1 Introduction: Definition of Social Enterprise

Social enterprise (SE) can be described as a complex and variegated phenomenon marked by different extensions and connotations according to the legal system of reference. The definitions of social enterprise indeed are numerous and differently characterised in the various legal systems.Footnote 1 For example, with regard to the countries belonging to the Western legal tradition, Europe and the United States have different approaches towards SE.Footnote 2

In Europe, social enterprise is traditionally considered an alternative to charities,Footnote 3 while the United States has embraced a broader view of SE, including profit-oriented businesses organisations involved in socially beneficial activities, hybrid dual-purpose businesses mediating profit goals with social objectives, and non-profit organisations engaged in mission-supporting commercial activity.Footnote 4 However, from a general perspective, it is possible to identify a common element characterising social enterprises regardless of the legal structure used, namely, the positive impact generated by the entity in the territory and the community in which it operates, through the creation of positive externalities or the reduction of negative externalities.

In this contribution, a broad definition of SE is accepted. Moving from such broader definition, the focus will be on a specific area of the social enterprise spectrum, that of the hybrid dual-purpose businesses, thus conceiving social enterprises as private organisations, particularly profit-making companies, that carry out commercial activities—with an economic method—to pursue economic, as well as social and environmental objectives.Footnote 5 Companies with a double (or blended) purpose, profit-making and “common benefit”, operating in accordance with the so-called “triple bottom line” scheme (the 3P scheme, regarding people, planet, profit), which takes into consideration the social, environmental, and economic result of the company.Footnote 6

2 The Evolution of Social Enterprise Hybrid Legal Forms: A Comparative Law Perspective

From a legal perspective, the development of laws aimed at regulating social enterprises is related to the debate on the use of existing entities, particularly for-profit legal structures, for the conduct of “hybrid” (profit and non-profit) businesses.

Some legal systems, such as the United States, Germany, and Switzerland, do not have problems of systematic interpretation related to the logical coherency of the system itself in the use of for-profit structures by social enterprises because they generally allow the use of the business structures (e.g., corporations/companies limited by shares, or limited liability companies) for non-profit activities. Other legal systems, such as France and Italy,Footnote 7 provide for the use of for-profit structures mainly (unless specific exceptions are prescribed for by law) for the pursuit of profit-making purposes (although business companies may seek social benefit, e.g., through philanthropy or other corporate social responsibility (CSR) activities,Footnote 8 not as their primary objective but as a secondary and eventual objective), and reserve other legal forms (i.e., non-profit legal forms) such as associations and foundations for philanthropic activities.

However, a significant body of scholarship and business leaders argue that the existing for-profit entities, also in countries allowing their use for hybrid purposes, are not sufficient for the development of the modern social enterprise sector.Footnote 9 The most relevant issues about the use of for-profit organisations concern: i) the safeguarding of the “fidelity to the mission” following a change of control,Footnote 10 and ii) the predominance of the shareholder wealth maximisation principle as a parameter that directors must consider in their decisions, to avoid claims for breach of fiduciary duties.Footnote 11

To overcome all these limitations and the dissatisfaction with the for-profit/not-for-profit dichotomy, in the past few decades, several legal systems from the Americas to Europe, have introduced new hybrid entities designed to adequately meet the needs of social entrepreneurs and capable of bringing together social and environmental aims with business approaches.

Since the 1980s, the United States has experienced rapid growth in the modern SE movement with the proliferation of new hybrid forms, such as the low-profit limited liability company (L3C)Footnote 12 introduced for the first time in Vermont in 2008,Footnote 13 the social purpose corporation (SPC) introduced in California in 2011 (formerly known as the flexible purpose corporation),Footnote 14 and the benefit corporation introduced in Maryland in 2010.Footnote 15 The latter is reflected in a more comprehensive model legislation (the Model Benefit Corporation Legislation – Model ActFootnote 16), and currently implemented by 36 states plus Washington DC and Puerto Rico.Footnote 17 In North America, British Columbia – Canada, followed the U.S. example introducing the “benefit companies” in 2020.Footnote 18

With regard to Europe, sustainable development has long been at the heart of the European project, but European countries and Institutions have long adhered to a narrow view of the social enterprise, considering it as a synonym for charitable activities rather than a genuine blended-value enterprise.Footnote 19 As a result, the social enterprise movement in Europe is mainly focused on the development of third sector services, on areas from which the welfare state had retreated, and operates through non-profit associations, foundations, or cooperatives, which are generally characterised by the non-distribution constraint.Footnote 20

A different approach has been taken by the United Kingdom, which in 2004 introduced a new hybrid model specifically designed for SE, the “community interest company” (CIC), consistent with the evolution of the SE movement towards blended enterprises aimed at pursuing social and environmental goals as well as generating shareholder wealth.Footnote 21 CICs represent the first step towards a new blended-value entity, but they have as primary purpose the pursuit of social and environmental objectives and are characterised by limits to the distribution of dividends.

