The Governance of Social Enterprises - Managing Your Organization for Success

SCHWAB FOUNDATION FOR
SOCIAL ENTREPRENEURSHIP

The Governance of
Social Enterprises
Managing Your
Organization for Success

June 2012

Authors
Mirjam Schöning, Head of the Schwab Foundation for Social Entrepreneurship, joined the
Foundation in August of 2000 at its inception and has been shaping the strategy and activities
TUM School of Management of the Foundation as a pioneer in the field of social entrepreneurship.
Ann-Kristin Achleitner
Judith Mayer Abigail Noble, Head of Latin America and Africa for the Schwab Foundation for Social
Entrepreneurship, joined the Foundation in 2010 and is a World Economic Forum Global
Leadership Fellow.

Andreas Heinecke, Founder of Dialogue Social Enterprise, and was named Social
Entrepreneur of the Year 2007 by the Schwab Foundation for Social Entrepreneurship. He
holds a PhD in Philosophy and is a Professor for Social Business at the European Business
School in Germany.
SCHWAB FOUNDATION FOR
SOCIAL ENTREPRENEURSHIP
Ann-Kristin Achleitner holds the Chair in Entrepreneurial Finance and is Scientific Co-Director
at the Center for Entrepreneurial and Financial Studies (CEFS) at Technische Universität
Schwab Foundation for Social
München. Her research focus is in the areas of venture capital, private equity, family firms and
Entrepreneurship
social entrepreneurship.
Mirjam Schöning
Abigail Noble
Judith Mayer is research assistant at the chair in Entrepreneurial Finance at the Technische
Universität München . Her research focuses on the relationship between social investors and
social entrepreneurs and protection of double bottom line in mission focused businesses.

European Business School
Andreas Heinecke

© World Economic Forum

2012 - All rights reserved.

No part of this publication may be reproduced or transmitted in any form or by any means,
including photocopying and recording, or by any information storage and retrieval system.

The views expressed are those of certain participants in the discussion and do not
necessarily reflect the views of all participants or of the World Economic Forum.

REF 070612

Contents Foreword

3 Foreword This document was conceived by social entrepreneurs for social
4 1. Introduction – Creating Your Board
entrepreneurs and those contemplating to start a social enterprise.
Two years ago, a group of social entrepreneurs from the Schwab
4 1.1 What is governance? Why is Foundation community came together to identify the issues on
it important for social which they wished someone had provided guidance when they
enterprises? were embarking on their social enterprise journey.
4 1.2 Why create a board?
In 2010, the first challenge they took was social investment. Many
4 1.3 How should boards evolve had struggled with questions such as if and how to raise capital
over the lifespan of a social
from social investors, whether they should sign a non-disclosure
enterprise?
agreement or not and simply which social investors to approach.
6 1.4 How do I choose the right The experience and questions of the Schwab Social Entrepreneurs
governance structure? Hilde Schwab were taken up in the first publication of the task force, called the
11 1.5 What is the right size for my
Chair, Schwab Social Investment Manual.
board? Foundation
for Social Based on the success of the Social Investment Manual, Andreas
12 1.6 How do I recruit the right Entrepreneurship Heinecke, Founder of Dialogue Social Enterprise, convened the
board members? task force during the World Economic Forum Meeting on Europe
13 1.7 How should I appoint board in Vienna in June 2011 to discuss the next logical step after social
members and for what term of investment. The task force identified Corporate Governance of
time? Social Enterprises and, in particular, Boards. Many investors
14 2. Managing Your Board for Optimal demand a change in governance structures as a result of investing
Performance in an organization. This requires social entrepreneurs to think about
creating a board if they do not already have one and managing it in
14 2.1 What are the rights and an optimal way.
duties of my board members?
15 2.2 What are the roles and Boards bear the potential to greatly enhance the mission of a social
responsibilities of the board enterprise, if careful thought goes into the right composition and
chair? management. Governing boards also have significant influence and
can take social enterprises into different directions than intended
16 2.3 How do I create a board
culture? by the founders. Many entrepreneurs of social businesses which
Mirjam Schöning generate attractive financial returns find over time that their boards
17 2.4 How should management Head, Schwab might be tempted to choose higher profitability over deeper social
report to the board? Foundation impact. Overruled by investors’ priorities, many founders have left
for Social their organizations. Among others, this document addresses the
17 2.5 How do I evaluate the work
of a board? Entrepreneurship question of how social enterprise leaders can protect the social
mission of their organization through the governance structure.
18 3. Conclusion
20 4. Appendix While this is a manual by social entrepreneurs, it would not have
been written without the crucial support of Professor Ann-Kristin
20 4.1 Board composition and tasks Achleitner and Judith Mayer from the Technical University Munich.
over the lifecycle We are greatly thankful to Professor Achleitner for providing her
21 4.2 Link of financing instruments deep expertise gathered over years as Chair of the Institute of
and governance requirements Entrepreneurial Finance on governance in small and medium
enterprises. We would like to thank Judith Mayer for her close
21 4.3 Conflicts of interest
collaboration with the social entrepreneurs of the task force through
22 4.4 Template for a quarterly regular calls, interviews and a survey to compile this manual.
update
23 4.5 Example of impact value We hope this manual will serve as a practical tool for social
chain entrepreneurs and will find its way into university courses. However,
it is only as useful as you find it. We hope, therefore, to hear your
24 4.6 Reporting cycle feedback to incorporate into subsequent versions.
25 4.7 Example of a board self-
assessment questionnaire
32 4.8 orporate governance
guidelines and codes of best
practice
34 4.9 Rules of procedure for
boards

37 5. Task Force Members of the Schwab Note: This is a “living document”. Please help us to strengthen it with your feedback
Foundation Community and comments.
Contact us at: abigail.noble@schwabfound.org and judith.mayer@wi.tum.de
38 6. Sources

