Multitasking is crucial to the growth of social enterprises

Co-authors:

Mitchell Franken, intern

Nanouk Grootendorst, Programma Manager Rabo Foundation

We surveyed social enterprises about the challenges they face and the ambitions they have. Our results show that, on average, social enterprises have fewer employees, more revenue growth, but also more revenue uncertainty than enterprises without a specific social goal. Social enterprises who indicate that they find successful entrepreneurship a greater challenge, show a lower growth ambition.

To achieve financial goals and a social goal, managers and employees need to successfully multitask (Vladasel et al, 2022). When the social goal receives more attention, is more salient, or attracts more intrinsically motivated employees, the imbalance can lead to growth problems within companies. These dual or social enterprises would benefit from measures that provide more guidance toward financial goals. The scientific literature on this topic describes three ways to solve this problem.

Firstly, it may benefit larger social enterprises to separate the activities for the social goal from those for the financial goal, with certain employees focusing on either the social or the financial aspect (Battilana et al., 2015). A second option is to offer employees financial or non-financial incentives (Vladasel et al., 2022) to achieve the financial goal, such as small bonuses or a tournament with a non-financial prize. These incentives should not be too large, as this could lead to a hiring policy where employees who are hired are less intrinsically socially motivated. A third possibility is to set clear financial goals and monitor which financial goals the company achieves. In combination with, for example, more knowledge about the financial aspects of entrepreneurship, this could also lead to growth of social enterprises.

Our research concerns social enterprises. But in the near future, more companies will have to multitask to achieve both their financial and sustainability targets, whether these are mandated by regulation or voluntarily set. These could be climate goals (reducing CO2 emissions, recycle requirements), energy goals (green energy or energy neutrality), or - as with the enterprises in this article - social goals (providing work to disadvantaged individuals on the labor market). Good coordination is required for the distribution of financial resources and labor between different goals to ensure growth of the company or to prevent a company from failing to achieve its social, environmental, and/ or energy goals.

Social enterprises combine a business goal with a social goal. This combination distinguishes them from charitable institutions and other businesses. In this article, we investigate the effect of a social goal on business outcomes and whether this additional goal hinders the growth of companies.

We surveyed social enterprises of the Rabo Foundation (response rate 36%, n=51 observations) and compared their business outcomes with the results of enterprises without a specific social goal from our sustainability (NEx-T) survey. For our comparison, we took into account both the sector as well as the year of establishment of the enterprise. About 20% of the social enterprises in the survey are active in the so-called other services sector (e.g., computer and consumer item repair), and 16% of them are active in the hospitality industry (see figure 1). The majority of the surveyed social enterprises’ social goals are aimed at a certain group: 41% focused on individuals with for example a migrant background, and 22% specified a target group in a specific neighborhood.

Social enterprisers have fewer employees than businesses without a specific social goal (see table 2). An enterprises without a social goal has an average of 20 to 49 employees, a comparable enterprises with a social goal counts 10 to 19 employees on average. The revenue of social entrepreneurs is growing at a higher pace (1% to 20%) compared to the more stable revenue for enterprisess without a specific social goal. Social enterprises also experience higher revenue uncertainty. These differences may be caused by social enterprises remaining in the startup phase for a longer period of time (and facing more difficulties scaling up, see Bloom and Chatterji, 2009).

Social enterprises experience less labor market tightness than enterprises without a specific social goal. Recruiting candidates for vacancies from a larger group of potential employees (e.g. employees with a distance from the labor market) than companies without a specific goal, may be the cause of this difference.

We surveyed social enterprises about their ambitions to expand their workforce, and compared those ambitions to the current number of employees within the company. To measure the number of employees within a social enterprise, we used a categorical scale (see figures 2 and 3).

We also asked social enterprises about the challenges they face regarding the governance, financial, operational, and marketing aspects of the company (see table 4). In their answers, the enterprises reported difficulty with financial aspects such as achieving profitability goals and limiting cash flow fluctuations.