From this perspective, the most innovative legal structure introduced in Europe in 2016 is the Italian “società benefit” (SB), which is the legal transplant of the U.S. benefit corporation.Footnote 22 A few years later, in 2019, also France, going further the development of the “Économie Sociale et Solidaire”,Footnote 23 introduced a new hybrid legal status similar to that of the benefit corporation, the “entreprise à mission”, allowing for-profit companies to incorporate social and environmental aims into their corporate purpose.Footnote 24

Latin American countries are also exploring new models of growth that focuses not solely on making profits but also on a social and environmental mission.Footnote 25 A legal model designed for SE is pending introduction in several states, such as ArgentinaFootnote 26 and Chile,Footnote 27 while, between 2018 and 2020, benefit corporations have been transplanted in Colombia,Footnote 28 EcuadorFootnote 29 and PerùFootnote 30 through the introduction of the “Sociedades de Beneficio e Interés Colectivo” (BICs).

Finally, the spread of new hybrid legal structures also reached the African continent. At the beginning of 2021 in fact, Rwanda passed the benefit corporation legislation introducing the so-called “community benefit company” and becoming the 7th country in the world to provide this option.Footnote 31

3 Philanthropic Purposes and For-profit Corporation

Observing the convergence of the legal systems in the implementation of hybrid entities statutes to support the development of SE one wonders why in the context of the for-profit sector, traditionally characterised by a self-interest purpose (materialised in the maximisation of profits and their distribution to the shareholders), the need has been felt to introduce altruistic or philanthropic aims right into the articles of association’s corporate purpose clause.Footnote 32

It is particularly difficult to find an answer analysing the phenomenon through the inflexible lenses of the economic analysis of law (EAL) or the neoclassical economics and its homo economicus paradigm, according to which human beings are rational and selfish actors, focused entirely on maximising their own material well-being.Footnote 33 Once accepted the rational choice theoryFootnote 34 indeed, appears to be difficult to justify those human conducts led by altruistic and disinterested behaviours (such as the inclusion of altruistic purposes within the corporate purpose of business companies).

Nonetheless, the observation of the reality shows that the unselfish prosocial behaviour is very common in human social life (as also demonstrated by several social dilemma experiments),Footnote 35 suggesting the need for re-thinking the behavioural paradigm of the homo economicus that is not apt to explain inclination towards altruism and cooperation that is, to the contrary, a fundamental and universal aspect of human behaviour, as much as selfish conduct and the pursuit of material well-being.Footnote 36

In this sense, new behavioural models suitable for explaining the physical and juridical world can be found both in the studies of Behavioural Law and Economics (aimed at highlighting the cognitive variables within the decision-making processes of individualsFootnote 37 and the reasons underlying human behavioursFootnote 38), as well as in the “multi-faceted approach” to juridical phenomena that is typical of the Yale School of economic analysis of law (the so-called “Law & Economics”).Footnote 39

Regarding this latter, an impressive starting point for the reconstruction of the phenomena of altruism and beneficence, useful for our purposes, is offered by a recent contribution of Guido Calabresi.Footnote 40 According to the author, altruism, beneficence, and similar values exist in the empirical reality not simply as “means” for the production of other goods and services, but also because they constitute “ends in themselves”, they are desired as “goods in and of themselves” to satisfy the desire of which individuals are willing to pay a price.Footnote 41

Using the arguments employed by Calabresi, hybrid entities (or SEs), although apparently in contrast with the concept of maximising individual, are therefore made logical when considered as the products of a new way of interpreting economics, in which the purposes, selfish (profit-making) and altruistic (public benefit), are both desired by the shareholders as goods in and of themselves. Both purposes enter the company’s articles of association and by-laws, legitimising the pursuit of business strategies that can turn out to be less profitable in terms of immediate profit and maximisation of wealth for the shareholder,Footnote 42 but also capable of generating wealth to be shared with the community and the territory. Hence, if we look at the public benefit purpose pursued by social enterprises as a good in and of itself, desired by members/shareholders, the social enterprise model cannot be deemed irrational merely because it does not correspond to the behavioural model of the homo economicus.

