LAW AND SOCIAL ENTREPRENEURSHIP

Cross-posted at Conglomerate.

This is my third and final substantive post comparing the Model Benefit Corporation Legislation (the “Model”) to the proposed Delaware Public Benefit Corporation (“PBC”) amendments.

“Branding” is one area where proponents of the Model may argue that the Model is better than the PBC.  As mentioned in my first substantive post, the PBC favors private ordering more than the Model, which makes the PBC more flexible, but also makes it more difficult to maintain a consistent brand.  Branding could be useful to investors, consumers, and governments that wish to quickly identify socially responsible companies.

Some proponents of the Model may point to the required annual report (PBC only requires a biennial report) and the requirement of measuring general public benefit against a third party standard (optional under the PBC) as building the Model’s brand.  In my opinion, however, neither the required annual report nor mandatory use of a third party standard is likely to facilitate creation of a useful brand under the current language of the Model.

First, the Model does not expressly provide an enforcement mechanism for assuring the public posting of an annual report and the use of a third party standard.  Currently, a number of benefit corporations are in violation of the statute, but nothing seems to be done about the violations.  Second, most of the few annual reports available are full of fluffy self-promotion and do not include much of value.  Third, the available third party standards vary wildly, so simply requiring a third party standard is not likely to lead to a consistent and valuable brand.  The updated version of the Model requires that the third party standard be “comprehensive,” “independent,” “credible,” and “transparent,” but those requirements will be difficult to enforce and, in any event, do not appear aimed at creating a consistent brand.  A benefit corporation that does not see the value in using a third party standard may use the lowest standard available, provide little to no useful information to the market, and waste company resources in the process.

If the Model proponents wished to create a brand via statute they would do better requiring an annual charitable giving floor and a partial asset lock, as I suggest here.  In my opinion, however, the heavy lifting in the branding department of social enterprise should be left to private organizations like B Lab.  The social enterprise space is evolving quickly, and I think it unlikely the state governments would keep up with the changes and engage in the type of enforcement needed to maintain a valuable brand.  Also, the term “social good” means very different things to different people, and therefore it is likely better to have private organizations develop various standards and allow the market to determine which standards, if any, are useful and valuable.

Joan MacLeod Heminway (University of Tennessee College of the Law) has written the first, or at least one of the first, academic law articles on the application of federal securities law to social enterprises. Here’s the article abstract:

To Be or Not to Be (A Security): Funding For-Profit Social Enterprises — This article explores the federal securities law status of financial interests in for-profit social enterprise entities. When analyzed through the lens of the Securities Act of 1933 and the Securities Exchange Act of 1934, financial interests in social enterprise businesses raise both concerns and opportunities. Ultimately, the federal securities regulation status of interests in for-profit social enterprise ventures is important for choice-of-entity reasons (since the regulatory framework may impose different costs on interests in different structural business forms), for capital-structuring reasons within individual forms of entity, and for risk-management reasons at the entity level. In addition, an inquiry into the applicability of federal securities regulation to the funding of social enterprise serves as a catalyst for further thought on the optimal applicability of federal securities regulation to interests in business entities and projects.

As I recently told Joan, I wish that my students had the benefit of reading her article this spring semester during my Social Entrepreneurship & the Law Practicum course. During the course, the students drafted a legal case study for Ashoka that details the securities law issues faced by a for-profit social enterprise that uses crowdfunding to finance small solar power projects in developing countries. In the case study, the students address how the social enterprises’ capital-raising vehicle is not a “security” because it offers no expectation of financial return and offers no claim on the company’s assets in liquidation. I look forward to reading more about the application (and inapplication or exemption) of securities law to social enterprise finance. Indeed, this summer I’m supervising an independent research paper by another law student on this very issue — hopefully that will go to print and I’ll be sharing it on this blog as well soon enough.

Georgetown Law students from my Social Entrepreneurship & The Law practicum course will be presenting their final projects — legal case studies of two social enterprises — at Ashoka tomorrow. Here’s the invitation: Ashoka + Georgetown Law Invitation. Please note that the event is NOT open to the public to attend in person but you can listen in on Google Hangout (for details email socialenterprise (at) law.georgetown.edu).

