Social entrepreneurs deserve support: Such enterprises have best elements of both money-making businesses and charities

February 20, 2008

Social entrepreneurs deserve support

Such enterprises have best elements of both money-making businesses and charities


Paul Martin

For the last 150 years, politicians and pundits the world over have debated the merits of the free market system versus socialism. It’s clear now which has won: the free market, because it gives full flower to individual entrepreneurship.

That being said, it is not the free market in pure form that has won out. The structures that make the market work – courts, banking regulations, bankruptcy laws – are all government-created and supported. The fact is all developed countries depend heavily one way or another on government for the delivery of the public goods that round off the hard edges of the free market: universal primary and secondary school education and public infrastructure are just two examples.

There is one area, however, where government has not been able to round off these hard edges, and that is the lack of equality of opportunity that is manifest in the statistics, which, year after year, show an ever-increasing gap in income between the rich and the poor.

The reason for this may be privilege or it may be disability, but in most cases it arises simply because some people have good jobs and others don’t.

One could correctly argue that these gaps in equality emerge out of intrinsic disadvantage or as fallout from the free market, or both. But it is equally correct to say that some of the gap arises because we are not using the free market to its fullest potential.

And this is what I want to address today. Specifically, I want to focus on social entrepreneurs whose organizations borrow from both the private sector and traditional charities. A social enterprise is like a business in that it makes money by trading goods or services. And it is like a charity in that its primary objective is a social good. What distinguishes it from both is its double and, in the best of cases, triple bottom line.

The problem is while social entrepreneurs exist in reality, they don’t exist on paper. Simplifying its complexities somewhat, the tax act sets out rules for three categories of endeavour:

First, taxpaying corporations and individuals.

Second, non-profits, which do not pay taxes.

Third, conventional charities, which do not pay taxes and have the added benefit of being able to distribute charitable tax receipts.

These categories, with their historic boundaries, have played an important role in the growth of Canadian charitable giving. But they have not kept pace with the evolution of the social domain they seek to serve and as such these traditional limits are a barrier to innovation.

More specifically, they do not recognize the hybrid nature of social enterprise and they do not allow for the potential of social enterprise to attract new forms of capital.

If you want to create employment for people in difficult circumstances and you want to do it solely as a charity or a non-profit, you can; non-profit disability workshops are a well-known example. But if you want to raise money from investors to create those jobs and in so doing provide a return on investment, consisting of a high social return and a below market financial return, then in terms of tax incentives, you are out of luck.

Why do I think this is important? It goes back to my opening statement. We must understand that the social entrepreneur is every bit as much a part of the free market as is the business entrepreneur. And just like business entrepreneurs, social entrepreneurs run with vision, energy and passion. They come up with solutions that seem perfectly obvious – but only after they have been created.

What we need to do is develop the right mix of risk and reward so that social enterprise becomes attractive to mainstream capital. We have to make it possible for social entrepreneurs to tap capital markets and angel investors the same way their business counterparts do.

We in Canada use incentives to enable business entrepreneurs to tap capital markets for the betterment of the economy. Why would we not provide similar incentives for social entrepreneurs as they seek to tap capital markets for the betterment of society?

Financial experts ought to be developing cutting-edge instruments to make funding available to social entrepreneurs. Tax experts ought to be thinking about mechanisms that can support social enterprise in a meaningful way. Legislators should encourage an environment that allows foundations to become more imaginative in support of social enterprise. And all the rest of us need to raise the profile of the issue and push for change.

We are at a point in our nation’s history where we can do this. All the elements are there. We have a history of progressive social policy. We have social entrepreneurs who are already running successful operations. We have a charitable and voluntary sector that is the second-largest in the world, contributing almost 8 per cent of Canada’s GDP, more than the retail industry and more than mining, oil and gas together.

The business entrepreneur improves our quality of life by creating wealth and economic growth. The social entrepreneur improves our quality of life by confronting the inequality that can often be the collateral occurrence of free markets. Both kinds of entrepreneurs are necessary. Let us give them both the chance to succeed.

Former prime minister Paul Martin is Liberal MP for LaSalle-Émard.