The Governance of Social Enterprises 3

1. Introduction –
Creating Your Board
1.1 What is governance? it demonstrates the lack of understanding – Ensure the vision and legacy: Boards
of how boards can facilitate an enterprise’s include and empower carefully selected
Why is it important for success and make the management team’s individuals to guide the enterprise.
work easier. Furthermore, of those social This ensures the organization’s vision
social enterprises? enterprises that have a board, many fail to succeeds beyond the efforts of the
Governance is formally defined as “systems engage their board actively in the strategic founder or management team.
and processes that ensure the overall guidance and oversight of their organization.
This represents a lost opportunity. – Signal credibility to external
direction, effectiveness, supervision and
stakeholders: Investors, contractors and
accountability of an organization” (Cornforth,
Most countries have developed guidelines customers may trust the organization
2003). Governance mechanisms can
around governance and boards for the more if it has well-regarded board
include governing boards, monitoring
corporate and often also for the non- members.
systems and signalling mechanisms like
profit sector. See Appendix 4.11 for a
reporting or codes of conduct.
comprehensive list of national governance
The focus of this document will be on guidelines and codes of best practice. 1.3 How should boards
creating and managing boards, while
acknowledging that the governance of
evolve over the lifespan of
social enterprises covers a broader field 1.2 Why create a board? a social enterprise?
than governing boards.
For social enterprises, governance is key to No single governance structure fits all social
Social enterprises address the most both overseeing compliance with policies enterprises or even fits the same enterprise
pressing problems societies face through and regulations and to safeguarding the over time. Rather, governing boards
employing scalable, self-sustainable and organizational mission while meeting should be tailored to the organization and
innovative business models. They must the demands of various stakeholders. be dynamic to the changing needs of
balance financial responsibilities and Social enterprises limit their potential and the organization over its lifespan. Social
social impact and must coordinate among undermine their mission when they do not enterprises should evaluate and modify
multiple stakeholder groups, including invest appropriate effort and thought into their governance structures regularly
investors, employees, regulators, clients and creating a well-functioning board. In short, and in particular during the following
beneficiaries. As a result, social enterprise if applied correctly, a board strengthens, circumstances:
leaders manage complex trade-offs. not weakens, the leadership and helps to
ensure the success of the social enterprise. – The enterprise reaches the next lifecycle
A carefully selected, well-designed and stage
well-managed board will help the social Boards can help management teams reach – The legal structure of the enterprise
enterprise reach its goals. Yet many social their enterprise’s goals and mission in changes
enterprise leaders are reluctant to set up several ways:
a board.1 They express concern that a – The financial structure of the enterprise
board will limit their management team’s – Provide strategic support and expertise: changes, most commonly related to the
effectiveness. While this is a valid concern, Organizations can compensate for shareholder base
a lack of in-house competencies or
– The external environment changes (e.g.
expertise through board members.
1
new government regulations)
Remark to legal regulations: While some legal forms require the
inclusion of a supervisory board or non-executive board members, – Provide access to networks: Board – The founder steps down
others do not. As shown below there are several reasons to
establish a board even if it is not legally obligatory. There are two members open doors to valuable
types of voluntary boards: informal boards without any regulations external networks (e.g. fundraising,
and boards formally organized by documents like bylaws or rules
of procedures. All aspects within the manual should be considered advocacy and the recruitment of high
as recommendations. It is important to obtain applicable laws and talent).
make sure to comply with them.

4 The Governance of Social Enterprises

Introduction – Creating Your Board

1.3.1 The enterprise reaches the Figure 1: Exemplary board composition and main tasks over the lifecycle;
next lifecycle stage: governance
needs to adapt
During the start-up stage when
experimentation and innovating is
necessary, social enterprises may rely on
advisory committees or informal boards
(i.e. boards without any legal obligations
or decision-making authority) given
these allow for more flexibility. As social
enterprises scale, they should establish
more formal governance structures.
During transitional stages, governance – Create mission & vision – Increase visibility – Detect further business
mechanisms are crucial, especially when – Approve business plan – Enhance and preserve opportunities
the social enterprise’s brand is well – Consult key stakeholders culture (quality control) – Prove system change
known, the environment is complex and – Define performance – Provide resources achieved (advanced impact
important decisions must be made. When indicators & benchmarks & network access measurement)
the social enterprise’s business model is Plan succession
mature, governance may evolve into a

more participative structure. A participative See Appendix 4.1 for a more comprehensive description of board composition and tasks
structure ensures that the well-established over the lifecycle
enterprise remains in touch with its
stakeholders and true to its vision, mission
and goals.

1.3.2 The legal structure of 1.3.3 The financial structure 2. Equity, grants, non-repayable hybrid
enterprise changes: governance of the enterprise changes: capital: Limits the decision-rights on
how funds are used as equity investors
needs to adapt governance needs to adapt and donors require active involvement in
those decisions. However, equity stakes
While the governance of a non-profit Capital providers are an influential
do not require continuous repayments,
enterprise is mainly concerned with stakeholder within governance, and can
and therefore can be more financially
achieving its mission, the governance of therefore play an important role in the
attractive for growing enterprises.
a for-profit enterprise focuses primarily on success of the social enterprise’s mission.
shareholder return. If a social enterprise is Equity investors, for instance, often strongly See Appendix 4.2 for a link of financing
organized as a for-profit entity, mechanisms influence the operations of an organization. instruments and governance requirements
have to be put in place to safeguard the Thus, it is important that the interests of the
mission while controlling for a reasonable investors be aligned with the mission of the A recent study found that social enterprises
shareholder return. social enterprise. use multiple capital sources to be financially
sustainable and to grow (Monitor Group,
Some governments have recognized this This alignment might not be problematic 2012). Often traditional investors want to
need and established legal structures at the early stages of a social business or mitigate their risk by having philanthropic
that protect the social mission as well as when profits are achieved at the same time capital committed to the enterprise.
financial obligations of the enterprise, such as a strong social impact. However the Philanthropists solely focus on the social
as Benefit corporations (B-Corps), low- interests of the founder and equity investors return and do not require a financial return
profit limited liability companies (L3Cs) and may diverge when the organization takes while investors mandate a healthy financial
Community Interest Companies (CICs). decisions that require a trade-off between return in addition to a positive social return.
the founding social mission and achieving Governance is key to balance the different
In the countries that do not recognize a financial return. These often lead to capital providers’ interests as well as to
these legal structures, social enterprises cumbersome board struggles. ensure the enterprise remains true to its
may create a hybrid legal structure, which mission.
consists of both a for-profit and a non-profit During the discussion and negotiation
entity. In many cases, the non-profit entity process with investors, social enterprises There are two solutions to mitigate the
will hold a golden share in the for-profit should therefore look beyond the cost of influence of investors in creating mission drift:
entity, allowing the profits to be used to capital to the non-financial terms in which
run the non-profit activities. Some have a the financing is provided. Funding sources 1. Create non-voting shares for equity
central board or ensure that 50% of the for- can be categorized in two groups: investors that are content with a more
profit ownership is with the board members passive role. This allows key actors (e.g.
1. Debt, repayable hybrid capital, the founders) to keep the organization on
of the non-profit entity.
mezzanine capital: Offers the social mission.
enterprise more decision-rights on how
the funds are used. However, they limit 2. Retain the right of social entrepreneurs
the cash-flow available for operational (written into the constitution or charter of
investments, and therefore can limit the their organization) to select a set number
growth plans of the enterprise. of board members.



