005 – IDEMS as a Community Interest Company

The IDEMS Podcast
The IDEMS Podcast
005 – IDEMS as a Community Interest Company
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Description

In this episode, we delve deeper into the legal structures behind IDEMS as a social enterprise. Santiago Borio interviews David Stern, a co-founder of IDEMS, and questions him on the technicalities behind IDEMS the business, the somewhat challenging decisions made when setting it up, and the potential to demonstrate an alternative way to make sound business decisions while maintaining a thoughtfully ethical mindset.

[00:00:00] Santiago: Hi, and welcome to the IDEMS podcast. I am Santiago Borio, an Impact Activation Fellow. I’m here with David Stern, a founding director of IDEMS. Hi, David. 

[00:00:15] David: Hi, Santiago. What’s the plan for today? 

[00:00:17] Santiago: Well, in an earlier episode we discussed IDEMS, the word, the acronym. Today I would like to dig deep into IDEMS, the company, and the legal structures. 

[00:00:30] David: And the company name.

[00:00:31] Santiago: And the company name… The full legal name is IDEMS International Community Interest Company, and as we said before, and we will say many times again, every single word in there has a meaning. 

[00:00:48] David: Well, Community Interest Company, or CIC as some people call them, is… is a term which is recognised as a legal term in the UK.

[00:00:57] Santiago: Okay, and what is it? 

[00:00:58] David: So in the UK this is… the UK is not the first country to do this. Within Europe, I believe, I really like the Italian legislation, which predates the Community Interest Company legislation, but it’s a legal form of social enterprise. Social enterprises have many different forms, but the community interest company is, in the way you register a company in the UK, this is a recognized legal form of social enterprise. It’s the only, I would argue, legal form of social enterprise. 

[00:01:31] Santiago: Okay… the only legal form of social enterprise?

[00:01:35] David: Yes. I mean, social enterprises could be charities. You could have a charity which actually is a social enterprise because of the way it works, the way it functions. You can have a purely for profit company, which actually works and behaves as a social enterprise. There’s also accredited social enterprises in the form of B Corps. And there’s many other forms of social enterprise. But in terms of legal structures, a community interest company is not a charity, very explicitly so, and it is a social enterprise. I don’t believe you can be a community interest company without being a form of social enterprise. It is inherently a social enterprise.

[00:02:16] Santiago: But there’s no other types of social enterprises than community interest companies? 

[00:02:20] David: There’s, I’ve just said, there’s a whole range of social enterprises for legal… 

[00:02:24] Santiago: Legally speaking. 

[00:02:25] David: Well, they’re still social enterprises, but it’s not a legal form of social enterprise. They just have their legal forms as organizations and and so…

[00:02:36] Santiago: Okay, so let’s get into a bit more detail. So, it’s a legal form of social enterprise. 

[00:02:43] David: It is a legal structure where if you decide to take this route, and I should be clear, we were advised against it. Many people are advised against it because it’s seen by some as being the worst of both worlds…

[00:02:58] Santiago: the worst of which worlds?

[00:03:01] David: You live between the charity world where you’re regulated, where you have a regulator and the commercial world, where you are, paying taxes, you know. Charity world, you’re generally tax-exempt; commercial world, you are taxed. 

[00:03:19] Santiago: So in the commercial world, you have your taxes, but you have more freedoms in some regard. In the charity side, you are heavily regulated but you have the benefits of tax exemptions. 

[00:03:32] David: And, and so the worst of both worlds of being a community interest company is you pay taxes and you are regulated. I also see this as the best of both worlds because in many ways, this gives you the total freedom about how we do business. We do business exactly like any other company. We’re not regulated on how we do business and what we do business on. As long as it’s legal business to do, we can compete with commercial companies,

[00:03:57] Santiago: So, for example we can apply to any grant that any other business would be able to apply for. So we could take any work that… 

[00:04:06] David: Any work is more important, if you think about the business side of it. There are cases where, as a charity, competing for work against a company, you could be conceived as having an unfair advantage because you don’t pay taxes, because you’re tax exempt, your tax status and so on. Whereas as a community interest company, we can compete for any work. 

Similarly, we are eligible, in theory, in practice it’s different, in theory we’re eligible for some grants where you have to be a community interest company or a charity, to be a normal for profit company would not qualify. So in theory, it’s also the best of both worlds.

[00:04:43] Santiago: Okay… there is a key word in community interest company, or set of words, community interest, community. How does that come into it? 

[00:04:53] David: This relates to the regulation. We are regulated on how we serve our community. And to do that, we need to define our community.

