LAW AND SOCIAL ENTREPRENEURSHIP

NEW LEGAL PROTECTIONS FOR SOCIAL ENTREPRENEURS

When Ben Cohen and Jerry Greenfield sold Ben & Jerry’s to Unilever (UN) for $326 million a decade ago, they did so reluctantly. They liked the payout but feared the new owners would ignore the social goals famously embraced by the ice cream maker. The board, though, felt it had no choice but to accept Unilever’s offer. “The legal advice was that the primary concern for the directors was the financial interests of the shareholders,” says Greenfield.

Entrepreneurs who want to put principles before profits—even after their companies go public—may soon have the legal cover to do just that. On Apr. 13, Maryland Governor Martin O’Malley signed a law creating legal entities known as “benefit corporations” and giving them greater protection from shareholder lawsuits. California and Vermont have similar bills in the works and legislators in at least three other states, including New York, are considering them. While many entrepreneurs applaud the measures, corporate governance experts worry about the rights of shareholders.

Interest in so-called socially responsible businesses by investors and entrepreneurs has grown in recent years. More than $2.7 trillion­—about 11% of all assets under professional management—were in some kind of socially responsible investment in 2007, the latest data from Bloomberg show. More than 30,000 U.S. companies are members of socially responsible or sustainable business organizations, according to B Lab, a Berwyn (Pa.) nonprofit that certifies businesses as socially responsible.

Under the new Maryland law, benefit corporations must spell out their values in their charters, report annually on activities that benefit the public, and submit to third-party auditing of their societal impact. Becoming a benefit corporation, or shedding that status, would require approval of two-thirds of shareholders.

A California bill would have similar provisions for what it calls “flexible-purpose corporations.” In Vermont, a bill creating benefit corporations passed in the state senate and is awaiting action by the lower house. Such measures would “better insulate [companies] from the pressures of short-term­ism that dominate the public equity markets,” says Jay Coen Gilbert, co-founder of B Lab, which has certified 296 companies as B Corporations.

Many more privately held companies are likely to seek benefit corporation status. Small Dog Electronics is a 40-employee Apple (AAPL) reseller with two stores in Vermont and annual sales of $20 million. CEO Don Mayer wants to recharter as a benefit corporation if the Vermont law is passed, in part because he is considering selling a stake in the company to raise funds for a third store. Small Dog, which is 15 years old, operates e-waste drives that recycle hundreds of tons of discarded electronics. It also matches customer donations to charities and pays 90% of its workers’ health premiums. It even covers some veterinary care. “This will give us another tool in our quiver to attract the kind of investors that we want,” says Mayer, 61, who hopes to ensure that future owners will preserve the company’s mission after he retires.

Will shareholders want to invest in companies that don’t have a laser-like focus on profit? “Most shareholders invest for the return to them, not for the return to somebody else,” says James J. Hanks Jr., a corporate lawyer at Venable in Baltimore. Others think managers could cite these alternative aims as justification for bad decision-making. “If your goal as a corporation is to better the environment, then you should be working philanthropically,” says Charles Elson, director of a corporate governance program at the University of Delaware.

That’s not the view of Jeffrey Hollender, co-founder of Seventh Generation, a $150 million maker of environment-friendly household products based in Burlington, Vt. Hollender took Seventh Generation private in 2000 after seven years as a public company and recently wrote environmental values into his corporate charter. When the company was public, “brokers promoted the stock on primarily financial metrics: Buy this stock and get rich quick,” he says.

Hollender, 55, says Seventh Generation’s board will consider incorporating as a benefit corporation if the Vermont law passes. He calls the bill “part of a larger transition to a more just, equitable, and sustainable economy. It’s the beginning of creating institutions that support that transition.”

The bottom line: Activists like the idea of protections for companies with social aims, but corporate governance experts worry about shareholder value.

By John Tozzi

from: http://www.businessweek.com/smallbiz/content/apr2010/sb20100421_414362.htm

 

CK PRAHALAD: A MENTOR AND ICON REMEMBERED

The world has experienced a great loss this weekend, Coimbatore Krishnarao (CK) Prahalad, strategy guru, University of Michigan Professor, and mentor to me and many others passed away on Friday evening.

There are few people who have created a global movement that has changed the way millions of people see the world and CK Prahalad is one of them. I first heard about CK through his book, “The Fortune at the Bottom of the Pyramid”. The idealist in me was moved by his words of dignity and a new approach to poverty alleviation and the pragmatist in me was driven by his talk of business models and market opportunity. I immediately left my job, was accepted to the University of Michigan’s Ross School of Business, and moved to Ann Arbor to learn from this remarkable man. I am merely one of thousands, perhaps millions, who were inspired by Professor Prahalad’s message.

While CK was one of the world’s most respected strategy gurus (ranked #1 in the top 50 global business thinkers) it was clear his life’s mission was to change the way the world thought about poverty. He believed in the dignity that came with giving the poor a voice and a choice in the decisions they made about their lives. And most importantly he believed in humility and deep listening. He once told me that when you do your work go with real humility Blair, for the poor know more about life than you could possibly imagine.

What makes CK so amazing is that he was not walking the halls of the United Nations or the State Department to address poverty; he was waking up Fortune 500 companies to his vision of social change. He was attempting to convert the seemingly unconvertible, and he was creating an entirely new paradigm in his wake.

CK created a language (Bottom of the Pyramid for example) that allowed the business community to talk about social change and simultaneously allowed the social sector to talk about capitalism as a tool to fight injustice. This contribution alone demonstrates his sheer brilliance in the face of one of the greatest cultural and ideological divisions of our time.