1.3.4 The external environment 1.4 How do I choose
changes: governance needs to
the right governance
adapt
structure?
When a government implements new
policies and regulations and the social There is no “one size fits all” for social
enterprises must change the way they enterprises. Specific organizational factors
operate, such as new reporting standards like size, complexity or maturity influence the
for enterprises or new regulations optimal governance structure. The following
for a particular industry (disclosure table explains how the circumstances
of microfinance terms or educational of a social enterprise lead to specific
enterprises requiring additional certification considerations the enterprise must address
and approvals), the social enterprise must to create a well-functioning governance
ensure it has within its own organization structure.
and board the means with which to manage
these new requirements and hold itself
accountable. Table 1: Choosing the right board structure; own illustration

Social enterprises can adapt to the changes Instructions: Social entrepreneurs should consider all circumstances mentioned and then
in the environment by institutionalizing combine the recommendations.
new practices and policies that automate If none of the statements below applies, social enterprises should consider Option 1 and “keep it
compliance with new regulations and simple”.
policies. It is also a best practice to make
CIRCUMSTANCE CONSIDERATION RECOMMENDATION
sure someone on the board is able to
oversee and hold accountable compliance Organization operates in Governance is needed to
with these new regulations and norms. one country with a clearly provide overall “good health” Option 1: Keep it simple
Three possibilities exist to ensure this: executable strategy checks on the enterprise
an existing board member develops that
expertise, the board recruits a new member Organization operates across Governance must include Option 2: Several boards;
several countries or regions local knowledge refer to box 01
with that expertise, or the board develops a
committee dedicated to those compliance Organization has several The work of the boards must Option 2: Several boards;
issues. boards be well coordinated refer to box 01

Option 3: Board commit-
1.3.5 The founder steps down: Board faces a high workload Current board’s capacity is
tees and task forces; refer to
governance needs to adapt or specialized tasks insufficient to fulfil tasks
“Committees”

The start-up and scaling stages. This often Option 4: Advisory council
Organization cannot insure People might be reluctant to
ensures the founding mission and vision plus legally binding board;
board against lawsuits join the board
are woven into all strategic decisions but it refer to box 02
also means that the power and influence of Target group cannot assume Option 4: Advisory council
the enterprise rests in one person. When Target population should be
legal liabilities due to a lack plus legally binding board;
a founder steps down, the governance represented on the board
of experience refer to box 02
structures must step in to fill the void. The
board itself can replace the founder as the Organization has a hybrid le- Governance is a mechanism
Option 5: Hybrid organization-
key decision-maker during the transition gal structure (mix of for- and to coordinate actions and
al structures; refer to box 03
period as well as institutionalize the mission, non-profit) safeguard the mission
vision and values into the culture of the
enterprise and into the operations.

The board as well as management should 1.4.1 OPTION 1: Keep it simple system where the management board and
plan the succession a long time ahead the supervisory board operate in parallel
and include it within the strategy. Actions The simplest structure is a single governing is often seen in continental Europe (e.g.
that could be taken by boards include the board, with either a one-tier or two-tier Germany and the Netherlands).
following: structure. In Anglo-Saxon influenced
countries, (e.g. the USA and UK) the one-
– The board could select a new chief tier system, where there is a single board
executive officer (CEO) from its own composed of both the management team
members who is already familiar with and external non-executive members, is
the operations and the strategy of the more common. The one-tier system usually
business. refers to a board of directors.2 The two-tier
– The board could provide support to a
new external CEO. The board may also
find a suitable mentor for the CEO.
2
For reasons of simplification, we will mainly be talking about
boards and board members in the manual, referring to supervisory
boards, advisory boards or non-executive board members.



Figure 2: Two-tier vs one-tier structure; own illustration

1.4.2 OPTION 2: Several boards There are two ways to structure relations and greater risk of mission drift of the
among several governing boards. One, enterprise. On the other hand, a vertical
Organizations that operate across several all boards have equal rights (horizontal board structure, which puts more effort into
countries or with several subsidiaries might structure). Two, the boards have a ensuring alignment across all units, restrains
have several governance boards. Here, the hierarchical or vertical structure. While a the independence of the units and therefore
enterprise can differentiate according to local horizontal structure is more democratic and is less likely to be effective within enterprises
circumstances and align across geographies facilitates autonomous decision-making that thrive on the diversity of operations
and sectors. The disadvantage with this among the units, enterprises with horizontal and practices as well as on continuous
model is increased coordination efforts and boards are more likely to have divergence innovations.
management of the boards. in strategy and practices across the units

Several boards, vertical structure

Case study: Lumni designs and manages social investment funds that invest in the education of diversified pools of students across Colombia,
Chile, Mexico and the USA. Students who graduate pay a fixed percentage of their income for 120 months after graduation. Lumni has a separate
board for each region and a member of each regional board is represented on the board of Lumni’s head office.



