“At some point in the not too distant future, policy makers and leaders in philanthropy will need to decide what role they prefer for themselves in a world reshaped by social enterprise: visionary enabler or sidelined naysayer.”
Peter Dietz, Managing Editor, Social Finance.ca

“Expecting price competition, the profit motive, short term deliverables and supply chain control to bring about a world of compassion and solidarity, is, to say the least, a little strange.”
Michael Edwards, Author, Small Change: Why Business Won’t Save the World

The term “hybrid” describes an organization that mixes the characteristics of different sectors. The boundaries between the private, public and third sector have of course always been malleable. Thrift stores sell clothes and CBC sells advertising. The Canadian public health service uses private enterprises that need to make a profit, and holds lotteries to raise funds.

But blurring doesn’t adequately describe or explain what is happening today. The terms of debate have shifted. They are about the need for new legal structures, in part driven by the need to increase private sector funding for public good.

These discussions and the associated terminology — blended value, triple bottom lines, social enterprise, Community Interest Companies, social finance, Big Society, social purpose businesses and impact investing — are bewildering and intimidating for many in the nonprofit sector. Perhaps new legal structures would lend clarity to the new organizations and their roles? This is certainly being actively examined in Canada, the UK and US.

The search for hybrid legal solutions

Canadian hybrids have historically found space in the legal cracks of existing organizational forms. Social enterprises can be found in many legal forms, including sole proprietor, partnership, cooperative and incorporated entity; for-profit, nonprofit or charitable.

Many industry leaders, tax experts and commentators believe no legislative changes are thus required in Canada as tax and corporate structures have shown they are sufficiently flexible.

But the tide is starting to flow strongly in the opposite direction.

Ontario passed Bill 65 last October, which has been lauded for creating an enabling environment for social enterprises, while British Columbia has announced its intention to reform its own Business Corporation Act to “allow a new hybrid type of company, the Community Interest Company, structured to both benefit the larger community and allow limited investor returns.”

Canadian legislators have the chance to learn from the experiences of the UK and US, each trying different legal solutions to accommodate and encourage hybrids. In 2005, for example, the UK created Community Interest Companies (CICs), of which almost 5,000 now exist.

A CIC must file a community interest statement certifying what it will do and how that will benefit the community. Unlike charities, they may raise capital from shares and pay dividends, but a regulator caps the level of return. Their assets are locked and must be passed to another CIC or the community. On balance, they experience less regulation than charities.

In the United States, access to capital, simplified regulation and community benefit also drove the creation of Low-Profit Limited Liability Companies (or L3Cs). First created in Vermont in 2008, L3Cs are businesses that put public benefit ahead of profit; their status negotiates complex tax laws to allow access to both private and charitable funding. The concept was developed by Robert Lang, who invested $200,000 of his family’s foundation money to develop legislation and founded Americans for Community Development to promote the concept. The tagline on its homepage, “providing nonprofits with for-profit solutions”, is a beguilingly simple statement for a complex hybrid arrangement.

A second US initiative, B Corporations (B Corp), is a certification system, with a logo to show for it and for which any business can apply. It allows companies to brand themselves to consumers and investors as socially and environmentally responsible. B Corps are an initiative of B Lab, a nonprofit that aims to “build a community of Certified B Corporations to make it easier for all of us to tell the difference between ‘good companies’ and just good marketing”. B Lab certifies B Corps through its own B Ratings System.

However, once achieved, B Corps status could be revoked by a shareholder vote and can also leave directors at risk of being sued for failing to meet their primary requirement – maximizing shareholder profit. B Lab has since helped to draft legislation to create a legally binding new form, the Benefit Corporation, already adopted in four US states and pending in eight others.

Laura Jordon incorporated the first Benefit Corporation in Maryland and explains her enthusiasm for the model: “What is so great about a Benefit Corporation is that it ties in so well and so neatly to our existing free market system…it’s perfect for a company which wants to combine profit making with a social mission.”

