The concept of ‘social enterprise’ predates the rise of the Community Interest Company (CIC), introduced in 2005 under the New Labour government. This legal form has come to monopolise the concept of social enterprise in the UK, adopted by a wide range of community groups, co-operatives, and larger-scale organisations, whose activities and objectives must fall under the banner of being ‘for the benefit of the community’. But given its numerous problems, and the other more democratic options available, why is it still seen as advantageous?
As we approach the twentieth anniversary of the introduction of the CIC, it seems that across purpose-driven entrepreneurship and the third sector, it’s become the standard model. This is all despite the fact that the overwhelming majority of CICs I’ve met over the last 20 years – in my capacity as a business advisor – have largely been unable to articulate what it is about this legal form that meant it was the ‘best fit’ for their activities, values, and community. And in recent years, we’ve seen the Charity Commission and CIC Regulator agree to a ‘conversion process’ for CICs finding that the legal form is inhibiting their ability to achieve their purpose.
My apparent interest in the motivations and understanding of those who choose the CIC form is based on a starting point of asking – “Why?” and “What does the research and evidence say about this?” On both counts, I have remained puzzled as to why the CIC is perceived to be advantageous, and has seen such rapid growth. The most recent State of Social Enterprise report by Social Enterprise UK shows that the CIC is now becoming the most popular choice for social entrepreneurs to incorporate with, for the first time since its introduction.
Let’s start at the beginning of the story. In the early 2000s, the concept of social enterprise was increasingly becoming a buzzword across the public and third sectors: the NHS had created a social enterprise unit; national public sector contracts started to reference social enterprise in procurement documents; Big Society Capital was formed to help better identify financing gaps; and several sector bodies, such as UnLtd, Social Firms England, and Social Enterprise UK, developed and ran ‘replication’ – social franchising – programmes.
But none of the strategies for the sector identified either actions or priorities for the creation of a new legal form. With the plethora of options that already existed in 2002 – such as companies, charities, co-operatives, societies, and partnerships – it was largely accepted that there wasn’t a need for a new one, and that social enterprises weren’t really that concerned with legal forms. In 2002, the Department of Trade and Industry’s report, Social Enterprise: A Strategy for Success, even remarked that “many social enterprises point out that the legal model is only the vehicle for their activities, not the defining feature.” There were, though, many references to the need to develop a clear ‘brand’ for social enterprise to make it more visible and recognisable in all its forms. In the following years, new accreditation bodies worked to realise this ambition through the introduction of the Social Enterprise Mark, the Star Social Firm, and more recently, the Social Enterprise World Forum’s verification standard. However, one person who was inspired by the Department of Trade and Industry’s report was the late Stephen Lloyd. As a lawyer at Bates Wells & Braithwaite, Lloyd had a passion for the reform of the charity sector, and his involvement in the conception of the CIC was influenced by his ambition to "achieve a marriage of private and business wealth with charitable purposes". According to Lloyd, it was “hatched over a bottle of claret in Balls Brothers Wine Bar”, rather than in consultation with the existing sector, which might go some way to explaining why it has subsequently struggled to realise its aspirations.
Why did it take nearly 20 years to become the most popular model choice for social enterprise?
Despite being introduced to widespread interest and support from various bodies representing and advocating for the wider social enterprise sector, and policy makers alike, it’s taken nearly 20 years for the CIC form to be reported as having now become the most popular choice for social enterprises to adopt (based on bi-annual mapping of the sector by Social Enterprise UK). CICs are presented as having special characteristics that clearly distinguish them in contrast to other Companies, namely social objectives, an asset lock, and a cap on how much profit can be shared amongst private individuals. But all of these constitutional features have not only been available to any company to adopt, but also have been protected by Companies House, since 1985. This is probably why the simpler Company Limited by Guarantee steadfastly remained the most popular choice for social enterprises, recognised in Social Enterprises UK’s bi-annual state of the sector surveys until 2023.
