Institutionalizing-social-entrepreneurship-in-regulatory-space-Reporting-and-disclosure-by-community-interest-companies_2010_Accounting,-Organizations

institutionalizing social entrepreneurship in regulatory space reporting and disclosure by community interest companies alex nicholls said business school university of oxford united kingdom a b s t r a c t in 2005 the british parliament passed legislation to make available the fi rst new legal form of incorporation in over a century the community interest company cic this initiative represented an important element within a larger set of public policy measures that aimed to create a more enabling environment for the accelerated growth of social entrepreneur ship and specifi cally social enterprises in an exploratory study this paper presents an analysis of the regulatory space within which the reporting and disclosure practices for cics were negotiated three elements within the regulatory space are identifi ed as having explanatory value regulatory boundaries that set and limit the terms of negotiation around regulatory practice the key actors that engage in a process of negotiation around the establishment of actual practice the range of debate and confl icting ideas that inform regulatory negotiation and legitimating consensus the analysis suggests that a normative logic of light touch regulation was of particular importance within the wider uk policy con text from within which cics emerged and that the cic regulator acts as a mediator of dis closure information across multiple user constituencies empirically this paper draws upon a sample of 80 published cic annual reports to consider two aspects of cic reporting the quantity of information provided and the type of data presented these data demon strate the limitations and challenges of current cic regulatory disclosure practices for key users of reporting information particularly in terms of perceptions of organizational legitimacy conclusions are drawn concerning these limitations particularly in terms of their implications for public policy in terms of new research this paper makes two important contributions first it devel ops theory in terms of social reporting and public policy with respect to the regulatory mechanisms that relate the two this has yet to be explored in social entrepreneurship research second this paper includes a preliminary examination of the reporting practices of cics in their policy context including an analysis of a sample of the publicly available cic annual reports that have been fi led to date this data set has yet to be the subject of any other academic research 2009 elsevier ltd all rights reserved the community interest company does what it says on the tin the concept is straightforward it has the interests of the community at heart and proves this by agreeing to regulatory oversight of the use of its assets and social pur pose and by providing transparency in the way it operates burgess 2009 introduction in 2005 the british parliament passed legislation to make available the fi rst new legal form of incorporation in over a century the community interest company detini 2004 dti 2003 hereafter cic this initiative rep resented an important element within a larger set of public policy measures that aimed to create a more enabling envi ronment for the accelerated growth of social entrepreneur 0361 3682 see front matter 2009 elsevier ltd all rights reserved doi 10 1016 j aos 2009 08 001 e mail address alex nicholls sbs ox ac uk accounting organizations and society 35 2010 394 415 contents lists available at sciencedirect accounting organizations and society journal homepage ship dees 1994 1998 nicholls 2004 2006 2008a and specifi cally social enterprises1with the state acting as cat alyst customer and champion of the emergent sector cabi net offi ce 2002 dti 2002 ots 2006 the uk was not the fi rst european country to create a new legal form for social enterprise italy introduced a new type of organization the social solidarity co operative specifi cally for social enter prises in 1991 and other european countries such as spain and france followed later defourny spear lounsbury meyer meyer scott 2008 stryker 2000 second the sociology of accounting as institutional practice that reveals reporting and disclosure systems as products of wider social power structures and norms hopwood 1978 1983 hopwood power 1994a 1994b 1997 2003 2007 the research uses these ap proachestoexaminethedisclosureandreporting mechanisms designed for cics in terms of the regulatory space hancher suchman 1995 the regulator thus translates policy objectives into light touch regulatory structures and synthesises the resultant reporting data back to users as meta evidence of perfor mance and organizational legitimacy the paper proceeds as follows fi rst it defi nes the cic legal form and its key features next the notion of regula tory space is used to analyze the processes by which the disclosure requirements of cics became institutionalized three elements within the regulatory space are identifi ed as having explanatory value regulatory boundaries that set and limit the terms of negotiation around regulatory practice the key actors that engage in a process of negoti ation around the establishment of actual practice the range of debate and confl icting ideas that inform regula tory negotiation and legitimating consensus hancher the capacity to pay directors transfer as sets under certain conditions issue shares pay dividends and offer performance related debt interest the cic34 re port in conjunction with the annual accounts aims to capture basic information concerning the fi nancial perfor mance of the company and its community or social pur pose thesereportsrepresentedablendedvalue accounting model of disclosure see nicholls 2009 that aims to capture the twin objectives of the social enterprise form regulatory space wolk francis and tearney 1992 suggested that effec tive disclosure regulation has three functions to set mini mum standards