This is a CTP of initiative: Impact Hub London King’s Cross (UK)
This CTP is a change in ownership and more generally the governance structure of the IH KC. The CTP took place in the year 2011 and can be considered as a drawn-out process.
IH King’s Cross used to be owned by one individual possessing 51% of the shares and a company owning the other 49%. To finance the initiative, they borrowed money both commercially and privately. The lenders however had not become co-owners (even though several had wanted to), so the control of the company had remained with the founders. This changed in 2011: the company was decoupled from one of its founding partners and the business was restructured both financially and in terms of ownership.
The founding partner sold his 51% stake to the biggest lender, in return for the lender writing off his debt. At the same time that the former owner stepped down, the second biggest lender became the new legal director of the IH KC. Soon after, the director agreed with a majority of other lenders to write of their loans in return for shares. On that basis, they were able to reduce more than half the debt in the books, which significantly reduced the interest payments that were required. This also meant that with the improved operational cash flow, they were able to pay off the bank and those lenders who didn’t want to have shares.
The ‘turning’ in this CTP was manifested in a significant improvement in the financial situation of the IH KC. Before, the debt had been 10 times the turnover, while currently, the debt is 10% of the turnover. Even though the operation of the IH KC had already become profitable in the first year, the debt had been so high, that there was not enough money to pay off the interest, which kept building up: “It was basically never going to pay off its debt (…) Sooner or later lenders would lose patience and it [IH KC] would probably have gone bust” (legal director). The CTP is considered to be ‘critical’ in that it “was crucial to unlocking [the business], securing its future at a difficult early stage (…) If we hadn’t done that, we probably wouldn’t be here” (legal director). Building on the latter, the board member elaborates that this organizational structure had a negative effect on the mode of practice in the Impact Hub: “we had a lot of disagreements, different opinions on where money should be paid and to who, and how. We had a lot of unknowns, so people were not entirely sure who was responsible for what and accountable for what”. As a result she argues that on a scale of 1-10 this CTP was a 9,5 in terms of being critical.
The legal director refers to this CTP in terms of a ‘founder syndrome’. “Whether we are talking about businesses or charities, founders syndrome is that dilemma where a lot of these organisations wouldn’t exist without their founder. But sometimes after a while once they are established the founder is the biggest threat to their continuation”. The legal director reflects on the founder syndrome as something that occurs more often and that is somehow part of a natural process: “it is not at all unusual that what business or organisations need is a certain type of person to get it started, and to get a [different] kind of management or governance that allows it to grow”.
The main players in this CTP include the founder, the new legal director, as well as all the investors who lent money, some of whom became shareholders later on. All of these players were involved during a period (2009-2011) of growing pressure on the founder to let go of control and majority ownership, which led up to the actual CTP (see CONTESTATION). In hindsight, this process of building up tension had already started quite soon after the opening of the IH KC in 2008, as the financial situation of the initiative was fragile due to high levels of debt (see CONTENT).
Here, it is important to explain that this CTP of the IH KC has been very closely intertwined with developments at the global network level. This culminated in a period of ‘crisis’ at the global network level (2010), which resulted in the ‘transition’ of the global network structure (2011) (see related events). This process is considered a CTP (see CTP CHANGE IN GLOBAL NETWORK GOVERNANCE) in itself, at the level of the global network structure, which “went from being owned and controlled by one individual, to an association which was owned and controlled by no one personally but by everybody” (legal director). The change in ownership of the IH KC went hand in hand with the restructuring of the global network. The legal director explains how the change in IH KC “was tied up with the demise of Hub World (as it was known at that time)” and argues that if the change in ownership had not occurred, not only would IH KC probably no longer exist, but “it's possible the network wouldn’t be here either”.
Interestingly, the lead investor (lender) for IH KC was also the lead investor for the global network, and is described by the legal director as a “catalyst for both” the local and global processes: “in essence, the Hub owed its financial existence to this investor”.
This intertwinement also meant that the people involved in making the CTP at IH KC happen, were not only the investors from the local IH KC, but also people from other hubs who were involved in the global governance ‘transition’. “Some of the other hubs in the network were equally frustrated, losing patience, and it was obvious that it was going to break”. And “basically there was pressure from the other Hubs and the investors [on the founder] to let go of control and ownership” (legal director). Also the other way around, people from the IH KC team supported the formation of the association. The current legal director, however, only became personally involved at the global level at a later stage (as the chair of the global association). This was not the case at the time that the CTP took place. The legal director argues: “I wasn’t part of that [global] community at that time. I was an investor, and I was concerned with the survival and the governance of King’s Cross. (…)” The local team running the IH KC was involved in the CTP, both at the local and global level. The board member indicates that team members were more deeply involved in the built up tensions than he was at the time, because they “were here all the time and therefore much more involved emotionally in what was going on. I was turning up once a week for an hour to see how thing were going and [was] not so emotionally involved”.