[00:05:01] Santiago: And what is our community?

[00:05:03] David: Maybe a better question is what are normal communities? 

[00:05:05] Santiago: Okay, let’s start with that. 

[00:05:07] David: So, often, community interest companies are thought of as being very local. That you would have, let’s say, a community around a park. The community interest company might be the cafe in the park… or the community of the users of a park would be a well defined community. 

We wanted to be global and so our community is related to our name. Our community is related to development, people in poverty, relative and absolute, people who are taking education, formal or informal, and mathematical scientists. Both mathematical scientists themselves, but also users of mathematical sciences. And so that is our community we serve. We serve people who fall into any of those three communities. Their intersections, but also individually. 

[00:06:04] Santiago: But that is hugely broad. 

[00:06:07] David: Exactly. We were not sure whether we’d be accepted with this community. And we were really pleased that we were. This is a well defined community, which is worth serving. And so we serve that community. 

[00:06:20] Santiago: And you mentioned global. 

[00:06:24] David: Yes. 

[00:06:25] Santiago: And you mentioned, in that regard, relative and absolute poverty. 

[00:06:29] David: Yes. 

[00:06:30] Santiago: So can you delve a bit deeper into that… 

[00:06:33] David: Absolutely. 

[00:06:34] Santiago: …global aspect, which I believe is what gives the international part of the name.

[00:06:39] David: Yes and no. I mean… Actually, it is central to who we are, that we are interested in relative poverty. So in the UK, we are interested in serving those who are in relative poverty. There’s almost no one in absolute poverty in the UK. Generally, that’s defined as either being less than $2 a day or less than $5 a day. And that’s a really low level in the UK. So there’s very few people in absolute poverty in the UK. But actually, if you’re in relative poverty in the UK, you still have a really serious issue. And this is sort of why relative poverty is such an important issue to deal with.

So, we believe in and we want to serve communities in relative poverty in the UK, but we have an international outlook and a lot of what we do is working in communities that are in absolute poverty, looking at the most difficult environments in the world where people are living on less than $2 a day. And how do we serve those communities better? How do we build technology for those communities? How do we use the mathematical sciences and education to reduce, or maybe even in a dream world, remove absolute poverty. Or certainly reduce it substantially.

And I need to come back to international, which as you said is key. So our view of international was not just because we have this international outlook. Our view of international was because with this international outlook, we recognised that from day one, we wanted to support partners to take the same model that we’ve taken but apply it locally. 

And so we see ourselves as the coordinating partner of those individual organizations. And we already have two, one in Kenya, one in Ghana, Francis has set up GHAIDEMS; Zach and Letitia at INNODEMS.

[00:08:51] Santiago: INNODEMS in Kenya and GHAIDEMS in Ghana.

[00:08:53] David: Exactly. 

[00:08:54] Santiago: But before we digress too much, let’s get back to the legal structure. We identified a community.

[00:09:03] David: Yes.

[00:09:04] Santiago: Okay. So we set the business up to serve that community. 

[00:09:11] David: Absolutely.

[00:09:12] Santiago: What does serving that community actually mean? 

[00:09:16] David: In terms of our legal responsibility to serve that community, as a community interest company, we are legally obliged for some of our profits to then feed back into serving that community in certain ways.

Now, we go a step further. We are a full not for profit, and so all of our profits either feed back into the growth of the organisation or to serving our communities. Further than that, through our activities, we also serve our community. And so our activities serve our community in certain ways, and we report on how our activities have served our community. And we also report on how … 

[00:10:11] Santiago: Investment… 

[00:10:12] David: Well, not investment, because the investments are still our activities, but anything we donate from our profits, how our profits can feed back into that. And that relates, there’s a, there’s a specific charity, SAMI, Supporting African Maths Initiatives, which we are asset locked to, and we have given, and we can give them, without going back to our regulator elements of our profits. 

[00:10:39] Santiago: Hang on a second. Asset locked. What does that mean specifically? Because it’s quite a complex term. 

[00:10:45] David: It’s, it’s a, it’s a very important term. This is around us being this halfway house between a commercial company and a charity. As a charity, the assets of the charity are, are sort of looked after, you know, your directors, your… 

[00:11:05] Santiago: Trustees 

[00:11:06] David: Trustees of a charity are caretakers of the assets of that charity. If the charity is wound down, they need to make sure that the assets make their way to serve the goals of the charity as they wind it down, they can’t take them themselves. Whereas a company… If a company is wound down, then the assets revert back to its owners. You know, they can sell the company or they can go back and they can take the assets out for themselves.

