A New Blueprint for Regulating Social Enterprises

Abstract

Social enterprises solve social and environmental problems in rich and poor countries alike. Some advance a social mission and work to expand access to critical goods and services for the poor and under-served, such as healthcare (e.g., affordable ambulance services and cataract surgeries), housing, financial services, and quality employment. Others commit to an environmental mission and develop green products such as eco-friendly household cleaning products and textiles, solar powered cooking stoves, and sustainably sourced food products and minerals.

Social enterprises receive funding from impact investors who expect their investments to generate double or triple bottom line returns: Financial, social, and environmental. Like the social enterprises it finances, impact investing — also referred to as social finance — is hybrid in that it is driven by both commercial and non-commercial imperatives: To generate financial returns alongside a positive social or environmental impact. Impact investors — individuals or institutions like funds, investment banks, foundations, etc. — supply “patient” capital to finance the provision of goods, services, and technological innovation that make the world a better, safer place.

This chapter is concerned with identifying norms, rules, and mechanisms for protecting the promise of social enterprises — and, by extension, social finance. The aim is to maximize the potential for social enterprise to have positive impact while minimizing the risk of “hybridity diversions,” which are produced when commercial and non-commercial imperatives come into tension. The argument is that, to protect the transformative promise of social enterprises, hybridity must be regulated, both formally and informally, through a mix of hard and soft norms. To do this effectively, we cannot simply blueprint the regulatory frameworks designed for conventional corporations and conventional finance — frameworks designed to protect financial expectations, not those of stakeholders, and not impact. Instead, a new blueprint must be developed.

Keywords: social enterprises, purpose-driven companies, regulation, mission drift, transplant