How the right legal frameworks can catalyze a social enterprise surge

The time for small intermittent steps towards inclusivity, equality and sustainability has passed. Watershed global crises in health, the economy and climate have brought the need for a seismic shift sharply into focus. Governmental and non-governmental organizations cannot tackle these challenges alone. Nor can we rely solely on the goodwill of business interests to reform economic systems and promote sustainable growth.

Social enterprises, organizations that place mission at the forefront of their operations, have a critical role to play in bridging this gap.

While social enterprises have existed for decades, in recent years they have gained greater recognition in both the business community and policy arena. Research by the Schwab Foundation’s Global Alliance for Social Entrepreneurship has documented the myriad benefits of social enterprise — but has also uncovered some of the barriers these mission-driven organizations face.

Among the top obstacles facing social enterprises are complex and sometimes unclear regulatory frameworks. Although social enterprises can be found all over the world, most jurisdictions suffer from a lack of laws and policies that support them. Worse, in some countries, governments have specific regulations that actually hinder their growth.

To address this challenge, the Lex Mundi Pro Bono Foundation, led by their California member Morrison & Foerster LLP, collaborated with more than 60 Lex Mundi member law firms around the world to investigate how legal reform can act as a catalyst for social enterprise.

The research and resulting report were commissioned by Catalyst 2030, and involved 66 Lex Mundi member firms responding to a comprehensive questionnaire requesting information on issues ranging from funding to government infrastructure. The team at Morrison & Foerster then analyzed and consolidated the findings into a final report titled: Legal reform as a catalyst for social enterprise: an international social enterprise law & policy report ( “Social Enterprise Law & Policy Report”). The interactive appendix includes jurisdiction-specific responses for 83 countries on the many laws and policies that impact social enterprise.

The Social Enterprise Law & Policy Report offers a comparative analysis of how different countries support and enable the development of social ventures, including observations from each inhabited continent and every major legal structure. It also offers recommendations to assist policy-makers in catalyzing the formation and growth of social enterprises in their respective jurisdictions.

Specifically, the report identifies key legal policy recommendations that could assist countries in helping social enterprises flourish, thereby contributing to a more sustainable and equitable future. Of course, there is no one-size-fits-all solution for all jurisdictions. Therefore, each jurisdiction should tailor its approach to reflect its local laws, regulations, needs and goals. Nevertheless, this framework and its supporting global review provides policy-makers with a useful roadmap for success.

The first step in shaping an equitable and sustainable community through social enterprise is to lay out a clear definition of these entities based on desired policy outcomes. It is imperative to begin with a coherent definition in order to achieve specified goals. Further, clarifying when and how fiduciaries may consider social and environmental factors is necessary to facilitate best practices and investments. Once these foundational principles are understood, other policies can be implemented to bolster support.

Policy-makers could then consider tax benefits for social impact entities and their investors, as well as measures to make investing in social ventures easier. Most jurisdictions tax for-profit enterprises one way and non-profit organizations another, with few exceptions and not much middle ground. A third approach that rewards for-profit social enterprises and their investors with tax benefits for pursuing public good would be enormously valuable. Further, regulators could remove or minimize legal obstacles to fundraising for social enterprises to ease the inherent burden in their hunt for capital.

If policy-makers choose to provide benefits and incentives to social ventures, they must also take steps to prevent corruption. Regulators should develop a form of reporting or certification to, first, ensure legitimate social ventures continue complying with relevant standards, and second, prevent illegitimate businesses from defining themselves as social enterprises solely for the purpose of receiving benefits. Meaningful and quantifiable reporting requirements, potentially coupled with independent third-party auditing, will help guard against fabrication and aggrandizement.

Recognizing that not all social enterprises are created equally, policies should be flexible and allow for scaled implementation as appropriate. Some entities are small for-profit start-ups, others are structured as nonprofits, while some are very large organizations, flush with assets. Most social enterprises are not public companies, but some are. Although larger companies may not need as much support, they could be eligible for some benefits, nonetheless. More importantly, large corporations have incredible influence and are capable of setting standards that impact the ecosystem as a whole. Elastic regulations that can account for size, structure, mission and impact will result in benefits being spread equitably across ventures that truly require it.

There are many ways for policy-makers to support and accelerate social enterprises and contribute to a more equitable and sustainable world. Any one of these recommendations, or a combination thereof, has the capacity to propel and accelerate these vital organizations. This report can inspire policy-makers around the world to examine current regulations, consider changes and provide a more fertile ground for social enterprises to further their meaningful work.