From stakeholders to institutions: the changing face of social enterprise governance theory

Electronic copy available at: http://ssrn.com/abstract=1345903

From stakeholders to institutions:the changing face of social

enterprise governance theoryChris Mason

Liverpool Business School, Liverpool John Moores University,Liverpool, UK

James KirkbrideFaculty of Business and Law, Liverpool John Moores University,

Liverpool, UK, and

David BrydeLiverpool Business School, Liverpool John Moores University,

Liverpool, UK

Abstract

Purpose – This paper aims to set out the current theoretical landscape of social enterprisegovernance. It considers the two theories of governance currently advocated in the social enterpriseliterature – stakeholder and stewardship theories. Furthermore, it asserts the utility of neoinstitutionaltheory in analysis of social enterprise governance.

Design/methodology/approach – The methodology employed was critical review and applicationof the prevailing governance theory in a social enterprise context.

Findings – The prevailing institutional theory offers a great deal in explaining the governancedynamic in these organisations. The influence that values, symbols and cultural norms have uponorganisation structure are not fully encompassed in social enterprise governance theory. Rather, it hasbeen adapted and diluted to fit different explanations of governance, such as stakeholder andstewardship theory.

Research limitations/implications – Institutional theory offers an alternative lens with which toanalyse social enterprise governance. This paper advocates institutional analysis of governance as analternative method of mapping social enterprise governance, testing existing concepts such asisomorphism within the third sector, and new conceptual research.

Originality/value – The paper consolidates the governance theory currently attributed to socialenterprise governance, and puts forward an alternative theory that considers the influence ofinstitutional pressures upon governance arrangements. It adds to the governance literature bysuggesting a deeper analysis of institutional factors upon governance structure. It also adds to thegrowing literature that focuses on the governance of social enterprise as a distinct form of organisationin the third sector.

Keywords Corporate governance, Organizational theory, United Kingdom

Paper type Conceptual paper

IntroductionThe social enterprise business sector is making an increasingly important andsignificant contribution to UK communities and economies. This has led to heightenedinterest in both academic and practitioner communities in relation to the management

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Received 16 June 2006Revised 10 October 2006Accepted 15 November 2006

Management DecisionVol. 45 No. 2, 2007pp. 284-301q Emerald Group Publishing Limited0025-1747DOI 10.1108/00251740710727296

Electronic copy available at: http://ssrn.com/abstract=1345903

of social enterprises. One such topic that is currently being debated is how suchenterprises ought to be governed and what theoretical frameworks can be used forsuch governance-related activities. This paper aims to make a contribution to thisdebate by reviewing existing governance theories and concepts to see how they relateto social enterprises and from this to review to identify gaps in the literature for furtherconceptual thinking and empirical study. The paper is structured as follows: first, thedevelopment of the social enterprise sector in the UK will be reviewed from a historicalperspective, with a particular focus on the difference between traditional non-profitorganisations and social enterprises; second, the growing interest in the corporategovernance of social enterprises will be examined; next, the relevance and usefulness ofstakeholder, stewardship and institutional theories to social enterprise governance willbe explored; and finally, conclusions will be drawn, gaps in the current literature willbe identified, and future directions for academic work will be highlighted.

The development of social enterprises in the United KingdomIn recent times social enterprises have been afforded a high profile by the governmentin the UK as a vehicle for enabling economic and social regeneration in communities.The social enterprise sector is currently valued at approximately £18 billion, with suchorganisations accounting for 1.2 per cent of all enterprises in the country (Departmentof Trade and Industry, 2005). More importantly, social enterprises are invaluable in thedaily lives of the communities they serve and support. Prior to publication of this data,the social enterprise sector (as a part of the “third sector”) had not been fully surveyed.Social enterprises are defined in the UK Government report “Social enterprise – astrategy for success” as: “business(es) with primarily social objectives whose surplusesare principally reinvested for that purpose in the business or in the community”(Department of Trade and Industry, 2002, p. 7). Social enterprises form part of thebroader third sector or social economy, which includes non-profits and charities. Thereare a range of organisation types that are classified as social enterprises, including:

. worker cooperatives;

. social firms;

. charity trading-arms;

. housing associations; and

. credit unions (Spear, 2001; Westall, 2001; Pearce, 2003).

Although the definition is a recent one, many social enterprise types existed prior to thecommon usage of the “social enterprise” term. For example, in the UK, philanthropicactivity and the cooperative movement first arose in the late nineteenth and earlytwentieth centuries (Grant, 2003).

