Thoughts on Social Cooperative Enterprises
Truth is it has been a long time since I first thought about writing to you about the topic of Social Cooperative Enterprises, Social Economy Record and the financial tools used respectively, as I was conflicted with what should I write with regard to the matter. Nevertheless, Mr. Chouliaras, co-founder of HIGGS, had already delved deeply into that in his work, which I recommend to everyone considering working for civil society and interested in the creation of Nonprofit Organizations, with the title “Big scale private charity: the present and future of foundations” included in the practical guidebook for NGOs published by Papazisi publications and sponsored exclusively by Stavros Niarchos Foundation. Notably Mr. Chouliaras underlines (see pages 29-30, a practical guidebook op.cit.[1]) :
“In this perspective, Pierre Omidyar, founder of eBay, is a very interesting example. Since Carnegie, in the 19th century, until nowadays, it is common for the overly rich people in the USA and everywhere else to give part of their wealth to foundations that usually take their names after them and which consequently provide other social organizations with funds (The Economist 2013). Omidyar started in the same manner. Notwithstanding, in the year 2004, he replaced Omidyar Foundation with Omidyar Network. Network does not provide funding for projects which have an expiration date but finances organizations instead. The latter can even be profit-driven, but in the sense that profit is being re-invested in social causes. Typical examples are D.light which provides people in India and Africa with cheap light bulbs that absorb sunlight in daytime to use it at night and Bridge International Academies which assists the operation of 200 schools in Kenya, whose monthly tuition fees is 5 $. This is considered to be a form of “Venture Philanthropy”, a term added in modern vocabulary alongside social entrepreneurship. In spite of it all, there’s a long road ahead of us. As noted by management-guru Michael Porter, “billions are still wasted away to ineffective philanthropy (cited in The Economist 2013)”.
Plenty of questions emerge from the above. In a more advanced phase, what suffices is the realization that what Mr. Chouliaras, Mr. Omidyar -mainly-, but even Mr. Michael Porter are actually talking about Social Cooperative Enterprises. The real question, though, seems to be the following: are Social Cooperative Enterprises really non-profit organizations and what position do these factors hold in the Greek legislative system? In Greece, is there any room for organizations of a different type, promoting transparency and modern -business- thinking as a way to combat poverty?
Do you think civil society is ready to embrace Social Cooperative Enterprises and this particular “new type” of rights? According to the writer’s viewpoint, it is not yet. There is a long road ahead of us, as Mr. Chouliaras had aptly noted beforehand. Our work is to make a more purposeful effort in battling inequality and this is something we should all contribute to. Foundations first. After a little while, since the publication of the law[2] that first introduced the establishment of that type of “enterprises” and the shy appearance of the very first Social Cooperative Enterprises in the economic life of the country, a justified reluctance was observed on the side of foundations and social donors in general with regard to financing these types of groups of natural persons. Truth is that, in the past, there were certain Social Cooperative Enterprises which had been misconducted and had become vehicles, used for the promotion of clientelism. This led to the almost irretrievable corrugation of the real social and economic purpose of their creation. This purpose can be very briefly summed up to the following three phrases: battling unemployment – concurrent pursuit social and economic goals[3] – direct democratic procedures.
There is another viewpoint according to which a Social Cooperative Enterprise is considered as a profit-driven enterprise, hence not entitled to financing from entities that belong in the private sector or other entities providing financing. According to this opinion, which has many supporters and is dominant at the time, Social Cooperative Enterprises can distribute profit to their members, a practice that equals to speculation. According to writer’s opinion that specific wording is dogmatic and creates a lot of confusion at the expense of truth, that we are actually in search of. In order to understand the real meaning of speculative activity we are going to return to a really complicated matter on which we have written in one of our previous articles: this of speculative activity. For this reason, we will have to “borrow” an extract from the limited case-law available concerning the matter. Happening to attend to the issue of speculative activity in Non-Profit Civil Partnerships, the Multi-membered Court of First Instance of Piraeus, in its number 3010/2014 decree, analyses:
The differentiating factor between non-profit civil partnerships and their generic concept, the type of enterprise mentioned in the article ΑΚ 741., is its “ideal” purpose, in other words the inability of its members to profit from the partnership’s projects. On the other hand, according to ΑΚ 784 a prerequisite for the acquisition of legal personality by civil partnerships is the sharing of a common economic goal. It is not obligatory that this goal is relevant to profit, as it can relate to broader content instead. Its non-profit character is compatible to the economic goal defined by AK784 up to the degree that even if a non-profit partnership makes profit, this profit is not distributed to its partners. But even when a partnership is not seeking making profit in order to finance its goals, being literally a non-profit partnership…
All the above lead to the following consequence, to which we have been led once more, concerning the true meaning of speculative activity: it is possible that a non-profit entity engages in commercial activity provided the profit it has made is not distributed to its partners-members. But let’s go a little bit further than that; what does “distribution of profit” precisely mean? To be precise, the phrase “distribution of profit” means the transfer of title of net profit to the members of a union of natural persons that aim at profiting. In order to isolate net profit we should first remove all operational costs, the amount of costs that concerns salaries, as well as any other costs.
