The Distinctive Role of Social Enterprise
Abstract: Social enterprises, such as microfinance institutions, fair trade firms, and work integration social enterprises, pose a challenge to the traditional tenets of corporate law. On the one hand, they do not necessarily maximize profits, and on the other, contrary to nonprofit theory, they often distribute profits to their owners. The proliferation of social enterprises has led commentators to question both the profit maximization norm and the non-distribution constraint as essential elements of for-profit and nonprofit corporate law respectively. In this article, I present a theory of social enterprise that is consistent with the prevailing theories of corporate law. Social enterprises, I argue, perform a distinctive role, which I call the measurement function of social enterprise. More specifically, social enterprises that have a commitment to transact with their beneficiaries as patrons (e.g., customers, such as poor borrowers, or providers of input, such as disadvantaged employees) have incentives to measure or gather information on the attributes of their beneficiaries. This information enables social enterprises to enter into transactions with their patron-beneficiaries and allocate subsidies to them efficiently. The measurement function makes social enterprises efficient vehicles for channeling subsidies to certain categories of beneficiaries. In particular, social enterprises tend to be more efficient than other alternative mechanisms which bear a similar structure, but have a distinctly different function, such as corporate social responsibility initiatives and corporate charity. The measurement function can thus serve as the basis for informing legal policy, especially the design of a new social enterprise legal form.