The current rise of the “social enterprise” form as a vehicle to deliver public serviceshas been influenced by a reduced provision by the welfare state (in the context of theUK), and other factors such as the influence of entrepreneurship (Spear, 2001).Innovation and entrepreneurship are encouraged to meet the demand for flexiblesolutions to social needs, where traditional approaches have failed to account for theoften unique circumstances within defined communities (Defourny, 2001). Socialenterprises enable local communities to take direct action in providing much-neededproducts and services. In so doing, they fill the gaps in provision left by the withdrawal

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of the state. The development of the social enterprise has encouraged empowermentwithin local communities. Also, it has promoted the development of entrepreneurshipas a sustainable solution to demand and supply issues where traditional approacheshave failed.

It is important to recognise the growing importance of social enterprise in manyOECD countries to pursue various social missions, for example, the Ghanaian farmercocoa cooperative Kuapa Kokoo, and the UK-based Day Chocolate Company. Thisfarmer-owned organisation manufactures mainstream Fairtrade chocolateconfectionery, successfully competing against long-established competitors in theUK confectionery sector (Ronchi, 2002).

Social enterprises are distinguished from other organisations in the social economyby virtue of the trading of products and services (Spear, 2001). The UK Governmentreport (Department of Trade and Industry, 2002) highlighted the importance of socialenterprises in key areas of public policy, including the delivery of public services. Thepublication of the government strategy for social enterprise reflects the growinginfluence that these organisations have on the UK economy. An important element ofthis strategy is fostering an entrepreneurial culture to tackle social problems anddeliver much needed services to communities. This reinforces the need for flexibility infinding solutions to problems in communities. It also focuses on developing themanagement skills to create a sustainable social enterprise. Dart (2004, p. 415) notesthat social enterprises “blur boundaries between nonprofit and for-profit [. . .] theyenact hybrid nonprofit and for-profit activities”. Non-profit organisations are restrictedfrom using trade as a means to raise capital, making them heavily dependent ondonations and grants. The entrepreneurial focus is encouraged so that socialenterprises can trade and gradually become self-financing through organic growth.

A further important characteristic of social enterprises is how they distributesurplus, which Hansmann (1980, p. 838) refers to as the “nondistribution constraint”.Social enterprises can either reinvest net earnings, or redistribute to the primarystakeholder group. Social enterprises are expected to overcome the limited access tocapital markets by engaging in strategic partnerships and agreements, for examplewith local authorities. The implications of this are that it diverts from short-termstrategies to engender a longer-term, triple-bottom line approach. This reinforces theemphasis given at the regulatory level (at least in the UK) for social enterprises todevelop the requisite entrepreneurial and management skills to guide the transitionfrom grant-funding to trading (a comprehensive review of nonprofit governance isgiven in Cornforth, 2003).

A further development by the UK Government that delineates between traditionalnon-profit organisations and social enterprises is the creation of the CommunityInterest Company (CIC). The CIC offers social enterprises a bespoke legal form thatreconciles the inherent tensions between having a business focus and providing socialbenefit. The range of legal forms available to the social entrepreneur enables them tomeet the needs of defined stakeholder constituencies. However, the legal form choicehas been limited by legislation in the UK, where the two most common options forsocial enterprises are the company limited by guarantee and the Industrial andProvident Society (Spear, 2001). The legal code regulating the two forms has requiredmodernisation for some time. The introduction of this new form (allied with reform ofcharity law) has enacted this change. Legislative developments in the UK have

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provided a slow but steady uptake of the CIC legal form amongst start-up socialenterprises.

The interest in corporate governanceGiven their growing value in the UK economy, the requirement for effectivegovernance of social enterprises is receiving increased attention. Corporate governanceis defined as: “[A] set of relationships between a company’s management, its Board, itsshareholders and other stakeholders [. . .] also (providing) the structure through whichthe objectives of the company are set, and the means of attaining those objectives andmonitoring performance are determined” (Organisation for Economic Co-operation andDevelopment, 2004, p. 11). The furore caused by high-profile mismanagement of large,multi-national private-sector corporations has brought heightened media attention tothe whole issue of corporate governance. High-profile cases have included Enron,Parmalat, WorldCom and Barings Bank, though these are just a small representation ofthe many corporate governance failures. However, they do represent some of the mostinfamous, which were costly to shareholders and other relevant constituencies.

In broad terms, corporate governance research has produced three influentialtheories. Each theory provides explanation of how the interests of shareholders (orstakeholders) can be safeguarded. These theories have been conceptualised into threedistinct groups to clarify their view of the organisation:

(1) as property;

(2) as nexus-of-contracts; and

(3) as a social institution (Parkinson, 2003).

The former two groups focus on the corporate form of organisation. This is because ofthe primacy of shareholders in the corporation. In their role as providers of capital andas bearers of residual risk, shareholders are the ultimate beneficiaries of corporateactivity. Managers, as “agents”, must act in the interests of shareholders who providecapital (often in great numbers), and as a consequence dilute their control over its use(Berle and Means, 1932).