For social enterprises that are expanding Committees
into new markets and scaling into new
Table 2: Board committees: Purposes and membership; own illustration
geographies, vertical governance structures
can help ensure the centralized coordination
of strategy and operational alignment. Task/Purpose Proposed Members
However, for social enterprises that prefer to
scale using a decentralized approach (e.g. Audit and finance committee
franchising) a vertical governance structure
might limit local autonomy for growth - Finance: Help with the preparation of the annual Finance experts
decisions and a horizontal governance budget; review performance against budget;
structure empowers local decision-making scrutinize major capital expenditures
and differentiation.
- Investment: Appoint and oversee investment Experts with investment and
Social enterprises with several boards can advisers; advise on investment strategy valuation know-how
align and coordinate across boards by: - Audit: Oversee the annual audit; review the Audit experts
adequacy of internal control systems; oversee risk
– Requiring all its boards to use a uniform management; oversee the accuracy of financial
reporting template across all entities statements and reports
– Ensuring one representative of each - Compliance: Ensure compliance with agreed Legal experts
board participate in an annual cross- structures and law; deal with breaches
entity meeting
- Fundraising: Oversee the fundraising strategy; Board members with a wide
– Encouraging the transparency of contribute ideas and contacts; provide governance network and fundraising skills
performance metrics and creating a oversight of fundraising activities*
“positive competitive pressure” among
the entities on shared enterprise goals Human resource/nomination/remuneration committee
and practices
- Compensation: Advise board on remuneration of Senior board members;
1.4.3 OPTION 3: Board the CEO; advise on overall remuneration policy independent board members
committees and task forces - Nomination: Plan board and committee Independent board members
succession; manage search and selection process;
Some organizations establish committees oversee election process and the induction of new
within the board to delegate ongoing board members
functions and to leverage members’
capabilities. As committees lead to increased - Human resources: Oversee employment policy Well connected board
workload, they should be created only for and procedures; hear disciplinary appeals and members
specific work streams and when specific complaints
skills sets are required. Examples are:
Service and research committee
– Audit and finance committee: Scrutinizes
capital expenditures, oversees financial - Provide advice on issues regarding main services, Members with specific know-
and support research and development of new how and background in the
statements
concepts organization’s industry
– Human resource committee: Focuses
on key senior appointments and *It is not common to have fundraising committees in the corporate world. However, when boards should help with
fundraising, such a committee might be relevant.
compensation

Task forces of a temporary nature and
invitations of external experts are an option
when the work content is more dynamic and
benefits from external perspectives.



1.4.4 OPTION 4: Advisory council
plus legally binding board
Board membership requires significant
experience and knowledge not only because
that is what the enterprise requires but
because board members can be held liable
before the law if they do not perform their
duties diligently. Therefore, it is often hard to
include certain stakeholder groups (e.g. the
target group) if they do not possess sufficient
expertise and experience. Furthermore,
some prospective board members, such as
key customer stakeholders or celebrities,
might be reluctant to join a board if they
are not insured against lawsuits. To
accommodate this, the social enterprise can
set up an advisory council in which members
are not legally liable. For some individuals,
the prestige attached to serving on a formal
board as opposed to an informal advisory
council outweighs the potential legal liability.

Note: if a member of an advisory council
has significant decision-making power for
the enterprise, the courts may deem this
member a “shadow director” and hold him/
her liable (see CIC regulations; Community
Interest Companies, 2005).

Advisory council in addition to legally binding board
Case study: Aidha is a “micro-business school” that offers more than 1,000 micro-entrepreneurs
per year skills training to entrepreneurs at the bottom of the pyramid



1.4.5 OPTION 5: Hybrid Hybrid organizational models
organizational structures Example: Projeto CIES has created a “hospital in a truck” that has offered over 24,000 people in
15 Brazilian cities advanced technology for 10 medical specialties.
Social enterprises sometimes combine
non- and for-profit legal entities within their
organization. An additional legal entity
is often created out of necessity, e.g.
investor requirements. It is important that
the governance of both entities be well
coordinated and that both be steering
towards the same mission. The following box
shows case studies on how to coordinate
several legal entities in order to serve a
common mission.

Example: The Homeless World Cup works across 70 countries and uses football tournaments to
end homelessness.



1.5 What is the right size
for my board?
The optimal size of a board depends on the
needs of an organization. Large boards (>12
members) create more administrative and
coordination efforts and include the danger
of ineffective oversight due to some board
members free-riding on the efforts of others.
Among the social enterprises in the Schwab
Foundation network, for-profit social
enterprises tend to have smaller boards
than non-profit social enterprises.

s.
Table 3: Median board size; Survey Size = 71; own illustration

Organizational model Non-profit model Hybrid model For-profit model

Median number of board members
10 6 5
(only non-executives)

Especially in the US, donors are often
granted a board seat and large boards often
constitute fundraising boards. In contrast,
boards of for-profit organizations are rather
kept small in order to stay manageable.
Research on board effectiveness suggests
that smaller boards positively influence
organizational performance (Eisenberg et
al., 1998). Furthermore, an uneven number
of board members seems favourable to
facilitate the decision-making process.

Table 4: Considerations on board size



1.6 How do I recruit the Table 4: Skills grid to determine skills gaps, based on Hudson, 2011

right board members?
Minimum
John Ann Daniel Susan SUM
Many early-stage social enterprises build level
boards out of their network of family and
friends. While this may reduce the initial Experience in the sector
2 0 0 1 3 2
(e.g. early childhood education)
effort, it can be a disadvantage at later
stages if board members do not possess
the relevant skills, representation, network Start-up experience
0 1 0 1 2 2
(e.g. worked for 1+ yr in start-up)
and reputation to provide strategic guidance
and oversight to the social enterprise.
Finance skills
0 2 0 1 3 4
To search for capable board members, (e.g. CFA, CFO experience)
social enterprises can:
Fundraising skills
0 1 0 0 1 2
(e.g. network of HNWI)
– Solicit recommendations from investors,
foundations and other social enterprises Legal skills
0 1 2 0 3 2
(e.g. lawyer or barrister)
– Search through intermediary platforms
(e.g. www.bridgestar.org) Accounting/audit skills
0 0 2 0 2 2
(e.g. CPA)
– Research, identify and reach out to
people with expertise in or passion for Marketing/public relations 1 2 0 0 3 2
the cause

– Attend networking events and ask [0= no relevant experience; 1 = some knowledge; 2 = substantial skills; Red lines: skills gaps]
intermediaries for support in making
contacts

