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Social enterprises: Between a rock and a hard place

Wednesday 17th April 2019

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New Zealand’s lack of a suitable framework to support social enterprises - companies that create impact as well as profit - is stymying a burgeoning sector.

That’s the conclusion of a new report supported by the Law Foundation and commissioned by social enterprise development organisation Ākina and the New Zealand government.

The report, Structuring for Impact: Evolving Legal Structures for Businesses in New Zealand, is intended to provide ammunition for ministers to change the 1993 Companies Act to recognise social enterprises as a legal category.

It was launched this morning in Wellington, the same week the government signed off its Wellbeing Budget 2019: The new budget, will "broaden the Budget's focus beyond economic and fiscal policy by using the Treasury's Living Standards Framework to inform the Government's investment priorities and funding decisions", the government says. The change to the traditional scope of the budget will see government "reporting against a broader set of indicators to show a more rounded measure of success".

Ākina Foundation CEO Louise Aitken has similar ideas about reform of the Companies Act to allow it to reflect the social enterprise sector.

“Our legal structures are built around very traditional ideas that you’re either a business like a limited liability company, or you’re a charity,” Aitken says.

“Social enterprises are telling us that they’re caught in the middle. They exist to create maximum positive social or environmental impact, but our current business structures make it challenging for them to do this.”

Eat My Lunch, Whale Watch Kaikōura and Trade Aid are well-known social enterprises, but Ākina estimates there are 3,500 others in New Zealand contributing $1 billion to the New Zealand economy.

Aitken says the report was commissioned after Economic Development Minister David Parker asked for evidence that social enterprises were being disadvantaged by the existing Companies Act provisions.

The Structuring for Impact report highlights 10 case studies of social enterprises saying just that.

For example, there is Ruatoria-based Hikurangi Enterprise, which is working to develop value-added businesses on their land, including breeding cannabis strains. It sounds commercial, but the mandate behind the business is to provide employment, community development and wellbeing to people living in the disadvantaged East Cape.

“Hikurangi has had to create a very complex legal structure to attract investment and operate as a competitive group of companies,” the report says. “The cost of set-up and maintenance of all the legal entities including the charities is a real burden and takes time and expertise away from innovation and impact.”

Similar story for QR code payments startup Choice, which allows people to pay for goods using their mobile and gives half the transaction fee to charity.

“The available legal structures were not capable of giving primacy to mission whilst receiving investment and generating profit,” the report says.

“They needed to create a bespoke legal structure at considerable cost in order to protect their mission and be a tech company that must attract equity to compete and scale.”

Aitken hopes the report will encourage the government to set up a working group to look at law change.

She doesn't believe New Zealand needs a whole new piece of law; changes to the Companies Act could be enough.

“I’d say a refresh; it’s a 25-year-old act, but it’s a highly flexible piece of legislation.”

But even a few tweaks probably aren’t going to happen soon. First, social enterprises need to get onto the government’s priority legislative radar. Then all the parties (business, not-for-profits, government and advisors) need to get together to come to agreement and later to flesh out the details.

“It would be wonderful if it could be in place within five years,” Aitken says.


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