This basic description of the separation of ownership and control outlines thestarting point for the development of different explanations of corporate governance.For example, the property view of the corporation outlines the rights of shareholders aslegal “owners” of corporate assets. Therefore this group has a moral and legal rightthat the corporation is run solely in their interests (Parkinson, 2003). Governanceprocesses must uphold the legal rights of ownership.

Alternatively, the nexus-of-contracts model conceptualises the firm as a base forcontracting. The contactors set and accept terms on which to deliver inputs. Eventuallythe corporation, as a nexus, produces outputs that provide residual income for thebenefit of shareholders (Alchian and Demsetz, 1972; Jensen and Meckling, 1976;Williamson, 1984). The dynamism of these arrangements enacts a change in the natureof contract-setting over time. The ultimate aim is to externalise costs and make the firman optimal base for contracting. This approach aims to maximise benefit toshareholders via efficiency gains created through optimal contracting.

The third conception of the corporation is as a social institution. This approachdiffers from the former two, where the corporation is private or less focused onnon-contracted parties (stakeholders). The implication of the social institution view is

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that governance must account for claims on resources other than those made byshareholders. These “other” claims come from groups affected by corporate activity,stakeholders, who may or may not have financial interests in the organisation.

Corporate governance and a stakeholder approachStakeholders are defined as: “Any identifiable group or individual who can affect theachievement of an organisation’s objectives, or who is affected by the achievement ofan organisation’s objectives” (Freeman and Reed, 1983, p. 91). The central element ofthis view, that corporations (and organisations generally) have responsibilities tostakeholder groups, forms the basis of stakeholder theory and corporate socialresponsibility (Freeman and Reed, 1983; Goodpaster, 1991; Donaldson and Preston,1995). The stakeholder theory of governance attempts to explain how organisationscan prioritise and manage relations with identified stakeholders. The application of thestakeholder approach to corporations has been heavily criticised, mainly byproponents of other theories that fall into the property or nexus-of-contracts models.

The criticisms centre on the ceding of resources and benefits to stakeholders, ratherthan solely to shareholders. Criticisms are asserted and rebutted on legal (Friedman,1970; Goodpaster and Holloran, 1994), economic (Williamson, 1979; Boatright, 2002)and moral grounds (Langtry, 1994; Sternberg, 1997; Gibson, 2000). It is now claimedthat the debate is inimical to the progression of corporate governance theory (Letzaet al., 2004). However, the influence of this debate upon non-profit and social enterprisegovernance is diminished by the absence of one of the key factors in the mainstreamcorporate governance literature and practice, the shareholder (e.g. Alexander andWeiner, 1998; Low, 2006). The social institution perspective is naturally aligned withthe structure and goals of these organisations, because they exist as a part of society(rather than distinct from it). Therefore governance structures should facilitatemanaging the claims of the stakeholders they serve.

The application of stakeholder theory in governance is manifested in instrumentaland descriptive terms, particularly through appropriate stakeholder management(Donaldson and Preston, 1995; Jones, 1995). However, as important is confirmation ofits normative foundation, i.e. the decisions that managers ought to make based uponmoral correctness (Donaldson and Preston, 1995). The normative foundation of thestakeholder-focused organisation provides legitimacy for its existence. However, thereis debate on how that normative base should be achieved. For example, an organisationcould aim to produce the “common good”, or the best benefit for a given society(Argandona, 1998). Alternatively, the matter is resolved with a pragmatic outlook, i.e. itmakes good business sense to recognise and integrate with a range of stakeholders thatdepend on your enterprise activity (Campbell, 1997). Social enterprises are created bypeople who are closely linked with the community they intend to serve. If the ultimategoal is to deliver social benefit, the rationale underpinning these organisations must beethical. Social enterprises exist to maximise positive social impact, and ethical practiceenables this.

With a normative basis of stakeholder governance clear, there is movement towardsconvergence with the instrumental and descriptive aspects of the theory (Steane, 2001;Friedman and Miles, 2002). To this end, research focuses on establishing the systemsthat enable efficient and effective implementation of stakeholder governance. A keyaspect here is the appropriate management and measurement processes that facilitate

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communication and decision-making throughout the organisation. Stakeholders needto communicate with the board of directors, and managers need to be given the scopeto pursue stakeholders’ interests most effectively. They must also be held accountablefor those actions. For example, the former can be achieved through inclusive anddemocratic Board election practice (Brown, 2002). The latter throughprofessionalisation and monitoring (Borzaga and Solari, 2001; Bryson et al., 2001;Richmond et al., 2003).

Stakeholder governance has further implications for the strategic direction of socialenterprise. Stakeholder representation at board level is beneficial because it encouragesusing a broader range of sources in strategy development. Consequently, stakeholderscan provide valuable input to board-level decisions that will ultimately affect them(Owen, 2000; Owen et al., 2001). In allowing stakeholders direct involvement inoperations, the social enterprise adopts and perpetuates a culture that is aligned withthe needs of that group. The recognition and inclusion of stakeholders into the socialenterprise reflects the democratic and ethical tenets upon which they are founded.

