LAW AND SOCIAL ENTREPRENEURSHIP

DEFINING SOCIAL ENTERPRISE

Given my interest in social enterprise, many friends and colleagues e-mailed me Professor Steven Davidoff’s recent article in the New York Times DealBook about Make a Stand,  a company founded by then eight-year old Vivienne Harr that sells “all-natural, certified organic, U.S. grown/Fair-Trade, GMO-free” lemonade and donates 5% of gross revenue to organizations focused on ending child slavery.

As Professor Davidoff mentions, Make a Stand is organized as a social purpose corporation in Washington state.  Social purpose corporations are one of the many “social enterprise” legal forms that have arisen in the U.S. over the past five years, along with benefit corporations, benefit LLCs, flexible purpose corporations, L3Cs, public benefit corporations, and sustainable business corporations.

While these new legal forms have been grouped under the term “social enterprise,” the term “social enterprise” is not well defined in the literature.

The Social Enterprise Alliance (the “SEA”) defines “social enterprise” through a tripartite test:

(1) Directly addresses social need;

(2) Commercial activity [not donations] drives revenue; and

(3) Common good is the primary purpose.

The recent “social enterprise” statutes, however, do not expressly require products or services of social enterprises to directly address social need in the way described by the SEA.   Most of the social enterprise statutes are also unclear on whether shareholder or other stakeholder interests take priority.  The benefit corporation statutes do require a “general public benefit purpose” but simply list shareholder interests alongside other stakeholder interests that the directors must consider in every decision (and shareholders are the only listed stakeholders that the statutes give standing to sue derivatively ).

Professor Christine Hurt (Illinois Law) describes one of the differences between corporate social responsibility (“CSR”) and social entrepreneurship (often used interchangeably with “social enterprise”) as:

“CSR focuses on companies that make widgets, but who do so in an enlightened way; Social entrepreneurship envisions companies that make a completely different kind of widget. . . .most of the companies who are heralded for “good CSR” make products for rich people or at least premium products that are a splurge for the average person: Ben & Jerry’s ice cream; Burt’s Bees; Toms shoes. In making these products, which are more expensive than their competitors, they brand themselves as “giving back” or being enlightened to employees, communities or the environment. These companies don’t seem to be losing money by “doing well and doing good,” though their profit margins arguably might be lower than otherwise.

Social entrepreneurs start for-profit companies in a sphere usually inhabited only by not-for-profits and try to do something that can’t be done by NGOs because of capital scarcity or knowhow scarcity. Social E’s make a different kind of widget that isn’t needed by rich people, but by the needy: affordable clean water, light sources, hygiene products, sanitation, etc.”

However, most of the companies that have chosen the social enterprise legal forms, including Make a Stand, look more like companies engaging in CSR than social enterprises as defined by Professor Hurt.  Make a Stand’s lemonade may be made in an “enlightened way” and a percentage of revenue is given away, but the lemonade itself appear to be made for sale to relatively wealthy consumers.

Some legal scholars have given “social enterprise” a much broader definition, a definition that looks much more like Professor Hurt’s description of CSR – essentially, companies that use commercial activity to drive revenue for the common good.

Part of the confusion stems from people using the term “social enterprise” to describe at least three different types of enterprises, which I have listed below.  Some companies will, of course, fall in more than one category.

Generous Enterprise.  What (and how much) the company gives away.  Examples include Make a Stand’s 5% of revenue giving pledge, Patagonia’s 1% of revenue for the planet commitment, and TOMs Shoes’ and Warby Parker’s buy one, give one model.

Responsible Enterprise.  How (and under what conditions) the product is made.  Examples include companies committed to fair trade, organic, recycled materials, LEED certified buildings, good corporate governance practices, fair treatment of employees, and the like.  Some companies that spring to mind as attempting to be “responsible” are Ben & Jerry’s, Method, Plum Organics, and Seventh Generation.  On the smaller side, someone I went to high school is a co-founder of a company that falls into this category; Recover Brands makes clothing from recycled plastic bottles and recycled cotton.

Justice Enterprise.  Who makes and who purchases the product.  These companies exist to provide employment to disenfranchised and/or create products for purchase by disenfranchised.  Greyston Bakery, Spring Back Recycling (a company that began as a project by the Belmont University Enactus team), Thistle Farms, and others, exist, in large part, to hire, train, and support the disenfranchised (especially those transitioning from homelessness and prison). Companies like Grameen Danone Foods, Cure2Children, and Power Africa develop products or services targeted at underserved communities with the goal of improving their lives; each of these three organizations is providing and developing, as Professor Hurt put it, “a different kind of widget that isn’t needed by rich people, but by the needy.” Steven Buhrman at Wannado Local inspired the naming of this category.  As mentioned to me by Professor Hurt, this category could be broken into two.  I agree.  Perhaps, “reintegration enterprises” for the first, and  “social innovation enterprises” for the second.

Social enterprises could also be divided by whether they make and distribute profits.  Originally, the term social enterprise was used primarily in the non-profit context and primarily in articles originating in business schools.  Law professors, however, have generally and increasingly used the term in the for-profit context.

Academics, managers, investors, consumers, customers, and governments are all using the term “social enterprise,” but more precise terminology may be helpful.  Clarity is important when governments offer incentives to “social enterprises” and investors decide to invest in “social enterprises” so that both groups identify the type of social return they are seeking.  Also, clarity within the three groups is needed.  How much giving is sufficient?  What are the standards for responsible operation?  What types of products and services are appropriate for a justice enterprise?  Right now there are more questions than answers in the social enterprise space, but there are an increasing number of people working on answers, including those at B Lab, academics and practitioners (including those who blog at SocEntLaw.com) and the Sustainability Accounting Standards Board (“SASB”).

Cross-posted at Business Law Prof Blog.

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