ASA bans A4e from calling itself a 'social purpose company'

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ASA bans A4e from calling itself a 'social purpose company'9

Finance | Vibeka Mair | 22 Aug 2012

A4e cannot call itself a 'social purpose company' as its business activities generate a profit, the Advertising Standards Authority has ruled this week.

In response, A4e is considering appealing the Advertising Standard Authority's decision.

A4e, which holds a number of government welfare-to-work contracts, had called itself a 'social purpose company' on its website. However a complainant challenged whether the claim was likely to mislead customers as to the nature of its business, and asked the Advertising Standards Authority (ASA) to investigate.

A4e believed the claim did not mislead because the key focus of their business activities was to achieve positive social outcomes. It said the majority of its revenue derived from contracts is aimed at achieving long-term sustainable employment outcomes.

However, the ASA decided that that the claim was misleading, because A4e's business activities were intended to generate a profit. It was also concerned that individuals would believe 'social purpose company' meant that A4e was a not-for-profit organisation.

The A4e website now states that it is a private company with a social purpose. A statement on its website advises that it is considering appealing the ASA decision on its use of the term 'social purpose business'.

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Richard Patey
Director
Profit Is Good Ltd
10 Sep 2012

A business model with an integral social purpose can increase profit in the same way that making a good profit can increase the positive social impact a business makes, e.g TOMS shoes.

Barb - agree, it is totally absurd. We live in a culture in the UK (moreso in Scotland than England) where making a profit is viewed by the majority of people working in this social purpose space as immoral. This is why we have so little global / scalable success stories from the UK even though we are leading the way with support agencies.

Daniel - top comment, profit redistribution and legal structure is all smoke and mirrors. An IPS housing association in Norwich where I'm based can't make a profit so it pays its CEO £130k+ a year in salary.

[Reply]

Daniel Phelan
Editor-in-chief
Civil Society Media
10 Sep 2012
Response to [Richard Patey]

Thanks Richard and I must say there is a good deal of informed debate on this subject on your own website which I would encourage people to read.

Nick Temple's response to my comment led me to re-read (after many years) the memorandum and articles of association of Civil Society Media Ltd which are the only 'constitution' this company has. As a director since inception (1990) I was worried that I have been ignoring my 'legal duty to maximise profits' as Nick puts it. Should I be handing myself over to the authorities for failing to maximise profit at every opportunity? I could certainly do with a bit of a rest, but jail time wasn't quite what I had in mind!

Company memo & arts aren't particularly easy reading but I have yet to find anything in ours which says we must maximise profits. It is quite clearly stated that the company has the power to make all kinds of arrangements on any terms it chooses but there is no qualification that I can see which mentions profitability. It does, however, have among its powers, the ability to 'support and subscribe to any charitable object'. From (distant) memory, this was simply a memo and arts pulled 'off the shelf' by a solicitor at the point of setting up the company, so nothing out of the ordinary.

This leads me to doubt Nick's assertion that there is a legal duty to maximise profits. Were that to be the case, I am already wondering how could it ever be enforced given the huge number of judgement calls that any enterprise makes as it goes along. How would you ever know if you had maximised profits or not? Please advise.

[Reply]

Gonzo
23 Aug 2012

Emma Harrison the founder and key share holder of Action 4 Employment (A4e) took £8million in self payment from A4e last year. That is a significantly more than just a wage for work for a social purpose. A4e has contracts that are financially target driven to get its clients in to sustainable employment. The targets vary from 13 to 26 to 52 weeks in employment. Therefore indirectly the DWP (Department for Work and Pensions) incentivies a profit driven company to seek and tender the welfare to work contracts. The ethos in these organisations to get as many clients in to work otherwise the projected profits are not meet. This is at the cost of the clients. Where is the social purpose in that.

[Reply]

Daniel Phelan
Editor-in-chief
Civil Society Media
23 Aug 2012

I do not stand up for A4E in any way, but surely it is possible for a private limited company to have a social purpose. Isn’t the legal form of an entity merely the dumb vessel into which the motivations and ethics of management are poured? A crook is a crook whether working for a charity or a business. Surely the reverse can also be true. You may find a saint as easily in your local corner-shop as in a charity perhaps!

in any case, the profit versus surplus discussion can be largely semantic. A charity paying its ceo £40,000 and making no surplus is in much the same place financially as a small business operating in the same field which pays its owner-manager £20,000 as salary and distributes ‘profits’ in the form of dividends to the same person of £20,000. One has made and distributed profit, the other has simply paid a higher salary. There is little difference in the end result.

I also have sympathy with Barb’s points that what matters most is the quality of service that is delivered and that profit/surplus should not be viewed as inherently evil. Without making more than you spend, there is nothing in the pot for ongoing investment in equipment, staff, products and services, all of which have to come ahead of distribution to shareholders for any enterprise to be sustainable or grow.

[Reply]

Nick Temple
SEUK
7 Sep 2012
Response to [Daniel Phelan]

It is possible for a private company to have a social purpose, but their constitution makes it their legal duty to maximise profits: so their primary purpose will always be financial. Of course, a legal structure never guaranteed anything, but it can provide safeguards or regulation.

For example, to take your £40,000 example. The real comparison is between a charity paying a CEO £20k, and utilising the £20k profit to further its social mission / do more good work...and a business that distributes that £20k profit to shareholders. In the context of public service delivery like the work programme, that £20k can be £8m or £10m, of course.

Of course, the quality of service and performance is crucial: all sectors need to get better at measuring and communicating the wider social value they create...no argument there.

[Reply]

Peter Munro
22 Aug 2012

According to the Inland Revenue, charities normally generate surpluses or deficits, not profits or losses. If I understand their policy correctly a charity's surplus isn't taxable but a charity's profit is taxable (though it's ignored when not significant).

Social enteprises are businesses with a social purpose, they make profits not surpluses, and their profits are taxable.

However, as I understand it, A4e is neither a charity nor a social enterprise but a private company and should not be allowed to call itself a company with a social purpose.

[Reply]

Barb
22 Aug 2012

This sounds like the biggest absurd in the world. 'Social purpose company' doesn't say that a company has to generate loss (it apparently can't generate profit) - UK is probably the only country in the world where companies are evil if generate profit. Setting up a company to run into bancrupcy is illegal - so what social enterprise are actually supposed to do if they are not supposed to generate profit?!
It's not about generating profit but about using profit for social purposes so either an article contains this interesting misunderstanding or actually profit is anti-social according to public services.
By the way, since when profit is anti-social? Or companies for that matter? I would prefer a solid company to teach me Spanish than a chaotic, rickety charity that is mostly closed anyway because people have better things to do (work maybe? in these anti-social companies I hope?...) and professionalism is a word good for a dictionary not for them. Oh boy, something went wrong in Europe...

[Reply]

Nick Aldridge
CEO
MissionFIsh UK
22 Aug 2012
Response to [Barb]

"Not for profit" = surpluses cannot be distributed as dividends to owners or shareholders. They must instead be used to further the organisation's (social) purpose.

[Reply]

Jo Wood
22 Aug 2012
Response to [Nick Aldridge]

What Nick says is absolutely correct, however I find it astonishing that the CEO of MissionFIsh UK would comment since MissionFIsh UK provide their services only to registered charities and not to other "Not for profit" organisations, for example, social enterprises, CICs, IPAs.

[Reply]

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