We asked social entrepreneurs to indicate and rate the challenges they face within their firm (see table 4). Social enterprises that experience more governance challenges (see tables 4 and 5) indicate a lower level of ambition to expand their workforce. Enterprises that indicated that knowledge and expertise for successful social entrepreneurship was a challenge displayed a lower ambition than enterprises that found changing regulation or finances a big challenge, for example, or struggled with operational challenges. Social enterprises without governance challenges expressed a desire to move up two employee categories within five years (for example, from 10 to 19 employees to 50 to 99 employees). Social enterprises who do experience governance challenges indicate that they do not want to recruit more employees in the next five years. We do not find this relationship for financial, marketing, or operational challenges.

Social enterprises combine a social goal with a financial or commercial goal (Austin et al, 2006 and Vladasel et al, 2022). The board and employees within social enterprises must therefore distribute financial resources and effort between these two goals. This leads to a multitasking challenge. When social enterprises do not use incentives or coordination instruments, their employees spend more hours and effort on the social goal, which threatens the survival of the company in the long term (Vladasel et al, 2022). This happens because social enterprises attract employees who are socially motivated and because the results of the social goal within these enterprises are often more salient and receive more attention. This phenomenon of dedication to a social goal at the expense of profits is called revenue drift.

Social enterprises often benefit from measures that emphasize the financial goals. The scientific literature describes three ways to better achieve these financial goals: splitting financial and social goals between employees (Battilana et al., 2015), offer employees financial or non-financial incentives (Vladasel et al., 2022), or placing more emphasis on setting clear financial goals and monitoring them. In combination with more knowledge about the financial aspects of entrepreneurship, this can increase the growth of social enterprises. The advisory needs reported by the social enterprises align with this conclusion: there is a particular need for more advice regarding financial goals and multitasking to balance these with their social goals.

Representativeness, methodology, and descriptive statistics

Since social enterprises do not have a specific legal form or other visible characteristics that distinguish them from other companies, there is no overview of the population of social enterprises in the Netherlands. McKinsey (2016) estimates the number of social enterprises at about 5,000 to 6,000 in 2016 for the Netherlands, with these enterprises providing employment for about 65,000 to 80,000 workers in 2015. Table 5 provides a comparison of the visible characteristics of the social enterprises in our dataset compared to the European Social Enterprise Monitor (2021-2022). It is not clear whether the group of social enterprises in the Social Enterprise Monitor is a representative sample of the population of social enterprises in the Netherlands.

In the first part of our analysis, we compare the social enterprises to the enterprises in the NEx-T survey without a social goal. To make this comparison, we use a statistical method called propensity score matching (see extended report for an explanation). Table 7 shows the descriptive statistics of companies that are comparable (including sector and year of establishment) to our dataset of social enterprises. The top table shows the social enterprises, and the bottom table shows the enterprises without a specific social goal. Many of the variables in Table 7 concern categorical variables; the description in the last column also gives the description of the median category of the specific variable.

Regression Tables

Limitations

The conclusions in this article are based on a limited number of observations (n=51). This can cause non-representative outcomes to be presented as significant (because of outliers). The population of social enterprises in the Netherlands is unknown, so whether the sample provides a good representation of the average social enterprise in the Netherlands also can not be determined.

Additionally, it is not allowed by law to survey certain individual characteristics of social enterprises, such as age and gender, through Crowdtech due to privacy legislation. We know from literature (Hoogendoorn et al., 2011) that social enterprises are often younger or older than the average enterprise and identify more often as female. But we could not use this information to match social enterprises to non-social enterprises. This can lead to an unbalanced comparison.

The statistical method we use to compare social enterprises to enterprises without a specific social goal - propensity score matching - is a standard method in financial-economic research (see, among others, Leung and Veenman, 2018 and Bebchuk et al., 2020). But this statistical method does not result in a causal relationship, only a better-founded correlation by linking a suitable control group of enterprises to the group of social enterprises.