So in a community interest company, we have locked our assets to a charity. So if we were to wind down the company, then our assets would not revert to its directors, they would revert to its asset locked charity. 

[00:11:54] Santiago: So if IDEMS happens to go bust, all the assets, if any…

[00:12:01] David: So bust is a slightly different scenario because then there may not be assets left.

[00:12:05] Santiago: Okay. 

[00:12:06] David: But if a… if for whatever reason… if IDEMS closes down with assets remaining, then… 

[00:12:15] Santiago: That’s quite interesting. So all the remaining assets would go to the charity, but, you mentioned that in a normal commercial enterprise, those assets would go to the owners. 

[00:12:24] David: Yes. 

[00:12:25] Santiago: Who owns IDEMS? 

[00:12:27] David: That’s a slightly complicated sort of sense. There isn’t an owner in the same way. In many ways, its directors are more like the trustees of the charity, their caretakers. They’re not owners in the same way, but they are more like owners in terms of the decision making power. You know, our regulators are much more lax than charity regulators would be on the running of the community interest company so that we can compete with normal companies.

It’s sort of that halfway house that we as directors of the community interest company are the equivalent of owners, but we are caretakers. We’re more like trustees.

[00:13:10] Santiago: And that is related as well to something else that doesn’t appear in the name but is key in the definition of the company. There’s one term that we already mentioned, not for profit.

[00:13:21] David: Yeah. 

[00:13:21] Santiago: IDEMS International Community Interest Company is a not for profit.

[00:13:24] David: Absolutely. 

[00:13:25] Santiago: But it’s also limited by guarantee. Absolutely. And that… kind of relates to their ownership. 

[00:13:34] David: Absolutely. And this is really important that the limited by guarantee, this is not a requirement for community interest company. On the contrary, there are many community interest companies which prefer to choose a limited by shares model so that you can sell equity. And that is an important decision. We have thought long and hard about this and we have good reasons that we’ve decided to go for the limited by guarantee option, which does restrict us in terms of how we can source finances.

However, it also enables us to be, if we succeed, or as we succeed, to maintain the growth as the value being contained within the organization. So it sort of, it has a mixture of two different… Maybe not the growth, maybe I should be saying the decision making power. If you issue shares, you can be issuing shares which relate to the decision making power. Whereas limiting by guarantee means the decision making power remains centralized within those structures. 

[00:14:51] Santiago: So, let me see if I understand this. So, IDEMS, by being limited by guarantee, cannot issue shares, cannot sell shares as a financing mechanism. 

[00:15:03] David: Absolutely. 

[00:15:03] Santiago: But that means that unlike commercial enterprises or other enterprises that can sell shares for financing by selling those shares, they respond to the interests of the shareholders.

[00:15:20] David: Absolutely. 

[00:15:21] Santiago: And that’s something that, when setting IDEMS up, you wanted to… avoid having. 

[00:15:28] David: And this was influenced by seeing Twitter being bought out. You know, that happened after, but this is an instance, it’s not alone. WhatsApp, you know, you can go back. There’s a lot of what we thought were really quite socially impactful organizations who had found a lot of success. And then found themselves in a position where they had to sell. There wasn’t a… they were forced to lose that independence because of the nature of the shares that had been issued. And so there’s, there’s real, there’s challenges around that. 

Now there are ways to do this and other people have sort of set up systems where the shares you issue do not have the decision making power, but so you can do that as well. So it’s not the only way to do this. I think that’s important to say, but it is a safe way that it’s something where, central to our vision was the awareness that we wanted the mission and purpose of the organization to be front and centere for the long term. And so that cannot be compromised by decisions which are made in terms of the shares.

[00:16:51] Santiago: So let me see if I get this right. We sit somewhere between commercial and charity. And by, design, you made certain decisions in the legal structures that create advantages and disadvantages at the same time. 

[00:17:14] David: Yes.

[00:17:14] Santiago: And complications. 

[00:17:16] David: Yep. 

[00:17:17] Santiago: All with good reasons. 

[00:17:20] David: Yep. 

Well, let me see if I can get this, because broadly, I, I laughed when you said advantages and disadvantages. We have yet to see an advantage from our decisions, and this is why I laughed at this point. 

[00:17:34] Santiago: Yeah. And that is related as well to the, the, the common advice of… 

[00:17:37] David: Absolutely 

[00:17:38] Santiago: not…

[00:17:38] David: Why would you do this? Why would you make your life harder? You know, why not just take the easy route, go through, you know, if you’re successful, if you succeed, it’s hard enough to succeed as it is. Why make your life harder to succeed? If you succeed, then you can decide what you do with the money you’ve made.

