorum, or minimum number of board members presentboard culture? for official decisions (at least two-thirds of the members). To diminish administrative effortsCreating the right board culture will increase during board meetings, voting proceduresthe commitment and value of board as well as required majorities should bemembers to the organization. When the determined in advance.board is diverse, it is critical to establisha culture of active listening, respect for See Appendix 4.9 for exemplary rules ofdifferent perspectives, productive dialogue procedure for boardsand the shared interest of coming to acollaborative decision (as opposed to Information about past months as well as analways getting their way). agenda should be sent at least one week in advance of board meetings, allowing board2.3.1 Onboarding the board members sufficient time to add topics and prepare. If management wishes to proposeNew board members should be introduced substantial changes, such as amendmentsto the organization’s work, current to the constitution or the strategy of anstrategies and plans. New board members organization, the proposals should be sent inshould meet the team to understand the advance.organizational culture and daily operations.Without understanding first the intricaciesof the organization, the board members willnot be able to provide constructive support Figure 5: Board tasks; see Kreutzer & Jacobs,and oversight. Familiarity with the entire 2011 for figure and a description of the typesteam makes it easier for the board to raiseconcerns. Topic Duration Administrative issues 5 minutes2.3.2 Recognizing the board, Wrap-up of past months, short discussion of open questions 10 minutesand valuing their commitments Matters for approval: group to approve en bloc 10 minutesappropriately Discussion of strategic issues, e.g.:While board members of social enterprisesare rarely incentivized by monetary - Financial situation and annual budget 80 minutesremuneration, some social enterprises - Human resourcesrecognize and reward board members - Scalingemotionally for their time and commitment.Beyond sending thank you notes, some Definition of next steps and responsibilities 20 minutessocial enterprises invite board members Evaluation of meeting 5 minutesto site visits or to join work outings.Compensating for expenses incurred out ofpocket, depending on the financial situation,may be a reasonable gesture. After the meeting, board members should receive minutes that clearly indicate next2.3.3 Recognizing the board, steps as well as individual responsibilities toand valuing their commitments achieve them. Furthermore, minutes shouldappropriately include place, day and time, participants, decisions, deliberations, voting resultsThe frequency of board meetings depends and the manner in which resolutions wereon the current situation of an enterprise. passed.There should be at least two meetingsper year to keep board members closelyon track with the development of anorganization and to maintain familiarityamong board members as well as betweenboard and management. When a socialenterprise must navigate rough waters (e.g.complex environments, changing needs), theboard should meet more often. Meetings cantake place over the phone. However, at leastone face-to-face meeting should take placeper year. One session per year should focuson strategic issues and a roadmap for thenext 3-5 years.16 The Governance of Social Enterprises
  17. 17. Managing Your Board for Optimal Performance2.4 How should 2.5 How do I evaluate themanagement report to the work of a board?board? Given that board members desire their contributions to be meaningful, socialReporting increases transparency and enterprises should communicate regularlyserves to legitimate the existence of an with them about what is working well andorganization. Regular updates about an what is not. Likewise, board membersorganization’s development keep board should take this feedback as an opportunitymembers involved and serve to maintain to make a stronger impact. Instead oftrust. assuming good intentions and goodwill lead to effective governance, boardsManagement should report at least should pay attention to evaluating their ownquarterly to their board members, informing performance.them about the current situation of theirorganization. Reports in the course of the – A review at the end of each meeting: It isyear should contain the following: good practice to review a meeting at the end, ask everyone for comments, what– cash flows, a comparison of budget and went well and what went wrong. To actual financials evaluate their own effectiveness, boards– social performance indicators compared should ask themselves at the final to benchmarks meeting of a year: “What would have happened if we had not met last year?”– management comments about important incidents, the development – Informal conversations between of external factors, etc. (2 pages meetings: The board members should maximum) communicate with each other about any outstanding issues or conflictsSee Appendix 4.4 for a template for a that are preventing effectiveness orquarterly update affecting the culture of the board. The management team should reach outA more detailed report containing the to the board to surface any issues orbalance sheet as well as the profit and loss to ask for guidance. Board membersstatement is required at the end of a year. should regularly ask themselves whether they are still able to add value to theTo set up an appropriate reporting system, organization.the management and board need a clearand common understanding of the value – Board self-assessment questionnairesproposition of the enterprise. The value every few years: Boards shouldproposition contains social as well as