The governance of social enterprises: Mission drift and accountability challenges in hybrid organizations

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Abstract

We examine the challenges of governance facing organizations that pursue a social mission through the use of market mechanisms. These hybrid organizations, often referred to as social enterprises, combine aspects of both charity and business at their core. In this paper we distinguish between two ideal types of such hybrids, differentiated and integrated, and we conceptualize two key challenges of governance they face: accountability for dual performance objectives and accountability to multiple principal stakeholders. We revisit the potential and limitations of recently introduced legal forms to address these challenges. We then theorize about the importance of organizational governance and the role of governing boards in particular, in prioritizing and aligning potentially conflicting objectives and interests in order to avoid mission drift and to maintain organizational hybridity in social enterprises. Finally, we discuss future research directions and the implications of this work for rethinking traditional categories of organizations, namely business and charity.

Introduction

One of the most profound trends in the social sector over the past thirty-five years has been its steady rationalization and marketization (Eikenberry and Kluver, 2004, Mair and Hehenberger, 2014, Hwang and Powell, 2009, Powell et al., 2005, Smith and Lipsky, 1993). Nonprofit or charitable organizations, whose primary activities have traditionally been premised on achieving a social mission, are increasingly adopting practices that are typically associated with business (Frumkin, 2002, Tuckman and Chang, 2006, Young and Salamon, 2002). Since at least the 1980s, charities have generated a substantial portion of their revenues from the sales of goods and services, especially in the arts, education, and healthcare sectors (Child, 2010). And they have experienced a growing shift toward the hiring of professional managers, and the adoption of formalized practices such as strategic planning, independent financial auditing, and quantitative evaluation and performance measurement (Brest, 2012, Bromley and Meyer, 2014, Ebrahim, 2003b, Hwang and Powell, 2009).

This gradual sector-wide change is epitomized by the growth of so-called “social enterprises,” organizations whose purpose is to achieve a social mission through the use of market mechanisms (Mair and Marti, 2006, Kerlin, 2009, Santos, 2012). Social enterprises are neither typical charities nor typical businesses; rather they combine aspects of both. Their primary objective is to deliver social value to the beneficiaries of their social mission, and their primary revenue source is commercial, relying on markets instead of donations or grants to sustain themselves and to scale their operations. For these organizations, commercial activities are a means toward social ends. As such, social enterprises are hybrid organizations that combine aspects of both charity and business at their core (Battilana and Lee, 2014, Besharov and Smith, 2014, Mair et al., 2014, Galaskiewicz and Barringer, 2012). Microfinance organizations that aim to help poor entrepreneurs by giving them access to financial services are a well-known example of social enterprises.

Although social enterprises are viewed as promising vehicles for the creation of both social and commercial value (Sabeti, 2011), they are at risk of losing sight of their social missions in their efforts to generate revenue, a risk referred to as mission drift (Fowler, 2000, Jones, 2007, Weisbrod, 2004). This concern echoes a long tradition of scholarship in organization studies that has highlighted the risk for organizations and their workforces of losing sight of their purpose and values in the quest for organizational survival and efficiency (Selznick, 1949, Weber, 1952). It has also been a central concern of research on organizational governance in the social sector – which may be understood as “the systems and processes concerned with ensuring the overall direction, control and accountability of an organization” (Cornforth, 2014: 5) – particularly regarding the internal means through which governing boards and managers ensure that organizations remain focused on their social goals (Chait et al., 2005, Cornforth and Brown, 2014, Drucker, 1989). Although the risk of mission drift is not specific to social enterprises, it is especially acute for them for two main reasons. First, because they are dependent on commercially generated revenue in order to financially sustain their operations, they are inherently at risk of giving priority to their commercial activities – which enable them to generate revenues and thereby survive – over their social activities which enable them to achieve their mission. Second, the consequence of mission drift for social enterprises is severe as it threatens their very raison d’être: if social enterprises lose sight of their social mission, they will fail to achieve their goals of delivering social value to their beneficiaries.