And that’s the approach that we didn’t want to because what we, the value that we’ve got is we’re not wanting… I’m not motivated to do this, and my co founder is in the same situation. Wwe’re not motivated to do this to make money. Both of us would have rather had academic jobs with a sensible, stable salary.

Our motivation is that we believe that with an innovative structure, if we are able to succeed, then we can do things with it. The organisation that then, or that organisation, will be able to do things that we couldn’t do otherwise if we sold out some of that decision making power. So we’ve made our life harder at every step of the way so far.

And it’s going to continue to be harder because of the decisions we’ve made. But I’m a mathematician. If I was afraid of a challenge, I wouldn’t… most people would have told me not to study maths. You know, so I don’t have a problem with being challenged. What I do care about is getting things right. This is the mathematician in me. There are reasons why the choices we’ve made are the right long term decisions for the organisation. They might make it harder for us to succeed. 

[00:19:17] Santiago: And it’s not standard as well. It’s not just… 

[00:19:21] David: Well, we hope in the future these will be standard. No, somebody has to show that this is… this is possible. The reason people say you shouldn’t do this is because it’s generally believed it’s not possible. We believe it’s possible. And if we can show it’s possible, then we believe, actually, other structures could be changed so that actually this is encouraged. We believe that these are good decisions. We believe that these are good decisions not just in the UK, but internationally.

We believe that these structures , even if the legal structure of community interest company existss in the UK, it doesn’t exist elsewhere. It doesn’t exist in Kenya. It doesn’t exist in GHAIDEMS. Part of the value we can give those partners, is to have this legal structure to fight these battles so that they don’t need to. And they don’t have the same constraints, the same difficulties as us in the same way. But we’re, we’re trailblazers. Aand that’s a very deliberate choice. 

[00:20:28] Santiago: And if we’re successful, that would be an incredibly powerful case study. 

[00:20:33] David: Exactly. If we’re successful, we believe this could change regulations. This could change how banks work. This could change how loans are given. This could change all sorts of things. It’s not about necessarily us being successful in the long run. It’s about us showing that this is not only possible, but desirable. Yes, we have… 

[00:20:54] Santiago: Things can be done differently. 

[00:20:55] David: the benefits that could come if we’re able to get through the painful times. It’s been painful. It has been a difficult five years, six years we’ve gone through. But if we are able to get through to a position where actually those decisions start paying off, we’re able to demonstrate how these legal structures ensure that we don’t have mission creep, which happens to so many, that our mission remains central, even as we grow.

That’s the sort of thing which… I believe could be what others are looking for. There’s a whole movement trying to get impact investment, where people actually focus on impact with their investments. But they don’t have many good options because there aren’t many organisations… 

[00:21:39] Santiago: People are not making the hard decisions that…

[00:21:41] David: And the structures are not in place. So actually what’s happening is, there’s sort of, people are paying lip service to the impact, or the impact is getting lost along the way . Don’t get me wrong, there’s fantastic companies. I hope we do a podcast at some point on the he… the phone… 

[00:21:57] Santiago: The fairphone. 

[00:21:58] David: Fairphone. And what they’re doing is fantastic. What I would love is that the Fairphones of the future, they have a legal model to follow which supports and enables them because of the decisions we’re making. The decisions we’re making are motivated by what we would have loved them to be able to do.

But there’s good reasons why what they’re doing is much harder than what we’re trying to do. Yeah, they’re, what they’re, they’re taking, I’m so, I admire them so much in so many different ways. I wouldn’t want to take on that challenge. And they’ve got their legal structures which support them to try and do the hard thing they’re trying to do.

But they’re trying to do one thing. We’re trying to do many things because we’re really lucky. Mathematical scientists are in demand. Our skills are needed and so therefore we’re in a privileged position that we can do a harder thing. We don’t need to take the easy way out. And in some ways I would argue that’s a mathematical scientist’s job.

A mathematical scientist’s job is to figure out what the right thing to do is, and not take the easy route. Others can and should take the easier route to get where they want to . Mathematical scientists need to think it out hard, and do what is right in this context, rather than what is easy. Easy definitely is not a decision point for us. We don’t choose to do something because it’s easy. 

[00:23:26] Santiago: That’s fascinating and there are definitely many elements that I will pick you up on in future podcasts. 

[00:23:33] David: I look forward to it.