Social Business Law, the first step for the new economy

Much has been said about a new economy , about forgetting old models or finding a new way of doing things . This is because many of the current problems –climate change, inequity, over exploitation of resources– have been attributed to capitalism and especially to companies.

The pandemic only exposed all these problems even more, igniting the conversation about the economic models that caused them and about whether the system of consumerism under which we have lived is the cause of many of the social problems that we have to face today.

But, just as businesses are part of the cause, they are also an important part of solving the social problems we face. At least that is how we believe those of us who have bet on a new economic model in which companies play a key role in creating not only economic value but also social value.

From Nobel Prize winners like Muhammad Yunus, who promotes social capitalism, to business experts and academics like Michael Porter believe that from the same companies and taking advantage of the same mechanisms of capitalism – market laws, private capital, scalability, competitiveness, etc. .– Social problems can be solved.

This vision has been developing for several years in which a new type of companies has been conceived that not only seek to generate wealth, but have also prioritized generating well-being, which are known as social companies .

This vision contradicts many discourses about the evil of companies, the abuse of power, the exploitation of people and natural resources, the disinterest in the environment and the social decomposition that they can create. And it is not that companies like this do not exist, but there are many that have decided to change the ways of doing things.

Mexico catches up

In many countries, the model that promotes social enterprises has been put to the test, betting on a new economy, thanks to the creation of a legal regulatory framework that defines both the legal figure and the regulations so that they can operate and above all prosper. Only in Latin America Colombia, Ecuador and Peru already have a social enterprise law and in Argentina, Chile and Uruguay it is already being discussed in congresses.

But in Mexico so far there are no “formal” discussions or proposals for a social business law, although there are businesses that, due to their activities and not because of their legal form, have been defined as social. They have had to operate around the legal and fiscal aspects as each one of them has considered and what has impacted the way in which they generate income or obtain financing.

This has limited its growth by not having laws that facilitate its operation and provide benefits to continue generating impact or to attract adequate capital. These laws, which should be considered from the legal figure, as well as the regulations on their operation and tax incentives or benefits, are the first step to move us to a new economy.

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The challenges we face to have a social business law in Mexico

1. The first challenge to create a social enterprise law in Mexico is the definition of what is social enterprise, since there is no consensual definition that encompasses the different models that existing social enterprises follow. Some know them as purpose-driven businesses, others as triple bottom line businesses or just plain social businesses. But beyond the name, there is no single definition that can encompass the different models. However, what does exist are certain components that must be considered, accepted by most of the actors, the main ones being: the measurement of impact, the purpose of profit and the use that is given to the profits of the company.
2. Impact measurement is basically the element that defines social enterprises: for a social enterprise, generating impact is part of its reason for existing, of the results it must deliver, and not just an area or responsibility, being the generation impact generated as important as profit generation. But this impact must be measured and recorded to confirm that it is being met. And although many social companies have their measurement methods, an external entity is also necessary that can confirm this impact. This is where we find the second challenge to define the entity – public or private – as well as the methodology that could certify that the impact measurement is appropriate and that the company is complying with the generation of the positive impact so that they can be considered as a social company.
3. The third challenge is to reconcile the profit motives with the social nature of the company. This mainly because this is where the obstacles are to define the tax incentives that they could have. Just as civil society organizations, foundations and NGOs have tax benefits such as tax deductibility on their expenses or access to funds and grants, especially considering their social work, social companies should have similar considerations. But the fact that they are for profit is a barrier to that. And although it is not said that they should have the same benefits as foundations, they should not be treated the same as other companies. The challenge of defining tax benefits or incentives may be the watershed for more people deciding to create or become a social enterprise.
4. Finally, there is the discussion of the distribution of profits . In traditional business models, profits are shared among partners, but in social companies, it is sought that the profits are reinvested to continue generating impact. But you ask like how much percentage of profits should be reinvested? How can you ensure that this happens? If there are no profits for the partners, would it be attractive to invest in social enterprises? In some countries with social enterprise laws, a percentage of the profits that must be reinvested has been defined, leaving a margin for the shareholders, but some also suggest that the profits serve to pay only the initial investment of the partners, but not for generate extra profit for them. Now, this will be key for social enterprises in Mexico to be attractive to attract investment.

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The road traveled

Until today, there have been many working and dialogue tables both with political actors and with some authorities to promote the law. For several years the Association of Entrepreneurs of Mexico (ASEM) included the law of social enterprises within its Emprendecálogo , the compendium of law proposals necessary to promote entrepreneurship in Mexico.

With the Entrepreneurship and thanks to constant work with the “entrepreneurial caucus” made up of 10 senators from different parties, several laws have been advanced, such as the “one-day business creation law” or the “re-entrepreneurship law.” However, at least six proposed laws are still pending, including the law on social enterprises.

In turn, the Alliance for Impact Investing, formed by a group of organizations and companies in favor of promoting ethical and sustainable investments, has also carried out efforts to identify opportunities to create public policies that promote impact investment for not only to ensure the growth of social enterprises in Mexico but also to attract foreign capital seeking ethical and sustainable investments to the country.

Similarly, Sistema B México has taken on the task of promoting the social enterprise law in the region and advising governments so that it can see the light of day. In particular, its certification tool has been a benchmark for measuring the positive impact of companies.

And this year the Secretary General of Ibero-America with the support of the United Nations Development Program and the International Development Research Center (IDRC) of Canada as well as relevant actors of the social entrepreneurship ecosystem have worked and presented one of the investigations more complete on the subject entitled “Companies with a purpose and the regulation of the fourth sector in Ibero-America” that will undoubtedly be a watershed in drawing the way forward to achieve a Law of Social Enterprises in Mexico.

Power in Mexico

As I mentioned at the beginning, much has been discussed recently about a new economy, but it is something that has already been built for several years in the country.

In 2020, an effort was carried out to carry out a census of social enterprises, in which 305 social enterprises were identified, although there were nearly 1,000 companies that participated by recognizing themselves as social enterprises. We can also consider as a good sign the growth of certified B companies in Mexico, which have been increasing year after year and today are close to a hundred.

Mexico has seen a growth in programs and studies related to social entrepreneurship and social enterprises, with incubators, accelerators, investment funds that during the last 10 years have bet on this new way of doing business, creating companies, and positively impacting the world.

Thanks to this, today social enterprises in Mexico have managed to impact more than one million people with access to basic and quality services, increased income, housing construction, reduced impact on the environment, while generating close of 100 thousand direct jobs and attracted more than one billion pesos in investments.

The potential to generate fast-growing companies that, in addition to creating economic value, also generate social value and thereby contribute to the solution of social problems in Mexico is enormous. And the country is in a situation of social and economic factors conducive to advancing a law on social enterprises.

The importance of having a legal framework and regulation on social enterprises in Mexico will not only serve so that those that are already operating can be more efficient and grow, but also so that existing companies or new companies can consider taking the path to become social enterprises and help drive a new economy.