Social enterprises thus face a unique governance challenge: how to handle the trade-offs between their social activities and their commercial ones, so as to generate enough revenues but without losing sight of their social purpose. In terms of organizational governance, social enterprises offer a rich subject of study as they combine not only potentially conflicting goals (social and financial) but also potentially divergent stakeholder interests. In this paper we adopt an accountability lens to unearth these challenges of governance facing social enterprises. It is a function of governance to articulate both for what an organization is accountable, and to whom it is primarily accountable (Behn, 2003, Ebrahim, 2010, Kearns, 1996, Mulgan, 2000, Najam, 1996, O’Neill, 2002). Our main argument is that social enterprises face distinctive governance issues associated with these dimensions of accountability.

Social enterprises are accountable for both a social mission and for making profits (or surplus). By virtue of their hybrid nature, they are therefore required to achieve both social and financial performance. Traditional corporations and charities also increasingly track performance in these domains. However, social enterprises that combine social and commercial activities in their core face a distinct challenge because their definition of success includes both dimensions. These dual objectives are not necessarily aligned and are oftentimes contradictory, thereby often creating a risk to the mission. In addition, while methods for assessing financial performance are well established, the assessment of social performance generally lacks standardization and comparability (DiMaggio, 2002, Ebrahim and Rangan, 2010, Paton, 2003).

Social enterprises are also accountable to multiple “principal” stakeholders. They are confronted with often diverging interests of the beneficiaries targeted by their social mission and of their funders or investors. This is not a straightforward principal-agent setting in which the problem for principals or owners, as represented by governing boards, is to ensure that managers carry out their interests (Dalton, Hitt, Certo, & Dalton, 2007Eisenhardt, 1989, Jensen and Meckling, 1976, Przeworski et al., 1999). Instead, it is a context in which there are multiple principal stakeholders (Freeman, 1984, Mitchell et al., 1997) with different objectives, some of which can enforce their interests and others who cannot. In order to hold managers accountable in such settings and to avoid mission drift, a key task of governance is the proper alignment and prioritization of diverse and sometimes conflicting interests.

In this context we probe two aspects of governance. First, we examine a series of newly emerging legal forms that have been explicitly designed to enable organizations to pursue both social and commercial objectives. We revisit the specific structures of ownership, financing and enforcement mechanisms prescribed by these “legislative experiments,” and we clarify their potential and limitations with respect to accountability for dual objectives and accountability to multiple stakeholders.

Next, we discuss organizational governance, paying particular attention to the role of governing boards, in addressing these same challenges. In doing so, we find it useful to distinguish between two ideal types of social enterprises. Whereas all social enterprises engage in social activities meant to achieve their social missions and in commercial activities meant to generate revenue, the level of integration between these two sets of activities varies across them (Battilana et al., 2012, Battilana and Lee, 2014; Lee, 2013). For some organizations, the activities that are primarily targeted toward serving the beneficiaries and thereby achieving the social mission are separate from those that are targeted toward serving customers and thereby generating revenue; for others they are the same. In this paper, we refer to the former as differentiated hybrids (DH) and to the latter as integrated hybrids (IH) (Battilana et al., 2012).

Integrated hybrids achieve their mission by integrating beneficiaries as customers. Most microfinance organizations are examples of integrated hybrids: they pursue their social objectives by providing loans to their beneficiaries who are also their customers. The primary activities in which they engage when they make loans to the poor enable them both to pursue their social mission and to generate revenue to sustain their operations. Such an integrated model does not exist only in microfinance. For example, consider VisionSpring, an organization that delivers affordable, high-quality eyeglasses and sunglasses to the poor in emerging market countries. Its social purpose is to provide improved vision and, as a result, greater economic opportunities and productivity for visually impaired individuals who can’t easily afford or access eyeglasses. The organization seeks to achieve its social objective through an extensive distribution network of local organizations and also by hiring and training poor local women, whom it calls vision entrepreneurs, to visit villages and sell glasses for a price of less than four dollars per pair (Karnani, Garrette, Kassalow, & Lee, 2011). VisionSpring's beneficiaries are its paying customers.

With differentiated hybrids, the social activities are separate from commercial ones. The profits generated by commercial activities, such as the selling of products and services, are used to fund social activities that help beneficiaries who are not the primary customers of the goods or services. In differentiated hybrids, customers and beneficiaries are thus two distinct groups. The Belgian organization, Mobile School, is an example of such a differentiated hybrid (Battilana et al., 2012). It provides educational materials to street children worldwide. Children who live on the streets have access to “a mobile school,” basically a box on wheels, which contains blackboards and educational games and can be pulled through the streets of a city. As these children are not able to pay for the products offered and services provided, Mobile School sustains its operations through offering corporate training programs to multinational and smaller corporations.

