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Golden Shares: Big Society Capital blog

Shantelle Rochester-Henry, founder of London Film Studio, was faced with a tough decision. She could see the impact of her film training courses on vulnerable young kids and wanted to expand her reach, but was worried that to do this she needed investment and  investors who were ‘only in it for the money’ wouldn’t understand the social heart of the enterprise. How could she grow her business and not lose her purpose?She found a middle ground – expand the commercial operations with the help of private investment but give the non-profit training operations power to ensure the business stayed true to its founding social mission. It did this through issuing what is known as a ‘golden share’.

Golden shares gained popularity in the privatisations of the 1980s. Government sought to bring  market discipline to utilities, defence and industrial companies (and cash to public coffers), at the same time as ensuring that the national interest was protected. As such, golden shares were issued in organisations such as BAE systems and Rolls Royce, which retains a golden share today and remains one of the last remaining British national industrial champions. However, although this was originally a tool of the public sector, it is now being considered by others, such as university spin-outs. But it is social enterprises, like London Film Studio, that are increasingly considering how they can deploy this legal innovation to manage this difficult balancing act between scale and values.

Therefore, Hogan Lovells, in partnership with Big Society Capital has launched a report, Going for Gold: How golden shares can help lock in mission for social enterprises explaining what golden shares are and how they can used best.

What are golden shares? Basically, a golden share is a share issued by the social enterprise to a trusted third party that hands over control over the social mission, so any change to this requires the third party’s approval. Giving up any control like this can be a little scary, particularly for a founder who is deeply committed to the enterprise. However, it can have benefits: it guards against new investors wanting to change the social mission or it drifting over time, it makes a clear transparent public statement that social mission is central and it allows the enterprise to differentiate itself. There is some legal technicalities involved, however it’s a relatively simple process, and the golden shares report provides some examples documents to help enterprise consider how this can be done in practice.

Who should hold this golden share? The beauty is that the social enterprise can pick who they think is best. Clearly, anyone with this level of control, should be someone that is credible, independent, has the relevant expertise and skills and of course is someone that can be trusted.  This could be an individual with deep experience of the social enterprise, a well-respected charity in the same social field, or even a foundation set up expressly to monitor the social mission spun off from the original enterprise.

What will an investor think of this? Investors will rightly ask some questions as they also won’t have ultimate control of the enterprise. However, golden shares allow investors to be confident that their money will be used for the social purpose they intended and that the enterprise is committed to that social purpose in the long term. It is also a signal that could help attract the right kind of co-investors, aligned to the social goals of the enterprise.  

For us at Big Society Capital, we’re keen to find new simple ways to support social enterprises to scale up not just their operations but their impact too. Currently, only around 8% of our investments support private companies with social purpose, and to get comfortable, we ask them to make a series of legal commitments in their articles of association to protect their social purpose through our governance agreement . However, new approaches that make it easier for social enterprises to use, and investors to recognise, are interesting to us, and we would be keen to see more innovation in our future portfolio.

Ultimately, having another independent enforcer  of an enterprises’ social mission through golden shares gives greater confidence to not just investors but a broader range of stakeholders, including consumers, Government purchasers and the general public that they mean what they say. A win-win for social enterprises and investors who are struggling with this difficult balancing act.

However, we’ll only know the true potential of this innovation when it is used more. Therefore, we hope that social enterprises, social investors and their legal advisers can all work together to see how in practice this former tool of privatisation can be used to help social enterprises like London Film Studios reach more people in need.

-Hazel Peck, Assistant Internal Counsel, Big Society Capital

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