In his analysis of altruism, beneficence, and non-profit institutions, Calabresi also underlines how the individuals’ need for altruism as good in and of itselfFootnote 43 shows in several forms: the desire of individual altruistic behaviors’ (private altruism), altruistic behaviours by the State (public altruism) and altruistic behaviours by private firms (firm altruism). In this last case, it can show both as non-profit companies and as philanthropic activity undertaken by for-profit companies.Footnote 44

From the perspective of for-profit companies, traditionally, the answer to the request for firm altruism was embodied in “corporate philanthropy” activities and programmes, thus supporting beneficial causes and achieving a positive social impact through contributions in cash or in kind. But using the categories employed by Calabresi, it can be affirmed that social enterprise constitute a further manifestation of firm altruism, more efficient (from a law and economic perspective) than the not-for-profit organisations, because devoid of the limits of the nondistribution constraint, and characterised, compared to philanthropy, by a deeper and lasting impact on environment and civil society, given the integration of altruistic values within the framework of the company purpose clause contained in the articles of association.

4 Social Enterprise as a Bottom-Up Process

Social enterprise statutes are thus the new legislator’s policy response to the growing demand for firm altruism emerging from civil society. SE law indeed, can be described as a bottom-up phenomenon.

In the last decades, especially due to the financial crisis, increased inequality, ethics-based corporate scandals, and the rise of awareness on climate change’s risks, a profound reconsideration of the current economy and the capitalist system has begun, pointing out the need for a broader and deeper involvement of companies in generating a positive impact on the environment and the society. The idea of corporations not only as a tool for maximising shareholders’ profits but also as an essential means for the resolution of social and environmental problems has spread, basically increasing and strengthening the demand for firm altruism.

Nowadays, many voices are supporting the cultural transition from the shareholders’ capitalism model to a new form of stakeholders’ capitalism. Among them, for example, it is worth mentioning the proposals offered by the Catholic social doctrine through Pope Francis landmark encyclical Laudato sìFootnote 45 in which the predominant paradigm of the profit maximisation is placed in doubt in favour of an “integral ecology” (namely environmental, economic, social and cultural) aimed at the protection of the common good.Footnote 46

With regard to international institutions, the Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy adopted by the International Labour Organisation,Footnote 47 the UN Global Compact,Footnote 48 and the UN 2030 Agenda for Sustainable Development and its 17 Sustainable Development Goals (SDGs)Footnote 49 can be mentioned. As far as the European Union is concerned, the call for sustainability has been supported by the Europe 2020 strategy for a smart, sustainable and inclusive growth Footnote 50 and, recently, in the context of the recovery plan following the SARS-CoV-2 pandemic, by the Communication Europe’s Moment: Repair and Prepare for the Next Generation.Footnote 51

The increasing desire of firm altruism seems also confirmed by several market studies.Footnote 52 People hold companies as accountable as governments for improving the quality of their livesFootnote 53 and the improvement of society is considered the first goal that every company should pursue according to a study conducted among millennials from eighteen different countries.Footnote 54 Regarding consumers, a growing number already aligns its purchases with its values and consider sustainability in its purchasing decisions.Footnote 55

Investors as well, are increasingly interested in financing socially conscious businesses, see e.g., the BlackRock statement of February 2019 on sustainability as the future of investing.Footnote 56 This contributed to the growth of the socially responsible investing (SRI) movement,Footnote 57 the emergence of specific stock markets (i.e., Social Stock Exchanges) and indices (e.g., the Dow Jones Sustainability Indices and the Financial Times Stock Exchange 4Good), as well as the development of ESG criteria (with reference to environmental, social and governance) and sustainability assessment tools (such as the Global Impact Investing Rating System (GIIRS), the Global Reporting Initiative (GRI) Standards, the Sustainability Accounting Standards Board (SASB) standards, or the “B Corp” certification issued by B Lab).

