Wednesday, 30 May 2012

Why Asset Locks matter

This subject seems to have come up in discussion again and again so I thought I might as well blog this and air my views.
In my opinion asset locks do matter in the world of Social Enterprises.  However, I need to clarify what I mean when I am talking about asset locks.  Having an asset lock means that upon winding up, an organisation can only pass what is left in the coffers once all debts have been settled, outstanding money owing collected, fixed assets sold off to an organisation with a similar or stronger asset lock and, frequently, similar objects.  It also means that assets should not be disposed of while the organisation is still running for less than their value (e.g. you can't sell off a £300 laptop to a staff member for 1p).

What do I mean by "asset lock"? 
Asset locks come in varying forms but generally will be recognisable as one of the following:
  • Statutory Asset lock - this means that you cannot touch the assets without reference first to a regulator, or you could be breaking the law.  The assets can only be passed to other bodies with a statutory asset lock.  The asset lock can not be removed.  Statutory asset locks exist for Charities (regulator: Charities Commission), Community Interest Companies (CIC regulator) and for Community Benefit Societies.
  • Voluntary asset lock - this means that the members of the company or society have opted to put an asset lock clause in their governing document so that upon dissolution the residual assets can only be passed to an organisation with similar objects and a suitable asset lock.  Voluntary asset locks (also referred to as "members asset locks") can be removed subject to the requirements of Company or Society law.
  • Common ownership - particular form of words for a type of voluntary asset lock, generally in worker controlled business.
  • Trust - the terms of a trust are decided when it is registered and the Trustees remain personally liable.

Some voluntary asset locked organisations can distribute profits to individuals, but any profits reinvested immediately become assets and protected.  It is worthy of note that some statutory asset locked organisations allow payment of bonuses to staff and have no cap on Director remuneration!

So why do asset locks matter?

Asset locks are a matter of protecting the "offer" that is made:
  • People establish social enterprises to achieve a social purpose and pass ownership onto others.  They need to know that purpose will continue to be achieved to be able to leave
  • They preserve value which was often created by people committing time and/or money freely to make a difference, not to make individual business owners wealthy. 
  • The life of the organisation's benefit is protected and lengthened.
How robust are these asset locks?

Asset locks can be circumvented by a devious mind.  They are part of the solution and not the answer in themselves:
  • An asset lock is only as strong as the membership of the organisation.  If you have participatory governance, an inclusive membership and accounts open to your members then the scrutiny provided by your community of interest adds to the strength of your chosen asset lock.  This applies equally to statutory asset locks.  If there is no whistle blower, how does the regulator know something amiss has taken place.  Especially when you consider that the CIC Regulator has a small staff team to monitor 6000+ CICs.
    For example, a small membership CIC (using CIC Regulator model) of 2 people is only answerable to its Directors and to the CIC regulator through annual Returns and accounts.  Any assets remaining at dissolution can only be passed to another asset locked body.  Safe you might assume.  However, the assets may also be used to achieve the objects of the organisation.  It would be completely legitimate for the Directors to pay themselves to pursue the objects of the CIC.  After all, that's what it is there for, not to sit in a bank account devaluing.  But who is to say that the Directors are providing Value For Money?  The Directors are allowed to decide how much they should remunerate themselves.  Are they actually converting the assets into wages under the guise of achieving the objects of the organisation so they can declare nil assets upon dissolution? Providing the Report to the CIC Regulator shows sufficient benefit to the declared Community they will serve would anyone know?  No-one but those 2 Directors gets to see "under the bonnet" of the business.  This is why I argue that the asset lock is only as strong as the membership is vigilante.  Some would argue that sections of the charity sector have become a gravy train for personal benefit of employees over benefit to beneficiaries for years - and all legitimately.
    And interestingly even the private sector is witnessing shareholders holding Senior Managers to account over their remuneration!
  • Your business model adds to the strength of the asset lock.  If your members stand to gain more in the long run by the organisation existing to serve them they will fight tooth and nail to protect it.  If they stand to lose very little they can be bought off in some way.  Just look at the demutualisation of building societies in the 90s.  People were bought off with £250-£1000 to convert their society into a plc.  And within a short space of time services changed from meeting the needs of borrowers and savers to meeting the needs of shareholders.  Some ex-members were probably more than £1000 worse off within a year.  FAIL!
It is arguable that an organisation of 50 people with a voluntary asset lock is more protected than a small CIC! Mine is a somewhat contentious view - an "Emperor's new clothes" moment if you like - especially for those who see the CIC legal form as a panacea, but I have been working with social enterprises since before the CIC existed.  I have also dismantled and reassembled a large number of different legal structures which maybe puts me in a position to view it objectively.  I made this point in a Guardian online Q&A session (  No-one challenged what I said, including the CIC Regulator who was taking part.  They have missed the comment or it may be an uncomfortable truth.

The only conclusion I can come to is that even for a statutory asset lock, the asset lock is only as robust as a vigilant membership.  This makes a clear argument for stakeholder led social enterprises as opposed to the crop of "entrepreneur led" social enterprises that are flooding the sector - encouraged by a number of high profile, well resourced programmes.  If your enterprise is truly social, in my opinion it needs more than just social aims: it requires some form of social ownership and clear accountability through its governance structures and management practices.  Only then can you be certain what you have established will sustain its social benefit in the future.

Saturday, 12 May 2012

So how am I doing?

While I have been so busy with the day job, I thought it would be nice to show what I've been up to.  A brief report on the support I have delivered during the first year of Olmec's Step Ahead programme can be seen by following the link below.  I am particularly pleased with the feedback and some of the comments on the support I provided, especially this one:
"Our advisor has a huge wealth of experience, very approachable and very helpful”.  That's me that is!