In selecting potential board members, social
enterprises should regard the following: 1.6.2 Representation of beneficiaries in the board with a consulting
stakeholders function only, without granting them voting
– Alignment with financial and social rights.
objectives: Board members who have Governance is not simply about protecting
shareholder rights but about safeguarding Note: When selecting board members, social
worked with double bottom lines or
and balancing the interests of all enterprises should be aware of potential
have deep commitment to social
stakeholders. conflicts of interest.
responsibility are more likely to ensure
the organization remains true to its
Stakeholders include investors, customers/ See Appendix 4.3 for further information on
goals.
beneficiaries, employees, government conflicts of interest
– Complimentary personality: Dominant officials or relevant community members (e.g.
Research by the Schwab Foundation
personalities can influence day-to- people who reside in the neighbourhood of
showed the following in relation to board
day business for their personal goals, the social enterprise). Boards with members
membership:
which can put the whole enterprise from various stakeholder groups represent a
at risk. Furthermore, powerful people larger variety of perspectives, which serves
– Overall, there is a strong focus on
could intimidate other board members. to legitimize the operations of an enterprise
expertise within board membership:
Thus, the ability to work in a team is in front of these stakeholders. However,
experts from business are the largest
an important characteristic of board multiple stakeholder boards may require
represented group (included in over 70%
members. more active management when stakeholders
of all boards).
are resolute in defending narrow interests
1.6.1 Expertise instead of the interests of the whole – Investors were mostly included in boards
organization (Spear et al., 2007). of for-profit social enterprises (>60%) but
Boards benefit from having members with quite seldom in boards of non-profit or
diverse areas of expertise and experience as Some social enterprise boards seek hybrid social enterprises (<30%).
they provide new insights and perspectives representation from target populations.
(Siciliano, 1996). Some areas of expertise Several cooperatives and microfinance - Vice versa, the target group was more
are needed by all social enterprises, such institutions, for example, opt to include frequently represented in non-profit social
as legal, financial and accounting expertise. representatives of their clients or beneficiaries enterprises (>60%) than in boards of for-
An organization should consider the current on their boards. One caveat with this profit or hybrid models (<30%).
skills set of its senior management team and approach is that the beneficiaries might not
board when selecting new board members. have relevant expertise and experience as a
A skills grid may help a social enterprise board member to provide strategic oversight.
evaluate where there are gaps in its skills. Alternative approaches are to create a
supplemental client advisory council, to
include advocates of the interests of the
beneficiaries on the board or to include



Figure 4: Background of board members; Survey Size = 71; data was obtained by sending a
survey to the social entrepreneurs of the Schwab Foundation; own illustration

1.6.3 Network access and – Where do you see the enterprise and the
reputation sector within the next 5-10 years?

– How much time can you devote to
A social enterprise can raise awareness
attending board meetings?
or legitimize its work by choosing board
members with esteemed reputations. – Which skills or other benefits (like
Well-regarded board members can facilitate networks) can you provide to our
external connections and attract similarly enterprise?
talented and respected people to join the
board. Yet, they can also weaken board Most boards limit terms to 2-3 years and
functioning if they yield disproportional allow for up to four terms. Advantages of
influence in decision-making or if they limited terms are that it is easy to get rid of
are highly risk averse to protect their own certain board members. However, it also
reputation. induces additional efforts to recruit and
elect new board members. Boards should
predetermine its rotation process. It is good
1.7 How should I appoint practice to have staggered terms to ensure
board members and for both the retention of valuable skills and
the infusion of new ideas, expertise and
what term of time? perspectives. Board members should ask
themselves regularly whether they are still
Nomination and election of board members adding value or can no longer provide any
frequently differs among for- and non-profit benefits for the enterprise. When electing
organizations. While, shareholders of for- new board members, social enterprises
profit organizations often maintain the right should rethink the size of their board.
to nominate/select a significant part of board
members, nomination and election in non- In the short term, a well-run board can
profits is often based upon a wider range provide valuable and time-saving guidance
of stakeholders or upon the members of a to the management team. In the long term,
membership organization. it can ensure the success of the social
enterprise. On the flip side, a poorly run
Relevant questions to ask potential board board can make the management team’s
members before selecting them include: work more difficult.
– What is your understanding of the This chapter focuses on how management
mission and vision? teams can create the optimal performance
– How would you measure the success? of the board through addressing key board
(expectations of social, financial return) tasks, responsibilities and communications
procedures as well as building a high-
performance work dynamic.


2. Managing Your
Board for Optimal
Performance
2.1 What are the rights
and duties of my board
members?
The focus of management should be
on execution, while the focus of the
governance body should be on providing
guidance and oversight. Boards should
not get involved in day-to-day operations
but should oversee the results of these
operations. Senior management must
ensure that the boards’ decisions are
implemented.
Figure 5: Board tasks; see Kreutzer & Jacobs, 2011 for figure and a description of the types
Boards serve two primary responsibilities:
support and oversight. While many view
these as mutually exclusive, they are
complementary in a high-performing
organization.