evaluate their effectiveness and identifyfinancial components. While the social development potentials. Appendixelement should always be primary, financial 4.7 contains a comprehensiveaims range from earned income strategies generic questionnaire that can helpto financial sustainability to the generation of with this process. Social enterprisesprofits. Measures of financial success can should further tailor this questionnairebe adopted from the corporate world. Social depending on their current situation.entrepreneurs who are not familiar with Such questionnaires require significantfinancial reporting should consult their board time and should only be conductedmembers to benefit from their expertise. every couple of years. An independent person should analyse them toPredefined measures of social impact are encourage board members to be openoften not available and social entrepreneurs and honest.themselves are frequently not aware oftheir impact value chain. Refer to the SocialInvestment Manual (Achleitner et al., 2011)and to Appendix 4.5 for a description andan example of the impact value chain. Oncesocial enterprises have defined their impactvalue chain, performance indicators mustbe determined and monitoring programmesshould be established.See Appendix 4.6 for a reporting cycle The Governance of Social Enterprises 17
  18. 18. 3. ConclusionFigure 7: Content of the guidebook; own illustrationSummarizing, we would like to highlight the – Transparency: Be transparent andfollowing aspects: accountable, especially when dealing with conflicts of interest (see Appendix– Organizational lifecycle: Consider your 4.3). organization’s needs when establishing your governance structure and selecting – Involvement of board members: Keep board members: be aware of your board members involved within strategic current lifecycle stage and of where your topics instead of becoming restrained organization is heading (see 1.3). by a reactive board (see 2.3).– Investor selection: Consider governance – Reporting: Keep your board members requirements during negotiations with on track with the developments of your investors (see 1.3). organization. If you report regularly to your board members, it is their– Role of the founder: Do not rely upon responsibility to ask questions (see 2.4). a single person for managing, shaping and overseeing the organization (see 1.3 and 2.2).– Board membership: Balance expertise and stakeholder representation appropriately in board membership (see 1.4).18 The Governance of Social Enterprises
  19. 19. 4. Appendix4.1 Board compositionand tasks over thelifecycleTable 6: Board composition and tasks over the lifespan; own illustration Start-Up Scaling Maturity Board composition Tasks and roles – Development of vision and – Enhancement and – Succession planning mission preservation of the culture of chief executive and – Definition of value of a social enterprise management team (jointly proposition, performance – Resource provision, with current managers) indicators, benchmarks – Examination of business networking – Supervision of affiliates, plan and forecasts – Extension of the talent subsidiaries, franchisees – Development of board pool – Deep scaling procedures – Definition of quality – Institutionalization of the – Consultation of key control mechanisms and approach stakeholders to increase standards legitimacy and visibility – Examination of license agreements – Selection of affiliates Questions to discuss – Is there a clear social – How can the approach be – What are further business need? made easy for others to opportunities? – Is the model scalable? replicate? – Has the social enterprise – What are the risks? – How can the approach be achieved a system – Is an open source protected against misuse? change? approach or trademark – How can the profits be registration appropriate? used?20 The Governance of Social Enterprises
  20. 20. Appendix4.2 Link of financinginstruments andgovernance requirementsFigure 8: How to choose the right financing instrument; see Achleitner et al., 2011; Spiess-Knafl, 20124.3 Conflicts of interestConflicts of interest: How to identify and treat them*Conflicts of interest are inevitable. In anticipation of this, social enterprises and their boards should develop policies and rules of procedurefor how to address and deal with emerging conflicts of interest. As a general practice, all potential conflicts of interest should be surfacedand shared for discussion.Potential sources of conflicts of interest:– Board members can gain financially from their board involvement (e.g. if the board member has an expertise that the social enterprise requires, such as marketing or accounting)– Board members can gain non-financially from their board involvement (e.g. a family member may be hired by the social enterprise, or if the board member is also a beneficiary of the social enterprise, she can influence its operations to serve her own interests)– Board members face competing loyalties and obligations (e.g. the board member serves on two social enterprises that compete in the same market or the social enterprise is part of a governmental, regulatory or oversight body)How to handle conflicts of interestBoard members must disclose all (potential) conflicts. If a person is conflicted in any decision, he or she should be removed from thisparticular decision-making process. Conflicts as well as any direct or indirect benefits received by board members have to be disclosed inthe annual reports.*Source: Charity Commission, 2011 The Governance of Social Enterprises 21