Criticisms of the stakeholder theory of governanceThere are a range of criticisms of the stakeholder theory of governance, and they haveimplications for social enterprise. The broader criticisms are found prominently inSternberg (1997) and Jensen (2001). Stakeholder theory is incompatible with corporategovernance because it allows accountability to more than one group (Sternberg, 1997).The board of directors must be held accountable to one group, to whom the risk offailure and benefit of success is delivered. In cases of multiple stakeholders, directorsmay be held accountable to a range of groups, some of whom may not be directlyinvolved with the social enterprise. This raises the issue of identifying and prioritisingstakeholder groups, so it is important that it is clear to whom managers and directorsare to be held accountable. This has an implication for social enterprise and themaximisation of social benefit. It is likely to be more effective to focus on providing aservice to one group rather than trying to manage a range of groups ( Jensen, 2001).

There is a need for a clear link between the normative base of the social enterprise’sstakeholders, and empirical evidence of the activity delivering benefit to that group(Bryde and Robinson, 2005). There may also be a discrepancy between what thestakeholder requires, and what the social enterprise actually delivers. It is nowcommon for service-level agreements to be implemented at the beginning of a project tosafeguard against this. However, it does not account for extraneous factors causingfailure to deliver the required service. In the social enterprise, this could include failureto acquire grant-funding, or political/state intervention rendering the service obsolete.

At an instrumental level, the management of stakeholders in the governanceprocess can be problematical. The inclusion and management of stakeholders at boardlevel must be transparent, clearly established and open to external scrutiny. If thegovernance process is complicated by the presence and poor management ofstakeholders, the effectiveness and legitimacy of the entire process is open to doubt.Furthermore, the degree to which stakeholder inclusion adds value to social enterpriseactivity must be evident to validate their involvement in board decisions. As the socialenterprise sector matures, there is likely to be enhanced competition for particularservice contracts, for example in the delivery of public health services. To increase theeffectiveness of the organisation, there will need to be a sufficient balance of expertise

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on the board to grow. Therefore a trade-off will be made between enabling stakeholderdemocracy and adapting to the demands of the market, forcing a change in philosophyat board level. Clearly, such a situation would question the legitimacy of the socialenterprise.

The concern is that as social enterprises become more professionalised, focus willshift away from delivering value to primary beneficiaries (Dees, 1998). It is with thisprogression to professionalisation that indicates how social enterprise governance islikely to be analysed in the coming years (Low, 2006).

Corporate governance and a stewardship approachAn alternative theoretical approach, stewardship theory, has been advocated as anappropriate basis of social enterprise governance (Low, 2006). Stewardship theorypresents a view of governance that diverts from economic interpretation ofrelationships within the organisation. This is the common in agency theory incorporate governance and neglects the salient non-economic influences that guidemanagerial activity (Donaldson and Davis, 1991). There are predominantlypsychological (such as identification and power) and situational (for example,management philosophy and culture) factors. The key assumption is that managersare trustworthy and “pro-organisation” (Davis et al., 1997). Managers and directors willseek to maximise principal interests to progress the overall goals of the organisation,into which their own interests are tied. Crucially, there must be a culture of trustbetween the principal (or primary stakeholder) and managers to support this approach.

In terms of social enterprise, stewardship theory aligns with the ethos of socialenterprise and the psychological and social profile of its managers. At the managementlevel there is support for the stewardship approach, where the manager/entrepreneurare also members of the defined community that the enterprise serves. Therefore,managerial decision-making should closely align with the required needs of thatcommunity. The success in prioritising, safeguarding and balancing interests isincreased. This is because the manager has an empathy and clear focus on therecipients of social benefit.

Furthermore, stewardship theory is consistent with the view that social enterprise islikely to evolve to a much narrower business-focus (Dart, 2004). This narrow focus willresult in the presence of a broader set of skills at board level. In turn, this moves awayfrom the inclusive representation at board level of a range of key stakeholdersregardless of their strategic utility, towards a skills set that can more effectivelymanage the entire operation. In practical terms, the key aim is ensuring that boardcomposition is both representative and sufficiently skilled to enable the socialenterprise to maximise its value to its defined communities.

To summarise, in contrast to the stakeholder governance model, it is appropriatethat board members should be sufficiently free and able to deliver increasedproductivity. This view is emergent in the literature and could predominate as thesocial enterprise sector matures to become distinct from traditional non-profits (Low,2006). However, for any theoretical approach to have utility it must be clear to thosegoverning, managing and served by social enterprises how this influencesperformance.