The excited and extended commentary (both negative and positive) on developments in the US does not hide the fact they are new and relatively few in number, with just 16 For Benefit Corporations, 300 L3C’s and 422 certified B Corps at the time of writing.

Show me the money!

Hybrids are said to be held back by their lack of access to capital, something the various legal forms try to address. A report by the Canadian Task Force on Social Finance released last December, Mobilizing Private Capital for Public Good, considers how private investment can be released to generate public good; if properly harnessed, the report suggests a potential $30-billion opportunity for Canadian social enterprises and community organizations. It discusses impact investing, defined as “the active investment of capital in businesses and funds that generate positive social and/or environmental impacts, as well as financial returns to the investor.”

In the UK, where the term more commonly used is social investment, there is also a vibrant debate about how to “stimulate long-term private investment…from individuals, companies and charitable foundations.” One UK initiative discussed worldwide has been Social Impact Bonds. A pilot project is helping nonprofits aiming to cut recidivism rates of released prisoners. Investors will receive a return if the project succeeds — the higher the reduction in reoffence rates, the more the money saved by government and the higher the return. If the project fails to deliver, the investors get nothing.

President Obama has announced US$100M of funding towards seven similar initiatives under the title Pay For Success Bonds.

Can these new forms of investment plug the gaping holes left by public sector spending cuts in the UK? Summed up by Nicholas Timmins and James Boxell in the Financial Times, “in the short term, absolutely not,” noting that compared to the $120B of cuts announced by the UK government, social private investment in 2010 was just two percent of that figure.

For its part, the Canadian marketplace is still maturing. Steve Croth, founder of Better the World, the first Canadian company to be certified a B Corp, remembers attending a function aiming to link enterprises with funders, only to find that the former outnumbered the latter 99 to 1.

Karim Harji, manager at Social Capital Partners and one of the founders of socialfinance.ca, a leading website for social entrepreneurs, has followed and contributed to the debates around hybrids, social enterprise and impact investing. He concludes that, while important, money is not necessarily the key issue: “The money will arrive — the real issue will be the ability of the organizations at the other end to generate financial and social returns promised”.

David Le Page of Enterprising Non-Profits agrees. “Financing is critical, but only one piece of the puzzle. If you don’t have demand or the correct business skills, all the money in the world will not create better organizations.”

And unless the capacity to deliver is there, together with agreed measures of social impact, Harji sees problems down the track. “If money goes to the wrong organizations, we will get blow-ups and there will be knee-jerk reactions impacting on the whole sector.”

Bob Wyatt, executive director of the Edmonton-based Muttart Foundation also wants more debate on the consequences of failure: “If a hybrid charity has to shut down there will be headlines. The immediate reaction of politicians will be to overreact and introduce regulations. We’d better sort this out beforehand.”

Identifying priorities, answering some big questions

Is the priority then to develop new organizational forms that work better than what currently exists? LePage believes that “hybrids may answer the problem or cause more — we have to experiment, to take risks or we will never have change.”

Just as importantly, should we focus on getting more money into the system? This is the view of Judith Rodin of the Rockefeller Foundation, who believes that although foundations and government funds are insufficient, “there is enough money. It’s just locked up in private investments.”

Should we also be asking if something inherently political and contested is underway? Are we moving on from the old ways, where governments raise taxes and use the democratic process to determine how funds meet need? Are we finding new ways for capital to make a profit? Have nonprofits been redefined by some as service providers — rather than as campaigning organizations pushing for sometimes painful changes in the policies and behaviour of both government and business?

The final article in this series will put these big questions to one side and look at actual organizations who have been living the hybrid life. What have they learned and what do they have to say for others following their example? For an introductory look at hybrids, check out the first article in this series, The Rise of the Hybrid: When Sectors Collide.

Further reading

Legal definitions of hybrids:

Social Finance and Social Impact Bonds

David Evans is a nonprofit consultant based in Vancouver. He has worked as a director with UK, European and international nonprofits and is particularly interested in appropriate education and training for the sector. David can be reached at Evansdn@aol.com or 778 883 7951, or via his website at davidnevans.weebly.com/index.html.

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