The social businesses, which are members of the IH KC were not involved in the CTP of ownership, neither at the local or global level. Even though some of them had known the founder, the tensions and the subsequent CTP were “by and large invisible to the majority of members” (Legal director), and all that time the operation on the ground had continued to work and provide services. The board member emphasizes the importance of all the other shareholders: “All of the other shareholders played a role or all of the other people who had some kind of involvement, because they all made decisions on to be in or out”. That ultimately led to a situation in which a new group of shareholders emerged.
As explained previously, an important related event concerns the global network ‘crisis’ and ‘transition’ that occurred in 2010-2011. Currently, the global governance structure consists of an Association of which all Impact Hubs are members (one Hub, one vote), and a Company that is owned by the Association and mandated to provide services to local Impact Hubs. This relatively new governance structure of the global Impact Hub network aims to be ‘decentralised’, ‘distributed’ and ‘bottom-up’, where every Impact Hub ‘is accountable for the whole’. The board member of the global IH association explains this as follow: “what we’ve done there is create all these mechanisms that power cannot be concentrated too much in anybody. (…) The board is elected to keep a close eye on the company and then the association keeps an eye on the board. At the end of the day, if we are not doing the job, they can fire us. All the big decisions are made by votes of the association not by the board.”
The global ‘crisis’ and ‘transition’ process was characterised by various events that marked the global CTP, in particular a ‘global gathering’ in 2010 “where they basically gave birth to the association” (Legal director).
At the local level of IH KC, there was no equivalent of such ‘crisis meeting’, but there was “a series of board meetings” in 2010-2011 where issues were discussed and decided regarding the situation of IH KC, which led to the CTP of a change in ownership. Besides the appointment of a new legal director and the decision to issue shares to replace loans, the CTP involved several other more concrete developments, which resulted in the current governance structure. Currently, IH KC has a total of eight shareholders. The legal director explains that the shares are divided in such a way that “nobody is in control”. The biggest shareholder has 30% and the legal director himself has 20%, “so not even the two of us together are in control”. Furthermore, rules were formulated on how the business is to be run and how decisions are to be made. These rules determine which decisions the directors take, which decisions the employees take, and which decisions stay with the shareholders. Unlike most other companies, majority voting amongst shareholders needs to be 2/3 (instead of 51%), so that “smaller shareholders cannot be controlled by the top 2” and ”that means we’ve got to have good alignment” (Legal director).
These rules were formalised in the articles of association, which were revised in December 2015. “They were overdue to change. They should have been changed sooner. But we just didn’t get around to it. (…) We’ve embedded the things we were already doing in practice” (Legal director).
The whole CTP of a change in ownership was rooted and born out of contestation. The fact that the lenders did not become co-owners of the IH KC from the beginning, led to tensions according to the legal director: “It was a tension from the start because several lenders said we’d rather be co-owners”. Not being co-owners meant that they did not have a say in how the IH KC was structured as a business and what kind of activities were developed. Also amongst the operational IH KC team there was a strong tension around this issue of ownership. The legal director recalls that some of the team members“would almost certainly have walked away” if things would not have changed.
Many of the preceding ‘co-productions’ and ‘related events’ (as described before) also revolved around contestation and the building of tensions regarding the position of the founder and the previous ownership structure, both in the global discussion as well as in a series of board meetings. As the legal director describes it, “there was over a period of time [2009-2011] an erosion of trust. And then I think, following the erosion of trust, there was an erosion of patience and ultimately, it was the main investors who were the key.” This quote indicates how several people were involved and lost trust, but also how a collective of a few key investors played a key role in escalating the tensions and pushing for decisions.
These tensions in the end were ‘overcome’ by the very CTP, i.e. the change in ownership structure and governance, which also served as a way to rebuild trust. “At the end of the day, it [new structure of IH KC] is all designed to create transparency and trust. Everybody can see what’s going on. They can see that [the directors] can’t and aren’t trying to drive their own agenda, it's set up that even if we wanted to, we couldn’t” (Legal director). The process of ‘overcoming’ tensions was also based on a shared understanding or ‘alignment’ regarding a solution to the prior problems: ”Remarkably, one of the things that I think was really positive, why we are where we are today both locally and globally, is that there was a high degree of alignment about what our solution should be. There was a real buying into the not for profit association, and there was a real alignment locally in how to structure [IH KC]” (Legal director).
Other contestations that played a role referred more explicitly to the relation between the global network and the local Impact Hubs. Both directors of IH KC were critical of the license agreement that the global Impact Hub association had come up with, they believed that the legal basis should rather be a membership agreement. As chair of the global association, the legal director of IH KC then worked on turning the licence agreement into a membership agreement. The main difference between the two lies in the issue of brand ownership. The membership agreement “still has a license section in it, because we do need an Impact Hub Brand, but the tone of it has changed from ‘you are licensed’, to ‘you are becoming a member of this association, and because you are aligned to this purpose and this vision and the values, you earn the right to use the brand’” (Legal director).