to increase the amount of information publicly available and to provide guidance for the prepa ration of such information to organizations to enhance comparability across entities however a neo institution alist analysis suggests that in reality such regulation is the consequence of a complex negotiation of multiple com peting interests that are articulating different perspectives on disclosure driven by different objectives and often focussing on different audiences hopwood young 1994 the research identifi ed three key elements a nicholls accounting organizations and society 35 2010 394 415397 that constitute a given regulatory space the regulatory boundaries that bracket or isolate existing sets of activi ties and apply normative models to them the various di verse actors engaged in the regulatory discourse the contentious or negotiated issues and areas of debate that are relevant to the regulatory fi eld hancher and moran s model provides a useful frame work better to understand the particular context from within which cic regulation emerged it is suggested here that the key regulatory boundary that drove the normative discourses of cic disclosure drew upon a larger trend to wards light touch regulation that has transformed the rationale for statutory reporting over the last 20 years the various diverse actors engaged in the regulatory dis course are identifi ed as the users of cic disclosure informa tion in a hierarchy lead by policy makers but that also acknowledges at least in principle other key stakehold ers finally the negotiated issues and areas of debate that are relevant to this regulatory space centre on the relation ship between the statutory cic disclosure requirements and the nature of the actual data disclosed in terms of the types and level defi ned here as a function of the quan tity and quality of information reported this paper also suggests that the role of the indepen dent regulator herself is critical in mediating information to reconcile the diverse users within this regulatory space in terms of their differing perceptions of organizational legitimacy this perspective draws upon work carried out by march and olsen 1989 see also young 1994 that ex plored the normative function of regulatory space within a logic of appropriateness context they suggested that the construction of regulatory space is constrained by norma tive expectations of the role and purpose of the regulator or higher authority and that this isomorphic pressure ulti mately constrains the boundaries around the social con structionof appropriate regulatorysolutionsand structures this logic of appropriateness is founded upon the established identity of the dominant actor in regula tory space defi ned as having three constituent parts the refl exive sense of the actor s own status within an institu tional fi eld who they think they are the framing of an ac tor by others that makes their actions meaningful who others think they are the actor s place within the narra tive structures that organize the institutional fi eld the ac tor s relationship to others refl ecting a similar theoretical perspective hopwood et al 1994 identifi ed a regulatory constellation that drove the rise of value added logics in accounting this construct identifi ed all the key actors and their interrela tions that ultimately formulated and enforced new regula tion furthermore this fl uid space described the complex patterning of institutional relations around regulatory change such as various economic and administrative pro cesses key bodies of knowledge systems of norms and measurement and classifi cation techniques hopwood et al 1994 p 225 these different actors all pursue their individual interests and purposive projects often in competition with others and the consequent oppositions and negotiations lead ultimately not only to normalized regulatory outcomes but also to unintended consequences p 227 macdonald and richardson 2004 further emphasized the legitimating function of the processes enacted within regulatory space namely that the development and imple mentation of regulatory consensus represents a negotia tion between the practical meaning of legislation and the legitimate role of the regulator p 492 this dynamic challenges conventional command and control systems of accountability and disclosure by engaging the regulated in a discursive process of regulatory change in effect this rapprochement between regulator and regulated generates a regulatory partnership rather than opposition all these conceptualizations of regulatory processes and outcomes share a number of common features first all acknowledge that normative discourses mythic narratives and other sense making mechanisms play key roles in framing the possible outcomes of processes of regulatory negotiation second all recognize the importance of key actors in establishing regulatory disclosure norms finally there is agreement that regulation provides legitimacy to users of reporting information the next three sections consider each of these key issues in turn bounding regulatory space the dominant logic of light touch regulation from the outset cics were to be the subject of monitor ing and scrutiny by an external regulator appointed by the secretary of state for trade and industry now the secre tary of state for business innovation and skills in the ori ginal cic consultation report dti 2003 p 22 four tasks were proposed for a cic regulator to check that applicants for cic status are not for profi t companies working in the community interest to review community interest reports which set out the actions the company is taking to pursue public or com munity benefi t and to involve stakeholders to publish these reports allowing stakeholders to check them and companies house records to ensure the com pany is complying with the obligations of its status to ensure that the residual assets of wound up cics con tinue to serve the public or community benefi t in addition the regulator had responsibility to ensure that