Managing Your Board for Optimal Performance

2.1.1 Support – Succession of the chief executive and In one-tier or voluntary boards, a single
the management team person often exercises the roles of
Support refers to four areas. First, chairman and chief executive. Such a
– Decisions about overall strategy
boards constitute sparring partners that structure erodes the system of checks and
provide strategic guidance and challenge Organizations should define which matters balances and constrains the independence
management. This also includes helping to require board approval to ensure proper between board and management. A joint
develop innovative and effective business oversight but not to micromanage the leadership structure provides a unified
models. Second, board members provide management team. For example, board focus and communicates strong leadership
access to their networks, which can help approval is only needed for investments to the external community, while splitting
raise awareness of the social enterprise above a certain threshold. these two functions bears costs and
as well as foster fundraising and business administrative efforts. Thus, organizations
development. Third, boards serve as face a trade-off between effective
ambassadors for the mission of a social
2.2 What are the roles monitoring (the separation of the two
enterprise and thus provide advocacy and and responsibilities of the functions) and strong leadership.
legitimization. The fourth area includes
aspects of oversight: ensuring cash flows to board chair? If a single person holds both positions,
increase the sustainability of the business. the board should appoint another board
The roles of chief executive and chairman member to lead on any issue that requires
are fundamentally different: while the separation of duties, such as reviewing
2.1.2 Oversight responsibilities of the chief executive entail the compensation of the chief executive.
running the organization’s business, the Furthermore, if a new chief executive is
Oversight primarily refers to safeguarding
board chair is responsible for running the appointed, it is advisable to pair the new
the mission of a social enterprise. Boards
board, which requires broad experience and chief executive with a chairman who is more
monitor the performance of management
against benchmarks that reflect the double
the ability to process knowledge on several seasoned.
bottom line. Thus, monitoring concerns high-level issues. Duties of the chair include
social as well as financial performance. determining meeting dates, addressing
While financial indicators are easy to conflicts among members, representing
measure and compare, social performance the organization at public events as well
is often hard to seize. To avoid an inordinate as boundary spanning between board and
focus on financial performance, social management.
enterprises should pay attention to defining
performance indicators for the social
mission. Furthermore, boards should
emphasize the need for external audits as
well as accountability measures to increase
transparency towards external stakeholders.
Figure 6: Board vs Management; own illustration
In addition, oversight also refers to
compliance. It is the duty of the board to
ensure that management complies with its
own governing document as well as with
legal requirements. Ideally, boards should
have a list of compliance requirements and
check periodically if they are being met.
Furthermore, the board is responsible for
appropriate risk management.

2.1.3 Approval of management
decisions
A task amid support and oversight is the
approval of certain management decisions.
Board approval should serve to guarantee
conformity with the overall mission.
Furthermore, board approval constitutes a
form of legitimization to communicate certain
decisions in front of the team. Topics that
require board approval include the following:

– Decisions related to the annual budget
– Decisions on financing
– Changes in ownership structure
– Remuneration of the chief executive and
the management team



2.3 How do I create a Board decisions require a quorum, or
minimum number of board members present
board culture? for official decisions (at least two-thirds of the
members). To diminish administrative efforts
Creating the right board culture will increase during board meetings, voting procedures
the commitment and value of board as well as required majorities should be
members to the organization. When the determined in advance.
board is diverse, it is critical to establish
a culture of active listening, respect for See Appendix 4.9 for exemplary rules of
different perspectives, productive dialogue procedure for boards
and the shared interest of coming to a
collaborative decision (as opposed to Information about past months as well as an
always getting their way). agenda should be sent at least one week in
advance of board meetings, allowing board
2.3.1 Onboarding the board members sufficient time to add topics and
prepare. If management wishes to propose
New board members should be introduced substantial changes, such as amendments
to the organization’s work, current to the constitution or the strategy of an
strategies and plans. New board members organization, the proposals should be sent in
should meet the team to understand the advance.
organizational culture and daily operations.
Without understanding first the intricacies
of the organization, the board members will
not be able to provide constructive support Figure 5: Board tasks; see Kreutzer & Jacobs,
and oversight. Familiarity with the entire 2011 for figure and a description of the types
team makes it easier for the board to raise
concerns.
Topic Duration
Administrative issues 5 minutes
2.3.2 Recognizing the board,
Wrap-up of past months, short discussion of open questions 10 minutes
and valuing their commitments
Matters for approval: group to approve en bloc 10 minutes
appropriately
Discussion of strategic issues, e.g.:
While board members of social enterprises
are rarely incentivized by monetary - Financial situation and annual budget
80 minutes
remuneration, some social enterprises - Human resources
recognize and reward board members - Scaling
emotionally for their time and commitment.
Beyond sending thank you notes, some Definition of next steps and responsibilities 20 minutes
social enterprises invite board members Evaluation of meeting 5 minutes
to site visits or to join work outings.
Compensating for expenses incurred out of
pocket, depending on the financial situation,
may be a reasonable gesture.
After the meeting, board members should
receive minutes that clearly indicate next
2.3.3 Recognizing the board, steps as well as individual responsibilities to
and valuing their commitments achieve them. Furthermore, minutes should
appropriately include place, day and time, participants,
decisions, deliberations, voting results
The frequency of board meetings depends and the manner in which resolutions were
on the current situation of an enterprise. passed.
There should be at least two meetings
per year to keep board members closely
on track with the development of an
organization and to maintain familiarity
among board members as well as between
board and management. When a social
enterprise must navigate rough waters (e.g.
complex environments, changing needs), the
board should meet more often. Meetings can
take place over the phone. However, at least
one face-to-face meeting should take place
per year. One session per year should focus
on strategic issues and a roadmap for the
next 3-5 years.



2.4 How should 2.5 How do I evaluate the
management report to the work of a board?
board? Given that board members desire their
contributions to be meaningful, social
Reporting increases transparency and enterprises should communicate regularly
serves to legitimate the existence of an with them about what is working well and
organization. Regular updates about an what is not. Likewise, board members
organization’s development keep board should take this feedback as an opportunity
members involved and serve to maintain to make a stronger impact. Instead of
trust. assuming good intentions and goodwill
lead to effective governance, boards
Management should report at least
should pay attention to evaluating their own
quarterly to their board members, informing
performance.
them about the current situation of their
organization. Reports in the course of the – A review at the end of each meeting: It is
year should contain the following: good practice to review a meeting at the
end, ask everyone for comments, what
– cash flows, a comparison of budget and
went well and what went wrong. To
actual financials
evaluate their own effectiveness, boards
– social performance indicators compared should ask themselves at the final
to benchmarks meeting of a year: “What would have
happened if we had not met last year?”
– management comments about
important incidents, the development – Informal conversations between
of external factors, etc. (2 pages meetings: The board members should
maximum) communicate with each other about
any outstanding issues or conflicts
See Appendix 4.4 for a template for a that are preventing effectiveness or
quarterly update affecting the culture of the board. The
management team should reach out
A more detailed report containing the to the board to surface any issues or
balance sheet as well as the profit and loss to ask for guidance. Board members
statement is required at the end of a year. should regularly ask themselves whether
they are still able to add value to the
To set up an appropriate reporting system, organization.
the management and board need a clear
and common understanding of the value – Board self-assessment questionnaires
proposition of the enterprise. The value every few years: Boards should
proposition contains social as well as evaluate their effectiveness and identify
financial components. While the social development potentials. Appendix
element should always be primary, financial 4.7 contains a comprehensive
aims range from earned income strategies generic questionnaire that can help
to financial sustainability to the generation of with this process. Social enterprises
profits. Measures of financial success can should further tailor this questionnaire
be adopted from the corporate world. Social depending on their current situation.
entrepreneurs who are not familiar with Such questionnaires require significant
financial reporting should consult their board time and should only be conducted
members to benefit from their expertise. every couple of years. An independent
person should analyse them to
Predefined measures of social impact are encourage board members to be open
often not available and social entrepreneurs and honest.
themselves are frequently not aware of
their impact value chain. Refer to the Social
Investment Manual (Achleitner et al., 2011)
and to Appendix 4.5 for a description and
an example of the impact value chain. Once
social enterprises have defined their impact
value chain, performance indicators must
be determined and monitoring programmes
should be established.

