3.6 Working with Investors
After working out the details of the investment deal, the social entrepreneur would be wise to set up a working relationship with the social investor. Creating an advisory board is both a practical way to involve the social investor in the operations and to give the social investor voting and control rights (e.g. one social enterprise sends a monthly overview of the financial situation to the members of the advisory board, which convenes four times every year).
The members of the advisory board usually include representatives of the social enterprise, representatives of the shareholders and independent experts, who can contribute expertise from either the social or business sector.
The advisory board can strengthen the quality of the entrepreneurial decisions and the accountability of the management by asking tough questions about current practices and suggesting new policies, procedures or approaches. Social investors tend to have extensive knowledge about corporate governance, reporting, controlling and corporate finance, but have limited knowledge of the core activities of the company such as delivering the social services to the target group. For this reason, the social entrepreneur should adjust his or her expectations and use the existing skill sets and network of the social investor.
As described in Box 4, a very important element is the interpersonal relationship between investee and investor. Given the many potential conflicts regarding alignment of the social mission, profit distribution and future development of the enterprise, the social entrepreneur should first be certain that he or she wants to have the social investor as a thought partner before including him or her in a key decision-making role.
Box 4
Achleitner et al. (2008) conducted a study on minority investments of private equity funds in family firms. Similar to social enterprises, family firms have multiple goals. Some of the key findings were:
- Family firms always install an advisory board (if not existing already) after the investment. Interestingly, the advisory board is kept in place even after the exit of the investor.
- The management particularly appreciates the role of the advisory board as sparring partner.
- The family firms benefit from the investor’s support in corporate governance, controlling, reporting and corporate finance.
- A clear common understanding concerning the profit distribution is necessary to minimize the risk of conflicts of interest.
- The interpersonal relationship between the investor and the family firm is the single most important selection criterion for the family firm in finding the right investor.