Every Social Cooperative Enterprise can indeed distribute its profit to its members, but under one condition: its members should also be working at the enterprise at the same time[4] . Summarizing that particular clause, which the reader can find in footnote number 4 of the text, 35% of the profit of a Social Cooperative Enterprise is not exactly distributed to its members, but to its employees, equally and as a whole. It is only possible that the employees of a Social Cooperative Enterprise are its members as well. Does this percentage represent a genuine distribution of profit, as briefly noted above or even according to popular belief?[5] Truth is it does not. A valid legal argument in favor of this opinion can be the most insightful verbiage of the previous clause, before its amendment. The 4019/2011 act was describing this distribution as a productivity bonus given to employees of such entities. The true nature of this transfer of title is clearly linked to salaries and not distribution.
In any case, if that particular amount of money is indeed to be offered, it will be filed as labor cost in tax return statements, and not as dividend issuing from commercial activity and participation in commercial enterprises, given the fact that members of Social Cooperative Enterprises do not gain commercial capacity because of their participation to the enterprise, even if they receive 35% of profit. This percentage is consequently distributed as an additional fee to the received salary and it is to be calculated for the recovery of insurance taxes from Social Insurance Institute. This means there are insurance taxes and payroll taxes that correspond to it. In that sense, it is not a genuine distribution of profit.
Last but not least, one should observe that this percentage is not only distributed among members-employees but among all employees (and to each one of them, equally), regardless of them being members or not. Moreover, it can be decided (by a minimum percentage of 66% of the votes of the general meeting of the Entity) not to be distributed to the employees but to be invested in broadening the productive activity of the Entity, meaning even productive activity which is related to the social – community services it provides. In these cases, which are indicatively listed in this paragraph, arguments in favor of the dominant opinion lack support and cannot be applied in practice. In these cases, meaning the cases in which part of the profit is not distributed according to the decision of the general meeting, does the non-profit character of the entities prevail? The answer is that the ideological clarity of the dominant opinion turns out, as we are about to witness in coming analysis, to be destructive to its very foundation.
Besides, who can claim that D.light, providing India and Africa with cheap light bulbs and Bridge International Academies providing low-cost but essential schooling, has a prevailing non-profit character, given the fact that, if I am not mistaken, their profit or part of it is received by their members, so that the latter can cover the cost of their living expenses and get paid for the valuable services they provide to those in need?
Costas Brilis,
Lawyer
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[1] op.cit. = opus citatum: Suggests that the reader should refer to that particular work, mentioned previously in the text.
[2] act 4019/2011, which is known to have been completely reformed after the amendments by act 4430/2016
[3] Non-Profit Civil Partnerships are preferred in cases the social goal of the entity is considered as more crucial than the economic one (see ‘more limited commercial activity’), the number of partners is relatively small and remains stable and unchanged, the unlimited liability of the partners does not impose a problem, the gain and distribution of profit is not of immediate interest and commitment to democratic procedures when it comes to the administration of the enterprise is secured. Partners in a Non-Profit Civil Partnership can get paid for the service they provide, but cannot receive part of the profit while being partners.
Social Cooperative Enterprises are preferred in case of concurrent pursuit of social and economic goals (growing market integration of securing income), engaging in multiple economic activities, commitment to its co-operative dimension, facilitating change regarding its members, commitment to democratic procedures when it comes to administration, as well as in case that the limited distribution of profit to the employees of the enterprise is of interest (http://ilfconsult.com)
[4] Especially in act 4430/2016, article 21, there is a clause that states:
- The profit of Social Cooperative Enterprises is not to be distributed to its members, except if these members are employees, in which case paragraph 2 is enforced.
- The annual distribution of profit is consisted by:
- reserve currency (5%), b. distribution to enterprise’s employees (35%), except from the case in which the 2/3 of the General Meeting of the Entity decides on the justified distribution of the amount or part of the amount to activities mentioned in part c , c. the rest is invested in the creation of new job positions and generally the broadening of its productive activity.
[5] We are going to delve more deeply into the true meaning of distribution of profit in future texts. In this text, the writer chooses not to proceed to a more thorough analysis of the term and its meaning, both for reasons related to the comprehension of the text, as well as for the economy of space.