There is potential, therefore, in exploring the value of non-profit (and cross-sector)governance theories. This would illustrate their explanation and assist the process of

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delivering the maximum benefit to communities served by the social enterprise(Borzaga and Solari, 2001; Low, 2006). However, if the dynamic of the social enterprisesector promotes a narrower, business-focus, the likelihood is that governance systemswill exhibit a hybrid of for-profit and non-profit characteristics (Dart, 2004; Low, 2006).

At the theoretical level, there is an emergent debate about the governance of socialenterprise that is contingent on the maturation of the social enterprise sector. The waythat social enterprises evolve their forms to meet the needs of their communities willdetermine the usefulness of either (or neither) of the relevant theories outlined above.With this in mind, the core focus of this paper is to assert the need for further analysisof governance by way of existing concepts from institutional theory. The next sectionelucidates some of the most influential concepts drawn from the institutional theory oforganisations, and analyses how these theories might be used to predict, as well asexplain, the actual and changing nature of social enterprise governance.

Corporate governance and institutional theoryA third explanation of social enterprise governance is through the application of theneoinstitutional theory of organisations. Parkinson (2003) identifies that thestakeholder model is subsumed within the social institution model of thecorporation. The purpose of adopting a broader context is to determine the role ofinstitutions in understanding a governance structure that is aligned with the conceptsof “citizenship, participation and legitimacy.” (Parkinson, 2003, p. 491). Furthermore, itlinks analysis of governance processes with achieving social values shared by thesocial enterprise and key stakeholder groups. These values comprise democracy,accountability and social benefit (Pearce, 2003).

Institutions are defined as “multifaceted, durable social structures, made up ofsymbolic elements, social activities, and material resources” (Scott, 2001, p. 49).Institutional theory has a long and varied history and advocacy of the institution ispresent in different fields, for example in economics (Williamson, 1975). An importantfeature of this, and in particular neoinstitutional theory, is the focus oncultural-cognitive aspects of the institution. Also of importance is the role ofembedding shared meanings and their influence upon existence and proliferation oforganisations (Scott, 2001). This approach represents a departure from strictrationality-bounded interpretations of institutions, to accommodate the influence ofcultural values and norms upon them.

Such is the breadth of institutional theory that a comprehensive review of itsvarious strands in this paper would not be practical. Therefore this discussion focuseson neoinstitutional theory, considering the role of values in social enterprisegovernance. Institutions, and the process of institutionalisation, can be examined inmyriad ways: as instilling value, as creating reality, as a class of elements and asdistinct social spheres (Scott, 1987). Each strand offers a subtly different means forexamining institutions, their constituents and their affects. There is a considerablebody of institutional theory, none of which are precluded from this cursory review. Themore prominent theories are discussed in context to social enterprise governancebelow.

The context for the neoinstitutional theory was set by “early” work in this field byinstitutional theorists, such as Selznick (1948). This work contrasted the traditionalview of the organisation as a formal structure (or economy) with the “institutional”

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view of organisations as adaptable social systems. Although the formal structure isuseful as a guide to hierarchy and authority within the organisation, it can often besupplemented or subverted by the competing “informal” system. Elements of theinformal system, such as power cliques and friendships all contribute in some way todefining the boundaries of individual and organisational scope. These can transcendthose defined in the formal structure.

The formal structure is limited in the way that it is determined, and individualscontribute to the whole nature of the organisation. This “whole” defines what theorganisation actually is, rather than its “technical” structure. This marks a departurefrom the structural viewpoint of early theorists to one that places “meanings” asinfluential (and central) to the construction and maintenance of institutional realitieswithin organisations (Berger and Luckmann, 1966; Silverman, 1971).

It is this view of the organisation that offers an interesting position for analysis ofsocial enterprise governance. To examine its governance is to expand beyond technicalprocesses and material requirements and explore informal aspects. These includeaspects such as cultural norms and symbolic rituals. Like other organisations, socialenterprises are a product of rational and institutional elements. Neoinstitutional theoryadvocates recognition of the former and analysis of the latter. The values and culturalnorms of social enterprises are built around delivering maximum social benefit.Because these values are central to the existence of social enterprise, neoinstitutionaltheory encourages analysis of the influence these values have upon key areas ofactivity, specifically, how these values “control” the behaviour and activities ofindividuals within the organisation (Zucker, 1977). Allied with this point, Scott (2001,p. 49) asserts the importance of analysing the processes that “produce and reproduce”the values and norms embedded within institutions.

Therefore an institutional approach may enable us to understand more of why socialenterprises are so unique (based on shared meanings, values and symbolic factors).Also, it prompts consideration of how these factors are manifested in the governance(in terms of processes) of enterprise for social benefit. In this way, institutional analysisof governance differs from the stewardship approach and infers structuration:prompting examination of the dualism of the power of cultural values that influencegovernance practice and how those who control this power seek legitimation over itsuse (Giddens, 1984). The allocation and control of resources is integral to socialenterprise governance, as access to resources enables the organisation to meet socialobjectives by improving the service that they deliver.

