Roger Cowe takes a look at the government’s latest plan to promote social enterprise and finds a potential new vehicle for corporate community investment
Social enterprise is one of the Labour government’s Big Ideas – pursuing social objectives using commercial means. And Community Interest Companies (CICs) are intended to be a means of furthering social enterprise. They represent a confluence of several important strands of New Labour thinking, straddling private provision and the role of charities in delivering public services, and the potential for regeneration of disadvantaged areas through private investment.
As ever with an idea that finds favour in the Treasury, there are influences from the US. But less commonly, there is also a strong European angle in the concept of providing special vehicles for non-capitalist enterprise.
Of course there have long been special legal forms in the UK. Charities are based in trust law, while Industrial and Provident Societies exist for commercial activity which is governed by members other than conventional shareholders. Many ‘third sector’ organisations also trade as limited companies, but limited by guarantee rather than having conventional shareholdings.
The government decided back in 2002 that this was not enough variety for the brave new world of social enterprise. Many charities find trust law extremely constraining, and onerous on trustees, especially when they move beyond the basic charitable activity of fund-raising and delivering charity. The IPS structure is rather rigid in terms of membership control and financial flexibility, while companies limited by guarantee are also restrictive for organisations which want to raise equity-style investment.
CICs appear to offer the flexibility which the existing legal forms do not. They will be conventional companies in many respects, but with clear social objectives (and a requirement to demonstrate how they are being met) and safeguards against financial interests overwhelming those objectives.
The concept has been met, mostly, with cautious enthusiasm. Charities are keen to make sure the new vehicle does not muddy the water for the charity sector, and still want a Charities Bill to clean up legislation in that sector. And the social enterprise movement, while welcoming CICs, stresses that this remains just one of several models for organisations aiming to deliver social benefits.
The detailed regulations, published for consultation in February, are still to be finalised and will be important in determining, for example, how a CIC demonstrates that it is fulfilling its community interest mission. But once established next year, CICs could provide an interesting vehicle for conventional companies to pursue their community support activities. Rather than making donations to local charities, a company (or group of local companies) could provide capital to a CIC, as well as other support to build a sustainable organisation that would not depend on regular injections of grant support. Public companies may also be able to learn something about social reporting from the development of CIC reports demonstrating their social impacts.
CICs will be subject to the basic legal requirements contained in the Companies Acts, but additional requirements reflecting their special status will be introduced in The Companies (Audit, Investigation and Community Enterprise) Bill, which is currently awaiting its final stage in parliament and is expected to become law next Spring.
Key provisions include:
CIC will have to pass a “community interest test”
there will be a statutory lock on the assets and profits of CICs so they cannot be exploited by financial interests, including caps on dividend and interest payments and restrictions on distributions of assets
CICs will be able to issue a kind of preference share, but financial investors will not be allowed to own more than a quarter of the voting rights
CICs will have to report on how their activities have benefited the community and how they are involving stakeholders
There will be a CIC regulator to ensure compliance
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