The Code of Social Enterprise in Scotland

In 2002 the UK government published a definition of social enterprise as part of a Department of Trade and Industry strategy: a business with mainly social objectives, whose surpluses are reinvested in that purpose rather than paid out to maximise returns for owners. Scotland adopted the same wording. Over the following decade the term became fashionable, and the definition proved too loose to keep it in check. Private firms with an ethical policy and public bodies with a trading arm could both describe themselves as social enterprises, and nobody had the standing to say otherwise.

The Voluntary Code of Practice for Social Enterprise in Scotland is the sector’s reply. It was drawn up in 2012 by people and organisations involved in supporting social enterprise in Scotland, working as a steering group of national intermediaries and social enterprises themselves. It is short. Its opening page sets out five criteria, a list of values follows, and an appendix names some wider influences. The full text is published by Social Enterprise Scotland.

The five criteria

The criteria are the hard part of the Code, the part an organisation either meets or does not.

1. A social enterprise is a business that trades, selling goods or services, but its main objective is social or environmental benefit.
2. Whatever its legal form, its constitution requires profits to go back into the business or to the community it serves. They are not distributed to owners, shareholders or investors. A footnote allows that a very small number of organisations might be honourable exceptions to this zero-dividend rule.
3. The constitution also requires that if the organisation is wound up, its assets go to another body with similar aims. Together with the rule on profits, this makes up the asset lock, which the Code calls the defining feature of a social enterprise and the thing that sets it apart from private business.
4. Social enterprises differ from charities and voluntary organisations that have no ambition to become financially independent through trading. A charity living on grants and donations is not a social enterprise, however worthy. One that sets out to pay its way by trading may be.
5. A social enterprise stands apart from the state. No subsidiary of a public body can qualify. Arm’s-length companies set up by councils to run leisure centres or other services fall outside the definition, however much they trade.

The values

The second part of the Code describes how social enterprises are expected to behave, and it is looser by design. They are to be founded on values of social fairness and care for the planet, and to deal honestly. They are to be good employers, working towards a living wage and flatter pay structures than private firms, with a ratio of no more than one to five between the lowest and highest paid offered as a useful guide. From co-operatives and mutuals they take democratic governance and common ownership. From development trusts and community enterprises they take the habit of solving problems from the bottom up. And they are to help one another, including by buying from each other where they can, a practice the Code calls intra-trading and compares to the way open source software developers share work.

The appendix adds that social enterprises need business support that understands them, investment that puts social outcomes first rather than private returns, and recognition from government of the added value they bring to public services and communities.

Who can sign

The Code is voluntary. There is no inspection and no licence. Organisations that meet the criteria can declare that they subscribe to it, and the sector relies on peer recognition rather than enforcement. The drafters chose this route on purpose: they argued that a mandatory rulebook would invite disputes over who was in and who was out, and that a code resting on shared values could regulate itself.

In practice the criteria decide the question. Trading charities, community benefit societies and co-operatives with an asset lock, community interest companies limited by guarantee and development trusts can all meet them. A community interest company limited by shares has a statutory asset lock but may pay capped dividends to private shareholders, so it sits uneasily with the zero-dividend rule unless its shareholders are themselves asset locked. A private company that promises to give a share of its profits to charity does not qualify, however good its work.

That is a deliberate contrast with the Social Enterprise Mark, an accreditation developed in England, which requires only that at least 51 per cent of profits go to social or environmental purposes. The Scottish Code sets the bar at no private distribution at all. Some in the wider sector think this too strict, and that it shuts out businesses doing real good with a mixed model. The Code’s answer is that such hybrids are welcome allies but are not social enterprises, and that a term which covers everything protects nothing.

Since then, the Code has been amended in 2015 and 2018, and every Social Enterprise in Scotland Census from 2015 onwards has used it as the benchmark for deciding which organisations to count.