When Does Financial Performance of a Social Enterprise Translate to Social Performance?

Abstract

There has been a growing interest in social enterprise as an alternative to for-profit and non-profit organizations. By combining the characteristics of non-profits and for-profits, this hybrid organization aims to tackle societal problems while generating revenues to do so. Although scholars are increasingly noticing the complementary relationship between financial performance and social performance of social enterprises, the literature has been silent on what causes the inter-firm heterogeneity in this relationship. In this study, I focus on the governance structure of social enterprises and try to answer the following question: Which will be a more effective form of governance structure – between corporations and cooperatives – for social enterprises to translate financial profits into social impacts? I suggest two competing arguments and empirically test their validity. On the one hand, cooperative social enterprises can better convert their financial performance into social performance than corporations because cooperatives pay more attention to social goals than economic goals. On the other hand, cooperatives’ democratic decision-making structures might delay decisions and thus hamper the efficient translation of financial profits to social impacts. Using the data on Korean social enterprises, I found that cooperative social enterprises have a lower tendency to reinvest financial profits for social purposes than corporation social enterprises. Mediated moderation analyses reveal that the negative moderating effect of cooperative governance structure is mediated by (i) managerial attention to social areas relative to economic areas and (ii) democratic decision-making structure of cooperatives. The implications for the social enterprise literature, comparative governance literature, and practice are discussed.