The role of boards of directors in social businesses

When it comes to corporate governance, providing a shared definition can be quite challenging. For brevity reasons and given the purpose of the paper, I will refer to the one by Monks and Minow, reported in Low (2006), according to which corporate governance is the relationship among various participants in determining the direction and performance of corporations.

Low himself specifies that such a definition can be adapted to embrace sectors beyond the for-profit one by replacing “corporations” with the more general “organizations”; such an interpretation helps him in his attempt to provide a base on which to build a governance theory specifically for the social enterprise drawing on existing for-profit and non-profit models.

The contribution of this author to my study is relevant also from several other points of view. He maintains that, within the non-profit sector, organizations that are grantdependent and those that use a transactional pattern will tend to adopt different corporate governance models: the former are most likely to present a democratic model, typical of non-profits, which stresses the importance of meeting the legitimate interests of all stakeholders (service-users, funding bodies, local authorities and the like) and of having them represented in the board.

The latter instead generally tend to have a stewardship model, common among for-profits, which views directors as the stewards of the company’s assets, predisposed to act primarily in the best interest of the owners (Donaldson and Davis, 1991). Those diverse theories clearly impact on the structure of the board of directors. In the first case in fact we will see democratic boards representing all the different categories of stakeholders and their diverse interests; otherwise, in the second one simpler forms of governance prevail, that relies less on representing diverse interests and more on a board that is capable of managing assets for greater return (Low, 2006).

Unlike private sector stewardship though, the surplus generated is not designed to increase shareholder wealth but is to be used to maximize social benefit. Since the social enterprise performs both non-profit and for-profit activities, social enterprise governance may in turn be, at least in theory, a hybrid of for-profit stewardship and non-profit democratic models. Low (2006) argues that social enterprises are distinct from other non-profit organizations: they wish to be seen as possessing rigorous performance objectives, not least in financial management terms, and they rely on corporate planning and business design tools.