CK’s work was always grounded in his deep commitment to education. Despite his fame and prestige he always continued to teach and to listen. I will never forget my first day in his class when he had assigned 100 business school students, with hundreds more waitlisted, to read philosophy. The typical MBA’s were waiting for him to deliver his lecture supplying them with their first framework for innovation and instead he asked us to reexamine our lives and the society in which we lived. Let’s just say that was not the typical assignment for business school, but CK was not a typical man. He once said to me, “I don’t like to think inside the box, I like to create my own box.” And he did just that.

Our final exam for the class was to write a two page essay on where we saw ourselves in five years. My vision was to be at Acumen Fund, and that vision has become a reality. It is amazing what happens when someone like him asks you about your dreams and then gives you the confidence and support to realize them. CK Prahalad was not just a guru or an icon he was a teacher and a mentor.

Last year I asked CK to speak at the Acumen Fund Fellows Graduation. During his presentation he told us, “If there was one thing I could wish for it would be to be young again”. While CK could not have his wish; his voice, his vision, and his passion, now live in those hundred of companies, thousands of social sector organizations, and millions of people around the world who are young enough at heart to hope, to create their own box, and to see the world through a different lens. These people no longer see the developing world filled with poverty and corruption but instead see these markets filled with opportunity and hope. CK we will carry on your legacy and as you told us we will “work to see the world not for what it is, but what it can be”.

Thank you Professor Prahalad you will be missed.

by Blair Miller

http://blairemilymosaic.blogspot.com/2010/04/mentor-and-icon-remembered-ck-prahalad.html

MD GOVERNOR SIGNS BENEFIT CORPORATIONS INTO LAW

ANNAPOLIS, Md., Apr. 14 /CSRwire/ – Maryland Governor Martin O’Malley signed into law the nation’s first legislation creating Benefit Corporations, a new class of corporations required to create benefit for society as well as shareholders.

Unlike traditional corporations, Benefit Corporations must by law create a material positive impact on society; consider how decisions affect employees, community and the environment; and publicly report their social and environmental performance using established third-party standards.

The legislation, sponsored by Senators Jamie Raskin and Brian Frosh and Delegate Brian Feldman, passed the Maryland Senate with a vote of 44 – 0 and the Assembly 135 – 5.

“Milton Friedman would have loved this,” said Andrew Kassoy, co-founder of B Lab, the non-profit that drafted the model legislation with William H. Clark, Jr., partner in the Corporate & Securities Practice Group of Drinker Biddle and Reath. “For the first time, we have a market-based solution supporting investors and entrepreneurs who want to make money and make a difference,” Kassoy added.

The new law addresses a long time concern among entrepreneurs who need to raise growth capital but fear losing control of the social or environmental mission of their business. These entrepreneurs and other shareholders of Benefit Corporations now have additional rights to hold directors accountable for failure to create a material positive impact on society or to consider the impact of decisions on employees, community, and the environment.

From a company’s point of view, the new law empowers directors of Benefit Corporations to consider employees, community and the environment in addition to shareholder value when they make operating and liquidity decisions. And, it offers them legal protection for those considerations.

“Today marks an inflection point in the evolution of capitalism,” said B Lab co-founder Jay Coen Gilbert. “With public trust in business at an all-time low, this represents the first systemic response to the underlying problems that created the financial crisis — protecting companies from the pressures of short-termism while creating benefit for shareholders and society over the long-haul.”

“This is a great moment in the evolution of commercial life in Maryland and America,” said Senator Raskin. “We are giving companies a way to do good and do well at the same time. The benefit corporations will tie public and private purposes together.”

Maryland is the first state to pass Benefit Corporation legislation, but others are quickly following Maryland’s lead. Vermont Bill S.263, co-sponsored by Senators Hinda Miller and Peter Shumlin, has already passed the Senate and will be considered by the Vermont Assembly over the next 30 days. Other states considering the legislation include Colorado, New York, North Carolina, Oregon, Pennsylvania, and Washington.

Benefit Corporation — Major Provisions

Purpose

  • shall create general public benefit
  • shall have right to name specific public benefit purposes (e.g. 50% profits to charity, carbon neutral, 100% local sourcing, beneficial product to customers in poverty)
  • the creation of public benefit is in the best interests of the Benefit Corporation

Accountability

  • directors’ duties are to make decisions in the best interests of the corporation
  • directors and officers shall consider effect of decisions on shareholders and employees, suppliers, customers, community, environment (together the “Stakeholders”)
    • not required to give priority to any particular stakeholder
    • have discretion to give priority to particular stakeholders consistent with general and any specific public benefit purposes
    • standard of accountability is identical for operating and liquidity/change of control decisions

Transparency

  • shall publish annual Benefit Report in accordance with recognized third party standards for defining, reporting, and assessing social and environmental performance, including assessment of successes and failures in achieving general and specific public benefit purpose and in considering effects of decisions on stakeholders
  • Benefit Report delivered to: 1) all shareholders; and 2) public website with exclusion of proprietary data

 

Right of Action

  • only shareholders and directors have right of action
  • no third party right of action
  • Right of Action can be for 1) violation of or failure to pursue general or specific public benefit; 2) violation of duty or standard of conduct

Change of Control/Purpose/Structure

  • shall require 2/3 majority vote

From CSR Wire: http://www.csrwire.com/press/press_release/29332-Maryland-First-State-in-Union-to-Pass-Benefit-Corporation-Legislation