See Appendix 4.6 for a reporting cycle


3. Conclusion

Figure 7: Content of the guidebook; own illustration

Summarizing, we would like to highlight the – Transparency: Be transparent and
following aspects: accountable, especially when dealing
with conflicts of interest (see Appendix
– Organizational lifecycle: Consider your 4.3).
organization’s needs when establishing
your governance structure and selecting – Involvement of board members: Keep
board members: be aware of your board members involved within strategic
current lifecycle stage and of where your topics instead of becoming restrained
organization is heading (see 1.3). by a reactive board (see 2.3).

– Investor selection: Consider governance – Reporting: Keep your board members
requirements during negotiations with on track with the developments of your
investors (see 1.3). organization. If you report regularly
to your board members, it is their
– Role of the founder: Do not rely upon responsibility to ask questions (see 2.4).
a single person for managing, shaping
and overseeing the organization (see 1.3
and 2.2).

– Board membership: Balance expertise
and stakeholder representation
appropriately in board membership (see
1.4).


4. Appendix
4.1 Board composition
and tasks over the
lifecycle

Table 6: Board composition and tasks over the lifespan; own illustration

Start-Up Scaling Maturity

Board composition

Tasks and roles – Development of vision and – Enhancement and – Succession planning
mission preservation of the culture of chief executive and
– Definition of value of a social enterprise management team (jointly
proposition, performance
– Resource provision, with current managers)
indicators, benchmarks
– Examination of business
networking – Supervision of affiliates,
plan and forecasts – Extension of the talent subsidiaries, franchisees
– Development of board pool – Deep scaling
procedures – Definition of quality – Institutionalization of the
– Consultation of key control mechanisms and approach
stakeholders to increase standards
legitimacy and visibility – Examination of license
agreements
– Selection of affiliates
Questions to discuss – Is there a clear social – How can the approach be – What are further business
need? made easy for others to opportunities?
– Is the model scalable? replicate? – Has the social enterprise
– What are the risks? – How can the approach be achieved a system
– Is an open source protected against misuse? change?
approach or trademark – How can the profits be
registration appropriate? used?


Appendix

4.2 Link of financing
instruments and
governance requirements

Figure 8: How to choose the right financing instrument; see Achleitner et al., 2011; Spiess-Knafl, 2012

4.3 Conflicts of interest

Conflicts of interest: How to identify and treat them*

Conflicts of interest are inevitable. In anticipation of this, social enterprises and their boards should develop policies and rules of procedure
for how to address and deal with emerging conflicts of interest. As a general practice, all potential conflicts of interest should be surfaced
and shared for discussion.

Potential sources of conflicts of interest:

– Board members can gain financially from their board involvement (e.g. if the board member has an expertise that the social enterprise
requires, such as marketing or accounting)

– Board members can gain non-financially from their board involvement (e.g. a family member may be hired by the social enterprise, or if
the board member is also a beneficiary of the social enterprise, she can influence its operations to serve her own interests)

– Board members face competing loyalties and obligations (e.g. the board member serves on two social enterprises that compete in the
same market or the social enterprise is part of a governmental, regulatory or oversight body)

How to handle conflicts of interest

Board members must disclose all (potential) conflicts. If a person is conflicted in any decision, he or she should be removed from this
particular decision-making process. Conflicts as well as any direct or indirect benefits received by board members have to be disclosed in
the annual reports.

*Source: Charity Commission, 2011


Appendix

4.4 Template for a quarterly update3

QUARTERLY UPDATE

Company: […] Quarter: […] Date: […]

Key figures:

Quarter ended Next quarter forecasts
Sales […] […]
Costs […] […]
Available liquidity […] […]

Activity development over the period:

Operation:
- [e.g. organizational developments, events, …]

Production:
- [e.g. set up of new subsidiaries, development of further business opportunities, additional income
streams, …]

Research & Development:
- [e.g. impact measurement, external validation, …]

Main strengths over the period:

- [e.g. cooperation, use of resources, …]

Main weaknesses over the period:

- [e.g. excessive expenditures, pending payments, ….]

Comments and additional information on the social impacts:

- [e.g. increase in number of beneficiaries, generation of employment opportunities, …]

Key aims for the next quarter:

- [e.g. opening new subsidiaries, development of best-practice guides, in-house training, …]

3
We would like to thank Andreas Heinecke, founder of Dialogue Social Enterprise, as well as PhiTrust for the kind provision of their reporting template.


4.5 Example of impact value chain
Figure 9: Impact Value Chain; taken from Mair & Sharma, forthcoming; based on Clark et al., 2004

IMPACT VALUE CHAIN
INPUTS ACTIVITIES OUTPUTS OUTCOMES GOAL ALIGNMENT

DESCRIPTION What you put into a Strategies, systems, and Products or servies Intermediate results Reflection on outcomes;
venture practices that serve as resulting from activities necessary to achieve and activity and goal
proxies for impact ("intervention") that is desired impact adjustment by
relevant to achieving management
outcomes MINUS

