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Creativebias Helpsheet: Board Governance for Social Enterprises

November 2006 (Creativebias)

Board Governance for Social Enterprises

A Guide for Creative Industries Entrepreneurs

What is a board and why do I need one?

Although social enterprises may operate in a slightly less formal manner than a purely profit-orientated business, they still need to have a form of governance and be accountable for their actions. In practical terms, this means there has to be a group of people who accept responsibility for ensuring that everything that happens within the social enterprise is:

  • legal
  • fair and non-discriminatory
  • ethical

Being responsible for the governance means this group will also need to ensure that the social enterprise is:

  • achieving its social aim
  • fulfilling its mission statement
  • financially solvent and meeting financial goals and targets at the same time as fulfilling its social mission [1]

They will also be held accountable if, at any time during the life of the social enterprise, there is evidence of:

  • financial mismanagement
  • disregard for current health and safety, employment or equal opportunities legislation
  • abuse of members' trust in any regard

This group of people is usually referred to as the board, and they, individually and collectively, are responsible for all of the above. In basic terms boards exist to provide strategic direction and ensure compliance with the law.


It is a legal requirement to have a board when you set up a social enterprise.

 

How do I put a board together?

The board of a social enterprise can be seen as similar to a board of governors at a school. However, rather than consisting of governors, the board is a combination of directors and management.

 

Directors [2] are normally professionals from the local community, who give their time and advice without charge at regular (usually monthly) meetings to help the social enterprise grow and progress.

 

The management deals with the day-to-day running of the enterprise and, in a small social enterprise, are likely to be the people who began the business. It is their responsibility to implement the policies created by the board.

 

The directors have a responsibility to ensure the organisation complies with the legal constitution and memorandum of the social enterprise. They also help to provide a perspective on a situation which is independent from management. Whilst directors are required to determine the future of the organisation and protect its assets and reputation, they also need to consider how their decisions relate to stakeholders.

 

The word stakeholder has evolved to mean a person or organisation that has a legitimate interest in a project or entity. In discussing the decision-making process for institutions the concept has been broadened to include everyone with an interest or stake, in what the enterprise does.

 

In terms of a social enterprise a stakeholder is anyone who has a financial or commercial interest in the business. It could be the management, employees, or a client. It could also include business support agencies or funders who have helped you start your enterprise such as the Local Education Authority or the MDA and Creativebias.

 

The memorandum which you used to set up the social enterprise should define how the board is run. If you need to make changes to the memorandum and articles of association you will have to go through a solicitor who will check your modifications are legal.

"We have directors who occasionally get involved in management; I made sure that it stated this in the responsibilities of my directors in my memorandum and articles of association. Everyone knows their position but is flexible enough to help in other areas if needed."

Steven Nze, Director and Founder, One Heart Productions.


Who should be a Director?

The most effective board of directors typically consists of a group of professionals who bring a breadth of skills, experience, contacts and diversity to your business. Choosing the right mix of personalities and skills for your board should improve your business' chances of success. As your social enterprise grows and changes, you may find you need to adjust the board's composition to meet changing needs and circumstances.

 

The board of a social enterprise might consist of:

  • members or employees of the enterprise
  • members of the local community
  • the enterprise's accountant or lawyer (or both)
  • a local government councillor
  • a local business person with relevant skills and knowledge
  • a priest or minister of a local church or other religious institution
  • a social entrepreneur associated with a similar local social enterprise
  • someone from another board - perhaps of a voluntary organisation


Successful local business people can make an invaluable contribution to the board of a social enterprise, even though they may have no experience of the social sector. They may help by bringing sound business sense, plus an interest in and sympathy with the vision, values and mission of your organisation.

Anyone who has particular experience and knowledge within a certain skills base that you lack will also be very useful to have on your board. If you are not particularly strong on the legal aspects of your business, it could be useful to have a lawyer or solicitor on your board. If you struggle with bookkeeping, an accountant may help. Creating a chart to determine what skills your business needs to move ahead can be helpful. List any skills that your management already has and those you need to gain.

 

It could also be useful to have someone from a developed social enterprise who has been through the processes of starting and running a successful social enterprise.

 

It may be beneficial to have some people on the board who you have worked with and built a business relationship with before as you will have an idea of the level they work at and how reliable they are.

 

In terms of personality and interests your board of directors should consist of people who:

  • have an interest in what the enterprise is aiming to achieve
  • are committed to the values, vision and mission of the organisation
  • will willingly share their experience, skills and knowledge
  • can devote time and energy to attending board meetings
  • are willing to work as part of a team
  • are prepared to accept responsibility for decisions made by the board
  • understand that they are accountable
  • are patient, good humoured and clear communicators
  • have a network of contacts within the industry you are involved in and can introduce potential partners and customers to the business

 

Being on the board of a social enterprise requires different skills to those required by directors on the board of a large corporation. Directors of a social enterprise must be able to offer practical skills and advice rather than just financial influence.

 

A director[3] is defined in law according to what they do, rather than their actual job title. Even a person not formally appointed to the board might be deemed a director if their role could be considered equivalent to that of a director, or if they have acted as a director. This is what is known as a shadow director.

 

"Get people on your board who you can trust and rely upon, ideally people who have a keen interest in your business! It's ideal if they possess skills, knowledge and experience that you don't."

Frank Titley, Blue Orchid Consultants.

 

How does it benefit people to be on the board?