It was also anticipated that CICs would allow social entrepreneurs to access grant finance nearly as easily as charities – who at the time were also being encouraged to become more ‘businesslike’ to help generate efficiencies that it was generally believed by state policy makers would lead to them becoming more sustainable. Further, in having a simpler registration process and more flexible governance arrangements than a charity, this new form would appear to be more appealing to any organisation seeking to create social change. However, many reports, including the CIC Regulator’s 2020 Annual Report, highlight that this is not the case: most CICs are wound up within two years of being formed because they find themselves unable to access funding in the way that they believed they would be able to.
The powers of the CIC Regulator might also seem daunting: it can remove and appoint Directors at will; restrict and future changes to trading activities that a CIC might want to make; refuse a request by the CIC to wind itself up; and sue other people in a CIC’s name. But bear in mind, since they were based on existing company law, a CIC can be formed and run by a single individual, so to try and protect the reputation and brand of all CICs, these powers might seem a prudent safeguard. But we also do not know if, how, or how often the CIC Regulator uses these powers to protect the CIC brand, because they choose not to divulge such information. The regulator states that their grounds for this apparent secrecy is to protect the wider reputation of CICs from damage – but that’s a contrary position to the regulators of all other legal forms used by social enterprises and community businesses (Companies House, the Charity Commission, and the Financial Conduct Authority) who all recognise that transparency is actually a vital part of building and maintaining trust.
Crucially, in enabling groups to affect systemic change rather than merely alleviate symptoms of problems in their communities, CICs are prohibited from engaging in any political activity. This means that due to the legislation that underpins this form, CICs cannot promote or oppose any proposed laws or policy that the government or any other public body may be looking to introduce; do anything that may be seen as supporting a political party; or influence the choice people may make in an election or referendum. In being so ‘stifled’, how can they address and tackle the root causes of issues that their communities are struggling with? CICs also seem to struggle to be a model that anyone or any group looking to create or set up a new venture can easily adopt. Typically, those who start a business can usually receive their economic rewards through dividends on the shares they hold in it, which can justify an inability to pay themselves in the early years of the business. However, with their built-in asset locks and limits on how much profit can be (re)paid to shareholders, founders of CICs are able to extract relatively little by means of reward and remuneration for their efforts and risks in the way that they would be able to in a private company form. That is if they’ve even chosen to become a CIC with the option of private shares – most don’t as this precludes them being able to apply for grants, instead opting to be 'limited by guarantee'. This leaves CICs only being able to recognise the efforts of their founders through employing them on a payroll, which is risky and expensive for any start-up enterprise, or contracting them on an ad hoc basis as sessional workers.
So with CICs unable to assure their founders that they’ll be able to be reimbursed at a future date through share dividends, and struggling to pay them otherwise through a fixed salary, their founders will need greater personal wealth and access to support to sustain themselves in this uncertain early period. CICs are, therefore, an option that is only realistically usable by the middle classes, rather than allowing for a truly transformative model for the masses – as co-operatives and mutuals have been historically.
There have also been a few ‘wrinkles’ in the CIC form that have come to light in its early years, too. The original CIC legislation relating to governance allowed for circumstances where a Director might automatically have the vote of another Director without any need for their consent, agreement, or permission (and CICs were the only legal form in which this could happen). This would seem to cut against a lot of the values of social enterprise in terms of empowerment, responsibility, and autonomy, especially for co-operatives, many of whom seemed to be adopting the CIC form when it first became available. However, following a public exchange between myself and the CIC Regulator in 2009 (assisted by founder editor and CEO of Pioneers Post, Tim West), they delivered a “quieter consultation” and changes were made to the legislation that governs how CICs are managed by their members and boards.
This also touches on the wider theme of democratic ownership which can often seem to be blocked in public policy and narratives. Social enterprise as a concept predates the CIC form, but emerged from the more widely established “economy within an economy” of co-operatives and mutuals. But with understanding of these democratic models of enterprise seemingly low and slow to spread, in the era of CICs being introduced, public policy became more interested in approaches that allowed for more dynamism and responsiveness to the open marketplace, and in ways that would encourage private investment alongside traditional grant-making bodies in an attempt to more closely link the meeting of social needs in communities with commercial opportunities. The prioritising of newer forms and structures over established democratic models during this period perhaps helps to understand why CICs suddenly found themselves in favour with these policy makers.