Legitimacy is sought for the use of resources from the same group that will benefitfrom their optimal use. If the institutional values constituting social enterprises aredeveloped from the social needs of a particular group, the power of these values overthe allocation of resources, governance structure and control of managerial activityshould be ascertained. For example, social enterprise managers may have a distinctempathy towards their primary stakeholders and this may predispose them not to actagainst the best interests of defined beneficiaries. Alignment of the values and beliefsof managers and the institutional values of the social enterprise reduces the likelihoodof self-serving activity. In turn, it encourages governance arrangements that improvetrust and reduce the burden upon resources required for monitoring and control ofstaff. The institutional environment supports the values that social enterprises are

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founded upon, and influences the processes required to maintain the primacy of thesevalues.

The application of extant concepts from neoinstitutional theory to social enterprisegovernance may yield further insight. The role of regulative, and especiallyconstitutive, rules must be considered. Corporate governance is achieved by theadherence to certain standards of behaviour and performance demanded/expected ofinternal actors. These standards are explicit or implicitly set by primary beneficiariesof organisational activity, external institutions and society at large. Regulative rulesset the acceptable boundaries within which the organisation operates. Constitutiverules shape and define the roles performed by institutional actors to specificorganisational contexts and cultural environments. For example, constitutive rulesexplain how for-profit and social enterprises compete in the same markets. Theconstitutive framework shapes the institutional environment of social enterprises. Ingovernance terms, this is predominantly (though certainly not exclusively) a reflectionof the needs of the primary beneficiaries of organisational activity. The interplaybetween regulative and constitutive rules is important for understanding why socialenterprises are governed differently to other types of organisations. The internal,institutional, environments of for-profits are constituted differently from traditionalnon-profits.

Meyer and Rowan’s (1977) examination of organisation structure, and how it isshaped by the institutional rules, as myths, of the external environment. In this way,organisations are isomorphic because they internalise these institutional norms, andthis provides an alternative to the rationality-bounded conception of organisationstructure. These rules provide legitimacy and stability, but have the counter-effect ofreducing internal coordination prompted by the rational, bureaucratic organisation.This offers some theoretical explanation for the governance dynamic in socialenterprises.

Similarly, DiMaggio and Powell’s (1983) explanation of structural isomorphismpresents a lens with which to study the conditions under which social enterprisegovernance adapts to environmental pressures. For example, whether coerciveisomorphism is responsible for procedural changes in governance, occurring as a resultof formal and informal pressures on the organisation. Alternatively, mimetic ornormative isomorphism may present analytical interpretations of pressures andresistance to change. The role and importance of isomorphism on governance is adevelopment of recent work that justifies the application of isomorphism to socialenterprises (Reid and Griffith, 2006).

Importantly, it presents theoretical justification for the deeper, contextualexamination of institutional factors that influence the social benefit that socialenterprises produce. Paton (2003), in recognition of the potential impact ofisomorphism upon social enterprises, asserts that convergence is likely whereregulatory and other external environmental conditions are supportive of it. Hepredicts that the outcome of this process will be a social enterprise that is more heavilyregulated, and subject to greater oversight and pressure to be evidently accountable(Paton, 2003 p. 33). However, given that social enterprises have a different orientationto corporations, it should not be expected that the former would develop similargovernance structure to corporations. The historical context of social enterpriseprompts an assumption that there is a traditional, “accepted” method for operating

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these (or similar) organisations. If this tradition has been diffused and evolved overtime, embedded in cultural values that have been adapted to the social enterprise typefrom nonprofits and charities. The degree to which such evolution can occur dependson the strategic course that social enterprises take. This is a key challenge of the boardof directors and the institutional environment will influence how those strategicdecisions are taken (Oliver, 1991; Judge and Zeithaml, 1992).

Consideration must be given to symbolic and relational carriers of institutions, inparticular the role of symbols and routines in ensuring standards of behaviour thatreflect shared values (Scott, 2003). Understanding the types of carriers involved indiffusing institutions through organisational sectors could be useful when applied tosocial enterprise governance. This is because it places symbolic meaning to values heldbetween actors within the organisation. In the social enterprise, these values comprisea shared cognition of social needs, and the shared meaning of their achievement.

An important facet of governance is transparency and external verification ofaccountability. The means of achieving this is the social audit/accounting process.Scrutiny of governance activity performance, via a social audit, should provide a levelof accountability (or unaccountability) of an organisation. In an environment wherelegitimacy is sought on the basis of social and environmental (as well as financial)performance, improvement in the level of accountability should enhance the continuedlegitimacy of the organisation in the medium-term. However, to enable this, theoutcomes of accountability processes should be (re)enforced into the day-to-dayrunning of the organisation. The achievement of transparent and accountablegovernance is through routines, such as social auditing. Routines represent attempts toformalise processes for checking suitability of governance activity by key actors, suchas directors and trustees.