  21. 21. Appendix4.4 Template for a quarterly update3 QUARTERLY UPDATE Company: […] Quarter: […] Date: […] Key figures: Quarter ended Next quarter forecasts Sales […] […] Costs […] […] Available liquidity […] […] Activity development over the period: Operation: - [e.g. organizational developments, events, …] Production: - [e.g. set up of new subsidiaries, development of further business opportunities, additional income streams, …] Research & Development: - [e.g. impact measurement, external validation, …] Main strengths over the period: - [e.g. cooperation, use of resources, …] Main weaknesses over the period: - [e.g. excessive expenditures, pending payments, ….] Comments and additional information on the social impacts: - [e.g. increase in number of beneficiaries, generation of employment opportunities, …] Key aims for the next quarter: - [e.g. opening new subsidiaries, development of best-practice guides, in-house training, …]3 We would like to thank Andreas Heinecke, founder of Dialogue Social Enterprise, as well as PhiTrust for the kind provision of their reporting template.22 The Governance of Social Enterprises
  22. 22. 4.5 Example of impact value chain Figure 9: Impact Value Chain; taken from Mair & Sharma, forthcoming; based on Clark et al., 2004 IMPACT VALUE CHAIN INPUTS ACTIVITIES OUTPUTS OUTCOMES GOAL ALIGNMENT DESCRIPTION What you put into a Strategies, systems, and Products or servies Intermediate results Reflection on outcomes; venture practices that serve as resulting from activities necessary to achieve and activity and goal proxies for impact ("intervention") that is desired impact adjustment by relevant to achieving management outcomes MINUS What wouldve happened anyway LEADING INDICATIORS IMPACT DATA CAPTURED Process Results Short Run Long Run EXAMPLE: - Money - Providing Loans Outreach repayment - Advice - Workshops on small - No. of loans, and ave. (1) Sustainable job Sector: MICROFINANCE - Time business loan size (2) Improved life - Knowledge - Consultations and site - No of first-time clients (3) Income generation for Theory of Change: Providing visits starting microfinance the community loan products to poorest of - Staff training enterprises, etc. the poor will increase income generation + Indicators: (1) No. of Jobs created, ave. loan size, wage of employee, repayment, and interest; (2) enterprise development, + Increase in income and savings, no. children in school, no. of meals eaten per day, decrease in improve health/education infant mortality; and (3) no. of active clients, no. of clients starting an enterise for the first time, and repeated loanThe Governance of Social Enterprises23 Appendix
  23. 23. Appendix4.6 Reporting cycleFigure 10: Reporting cycle; own illustration24 The Governance of Social Enterprises
  24. 24. Appendix4.7 Example of a board self-assessment questionnaire44 Taken from: The Corporate Fund:; we would like to thank Edward Tomey, the developer of the questionnaire, for his kindpermission to include the questionnaire within the manual. The NH Center for Nonprofits oversees the online administration of the questionnaire. The Governance of Social Enterprises 25
  25. 25. Appendix26 The Governance of Social Enterprises
  26. 26. AppendixThe Governance of Social Enterprises 27
  27. 27. Appendix28 The Governance of Social Enterprises
  28. 28. AppendixThe Governance of Social Enterprises 29
  29. 29. Appendix30 The Governance of Social Enterprises
  30. 30. AppendixThe Governance of Social Enterprises 31
  31. 31. Appendix4.8 Corporate governance guidelines and codes of best practiceTable 7: Governance guidelines and codes; own illustration Country/Region Code/Guideline Main content Mandatory for Available at Australia Corporate Governance Structure and diversity of Listed entities Principles and board; disclosure and risk governance/corporate- Recommendations management governance.htm Austria Austrian Code of Transparency, disclosure, Listed entities http://www.corporate- Corporate Governance competencies and qualifications of board Belgium The 2009 Belgian Governance structure; Listed entities http://www. Code on Corporate board efficiency and corporategovernance Governance evaluation; committees code/default.aspx orategovernance code/default.aspx Code Buysse: Corporate Composition, function, - http://www.codebuysse. Governance for Non- appointment, evaluation be/en/default.aspx listed Enterprises and compensation of board Brazil Code of Best Practice of Mission, composition, - Corporate Governance background and CodeBestPractices.aspx assessment of board; relationship with related parties Canada Corporate Governance: Composition, Specified disclosure Guide to Good Disclosure independence, tasks and requirements en/listings/tsx_issuer_ compensation of board resources/corporate_ governance.html Building on Strength: Role, transparency, - Improving Governance structure and succession eng/products/reports.cfm and Accountability in of board Canada’s Voluntary Sector Denmark Recommendations on Transparency, Listed entities http://www. Corporate Governance responsibilities, composition and sw58113.asp remuneration of board Europe Green Paper on the EU Composition, evaluation -- http://ec.europa. Corporate Governance and remuneration of eu/internal_market/ Framework board; risk management consultations/2011/ corporate-governance- framework_en.htm Corporate Governance Composition, - Guidance and Principles remuneration and Publications.html for Unlisted Companies in efficiency of board; Europe collaboration with management Finland Finnish Corporate Composition, Listed entities http://www.cgfinland. Governance Code 2010 appointment, charter and fi/content/view/16/63/ evaluation of board lang,en/ France Recommendations on Principles, independence, Listed entities Corporate Governance organization and index.php?option=com_ transparency of board content&view=article&id= 98&Itemid=87&lang=en32 The Governance of Social Enterprises