A CIC in the teeth?

Interesting to note that Jonathan Bland has come out to say that there hasn’t been enough marketing of the Community Interest Company model. Interesting because, currently, the CIC model is all over the sector press and the blogs because of ECT (see Social Enterprise Magazine‘s front cover this month: HAS ECT SOLD OUT?; the article isn’t online but it’s a helpful, if not full, explanation of what’s happened…combined with the Guardian article I posted about recently). Interesting, also, because of what he said was "absolutely shameful":

"All that work, all that money spent on the regulation – and now they
don’t have a marketing budget…When we brought together some
of the CICs that have been created, they said the biggest issue they
have is that nobody knows what they are and they have to spend all their
time explaining what they do."

But isn’t the ‘shameful’ aspect, if any, that "all that work" and "all that money" went on a legal structure that doesn’t appear to be producing any lasting changes to the sector. And that this is the case is as much a structural issue (i.e. how it was set up: the details of the structure) and a choice issue (i.e. there were lots of options anyway) as it is a marketing one. And that all that work and money could have gone into something that might have had a game-changing effect on the movement.

What has become evident is that there are critics of the structure for different reasons: on the one hand, those that feel the regulation around the structure is not sufficiently strong, nor the community interest test sufficiently rigorous, to ensure democratic accountabillity in the governance of the CIC. On the other, there are those who feel that the dividend cap prevents a decent level of equity investment. Finally, there are none of the benefits that a charity might receive (rate relief, tax relief, gift aid etc).

Some good introductions to CICs are here (written) and here (2 x podcasts). What surprises me, as a certified non-legal expert, is the simplicity by which the asset (held in the community interest: hence the name) can be transferred under these circumstances. Whilst my memory is sometimes faulty, I do remember the launch being all about how the asset lock would ensure these assets are used solely for the benefit of the community. This was to reassure investors, funders and other stakeholders in the structure (no.1 benefit of the CIC, according to them: "The Community Interest Company brand provides: Reassurance to stakeholders, as the asset lock and community purpose are regulated"). But actually those assets can be sold / transferred as long as they get market value for them.

Equally, few CICs have managed to gain inward equity investment, as drawn attention to by several of the venture investors / financiers in the sector. It’s interesting to note that ECT’s problems were exacerbated by this: as Steve Sears says in the interview in Soc Ent Mag:

"It was financed through debt and we were going to have a problem continuing to grow. The problem was lack of equity, lack of money, and it was getting harder to borrow because of the credit crisis"

So there wasn’t enough of a capital base to scale up and support further growth. As Rod Scwartz (who’s been passionate and perceptive on this issue) writes: "by structuring as a CIC, ECT and others forgo the ability to raise
genuine equity. Investors are unwilling to accept equity-like risk
(which is associated with many of these CICs) for what are (lower)
debt-like returns. Who could blame them? This is a fundamental flaw of
the system, especially for fast-growing companies like ECT which
require the cushion normally provided by equity."

And this is why so many have been writing about this story, and about the CIC structure: at a start-up level, CICs have difficulty (or simply can’t) in accessing start-up grants, and don’t have any of the benefits associated with a charitable structure. If they are trying to achieve inward investment once established, that is also proving very difficult. In a sense, as someone jokingly said to me, it’s "classic third way"….

Which leaves the main positive remaining USP feature as the "badge" or "reputation" of the structure as a social enterprise model. Clearly, though, in the wake of the above, this too may suffer. Will putting more marketing budget behind an unproven structure bringing few benefits and raising many challenges be the best use of resources in difficult times ahead? An investment in people, in skills, in knowledge, in peer-networks, in support….must surely bring more benefit, regardless of what structure they choose.

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One thought on “A CIC in the teeth?

  1. Nick
    Thanks for your very generous comments on this subject. We expect to post more on this issue and related issues on our blog at http://www.catfund.com/blog/ because I think this issue will run and run. the main failure of CICs, which you touchon towards the end of you post, is the point about CICs being some sort of badge or reputation, which you rightly claim is damaged in this case. I would also contend that there never was any such badge to get damaged. CICs were a form of company that few people had ever heard of. The notion that such a brand would convey something positive from which the CIC would benefit is pure conceit
    Rod Schwartz