all cic activities are subject to scrutiny and to provide legal protection against potential demutualization and windfall profi ts being paid to cic members and directors in the absence of the checks and balances of mutuality co operative or charitable status cic regulator 2009 the role of the regulator was further elaborated by burgess cic regulator 2007a p 3 to include a focus on facilitat ing the growth of the number of cics as well as their levels of public recognition whilst at the same time ensuring that trust in the new form was protected and enhanced in the communities they serve this represents an interesting extension of the conventional monitoring and sanctioning roles of a regulator into something akin to proselytizing however the execution of these functional aspects of the regulator s role was subject to a set of more general guidelines that determined the boundary of the regulatory 398a nicholls accounting organizations and society 35 2010 394 415 space within which cic disclosure practices were negoti ated the original legislation enacting the cic form set out the terms of reference for the cic regulator as an independent offi ce holder and as such he is com mitted to providing informed impartial and fair regulatory decisions and light touch regulation the act expresses this principle by requiring him sic to discharge his func tions in accordance with good regulatory practice having regard to the likely impact of his actions on those who may be affected the outcome of consultation with and with organiza tions representing community interest companies and others with relevant experience the effi cient and economic use of his sic resources cic regulator 2007b pp 6 7 the boundaries and requirements of light touch regula tion were drawn from uk government best practice guide lines that any regulatory action taken should encompasses fi ve key principles as set out by the better regulation task force brtf 2003 2004 2005 cic regulator 2007b proportionality intervening only when necessary and appropriate to the risk posed with costs being identifi ed and minimized accountability justifying decisions and being subject to public scrutiny consistency ensuring that government rules and stan dards are consistent and implemented fairly transparency being open and keeping regulations sim ple and user friendly targeted focusing on the key issues and minimizing any side effects this approach was consistent with that outlined with respect to the reform of charity law set out in the cabinet offi ce s 2002 review of the third sector here it was noted that regulation should be carefully targeted and propor tionate to risk both to the risk of abuse and also to the risk of damage to public confi dence and that a distinction should be made on a risk return basis between regulation of large and small organizations with the latter attracting lighter regulation 2002 p 30 these concerns to reduce the disclosure and reporting burden on organizations fi t within a larger set of policy objectives designed to improve the effi ciency of govern ment action gershon 2004 hampton 2005 specifi cally the introduction of light touch regulatory policy emerged from within the discourses of the new public management reforms that gained normative value in the 1980s and 1990s as part of the reinvention of government osborne behn 2001 dickie kelman 1990 arguing that tight hierarchical supervision of pro jects and activities is ineffi cient jos gambling jones power 1997 p 62 thus regulation becomes a stra tegic management opportunity rather than a mechanism of sanction for compliance and the legislative state shifts its focus from enforcing performance disclosure to the meta monitoring of organizational responsiveness to reg ulation this distances the state from organizational per formance and creates regulatory structures that allow for the control of the mechanisms of control rather than those designed to extract and test organization specifi c data the delegation of this controlling power to an independent reg ulator further distances the state from organizational per formance monitoring and also alters the legitimating discourse around regulatory disclosure attendance to light touch regulatory disclosure thus functions as a form of symbolic good governance which manufacturesreliability hannan mcsweeney 1994 the normative logic of light touch regulation proved dominant in the regulatory space that determined cic reporting and disclosure the consequence of this was two fold fi rst the bespoke reporting mechanism designed for cics the cic34 report was structured to require only a limited amount of information second the regulatory fo cus in terms of disclosure and reporting was on compliance not on the quantity or quality of information disclosed the implications of this are considered further below shaping regulatory space key actors and key actors in the case of the formation of cic regulation govern ment policy makers were the dominant actors in the regu latory space there is an established literature on the use of regulation as an instrument of policy and there are a num ber of examples of policy makers using regulation to build and support larger political projects for example merino and neimark 1982 suggested that in the usa the securi ties acts 1933 1934 were effectively the consequence of the ideological capture of a moment that represented a sig nifi cant opportunity to enforce greater corporate account ability thus the acts were not driven by a desire to reform regulatory failures within stock markets after the wall street crash but were rather framed to continue the wid ening of share ownership across the population as both a socio political project and as a soft mechanism to make fi rms more accountable under conditions of increasing economic concentration and centralization similarly loft 1994 and hopwood et al 1994 provided interesting his torical accounts of the relationship between the develop ment of new regulatory requirements on disclosure and re