Since social enterprises are a business form on its own, there should be a code of corporate governance specifically to govern social enterprises.
My stand: I disagree with the statement
In every corporation, quality management is essential to ensure that all the activities are well carried out and the involved parties, which include; stakeholders, employees, directors and the managers enjoy being associated with the company. All activities in an organization should run according to the corporate laws whereby the organization holds the accountability and responsibility towards its stakeholders as it conducts its businesses in an ethical manner. All organizations whether large, medium sized or small, possess a number of primary goals that assist in daily operations (Bebchuk, 2004). Corporate governance codes are ineffective especially in running of social enterprises because they only focus on profit making.
Developing countries that administer the code of corporate governance for social enterprise have experienced slow economic growth in their social enterprises because of the high taxes administered to them. Corporations that ignore the code of corporate governance in social enterprise have recorded observable improvement related to quality management and high productivity. An organization could either follow the business sector code of corporate governance, or the charity sector code of corporate governance. In addition, sustainable social enterprises have a working business strategies, products & services, and activities that satisfy the enterprise stakeholders’ needs while protecting resources for future growth. Accountability and taking responsibilities by the directors of a corporation are the key success to good governance (Sheik & Rees, 1995). A well managed company in which the corporal managers, the employees, customers and the shareholders have a perfect business and interpersonal relationship ends up meeting the targeted goals and fulfilling the needs of every one (Applied Corporate governance, 2012).
Assumptions from the statement
Social enterprises form part of the national economy since they perform business activities that bring revenues. In this statement, social enterprises are assumed to take the form of social firms, voluntary organizations who set up trading activities, co-operatives, and community businesses. All these organizations are accountable for the welfare of their stakeholders. Second, it is assumed that all social enterprises are governed by a certain code of corporate governance. The code increases the transparency between the social enterprise stakeholders and the outside world.
Definition of key terms
Ability of enterprise owners and other legitimate stakeholders to manage the allocation of resources to achieve the best possible outcome for these stakeholders
A state whereby business organizations carryout their operations in an integrity and fairness to all, and demonstrating transparency in all their transactions
A free flow of information to those that should have it in a way that is easy for them to understand and to respond.
A business with social aims of investing for the growth of the society and not necessarily for maximizing shareholder profits
Explanation on any assumptions made for the purpose of discussion of the statement
Social enterprise is a non-profit making business because it concerns with the welfare of its members without considering maximizing shareholders’ returns. In general, social enterprises trade for environmental purposes. In order to meet their environmental demands, social enterprises must perform businesses in order to meet their financial and social goals. Form the first assumption, different forms of businesses that fit the social enterprise have been given. In addition, the number of social enterprises is increasing in number in most developed countries. Moreover, these firms are accountable for the welfare of members not only to make profits, but also to improve their living standards. Social enterprises come in two forms; those that carry out social business operations, and those that carries out charitable operations. The charitable social enterprises are more of non-profit making organizations (Cornforth, 2003).
In order to perform their duties without any disturbances, social enterprises must be driven by a specific code. This code gives them the ability of performing business activities while they do not qualify as businesses organizations. The code makes the social enterprise behave like a business sector in the outside world therefore; they enjoy all the business laws but are not subjected to taxes. Social enterprises use business-like approaches in achieving their social goals because they get more earnings from a share of their income; however they structurally depend on donations. The rules and regulations of corporate governance assist in the success of market economies. The codes of corporate governance assist in streamlining operations in all organizations in order to make managers more accountable and improve their performances (Van den Berghe and Ridder, 1999).
Social enterprises must be governed by a business code in order to carry out their operations in a smooth and effective manner. Codes are the same as company laws only that they involve many businesses. Social enterprises face many challenges from other business corporations in the business environment because they are taken as forms of charity organizations. The code of business sector carries a lot of weight in the growth and development of a social enterprise in terms of business. The governance structure of an organization in any sector affects its ability to respond to various external factors. The organization faces many challenges on its ability to maintain the performance due to poor governance. Poor corporate governance issues result to financial crisis, as those experienced in Asia and European Union. In addition, the poor governance in US led to many scandals undermining the confidence of investors and affecting the global market stability (Reuters, 2002).
The importance of business sector code in social enterprise
The code of business sector assists in the management of the social enterprise to achieve the set goals and objectives. The social enterprise management starts with the people on the top who direct the others like the employees and the stakeholders on which ways to follow and which ones to avoid. The presence of inappropriate organization management leads to failure of achieving the set objectives and blames spear up directed to the enterprise directors. The codes of business sector ensure that all the functions in an organization follow a given protocol and every party receives their shares. The code eliminates conflicts of interests between managers and encourages transparency within the enterprise. Moreover, business sector codes ensure full presentation of the social enterprise on the business laws governing any operations that generate revenues. However, the application of such laws varies with the company size and the industry under which the company falls (Lasalle, 2010).
