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13 September 2004

How to tame capitalism

William Davies on Labour's plans for a new breed of company that can make profits to serve the commu

By William Davies

Joseph Schumpeter called it “creative destruction”. Karl Marx was referring to something similar with his oft-quoted phrase “all that is solid melts into air”. Observers of capitalism have long marvelled at both the energy and the turbulence that markets and profit-seekers unleash in society. But can we have one without the other?

Where Schumpeter and Marx thought that innovation and social turbulence were two sides of the same coin, new Labour believes that the disruptive effects of free enterprise can be subtly designed out. The Third Way is all about channelling the powers of the market towards social harmony: the yin without the yang, the creative without the destruction.

Next year we will see one of the definitive policy outcomes of this philosophy: the community interest company (CIC). The government describes the CIC as “an entirely new form [of company] designed to meet the needs of people seeking to pursue enterprise in the public interest, dedicating their profits to the public good”. The legislation should be passed early next year, and the first CICs will be established next summer.

The invention of CICs is designed to address the legal problems that confront many social enterprises. If they are established as charities, social enterprises are financially constrained, with limited opportunities for growth, entrepreneurship or access to capital. If incorporated as private companies, they risk losing public trust – not because a private enterprise is intrinsically untrustworthy, but because outsiders do not view profit-seeking companies as fundamentally altruistic. At present, many social enterprises must choose between a charitable public image and an entrepreneurial organisational status. They want both.

The CIC legislation will resolve the problem in two ways. First, in order to take advantage of the risk-taking features of a company, CICs will be able to expand through selling shares, although dividend payments will be capped at a certain rate. At the same time, an “asset lock” will be enforced on the CIC, so that donors and investors can rest assured that their money will be legally tied to the enterprise’s original social goals.

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Second, all CICs will be subject to a community interest test, carried out by an appointed regulator. This touches on something fundamental to the identity of any enterprise: the question of whose interests managers serve. Where conventional private companies expect managers to act in the interests of shareholders wherever possible (and they develop incentives such as stock options to support this), a CIC should be run in the interests of “the community”. To ensure that this is the case, the regulator will have to be convinced of the community interest at the outset. Thereafter, managers will have to produce an annual “community interest report” outlining how the CIC is acting in accordance with its status.

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The government is keen to assure everybody that the regulator will do very little actual regulating. As the bill puts it, he or she will intervene “only to the extent necessary to maintain confidence in CICs” – the equivalent of the “greenwashing” that is carried out by corporate social responsibility consultants in the private sector. The community interest test will seek only to ensure that a “reasonable person” would consider the CIC to have benefits to the community.

Will any of this convince the public? Anyone who was sceptical about the existence of a “third way” between socialism and neoliberalism may find it even harder to accept an organisation that is both “for profit” and “not for profit”. But as much as anything, the creation of the CIC is a branding exercise. At present, if you say “social enterprise” to people, they often do not know what you are talking about. Clarifying things legally and terminologically, it is thought, will help to build trust and recognition. Equally, injecting a bit of financial and managerial transparency into social enterprise may provide needed reassurance in certain areas.

The danger is that CICs fall foul of another classic piece of new Labour political philosophy: the belief, often reflected in the government’s approach to the media, that trust can be built through better management of the public’s perception. Too often, this is the opposite of the case. The CIC legislation is entirely agnostic on what “community interest” actually means, preferring to hide behind the benchmark of what a “reasonable person” thinks it is. All the while, the policy seems less concerned with improving social outcomes than with propping up public confidence in social enterprise.

CICs will be an important test of new Labour’s philosophical substance. The policy creates a legal framework within which dynamic, creative enterprises ought to be able to channel their energies towards the strengthening of community. With a few swipes of the legislative wand, the government is hoping to decouple “creativity” from “destruction”. However, the danger is that this underestimates how intrinsically disruptive successful entrepreneurship is, and that the policy ends up looking like a botched PR job. Schumpeter and Marx could end up having the last laugh after all.

William Davies is a senior research fellow at the Institute for Public Policy Research (