But as with the apparent oversight in the design of their governance, the rush to introduce the CIC in UK legislation created other issues. There is no requirement for a CIC to actually trade. As a result, the broad policy approaches that pushed forward the CIC as a structure of choice for would-be social entrepreneurs has also meant that many CICs remain heavily reliant on grants to sustain them. Perhaps this is a sign that the parallel policies of encouraging charities to become more ‘businesslike’ have been more successful.
There is also concern for CICs with regard to their accountability. CICs can be registered by, and remain legally answerable to, a single person. This is in direct contrast with charities, co-operatives, mutuals, and other community associations, all of which recognise the importance of having a wider body of people who can act to validate and protect the groups’ purpose, activities, and leadership. This is further entrenched by there being no requirement for CICs to involve their defined ‘community of interest’ in any of its decision making. There is only one section of a CIC’s annual report where the CIC Regulator asks how stakeholders have been consulted, but also allows for the CIC to not have undertaken any such consultations in that year.
Without such democratic models, the risks of a CIC ‘drifting’ from its original purpose and intent, particularly through rounds of future succession in its management or board, are significantly increased. As a result, the community and assets of a CIC are protected only by the CIC Regulator, yet details of any investigations it opens or actions it takes against individual CICs are not revealed. As this contrasts with the regulation of the other legal forms, we don’t know how widely this concern may be happening, and what actions have been needed to protect the interests of the affected community.
The benefit that such transparency might offer seems to ebb and flow over time. Charting the number of complaints made about individual CICs to the Regulator suggests that whilst initial concerns about them peaked within their first ten years, there’s been a resurgence of concern about how many of them have acted during the pandemic and initial lockdowns:
If all that sounds like CICs haven’t been going that well, their numbers suggest a problem, too. The CIC Regulator’s annual data shows they’re a declining population of legal form, and although the pandemic seemed to offer a resurgence of interest, this has quickly diminished:
So, nearly 20 years after their inception:
● CICs have an origin story that is at odds with all the other legal forms used by social enterprises
● Initial legislation forced social enterprises and co-operatives adopting it to compromise on some of their core defining values and identities
● The Regulator is not transparent and seems intent on not talking about what we can learn from when things go wrong
● There appears to be a reluctance amongst CICs to engage in trading activity to help sustain their impact
● And there is a pervasive myth about how they can help social entrepreneurs to access grants.
However, what the last 20 years have also shown is that the CIC form has offered communities and social entrepreneurs some clear benefits. It was recognised as one of the few legal forms eligible to apply for Social Investment Tax Relief (alongside charities and Community Benefit Societies). In comparison with these other recognised forms, the CIC was perhaps the most ‘light touch’ with regards to administration and ease of registration which allowed more communities to consider accessing this investment support than may otherwise have been able to.
Regardless of the myths and misinformation, the fact that it exists has given people a new currency of vocabulary to discuss and develop ideas in ways that they struggled to before. It’s unleashed more latent activism in people trying to get their ideas off the ground for making the world a slightly better place for all of us. Perhaps that’s the greatest legacy and impact that the CIC form has created in these last two decades: enabling people to realise that they have more power than they thought in starting new projects and activities that seek to fix different challenges.
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Adrian Ashton is a freelance advisor and consultant who works across social, private, and public sectors. As well as working on a variety of themes and topics in client projects, as part of his ongoing commitment to CPD* he seeks to undertake occasional research projects in his own time, based on published data sets from various sources. These are openly shared via his blog at thirdsectorexpert.blogspot.com
He’s also known for his love of props when on video calls and leading workshops, and holds the world record for the most number of annual consecutive impact reports published on the same organisation. linktr.ee/adrianashton
(*not what you think it stands for)
