Administration first, legislation later: the varied and lively development of social enterprises in Taiwan (Part 2)

After social enterprises have gained in number, do we need proper legislation to regulate the industry?
Social enterprises have increasingly become a business model applauded by the public. According to statistics from the Department of Commerce, Ministry of Economic Affairs, before the end of October 2016, there were a total of 118 companies, not including the already dissolved ones, registered with “social enterprise” in their names. If we widen the scope to organisations related to information collection in the social enterprise industry, including the Registration Platform for Companies and Social Enterprises, the Social Enterprise Hub, Government Resource Counselling, the Social Enterprise Incubation Project delivered by Social Enterprise Insights, and news media, the estimated number of social enterprises would be as many as 450.
It is fantastic to see the rapid development of social enterprises in Taiwan. However, some problems still need to be solved. Firstly, this kind of enterprise, with a social cause and market value at once, is not a legal structure of organisation in Taiwan. Any social enterprise that has a profit- making operation is subject to the Company Act if it is registered as a company. Two articles in the current version of the Company Act, Article 1 (“The term “company” as used in this Act denotes a corporate juristic person organized and incorporated in accordance with this Act for the purpose of profit making”) and Article 23 (“the responsible person of a company shall have the loyalty and shall exercise the due care of a good administrator in conducting the business operation of the company; and if he/she has acted contrary to this provision, shall be liable for the damages to be sustained by the company there-from”), might make it difficult for social enterprise owners to stick to their original altruistic intention.
Secondly, people in Taiwan have a rather shallow and fragmented understanding when it comes to the idea of social enterprise, which means that when consumers and investors are faced with a large number of organisations calling themselves social enterprises, they find it difficult to tell which organisation is trustworthy and actually makes contributions to society. In addition, the proliferation of the term “social enterprises” has also seen the appearance of some inauthentic companies. As a result, social enterprises might attract stigma, and those who are truly dedicated to this industry might be affected as well.
Social enterprise legislation: the different opinions of the general public, government and the Company Act amendment team
In response to the limitations of the existing laws and regulations, representatives from the social enterprise industry, governments, universities and research institutes have participated in many discussions and put forward suggestions on legal amendment in recent years, deciding whether or not the management of social enterprises should be written in law. After Tsai Ing-wen was inaugurated as the president of Taiwan in May of 2016, preparations to amend the Company Act sparked a new wave of discussion on regulating social enterprises. Given that revision of the law is still in progress, the latest developments at the time of writing will be summarised below.
In the face of the thorough revision of the Company Act, legislators who were in charge of social enterprises before entering the parliament pointed out two directions of future law amendment after collecting the opinions of all stakeholders.
1. Loosening up the existing regulations in Company Law
Traditionally, a company is considered to be a form of commercial organisation that only pursues profits. However, nowadays, the general public has much higher expectations of companies than just the pursuit of profits. If we look at the global trend of company law amendment, the existence of a company is no longer limited to the maximisation of interests. Given this, the Company Act amendment team suggested that the parliament should loosen up existing regulations, adding Section 2 (“companies can pursue other goals besides profits”) to Article 1 of the current Company Act and supplementing Article 23 with the clause “the responsible person of a company can give due consideration to the interest of other stakeholders in conducting the business operations of the company.”
2. Adding a special section for “benefit corporations”
The Company Act amendment team suggested that the parliament should introduce a special section for “benefit corporations” and add “benefit corporations” to the existing types of companies in order to encourage companies with social missions to grow and thrive in Taiwan, thereby motivating more enterprises to devote themselves to social influence, and making society more aware of how to recognise the right companies that are loyal to their social missions. It was thought that doing so would give entrepreneurs more options in terms of business legal structure. The amendment team pointed out that benefit corporations must pursue both profits and social goals at the same time and there should be a mechanism that keeps a company’s social missions in check. The mechanism would be built on four foundations: social goals that are clearly specified, the legal accountability of the responsible person of a company, influence disclosure to be checked by third party certification organisations, and low-density management that focuses on self-discipline.
It is worth noting that the use of the term “benefit corporation” rather than “social enterprise” is used in the Company Act amendment draft. The reason behind this choice is that social enterprises encompass many types of organisations, such as companies, foundations, associations and cooperatives. Social enterprises do not only exist in the form of registered companies. By adding the business type of “benefit corporation” and creating a special section to specify its definition and substance, the prevalent misuse of the term “social enterprise” is hoped to be avoided and social enterprises or other similar organisations can enjoy flexibility in terms of legal structure.
In the face of many suggestions for the amendment of the Company Act from the general public, the Executive Yuan approved the “Draft Amendment to the Company Act” proposed by the Ministry of Economic Affairs, which only adjusted Article 1 of the current Company Act, adding a section (“in the business operations of a company, the responsible person must abide by laws and ethics and can undertake actions that will improve the public interest in order to assume their social responsibility”) to the original clause, according to the draft already released for the public’s reference. The Company Act amendment team explained that the amendment draft put forward by the Executive Yuan does not remove the limit of “company organized and incorporated for the purpose of profit making”; and corporate social responsibility and social enterprise belong to different domains. The current amendment draft does not even include the amendment suggestions for Article 23 and addition of a special section for “benefit corporations”. In response to this, the Ministry of Economic Affairs said that its short- term priority is to research how to amend the Act for Development of Small and Medium Enterprises to mitigate the legal environment that prohibits the development of social enterprises.
In addition to the discussions and suggestions surrounding the amendment of the Company Act from the private sector, in May 2017 a group of legislators led by Yu Wan-ju proposed a Social Enterprise Development Act, which is dedicated to perfecting the environment for the development of social enterprises. This draft law aims to tackle a few challenges faced by Taiwanese social enterprises, including a lack of financial services, inadequate support from the market, and demand for training and education, as well as proposes ways to improve them. In the draft, apart from a clear status certification procedure for social enterprises, the installation of a Social Enterprise Development Fund is also suggested so that social enterprise development programs can be funded. Strengthening the mechanisms of investment, financing and credit guarantee for social enterprises and providing all sorts of consulting services to social enterprises are also part of the new law proposal.
The government cannot avoid its responsibility of listening to the public and looking for consensus
With regard to social enterprise-oriented legislation, the discussion has been heated for the last two years, and the direction of development is very unpredictable. The discussion has shifted from changing the existing law to adding a special section for benefit corporations. At the time of writing this article, the Legislative Yuan has also put forward the Social Enterprise Development Act. Whether or not the private sector, government and parliament can reach consensus on this issue is dependent on the government’s continuous role as communicator and its willingness to listen to the public, to find the common denominator across different parties and to make legislation concerning social enterprises more complete.
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