What would've happened
anyway

LEADING INDICATIORS IMPACT

DATA CAPTURED Process Results
Short Run Long Run
EXAMPLE: - Money - Providing Loans Outreach repayment
- Advice - Workshops on small - No. of loans, and ave. (1) Sustainable job
Sector: MICROFINANCE - Time business loan size (2) Improved life
- Knowledge - Consultations and site - No of first-time clients (3) Income generation for
Theory of Change: Providing visits starting microfinance the community
loan products to poorest of - Staff training enterprises, etc.
the poor will increase
income generation + Indicators: (1) No. of Jobs created, ave. loan size, wage of employee, repayment, and interest; (2)
enterprise development, + Increase in income and savings, no. children in school, no. of meals eaten per day, decrease in
improve health/education infant mortality; and (3) no. of active clients, no. of clients starting an enterise for the first time,
and repeated loan

The Governance of Social Enterprises
23
Appendix

Appendix

4.6 Reporting cycle
Figure 10: Reporting cycle; own illustration


Appendix

4.7 Example of a board self-assessment questionnaire4

4
Taken from: The Corporate Fund: http://www.nhnonprofits.org/boardselfassessment.cfm; we would like to thank Edward Tomey, the developer of the questionnaire, for his kind
permission to include the questionnaire within the manual. The NH Center for Nonprofits oversees the online administration of the questionnaire.


Appendix


Appendix

4.8 Corporate governance guidelines and codes of best practice
Table 7: Governance guidelines and codes; own illustration

Country/Region Code/Guideline Main content Mandatory for Available at
Australia Corporate Governance Structure and diversity of Listed entities http://www.asx.com.au/
Principles and board; disclosure and risk governance/corporate-
Recommendations management governance.htm
Austria Austrian Code of Transparency, disclosure, Listed entities http://www.corporate-
Corporate Governance competencies and governance.at/
qualifications of board
Belgium The 2009 Belgian Governance structure; Listed entities http://www.
Code on Corporate board efficiency and corporategovernance
Governance evaluation; committees committee.be/en/2009_
code/default.aspx
orategovernance
committee.be/en/2009_
code/default.aspx
Code Buysse: Corporate Composition, function, - http://www.codebuysse.
Governance for Non- appointment, evaluation be/en/default.aspx
listed Enterprises and compensation of
board
Brazil Code of Best Practice of Mission, composition, - http://www.ibgc.org.br/
Corporate Governance background and CodeBestPractices.aspx
assessment of board;
relationship with related
parties
Canada Corporate Governance: Composition, Specified disclosure http://www.tmx.com/
Guide to Good Disclosure independence, tasks and requirements en/listings/tsx_issuer_
compensation of board resources/corporate_
governance.html
Building on Strength: Role, transparency, - http://www.vsi-isbc.org/
Improving Governance structure and succession eng/products/reports.cfm
and Accountability in of board
Canada’s Voluntary
Sector
Denmark Recommendations on Transparency, Listed entities http://www.
Corporate Governance responsibilities, corporategovernance.dk/
composition and sw58113.asp
remuneration of board
Europe Green Paper on the EU Composition, evaluation -- http://ec.europa.
Corporate Governance and remuneration of eu/internal_market/
Framework board; risk management consultations/2011/
corporate-governance-
framework_en.htm
Corporate Governance Composition, - http://www.ecoda.org/
Guidance and Principles remuneration and Publications.html
for Unlisted Companies in efficiency of board;
Europe collaboration with
management
Finland Finnish Corporate Composition, Listed entities http://www.cgfinland.
Governance Code 2010 appointment, charter and fi/content/view/16/63/
evaluation of board lang,en/
France Recommendations on Principles, independence, Listed entities http://www.afg.asso.fr/
Corporate Governance organization and index.php?option=com_
transparency of board content&view=article&id=
98&Itemid=87&lang=en


Appendix

Germany German Corporate Cooperation with Listed entities http://www.corporate-
Governance Code management; governance-code.de/
tasks, composition, eng/kodex/index.html
compensation and
transparency of board;
reporting
Greece SEV Corporate Role, composition and Listed entities http://www.sev.
Governance Code for evaluation of board; org.gr/online/index.
Listed Companies internal controls aspx?mid=694&lang=en
Hungary Corporate Governance Role, independence, - http://www.bse.hutopmenu/
Recommendations remuneration and issuerscorporategovernance
evaluation of board; risk /cgr.html?pagenum=2&
management query=corporate%20
governance

India Corporate Governance Appointment, - http://www.nfcgindia.org/
Voluntary Guidelines responsibilities, home.html
independence and
remuneration of board
International ICGN: Global Corporate Responsibilities, - http://www.icgn.org/
Governance Principles independence, best-practice.php
appointment,
composition and
evaluation of board;
risk management;
remuneration
OECD Principles of Disclosure; transparency; - http://www.oecd.org/
Corporate Governance responsibilities of board document/49/0,3343,en_
2649_34813_315308
65_1_1_1_1,00.html

Italy Corporate Governance Role, composition, - http://www.borsaitaliana.
Code independence, it/borsaitaliana/
committees, regolamenti/
remuneration and corporategovernance/
appointment of board corporategovernance.
en.htm
Japan Principles of Corporate Transparency; Listed entities http://www.tse.or.jp/
Governance for Listed responsibility of board english/rules/cg/
Companies
Luxembourg The Ten Principles of Duties, composition, Listed entities http://www.bourse.
Corporate Governance independence, evaluation lu/application?_flow
of the Luxembourg Stock and remuneration of Id=PageStatiqueFlo
Exchange board w&content=services/
CorporateGovernance.jsp
Norway The Norwegian Code of Tasks and remuneration Listed entities http://www.nues.no/
Practice for Corporate of board; risk English/The_Norwegian_
Governance management Code_of_Practice_for_
Corporate_Governance/
Poland Code of Best Practice for Transparency; - http://www.corp-gov.
WSE Listed Companies remuneration; tasks gpw.pl/assets/library/
of management and english/regulacje/
supervisory board bestpractices%20
19_10_2011_en.pdf
Portugal CMVM Corporate Management and Listed entities http://www.cmvm.pt/
Governance Code supervisory board; EN/Recomendacao/
general meetings and Recomendacoes/
transparency Documents/2010consol.
Corporate%20
Governance%20
Recommendations.2010.
bbmm.pdf
South Africa King Code of Governance Responsible leadership; Listed entities http://african.ipapercms.
for South Africa board responsibilities, dk/IOD/KINGIII/
composition and kingiiicode/
collaboration; ethical
foundation; transparency;
risk management


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