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Social Enterprise Governance: The Best Theories

Are you involved on the board of a social enterprise?

Would you like to be?

Being a member of a social enterprise board means you need to have an understanding of governance. Governance refers to the set of systems, principles and processes by which a social enterprise is governed. They provide the guidelines as to how the enterprise can be directed or controlled such that it can fulfill its goals and objectives. Governance is known to be one of the criteria that impact investors are increasingly depending on when deciding on which enterprises to invest in. Having a clean image on the governance front could also make it easier for social enterprise to source capital at more reasonable costs. There are a number of theories of organisational governance out there.

There is agency theory which says that managers can’t be trusted so need to be held carefully to account by a board (Jensen & Meckling 1976).

There is stewardship theory which, unlike agency theory, says managers can be trusted to act ‘pro-organisationally’ and should be left to do so (Davis 1997).

There is managerial hegemony which sees that managers are best equipped and placed to control organisations (Lorsch & MacIver 2004; Mace 2004).

There is stakeholder theory which sees that the interests of all of an organisation’s stakeholders should be taken into account (Freeman & Reed 1983).

There is democratic theory which says that there should be representation of a broad range of an organisation’s stakeholders on its board (Cornforth 2003; Low 2006).

Finally, there is resource dependency theory which highlights the importance of maintaining positive relations with key stakeholders in order to secure resources for survival (Pfeffer & Salancik 2003).

The academic literature has theorised which, if any, of these theories are applicable to the governance of social enterprise. Some have suggested stewardship theory (Low 2006; Mason, Kirkbride & Bryde 2007). Research on the governance of Australian social enterprises supports this (Earles 2020). In the social enterprises studied, executive officers were trusted to act as a steward. They would come to a board meeting prepared with ideas for strategy and present these. The board members, on the other hand, asked questions or voiced opinions on the ideas proposed by the executive officer. They were ‘experts’ in a particular area of specialisation, whether that be finance, marketing, community development or otherwise. Stewardship theory is a rather agreeable theory to apply to the governance of social enterprise because it sits well with the ethos of social enterprise and the mental and social profile of its managers (Mason, Kirkbride & Bryde 2007).

It is important though that social enterprise exhibiting signs of applying stewardship theory to their governance make sure that board members continue to ask questions and voice opinions and that they don’t have any blind spots with regards to board members’ areas of specialisation.

Cornforth, C 2003, ‘Introduction: The Changing Context of Governance – Emerging Issues and Paradoxes’, in C Cornforth (ed.) The Governance of Public and Non-Profit Organisations: What do boards do?, Routledge, Milton Park, pp. 1-19. Davis, J, H; Schoorman, F. David; Donaldson, Lex 1997, ‘Toward a Stewardship Theory of Management’, Academy of Management Review, vol. 22, no. 1, pp. 20-47. Earles, A 2020, Social enterprise governance as strategy work, thesis, Centre for Social Impact, Swinburne University of Technology, Hawthorn, Victoria. Freeman, RE & Reed, DL 1983, ‘Stockholders and stakeholders: a new perspective on corporate governance’, California Management Review, vol. 25, pp. 88-106. Jensen, MC & Meckling, WH 1976, ‘The Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure’, Journal of Financial Economics, vol. 3, no. 4, pp. 305-360. Lorsch, JW & MacIver, E 2004, ‘Pawns or Potentates: The Reality of America’s Corporate Boards’, in T Clarke (ed.) Theories of corporate governance : the philosophical foundations of corporate governance, London ; New York : Routledge, London ; New York. Low, C 2006, ‘A Framework for the Governance of Social Enterprise’, International Journal of Social Economics, vol. 33, no. 5/6, pp. 376-385. Mace, ML 2004, ‘Directors: Myth and Reality’, in T Clarke (ed.) Theories of corporate governance : the philosophical foundations of corporate governance, Routledge, London. Mason, C, Kirkbride, J & Bryde, D 2007, ‘From stakeholders to institutions: the changing face of social enterprise governance theory’, Management Decision, vol. 45, no. 2, pp. 284-301. Pfeffer, J & Salancik, G 2003, The External Control of Organizations: A Resource Dependence Perspective, Stanford Business Classics, Stanford, Calif.

Throughout her career, Amber Earles has worked across Asia, the Pacific and the Middle East as well as in remote Australian Aboriginal communities to support individuals and organisations to achieve their goals. She is now applying her expertise closer to home as a Non-Executive Director of purpose-driven enterprises.

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