This perspective is useful because it explains how the institutional environmentmanifests control through routine processes. This illustrates how the central tenets ofinstitutions can diffuse from existing organisation types over time. They then arise innew, novel forms such as social enterprises. The norms of ethical business set theaccepted practice for all organisations with a primary social/environmental agenda.Social enterprises are a variety of such businesses, and adopt and adapt the routinestypically used to verify the required standards of performance. This is becauseexternal scrutiny of social, environmental and financial performance represents awillingness by internal actors to show their adherence to institutional norms and theiraccomplishment of shared goals. The key outcome of such routines and processes isbuilding and maintenance of trust in the abilities of directors and trustees. Importantly,such routines are also a key part of acquiring, and enhancing legitimacy.

LegitimacyA key aspect of the institutional environment is legitimacy, and the processes thatlegitimise the existence of the organisation. Legitimacy is defined by Suchman (1995,p. 574) as: “. . . [A] generalised perception or assumption that the actions of an entity aredesirable, proper, or appropriate within some socially constructed system of norms,values, beliefs, and definitions”. In examining the role of legitimacy in social enterprise,Dart (2004) outlined how Suchman’s categorisation of legitimacy could be applied tothis context. Pragmatic, moral and cognitive legitimacy, provide interestingperspectives on the nature of legitimacy in social enterprise. Further, these

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explanations offer insight into the ascendance of social enterprise as a direct result ofthem being a preferred method of organisation to meet social needs.

Pragmatic legitimacy has merit because it focuses on what is actually produced bythe organisation, as a means of legitimisation. However, where the expected level ofsocial benefit is not produced, social enterprise legitimacy is compromised (Dart, 2004).Moral legitimacy posits that legitimacy is attained when activities are conducted asthey should be done, irrespective of the results attained. Legitimacy is attainedprovided that all activities are in the interests of the group that provides legitimacy,namely primary stakeholders. Cognitive legitimacy is a more subtle form, reflectingupon the “preconscious” standards of how activities should be performed. This hasvalue in analysis of governance because legitimacy is contingent upon whethermanagerial activities fit (or otherwise) with implicit expectations of performance.

Therefore, the outcome of an effective, ethical governance system is theachievement of legitimacy. Legitimacy enables us to frame (and measure) theappropriateness with which a social enterprise is governed. Furthermore, thegovernance system and processes must be repeatable over time, to continuemeeting the needs of primary stakeholders, hence maintaining legitimacy. Theultimate aim for the social enterprise is long-term sustainability.

In advocating a multi-stakeholder approach, Borzaga and Solari (2001) assertthat social enterprises seek legitimacy both internally and externally. Theyconsider the multi-stakeholder approach more effective in the context of socialenterprise, compared with attempts to apply it in the for-profit sector, for example.So in adopting an institutional perspective of governance, consideration of thesetypes of legitimacy may help to explain the ascendance of particular governancearrangements. This aids an understanding of how governance arrangements havebeen developed due of endogenous and exogenous institutional pressures.

A key challenge for social enterprises is the development and evolution ofappropriate governance structures that suit the local, often unique mission of eachorganisation. This is an important step in matching the local needs of primarystakeholders with a governance process that enables managers to do this whilstremaining transparent and accountable. To enact this, asymmetries of informationbetween managers and stakeholders must be reduced to achieve a balance betweenefficiency and social impact. A complication is that social enterprises vary in thedegree to which they are “business-focused” in achieving social aims. This“hybridisation” involves conjoining two opposing functions: maximising socialbenefit using business methods. In practice, there is little guarantee of regulardialogue between different levels of staff, the board of directors and stakeholderrepresentatives.

The adopted or developed governance system needs to be adaptable to ensure thatactors can legitimate their activities and stakeholders can be fairly represented indecision-making and ensure normative legitimacy. Spear (2001, p. 253) asserts thatmany of the successful cooperatives in the UK may have achieved this success at thecost of eroding “their guiding values”. A crucial aim of the governance of socialenterprises is to guard against this erosion and in the long-term achieve theappropriate balance between competing claims upon resources. The act of seeking andachieving normative legitimacy is realised via the efficiency with which the socialenterprises prioritise and deliver social benefit (Dart, 2004). The methods for achieving

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this have previously been framed in a stakeholder theory context, though alternativeapproaches (such as stewardship and institutional theories) are put forward elsewhere(see Low, 2006).

ConclusionsThe field of social enterprise governance offers a variety of opportunities for furtherconceptual and empirical study. At present, there is a growing body of literaturespecifically focused on social enterprise governance. A significant part of this literatureis concerned with the application of extant concepts of stakeholder theory andstewardship theory.

