The role of boards of directors in social businesses

INTRODUCTION
On October 8th, 2009 a conference by Professor Muhammad Yunus entitled “The 
new frontier of management: the social business”, was streamed in this University, as 
part of the series of talks the Nobel Prize Laureate has been giving around the world 
to illustrate and spread the idea of social business; this paper drew its original 
inspiration from that conference.
Social businesses, which can be ideally positioned in the Third sector and whose 
theoretic roots are to be found in the concept of the social enterprise, represent a 
diverse interpretation of the traditional concept of business as it has been set by 
capitalism (Yunus, 2008); in fact, they distinguish themselves because they have 
been specifically conceived to reconcile the profit motive, that dominates the 
business sector, with social improvement, the primary concern of the non-profit one. 
Thus, due to their hybrid nature, social businesses are intrinsically featured by an 
interplay between potentially competing sets of values: social action set against the 
demands of market behavior (Fowler, 2000); clearly, such a duality may easily turn 
into a conflict between social and financial objectives. 
This peculiar context lays emphasis on corporate governance as a particularly 
relevant and critical aspect for social businesses' management, being the managerial 
area that sets the general framework within which those organizations operate. 
Specifically, the board of directors is the place where the contrast is to be faced and 
reconciled and a balance between the two souls of the company pursued and 
maintained. 
To date, that area of study has been quite neglected: these organizations are only 
now receiving greater attention due to their increased presence; despite the social 
enterprise has been a topic of academic inquiry for nearly twenty years, little 
scholarly output had appeared in managerial and entrepreneurial disciplines, and 
although it represents a fruitful domain of interest to organizational scholars, much 
work remains to fully embrace and understand this concept (Short, Moss and 
Lumpkin, 2009). Low (2006) highlights that there is a need for research of the social 
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enterprise sector in general, but he suggests that the governance function requires 
more attention than others due to its significance; the key challenge for future 
research into the social enterprise governance may need to focus on a principal task 
– namely, further empirical study of the range of theoretical aspects (Mason, 
Kirkbride and Bryde, 2007)
Furthermore, albeit it has been noticed that social entrepreneurship is becoming a 
more and more central topic in business literature thanks to the increasing efforts 
among for-profit businesses to pursue economic opportunities with mission deemed 
beneficial to the public good (Short, Moss, Lumpkin, 2009), being social businesses a 
relatively new phenomenon, there is an overall lack of theoretic and academic 
research about them, a lack concerning also the managerial field and thus corporate 
governance issues. 
Therefore, this paper is intended to address that gap by looking at social businesses 
from a corporate governance perspective, focusing on the analysis of the board of 
directors in its salient features.
First of all, the study will try to ascertain if an appropriate governance pattern for 
social businesses do exist, drawing on theories of for-profit and non-profit 
governance and insights from the literature about social enterprise (assuming that 
the social business can be seen as a specific form of social enterprise). This is a 
preliminary step meant to provide the missing theoretical framework for the main 
problem this work aims to discuss in detail.
The central purpose of the paper will in fact be to investigate the principal 
characteristics of the board of directors, especially focusing on: 
• its structure;
• its composition in terms of size, presence of executive and non-
executive directors and  committees;
• its functiones and roles, and • its operational processes and procedures.
To do so, insights from the most consolidated theories in both for-profit and 
especially non-profit sector will be taken into consideration. 
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Finally, taking into consideration the Italian social cooperatives, an empirical research 
is developed to find out what concretely happens with boards of directors in real 
examples of social businesses.
The conceptual structure of the paper is influenced by the fact a proper organic 
theory specifically about the social business is basically missing; hence, in order to 
treat social businesses as an object for economic and managerial reasoning, my 
study needs to build a theoretical background to the social business discourse, based 
on the analysis and the comparison of various theories developed within the non-
profit sector (in the latter case I will especially refer to researches regarding the 
social enterprise); setting this as a conceptual framework, the general attempt is to 
gain some insights about social businesses.
Accordingly, Section I clearly defines the object of the study, the social business 
model, presenting it in its salient features. Then, I search for some theoretical roots 
for this concept, in order to grant it a more precise position in the economic 
environment: I will examine the relationship between the social business and the 
social enterprise, to show that the former falls into the realm of the latter; a 
comparison between the two will furthermore contribute to better understand the 
nature of the social business. The social business nature as a reality in between the 
for-profit and non-profit sector is here accurately considered, particularly in its 
managerial implications, being that the main source of criticality and potential 
tensions from this point of view. Afterward, the attention is shifted on governance 
issues with first of all a review of the most relevant contributions about corporate 
governance theories and board of directors, focusing on literature contributions 
about for-profit and non-profit organizations, and especially the social enterprise. 