It can be very beneficial for a director to be on the board of a creative industries social enterprise. They gain experience of helping run a business which may be different from the ones they have worked with before. They also get the opportunity to network and build business relationships with other people on the board.

Being a director on the board of a social enterprise can provide people with:

  • Enjoyment - Personal satisfaction and enjoyment from helping people for free.
  • Networking Opportunities - Prospect of meeting new business people and setting up future deals and projects together.
  • Experience - valuable experience in a new and challenging area of business.
  • Encourage new ways of thinking about business and business relationships


A social enterprise can also offer a director a service provider at a reduced rate. For example: A social enterprise provides dance workshops for young people in schools and colleges. One of the board members is a lawyer who also works on a school board. He knows his school has a certain amount of funding available and so offers the social enterprise work in the school, which they provide at a slightly reduced rate.


What model should I choose for my board?

In terms of defined structures, there is no definite model for a small social enterprise's board.

Theoretical models of governance often assume that governance is entirely separate from management. However, organisations can only separate these two functions if they reach a certain size. In a very small organisation, such as a small, creative social enterprise with few staff, the board may do everything. They may have to act as board members, staff members and bookkeepers.

However, no matter how large your enterprise is, it is important from the beginning to distinguish between roles. It is important to separate governance issues and other management, operational or day-to-day issues.

Achieving the right size board is a balance:

  • Boards should not be too large otherwise decision-making becomes difficult.
  • They should not be too small otherwise the directors may have an unfair burden of work.
  • Between three and nine directors is normally adequate.

 

The right size for a board varies a great deal between organisations and can be determined by a number of factors:

  • Legal framework - Your memorandum should detail your maximum and minimum board size.
  • Stage of development and size - The larger and more developed your social enterprise is, the larger the board.
  • Income - When more money is coming in you will be expanding into new areas of business and larger projects so will need more varied advice.


How do I guide my board?

When they join the board, directors should be briefed so they know exactly what is expected of them. In summary this means they need to know:

  • What the enterprise's vision, values and mission are.
  • What the board's role and responsibilities are.
  • What each individual board member's responsibilities are.


Generally, a director's responsibility will be to:

  • Provide guidance and direction
  • Be accountable for the activities of the enterprise
  • Make sure the enterprise uses resources sensibly and legally
  • Work with other board members to resolve problems
  • Attend all board meetings
  • Read all relevant documentation
  • Contribute to discussions
  • Avoid any conflicts of interest that may arise from sitting on the board
  • Maintain confidentiality regarding the enterprise's activities


You also need to decide:

  • How often you think you should hold board meetings?
  • When and where they should be held?
  • What items need to appear regularly on the agenda?
  • Who should take on the role of chairperson?
  • Who should take on the role of secretary, or person who takes minutes?
  • How and when will the minutes be distributed to members?


A few major decisions such as ones about major financial transactions or changes to the enterprise's constitution may be made by a vote of the whole membership.

 

As your business plan, vision, values and mission are developed and revised a copy should be given to all board members.

"I do guide my board but they also need to be independent thinkers. At the end of the day I'm the one on the floor implanting the ideas, so strictly I'm in charge. They help me make sure everything I do is legal, logical and productive."

Steven Nze, Director and Founder, One Heart Productions.



What are the legal implications for members of the board?

Everyone on the board, both directors and management should be aware of their legal position from the beginning in order to avoid any disputes further down the line.

Directors have more legal responsibilities than the management.

Directors are required by law to apply skill and care in exercising their duty to the business and are subject to fiduciary duties. If they are in breach of their duties or act improperly, directors can be made personally liable in both civil and criminal law.

If a business becomes insolvent, or bankrupt, the insolvency act imposes various duties and responsibilities on directors that may involve personal liability and criminal prosecution.

Managers should be aware that, legally, they can be dismissed by directors. However, in a small creative social enterprise it is more likely that management and directors would come to a mutual agreement if someone needs to leave the board, rather than a formal dismissal.

If you are worried about this possibility, taking on the structure of a Community Interest Company (CIC) will allow management to also take on the roles of directors, which may be ideal for smaller businesses.

A CIC is a legal form, created in 2005, for a limited liability company dedicated to social enterprise.



Links

  • Business Link has advice and tips on finding board members and running a board: www.businesslink.gov.uk (look under CIC for more on the roles of directors and managers)
  • Practical guidance can also be found at www.diycommitteeguide.org under the social enterprise section
  • And the Social Enterprise Network has many useful tips: www.sen.org.uk
  • For more information on the benefits of becoming a CIC, see the Business Link page at: www.businesslink.gov.uk
  • Examples of memoranda and articles of association for CIC can be found at www.cicregulator.gov.uk


[1] For more information on achieving a balance between making a profit and fulfilling your social aim please see the Creativebias Helpsheet What is a social enterprise?

[2] A board of trustees and board of directors is the same thing; throughout this document "board of trustees"? can replace the term "board of directors"

[3] In the case of UK charities, a director/trustee is an unpaid volunteer who undertakes fiduciary responsibilities on behalf of the charity, subject to the provisions of Charity Law, a branch of trust law, and the Charities Act 1993. For charity trustees, the Charity Commission often has concurrent jurisdiction with the Courts. Many UK charities are also limited liability companies registered with Companies House. In this case the trustees are also Directors of the company and their liability is limited. This is the preferred model if the charity owns property or employs people.

 


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