The code of business sector recognizes the rights of different parties involved in the development and growth of a social enterprise. Most countries have established their own business sector codes that suit the business operations within their environment. In establishing such codes, a country must adhere to the international corporate principles and practices in order to allow global interactions with other enterprises. According to Freireich & Fulton (2009), a social enterprise is a business on its own, but the organizations must carry out actions that benefit the society at hand. Most social enterprises, especially co-operative societies offer credit to their members. The credits give people an opportunity to gain advancement although giving much credit leaves an individual in a debt trap. The code of business sector takes control of such issue by ensuring social enterprises do not exploit their members in the name of increasing revenues (Ben-Ner and Van Hoomissen, 1994).
The legal framework provided by the business sector code determines the appropriate governance practices for the social enterprise. From the statement, a social enterprise is a form of a business on its own. The business sector code could be the most appropriate for a social enterprise. The business sector code places social enterprises in a better position of performing business related activities that generate income for their stakeholders. In addition, the code ensures that all the enterprise activities are protected by business laws governing other business organization like, manufacturing firms, banking institutions, and delivery of goods and services businesses. Moreover, the code of business sector ensures an enterprise maintains good governance and maintains an effective communication between stakeholders (The Mercury Centre, 2010).
The charity sector code of business sector is not business oriented and only concerns with the voluntary operations within a social enterprise. The current business environment requires organizations to have an idea of entrepreneurial ideas because all activities are money oriented. The key challenge facing many social enterprises is the ability to perform business operations without having any profit oriented idea. In most cases, many social enterprise based organizations end up exploiting their assets in an effort of maximizing the social benefits. In addition, the organizations must look for ways of paying their board members, and this would occur only through carrying out businesses. By adopting the charity code of business sector, a social enterprise might dwell much on donations from interested parties. However, the charity sector code encourages good governance in that an enterprise follows its principles for not performing any business related activity since it deals with voluntary and community development (ACEVO, 2005).
Through the business sector code, a social enterprise could be registered under sole proprietor, partnership, co-operative society, or a company. Registration of a social enterprise under one of the above entities gives it a chance to compete in the external market and achieve a competitive advantage. In addition, the business sector code encourages the efficient utilization of resources in an enterprise and the bigger economy. An effective business sector code ensures a smooth flow of debts and equity capital to enterprises with the ability of investing for the production of goods and services. The code ensures all societal needs are met and managers take essential control of recourses through maintaining quality business ethics. According to Gregory & Simms (1999; FSA, 2006), for an enterprise to enjoy long term benefits they must comply with the corporate laws and society expectations. Enterprises that take their responsibilities as corporate citizens have a great contribution to the civil society.
The business sector code uses the business policies that govern most organizations. Policy makers in a social enterprise understand the effectiveness of the business sector code in streamlining various operations. Availability of the business sector code gives the enterprise an opportunity of venturing into the outside business, and learns more on how make more returns from its activities. Using the business sector code through the social enterprise promotes social development, either in the private or public sector. In addition, business codes always encourage the active co-operation between corporations and other stakeholders in improving corporate performance. Moreover, the code advocates on social responsibility by ensuring all legal requirements are met by providing any benefits. Most social enterprises take social responsibility by promoting diversity of race and gender, and financially supporting education and promoting environmentally friendly technologies (Ruttmann, 2012).
The business sector code still plays an essential role in providing entrepreneur leadership strategies to an enterprise. The board responsible for establishing the code provides the necessary framework that assists in preventing various risks related to the daily running of the enterprise. In addition, business sector assists in reviewing all registered businesses in terms of management performance and gives directions on business oriented operations. Moreover, the business sector code promotes wealth creation in social enterprises by encouraging collaboration among internal organizations. In doing so, the social enterprises fall in a better position of engaging with low-income markets and, adds value to the community market products (Jerkins et al, 2011).
On the other hand, between the charity sector code and business sector code, the discussion prefers business sector code. The code gives an enterprise an opportunity to take accountability and responsible of all stakeholders for perfect governance of the enterprise. In addition, the business code of business sector ensures an enterprise relies on its internal activities in covering all debts without waiting for donations from charity sectors. The following discussion is a call for all social enterprises to join codes of business sector in order for them to cope with the present business growth rate. Firms have adapted new methods of increasing their returns through carrying out unique activities that are acceptable, but leads to higher returns and create a competitive advantage.
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