Section II discusses the methodology I adopted to actually carry on my research, 
firstly presenting the subject matter of the study – Italian social cooepratives – and 
then describing the empirical tool employed, justifying its selection and illustrating its 
technical aspects. The following section is dedicated to the presentation of the 
concrete study and its results. Discussion of findings, conclusions and suggestion for 
further researches are in Section IV. 
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I. LITERATURE AND CONCEPTUAL REVIEW
I.1. Social business: towards a definition.
At first sight and out of any context, defining what a social business is may seem 
obvious: the expression itself is quite straightforward, indicating a business that has 
something to do with social issues, or, more explicitly, a business designed to meet a 
social goal. Nevertheless, the purpose of this paper calls for a deep understanding of 
this concept and of the implications it brings along. 
The emergence of social businesses is related to major changes in the nonprofit 
sector: lately, an increasing number of nonprofits has got more closely connected to 
the market, enjoying access not only to an enlarged resource base, but also to the 
energy and creativity that the market system has long represented. In this context, 
some nonprofit firms are integrating the market more directly into the pursuit of their 
social missions through the formation of "social purpose enterprises," or "social 
ventures” 1
. These organizations use market means to pursue nonprofit objectives – 
e.g.  by forming a catering business through which to train former drug addicts. Here 
the market is not simply a source of revenue but a preferred vehicle through which 
to achieve a social purpose (Salamon, 2002). Engagement with the market may help 
nonprofits  become more fully independent than either government support or 
private charity has made possible and it also opens possibilities for leveraging 
enormous private resources and talents for social purposes, allowing to bring the 
most efficient means to the service of the most valued ends (Salamon, 2002). 
To help us make sense of what a social business concretely is, I will start from a 
definition given by the Nobel Prize Laureate Muhammad Yunus, who recognized in 
this innovative business model a powerful tool to address one of the most serious 
social problem, that is global poverty; Yunus' analysis has the advantage of being 
clear, straightforward, and very practical, thus giving an immediate idea of the 
subject matter. 
Unlike the traditional companies (profit-maximizing businesses), social businesses are 
set up by entrepreneurs to pursue specific social goals, rather than profit, thus being 
1
The term “social business” is  used in this paper as a synonym of social purpose enterprise and social venture.
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totally dedicated to solve social and environmental problems. The new business is 
basically designed and operated in the same way as an existing for-profit firm: it 
employs workers, creates goods or services, and market these to customers for a 
price consistent with its objective. The substantial difference is to be found in the 
underlying objective – and in the criterion by which the business should be 
evaluated: social business is meant to create social benefits for a given community. 
While in a traditional company profit is the prime objective and social benefit, if any, 
is a by-product, in a social business, social impact is the prime objective, while profit 
forms a part of the company's strategy for managing in a financially prudent way 
(Yunus, 2008). Therefore, the first characteristic of a social business is that of being 
a company which is cause-driven rather than profit-driven: it may earn profit, but the 
investors who support it do no take any return out of the company, except recouping 
an amount equivalent to their original investment over a period of time. The absence 
of dividend-takers in a social business assures that the only objective of the company 
is to create social benefit.
Nevertheless, the focus on the social cause alone does not explain the uniqueness of 
this model. Nowadays, plenty of organizations exist in the world that are devoted to 
create social benefit, and they typically take the form of nonprofit or 
nongovernmental organizations; because of their inherent nature, most of them do 
not recover their total costs from their operations, and so they heavily rely on 
charitable donations, foundation grants, or government support to implement their 
programs,  being forced to devote a great part of their time and energy to raise 
money. This feature allows us to understand a first reason why a social business 
differs from a charity, an NGO, or a non-profit organization and conversely it 
represents a business in every sense, operated in accordance with management 
principles just like a for-profit firm. A social business must recover its full costs while 
achieving its social objective, and to do so it charges a price or fee for its products or 
services, generating sales revenue (Yunus, 2008).
The full cost recovery constraint is central to the definition of social business; the 
pursuit of a social goal by charging a price or fee for the products or services 
provided is in itself not sufficient for any social-objective-driven project to be 
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