LAW AND SOCIAL ENTREPRENEURSHIP

PUT YOUR MONEY WHERE YOUR HEART IS

    As I continue to research, write, and speak about the legal and tax implications of the social enterprise movement, I often encounter three types of contrarians in the law. There are the scoffers: commentators who believe that emerging social enterprise law is misguided and a little silly. Then there are the traditionalists: commentators who believe that social enterprise is stealing attention and money away from the true do-gooders in this world—charities. Finally, there are the skeptics: commentators who are not opposed to social enterprise, but who believe that social enterprise is just a glorified version of corporate social responsibility–important for business management practices but not for the law.

    To the scoffers, traditionalists, and skeptics: I understand and appreciate your perspective, but the triple-bottom line is that you’re wrong. You either need to be part of the solution or you need to get out of the way. To quote from the Borg (but without adopting their nefarious intent): “You will be assimilated. Resistance is futile.”

Of course, by stating this, especially in this fashion, I’m asking for it. And I probably will get it. But the fact remains that social enterprise is here to stay, and it is having and will continue to have a significant impact on the law. That is not because the law is leading change. No. Societal change is dragging the law along.

Essentially, the social enterprise movement and the corresponding changes in the law are the result of a simple, overriding principle that is embraced today: Put your money where your heart is. We see it everywhere. Investors and philanthropists are no longer willing to take a Jekyll and Hyde approach to managing money. Increasingly, it is considered unacceptable to make money by any legitimate means possible on the one hand while the other hand gives that money away to support charitable causes. Instead, thoughtful investors and philanthropists want their money to earn a return and benefit society. Employees and the consuming public echo these sentiments; they want their work life and their consumption to align with their values as well as their pocketbooks.

Where is the proof that this shift is taking place? College endowment funds are being pressured to divest holdings in companies that harm the environment. Private equity firms are selling positions in gun manufacturers. There is renewed interest among foundations regarding program-related investments. Oil companies are paying for ad campaigns that demonstrate how much they care about the environment. Major financial institutions are creating funds focused upon so-called “impact investments.” Consumer products companies routinely engage in “cause marketing” whereby charitable contribution dollars are tied to product sales. Uniform standards are being designed to measure a business’s social benefit alongside its financial returns. Books and reports are being written about the growing resentment in the nonprofit sector that one must accept less money to work in charity.

In response to these forces, business and tax law must and will change because it is founded on the incorrect premise that doing well and doing good are mutually exclusive. For instance, most business lawyers would agree that prevailing corporate law protects management decisions that further shareholder wealth maximization, but the same law provides considerably less protection for decisions that further the interests of other stakeholders (e.g., employees, the community, the environment). Social enterprise directly challenges this legal imbalance. Similarly, the Internal Revenue Code operates on the now false assumption that an organization falls entirely into either the for-profit, taxable model or the nonprofit, tax-exempt model. For income tax purposes, there is no middle ground. Social enterprise directly challenges this notion as well.

Thus, I say again to the scoffers, traditionalists, and skeptics of the emerging law of social enterprise: As time will tell, you’re wrong. Unless you want to become irrelevant, you should accept the social enterprise movement and work to refine and improve the applicable law. Change is coming whether you like it or not.

“First they ignore you, then they laugh at you, then they fight you, then you win.” –Mahatma Gandhi.

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