Danger! Socially incompetent enterprises ahead

CICs are great but they're not ready for export says international development expert Freer Spreckley

The recent Pioneers Post article entitled “New rules could ‘open the investment floodgates' for Community Interest Companies” put forward an interesting idea about the CIC model, a legal framework for social enterprise developed in the UK. There is a sense that now is the time to export it.
But, looking at the proposed changes to the CIC regulatory framework due in 2014, I would say it is facing in the wrong direction and not export ready. How a CIC plans and accounts for its social and environmental achievements is what needs to be improved, not how much more profit can be taken out by investors.
The proposed CIC changes seek to increase the financial returns on investment in social enterprise. Attracting investment by increasing financial returns suggests that this is why people and institutions invest in CICs. 
Financial return is not the point
CICs are attractive investment opportunities because they are seen as social enterprises with social and environmental purposes, not because they offer high rates of financial rewards. This fixation in the UK with financial investment instruments skews the purpose of social enterprise and complicates planning and reporting mechanisms, which are already a challenge to get right.
I recently worked in Vanuatu revitalising the co-operative sector. One of my tasks was to amend and update the legislation covering the Co-operative Act. As ownership of land and buildings is currently a topic of national significance I recommended a clause similar to the asset lock in a CIC, which prevents a percentage of profits leaving the business and ensures it is ploughed back into the social purpose.
I was also involved in designing a monitoring and evaluation system to help co-operatives become more accountable to members, engage stakeholders and improve their governance. What stopped me from using more of the CIC regulations were the weak social reporting requirements, an area where improvements need to be made before the model is exportable.
Learning from investment practices that are weakening cooperatives
In Vanuatu I found a problem. Too high a percentage of annual net profits were being returned to shareholders and loan providers and not enough was being retained for investment in the co-operatives themselves. The co-operatives were showing signs of weak financials. By and large their financial resources were insufficient to support debts to lenders and business operations. 
I suspect in many CICs in the UK a similar weak financial situation will be present. Relaxing the cap on the amount interest paid on loans and shares without a thorough analysis of the financials of CICs seems a bit reckless. Investment in social enterprise is mostly made because investors wish to support what they stand for, not to increase their profits. That CICs might be suffering from a “lack of investment” doesn’t explain very much. It is too weak to be credible and doesn’t provide the necessary understanding for making changes.
However, the CIC regulatory framework is at an interesting juncture: there is now sufficient history of the use of the CIC model to undertake a more thorough analysis of its successes and failures as a way of supporting community enterprise. Any analysis of community enterprise should include the triple bottom line - commercial viability, social wealth creation and environmental responsibility.
Achieving the triple bottom line is more attractive to investors, and to local communities. When you add to this the positive impact of the multiplier effect (profits being retained locally and circulating many times) the idea of people and institutions taking profits from the communities would seem counterproductive and just wrong.
Challenges of running a CIC
I am also the secretary of a community enterprise in the UK (Hay on Wye Community Enterprise CIC), regulated with CIC status. Part of that responsibility is preparing the Annual CIC Report and writing the section on the “General Description of the Company’s Activities and Impact”. This bureaucratic exercise is frustrating because it is nearly useful - but not quite. It’s neither simple nor comprehensive.
Many community enterprises that use CIC status would benefit from undertaking a more rigorous annual planning and evaluation. This could help management understand how to improve social, environmental and financial performance. It could also enable fuller engagement with stakeholders and strengthen governance and accountability – as well as provide content for the CIC reporting. 
Currently, the reporting requirements don’t do any of these and also don’t necessarily fit with how community enterprises report to stakeholders. 
However, the fundamentals of the CIC for use in community enterprise– asset lock, a cap on investment, and the need to report on activities and impact are in place. All that is needed is for the social and environmental planning and reporting aspect to be strengthened.
In Vanuatu, they had already adopted the triple bottom line of commercial viability, social wealth creation and environmental responsibility; they called it: Strong Co-operatives; Strong People; and, Strong Communities. Annual planning was introduced against which social accounting and audit could measure progress. The Department of Co-operatives in Vanuatu has adopted this approach and the supporting draft legislation.
As social enterprise is predicated on the triple bottom line – that is why they exist and why they are widely supported - it would be worth considering the use of simple social accounting and audit based on the Theory of Change model, which presents five clear steps to reaching social, environmental and financial goals.
5 ways CICs could improve their social, environmental and financial performance
Currently a CIC is asked to report on the activities undertaken and the impact they have had, but these are just two of five levels of the Theory of Change.
The 5-step hierarchy for the Theory of Change includes:
1. Inputs (problem/idea identification and human and financial resources)
2. Activities (what is delivered)
3. Outputs (what beneficiaries receive)
4. Outcomes (the positive change beneficiaries’ experience)
5. Impact (the wider benefits gained by society).
The logic of this hierarchy holds true in most cases and has been widely used since the mid-1980s. To short-circuit the logic risks a return to the old days when social interventions were designed by listing the activities, attaching a budget and hoping for the best. Without the full hierarchy of the five levels it’s impossible to attribute impact to the organisation’s activities.
When using the five level hierarchy not only is the step by step logic of planning made easier, but monitoring and evaluating also become more straight forward and credible.
To make the CIC framework not only worthy of export, but also to make it worthy of use to those who genuinely want to take responsibility for their communities, requires it to strengthen its social planning and measurement processes and how these are managed. 
A simple method would be to extend the “Activities” and “Impact” by filling in the missing levels of the hierarchy so that the CIC can report on Inputs, Activities, Outputs, Outcome and Impact. The hierarchy is a foundation for social accounting and audit, which could then be used to plan, implement and measure interventions by CICs in pursuit of their triple bottom line objectives - and to assist management in improving performance. 
The CIC framework will then be fit for purpose as a business model for the emergence of community economies, as a way of measuring microeconomics and as an exportable social enterprise model.
In the co-operative sector in Vanuatu, the design of the monitoring and evaluation system used a simple social accounting and audit approach based on a poster: Interested readers can download it for free here