Are you involved on the board of a social enterprise? Would you like to be?
Being a member of a social enterprise board means you need to have an understanding of governance. Governance refers to the set of systems, principles, and processes by which a social enterprise is governed. They provide the guidelines on how the enterprise can be directed or controlled such that it can fulfil its goals and objectives.
What's more, governance is known to be one of the criteria that investors increasingly depend on when deciding on which enterprises to invest in. Having a clean image on the governance front could also make it easier for a social enterprise to source capital at more reasonable costs. There are a number of theories of organisational governance out there, each with its unique perspective on how organisations should be managed and controlled.
Agency Theory
Agency theory is rooted in the belief that managers may not always act in the best interests of the owners or stakeholders. This theory suggests that there is an inherent conflict between the goals of principals (owners) and agents (managers), leading to potential agency costs. Therefore, it advocates for a governance structure where managers are closely monitored and held accountable by a board.
This is particularly crucial for social enterprises, which often operate with limited resources and need to ensure that funds are used efficiently to achieve their social missions. For instance, a social enterprise focused on affordable housing might establish a board committee specifically responsible for overseeing financial management and ensuring that budget allocations align with the enterprise's strategic goals.
Stewardship Theory
In contrast, stewardship theory posits that managers can be trusted to act in the best interests of the organisation, aligning their actions with its goals. This theory suggests that managers are motivated by factors beyond financial gain, such as personal satisfaction and the desire to contribute positively to society.
In the context of social enterprises, stewardship theory aligns well with the values-driven nature of these organisations. Managers are often deeply committed to the social mission, and their intrinsic motivation can drive the enterprise towards achieving its objectives. For example, in a social enterprise dedicated to environmental conservation, managers might take initiative in developing innovative strategies to reduce carbon footprints, knowing it aligns with both their personal values and the organisation's mission.
Managerial Hegemony
Managerial hegemony theory suggests that managers hold significant power in guiding the organisation, often being the most capable of directing its operations. This theory views managers as the primary decision-makers who possess the expertise and knowledge necessary to navigate complex business environments.
In social enterprises, where the operational focus may shift based on emerging social issues, having skilled managers at the helm can be beneficial. An example of this can be seen in a social enterprise providing healthcare services in underserved areas—where the management team continuously adapts strategies to meet the changing needs of the community and regulatory requirements.
Stakeholder Theory
Stakeholder theory emphasises the importance of considering the interests and needs of all stakeholders in the decision-making process. This theory advocates for a governance model that balances the diverse interests of stakeholders, including employees, customers, suppliers, and the community.
In social enterprises, stakeholder theory is particularly relevant as these organisations often have a broad range of stakeholders with vested interests in their social impact. For instance, a social enterprise focused on fair trade might involve representatives from producer communities, consumers, and advocacy groups in its governance structure to ensure all voices are heard and considered in strategic decisions.
Democratic Theory
Democratic theory proposes that governance should incorporate the representation of a diverse range of stakeholders on the board, promoting inclusivity and shared decision-making. This approach is aligned with the ethos of social enterprises, which often seek to empower communities and foster collaborative approaches.
By having board members from various backgrounds and expertise, social enterprises can benefit from diverse perspectives that enhance creativity and problem-solving. An example could be a cooperative social enterprise where all members, including employees and beneficiaries, have voting rights in key decisions, fostering a sense of ownership and accountability.
Resource Dependency Theory
Resource dependency theory highlights the importance of maintaining positive relationships with key stakeholders to secure necessary resources for the organisation's survival and growth. This theory underscores the strategic role of governance in managing external dependencies and ensuring access to essential resources, such as funding, partnerships, and expertise.
For social enterprises, cultivating strong relationships with donors, government bodies, and other stakeholders is crucial for sustaining operations and expanding impact. An example is a social enterprise focused on education that actively engages with educational institutions and policymakers to secure resources and influence education policy reforms.
Understanding and applying these governance theories can provide valuable insights for social enterprises seeking to optimise their governance structures. Each theory offers a different lens through which to view organisational governance, and social enterprises can draw on these perspectives to tailor their governance practices in a way that aligns with their mission and strategic objectives. By integrating these theories into their governance models, social enterprises can enhance their effectiveness, accountability, and resilience in achieving their social goals.
The academic literature provides a rich resource for understanding how these theories can be applied in practice, offering evidence-based insights into the governance dynamics of social enterprises. By leveraging these insights, social enterprises can build robust governance frameworks that support their mission-driven activities and long-term sustainability.
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This expanded version builds upon the original article by Amber Earles, sharing the same title. Amber is passionate about driving positive change and empowering for-purpose organisations to achieve their objectives. In her current role with Social Traders, she is dedicated to advancing Australia's social enterprise sector. Amber focuses on certifying and strengthening social enterprises, gathering and publishing valuable data, advocating for government policies that support social enterprise growth, and integrating these enterprises into business and government supply chains.