Stakeholder theory presents moral justification for the management of a range ofgroups who affect or are affected by an organisation. From a social enterprisegovernance perspective, these groups are (or at least should be) explicit andgovernance processes should prioritise their interests. A major criticism of thisapproach is that there needs to be more emphasis on how to prioritise between groupsof stakeholders.

Stewardship theory offers the view that to properly accommodate these needs, thefocus should be on the role of non-economic factors (such as trust) in facilitatingoptimal social benefit. The basis of this view is that managers are not motivated bypurely self-serving interests, and are pro-organisational. It shifts the focus onto therelationships within the organisation that, in social enterprise terms, influence thesuccessful delivery of social benefit. This provides a clear link with thecultural-cognitive factors prevalent in neoinstitutional theory.

The neoinstitutional approach advocated in this paper facilitates a broadexamination of the macro- and micro-environment and how this influences socialenterprise governance. Simultaneously, actors in the social enterprise environment canshape their own organisational processes (i.e. governance), influenced by institutionalelements and legitimacy seeking activity.

Neoinstitutional theory provides the analytical tools required to explain how andwhy social enterprises are governed. This is due to the centrality of the social missionthat social enterprises pursue, placing emphasis on strong ethical values consistent atall levels of the organisation. Institutional theory offers a range of explanations forunderstanding what makes these organisations unique. Also, it exposes how thiscommitment influences how they are structured relative to institutional pressures andmaterial/resource requirements. Understanding how legitimacy is sought and acquiredin these organisations is a crucial task. This is because it may shed light on the natureand development of governance arrangements that they adopt to ensure legitimacy,that are distinct from those understood in the existing governance literature.

Future workOne avenue for further study may be an examination of the nature of institutionalisomorphism upon governance structure (cf. Laville and Nyssens, 2001). The externalenvironment (including regulatory) is one where “role models” and “sector champions”are presented as best practice examples, for example the Furniture Resource Centre, theDay Chocolate Company, and Greenwich Leisure (Sesnan, 2001; Dearlove, 2002; Tiffen,2002). Empirical study could test the presence and impact of isomorphic change uponsocial enterprises, particularly in light of evidence of a significant relationship between

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isomorphism and legitimacy (Deephouse, 1996). The influence of constitutive rules inshaping the institutional environment, and understanding the relevance of routinesand symbolic elements, would also add depth to current understanding of socialenterprise governance. The variety of social enterprise types, allied with their growthon an international scale, offers diversity and challenge to researchers investigating thephenomenon of social enterprise.

Furthermore, the variables influencing legitimacy in social enterprises offer anopportunity to study how governance systems facilitate an effective performancereporting process. Of prime importance are governance systems that promotetransparency and efficacy. It follows that these systems engender accountability andsustainability, which are of importance if the social enterprise sector is to continue toprovide value to the social economy (Paton, 2003; Pearce, 2003). A key challenge is tointegrate and build upon the extensive non-profit performance measurement literaturewith the growing area of social enterprise governance.

Performance measurement is already a key aspect affecting internal and externalaccountability (Paton, 2003; Somers, 2005). This research provides critical insight intothe rationale and effectiveness of performance measurement systems. In other sectors,particularly the private sector, performance measurement and governance aresynthesised into scorecards (Strenger, 2004), and reporting systems (Sherman, 2004).Given the unique and varied nature of social enterprise, it would be valuable toascertain if the particular governance arrangements have a significant impact uponperformance (both of the organisation and individuals).

The appropriateness of stakeholder theory as a definite basis for understandingsocial enterprises needs to be determined more explicitly. The role of moral obligationsto stakeholders may prove to be useful on practical level to boards and managers ofsocial enterprises (Dees, 1998; Low, 2006). Laville and Nyssens (2001) outline that froman institutional economics perspective there are multi-ownership factors in the socialenterprise that require careful examination. The prevailing stakeholder model doesallow for governance that promotes diversity at board level and integrates a variety ofclaims into strategic planning. However, stewardship theory may be more appropriatein accommodating the evolving characteristics of social enterprise (Dees, 1998; Dart,2004; Low, 2006).

In conclusion, there is already a growing body of literature in the area of socialenterprise governance and the field is both emergent and evolving. The key challengefor future research into the social enterprise governance may need to focus on aprincipal task – namely, further empirical study of the range of theoretical optionsoutlined above. At the present time, practitioner-focused research is at a premium. Thefuture outcome of the steadily growing body of social enterprise governance theorymust be useful in assisting the task of social enterprise governance. Boards of directors,trustees, managers and stakeholders all contribute to social enterprise governance tovarying degrees, and want to contribute to the development of their boards and thegovernance of their organisations.

As the body of evidence accumulates, neoinstitutional theory offers an interestingoption for such research. Furthermore, it extends the debate of governance, demandingthat a holistic view of governance arrangements considers the influence of values andbeliefs on corporate governance practice.

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Corresponding authorChris Mason can be contacted at: [email protected]

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