Even in the labour market, an additional value is recognised by students and employees to companies that can make a positive social and environmental impact.Footnote 58

Moreover, in the last years, the debate about corporate purpose and the “problem of shareholder primacy” has intensified among legal academics and business scholars,Footnote 59 and the relevance of firm altruism has been recognised also by the business community. In 2018, BlackRock CEO, Larry Fink, called for companies, together with delivering financial performance, to pursue a “social purpose”, a positive contribution to society. Footnote 60 While in August 2019, nearly 200 CEOs representing the largest U.S. companies that are members of the Business Roundtable released a “Statement on the Purpose of a Corporation”, which moves away from shareholder primacy and includes a fundamental commitment to all of a company’s stakeholders. Footnote 61

The answer of the law to this strong demand for firm altruism coming from the civil society has been the introduction of new hybrid organisational forms suitable for the social enterprise and characterised by a governance structure appropriate for incorporating within the decision-making process altruism as good in and of itself, as a new company purpose equivalent and complementary to the profit-making purpose.

The hybrid forms regulated by the legislators in the various legal systems can be characterised by different features due to path dependency but is possible to identify a certain level of convergence on issues such as the dual company purpose,Footnote 62 new duties of conduct for directorsFootnote 63 and disclosure requirements.Footnote 64 This convergence is due to the circulation of legal models, particularly that of the U.S. benefit corporation, and to the actual global dimension of markets and economies.

5 New Challenges for the Social Enterprise

The spread of the social enterprise phenomenon and the hybridisation process of business companies’ purpose has given new life to the old debate on the nature and the purpose of the corporationFootnote 65 (and, generally, of for-profit entities). The emergence of new hybrid entities together with the growing awareness of the risks of climate change and the role of sustainability in businesses has led to an evolution of corporate and financial law towards the acceptance of the environmental and philanthropic dimensions.

An example can be offered by the European Union path in the harmonisation of company law that over recent years seems to have opened to a more comprehensive protection of stakeholders’ interests in for-profit entities, almost bringing traditional business companies closer to the social enterprise model.

The growing importance of sustainability and its perception as an added value for profit-making companies triggered an intense activity of revisioning and updating the European rules applicable to financial markets and company law. From an initial promotion of voluntary CSR programmes through the development of soft law instruments such as the European Strategy on Corporate Social Responsibility,Footnote 66 the focus has been shifted to the introduction of mandatory rules requiring the adoption of sustainable business practices. Among them, the Directive on non-financial reporting,Footnote 67 the Directive on long term shareholder engagement,Footnote 68 the Regulation on sustainability-related disclosures in the financial services sector,Footnote 69 and the recent Regulation on the establishment of a framework to facilitate sustainable investment.Footnote 70 Moreover, a directive on corporate sustainability reporting,Footnote 71 a directive on supply chain due diligence,Footnote 72 and a directive on directors’ duties and sustainable corporate governanceFootnote 73 are currently under consideration by the EU institutions.

Given the global nature of markets, it is possible to identify two new challenges that the social enterprise will have to face, i.e., the harmonisation of SE organisational forms, and the relevance and comparability of impact assessment metrics.

The first concerns the utility of some forms of unification or harmonisation of the fourth sector organisational forms, the social enterprise sector, in which firms integrate social and environmental purposes with the business method. From the international perspective, the unification/harmonisation of domestic regulation of hybrid companies can help foster a common approach for the development of a strong fourth sector, thus increasing trust and facilitating cross-border investment and trading within the sector itself. From the domestic law perspective, the introduction of a well-known and recognised international hybrid entity model may play an important role in the development of a domestic fourth sector and in enhancing the credibility and branding aspect of these companies in a global market perspective.

The second challenge is related to the essential role of reliable impact assessment metrics and their comparability. It is essential that positive effects generated by social enterprises and communicated to third parties through periodic reports are evaluated through metrics suitable for appraising the real impact generated on several areas (such as the environment, the community, and the employees and other stakeholders) and capable of guiding firms to improve their strategy and performances. Moreover, the freedom for companies to choose the impact assessment metric to use and the global market perspective emphasise the importance and the necessity of metrics comparability. They should be recognised internationally to boost public trust in social enterprises. The large number of private standards and frameworks in existence make it difficult for the public to understand and compare companies’ results. For this reason, the trend towards a worldwide convergence and simplification and standardisation of impact assessment metrics and sustainability reporting standards must be supported and strengthened.