Another more fundamental point of contestation that underlies this CTP lies in different opinions regarding how a social business like the Impact Hub is supposed to be run. The legal director has a strong opinion and vision on the need to choose for specific ownership and governance structures that fit with the social enterprise ideals: “In the end it is about control and power and the concentration of power and control and decision making. (…) What we’ve done [with the global association] is create all these mechanisms that power cannot be concentrated too much in anybody”.
Choosing for more equal decision-making structures, also inherently comes with contestations and disagreements. However, these are considered to be ‘worth it’, in terms of outcome and shared purpose: “There are lots of mechanisms there to make sure we don’t get another [similar] situation [one person owning everything]. Of course it has its downside as well, which is that it can be slow and cumbersome. But the key thing is that actually in the end decisions stick. Because they are the will of the majority and the minority have to respect it" (Legal director).
Looking more closely into the experiences of the board member, money was one of the main points of disagreement/contestation. For instance, there was the tendency at the beginning that not everybody paid for the services that were provided by the Hub. This resulted in a situation with a low cash flow and high debt, which in turn had a huge effect on the relations between staff. Some of the shareholders and team members were convinced that this situation was the result of bad choices and decisions of the founder and therefore they believed that he should take on the debt upon his leave. As a current board member of IH KC describes it: “There was a lot of disagreements and debate on how this should be handled and also how the relation should effectively resolve itself”. Because of these struggles and financial problems, the organisation was being run counter to its own ethics. According to the board member: “those things were completely at odd with each other. We didn’t want to be like that, we wanted things to change”.
The CTP was “absolutely” (Legal director) experienced as a CTP at the time. Not only by the legal director, but also by the wider IH KC team. Although the CTP had not been anticipated in the sense that the solution had been foreseen beforehand, there had definitely been a shared perception of a built up tension and problem that required a change.
The director recalls that when he first got involved in the IH KC as an investor, he did not agree with the existing governance structure at that time. He was however willing to still lend the IH money because he wanted to support the purpose. In that sense, he believed that at some point this governance structure would need to change: “I don’t have that much foresight. I don’t think anyone could have foreseen the future. (…) I would say I anticipated the issues, but not the ultimate solution”.
The legal director reflects on the CTP in terms of ‘a founder syndrome’: “Whether we are talking about businesses or charities, the founders syndrome is that dilemma where a lot of these organisations wouldn’t exist without their founder. But sometimes after a while once they are established the founder can become a threat to their continuation”. The legal director reflects on the founder syndrome as something that occurs more often and that is somehow part of a natural process: “it is not at all unusual that what business or organisations need is a certain type of person to get it started, and to get a [different] kind of management or governance that allows it to grow”.
Another important learning, related to the concept of social entrepreneurship and social enterprise more generally, is the need to reconcile the tensions between profit and social benefit. While the general description of social entrepreneurship stresses the ability to combine for-profit and non-profit, the legal director of IH KC stresses the need to still choose a priority between the two:“I think it is possible to profit from impact and that does not have to be a problem. We fully intend to profit from our impact here. You just need to have the impact first. If you then run like a business you can potentially make money out of it. If you put profit first that is when you have a problem”.
One of the main learnings from this CTP revolves around “the alignment of governance” (Legal director). Especially in the context of social business, there is a particular challenge regarding governance: “All companies need governance, all organisations need governance, all charities need governance, but possibly a social business needs to pay more attention to governance than anybody else. Otherwise what can happen is the erosion of trust. The founder is often a charismatic person who has attracted other people to them, and they are attracted to what they are saying about the mission and the purpose. That’s what brings people to them, and yet as they get familiar, as they get to know them, there can be another story. And that then can create all sorts of tensions or politics or fractures and it absolutely can destroy the organisation. Most small businesses, social businesses no exception, don’t think a lot about governance. When everything is going well nobody thinks about governance. The test of governance is when things are going wrong. Whether you can survive a difficult situation” (Legal director).
Not only has the CTP changed the governance structure of just the IH KC, it also changed the selection criteria of starting a new Impact Hub at other places. “One of the things that we’ve now changed in the IH is that all new candidates need to have founding teams. We won’t have a single founder IH now. That has partly to do with this problem, and partly to do with founder burden, which is the other side of the coin. You have founders who just try to do everything all by themselves. Sole founders are more likely to run out of energy and go off to do something else” (Legal director).
Another crucial lesson that can be drawn from this CTP and the interview with a current board member is that it is hard to transfer insights or practices from one Hub to Hubs in a different context. This relates to the fact that in this whole process there weren’t any third parties involved to host or facilitate the conversations between the old owners and the new ones. As the board member indicates: “We hosted them in a very London way, here there is not so much time given, it’s a quicker and faster city”. This doesn’t mean that IH KC doesn’t want to learn or adopt the insights or practices that are being performed in other Hubs, it's just that every Hub develops itself along its own pathway. As the board member indicates: “We built a successful community and a very successful financial model and that is because of the group of people that run the organisation. If you look at some other Impact Hubs and how they build their community it is exemplar for how to build a community, but if you look at their financials, their longevity, it’s a very different picture. (…) Although we are rooted in the same principles, in terms of practice we have gone a completely different way” (Board member).
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