We draw on the examples of Mobile School and VisionSpring throughout this paper, arguing that integrated and differentiated hybrids warrant distinct mechanisms of governance for avoiding mission drift and for ensuring that hybridity can be sustained. In doing so, we open up new avenues for research on how social enterprises, and hybrid organizations more broadly, can resolve the accountability problems arising from potentially competing objectives and expectations from multiple and diverse stakeholders (Cornforth and Brown, 2014, Ebrahim, 2010, Renz and Andersson, 2014). Each of these dimensions of accountability creates tensions that are likely to persist throughout the life of the organization. In addressing these challenges, we complement the literature on social enterprises (Galera and Borzaga, 2009, Mair et al., 2012) and contribute more broadly to the organization theory literature on organizations that combines different organizational forms (Haveman and Rao, 2006, Padgett and Powell, 2012, Battilana and Lee, 2014).

The paper proceeds as follows. First, we elaborate on the governance challenges facing social enterprises and expose the risk of mission drift that these organizations must confront in maintaining their hybridity. We build on the distinction between our two ideal types of hybrid organizations, integrated and differentiated hybrids, to further develop the sets of governance challenges they face: accountability for dual performance objectives and accountability to multiple principal stakeholders. We then discuss various means of addressing these governance challenges. More specifically, we probe the roles of new legal forms and organizational governance in monitoring the relationship between social and commercial activities, in monitoring manager performance through control strategies, and in enacting meaningful forms of accountability to beneficiaries. Finally, we close by highlighting how this paper contributes to research on governance, social enterprise, and more broadly on hybrid organizations, and we outline an agenda for further research.

Section snippets

Governance and the risk of mission drift

Social enterprises have existed for a number of decades in certain sectors such as education and healthcare, as well as in member cooperatives and mutual associations (e.g., Cornforth, 2004, Schneiberg et al., 2008). For example, the hospital industry in the United States is populated by both for-profit and nonprofit entities that rely heavily on commercial revenues for their survival (such as the Hospital Corporation of America and Partners HealthCare, respectively). In the field of higher

Accountability for what? Dual performance objectives

From a corporate governance perspective, the purpose of traditional business firms is to create value for their owners or shareholders. While they may consider non-financial interests, directors are generally expected under for-profit corporate law and convention to maximize shareholder wealth (Aguilera and Jackson, 2010, Brakman Reiser, 2010: 644). This emphasis on financial performance for private gain provides an important anchor for accountability within business firms. In contrast, the

Accountability to whom? Aligning principal stakeholders

In addition to overseeing dual performance objectives, organizational governance also involves accountability to multiple principal stakeholders. The problem of multiple accountabilities is not unique to social enterprises, but it is arguably more thorny than in traditional businesses and charities. The problem lies in how to align the interests of various stakeholders, or demanders of accountability, and whose interests to prioritize when those interests conflict.

Business firms have many

Discussion

Social enterprises force us to rethink traditional categories of organizations as they offer a fourth way of organizing that is distinct from business, nonprofit, and governmental organizations. The combination of commercial and social activities in their core is certainly not without precedent, as they have existed for some time in sectors such as healthcare and education, and have also played an important role in American welfare capitalism of the 1800s and the trajectories of welfare regimes

Conclusion

At a time when questions about reforming our economic system remain acute, social enterprises invite optimism as well as caution. They seem to offer a promising way of creating both economic and social value. However, we need to have a better understanding of the conditions under which they can successfully sustain their hybrid nature over time and achieve high levels of both social and financial performance, as well as the conditions under which they are unlikely to succeed. According to

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    We are grateful to Ting Wang for research assistance, Art Brief and Barry Staw for insightful feedback, and Dana Brakman Reiser, Ed Carberry, Chris Cornforth, Marion Fremont-Smith, Joe Galaskiewicz, and participants at the 2012 European Group for Organizational Studies (EGOS) conference in Helsinki for their very helpful comments and suggestions.

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