Ashoka and Georgetown Law, along with the University of Michigan Law School and the George Washington University Law School, are engaged in a partnership to contribute to the field of social enterprise law and provide legal support to Ashoka Fellows (see more on this collaboration here). Our collaborative approach is two-prong: First, through experiential learning courses, including the transactional law clinics at each school, law students collaborate to develop and share “best practices” for the sector through production of legal toolkits and research that helps Ashoka further its charitable mission, and support the field. Second, law students at each school (through transactional law clinics) provide direct legal representation to selected social enterprises within Ashoka’s network on business, corporate, nonprofit, and other transactional legal matters. The legal case studies that will be presented at the May 9th event are part of this collaborative effort. With the legal case studies we hope to illuminate some of the legal issues that social enterprises face and identify how social enterprise attorneys are adapting current legal and regulatory regimes to fit their clients’ social purposes. The Georgetown Law students will discuss crowdfunding, securities law, corporate governance, and U.K. community interest companies, among other topics. The legal case studies will be posted on Ashoka’s new legal website (launching this summer I believe).

Cross-posted at Conglomerate.

One of my main criticisms of the Model Benefit Corporation Legislation (the “Model”) has been (and still is) the lack of guidance for directors. (See, e.g., here and here).  The Model requires directors to “consider” seven different stakeholder groups (§301(a)), and directs them to pursue “general public benefit” but does not provide any priorities to guide directors. (§§102, 201(a)).  The Model allows companies to choose one of more “specific public benefit purposes,” in addition to the “general public benefit purpose,” but does not require that any specific public benefit purpose be chosen. (§201(b)).

In contrast, Delaware’s proposal does require public benefit corporations (“PBCs”) to choose one or more specific public benefits (§362(a)), though the statute is not crystal clear on priorities and requires directors to “manage or direct the business and affairs of the public benefit corporation in a manner that balances [1] the pecuniary interests of the stockholders, [2] the best interests of those materially affected by the corporation’s conduct, and [3] the specific public benefit or public benefits identified in its certificate of incorporation.” (§365(a)) (emphasis added).   (As a side note, the PBC’s requirement to “balance” the stakeholder interests seems more onerous than the Model’s requirement to “consider” the interests.)

Even if directors’ duties are owed to the corporation as a whole, I suggest that clear priorities are important.  I attempted to explain the importance of priorities in my response to Professor Lynn Stout’s thought-provoking recent book:  The Shareholder Value Myth:

Professor Lynn Stout and others reject the need for a single metric and have argued that directors, like other human beings, balance the interest of various stakeholders.   Among other examples of balancing by human beings, Professor Stout points to the ability of people to balance work and family.   This article admits that directors do and should balance various stakeholder interests and does not argue for myopic focus on a single metric, but rather posits that clear corporate priorities can make that difficult balancing job easier.

Using Professor Stout’s work/family example of balancing can help illustrate the point.  Clearly defined priorities can help an individual make difficult decisions in the constant work/family balance.  If an individual prioritizes family over work, that obviously does not mean that every decision leads to direct, short-term benefits for the family.  For example, on occasion, that family-primacy individual will rightly choose to stay late at work and miss dinner.  While that individual decision may have seemed to prioritize work over family, viewed in the long-term, the family may benefit from the resultant career security.  Even if the long-term benefits do not actually come to fruition, most would agree that the individual should not be judged for her well-intentioned decision.

The fact that humans certainly balance interests of various constituents, however, does not mean that priorities are unimportant.  Priorities can help guide and can also provide weightings for the costs and benefits of any decision.   Also, priorities most clearly help in critical situations.   To continue with the work/family example, in a zero-sum game, how does one decide between work and family when the outcome of that decision is of critical importance to both?   If an individual has clearly stated that family is a higher priority than work, this critical decision is more easily answered.  Even if the priorities are not clearly stated, priorities will still drive the decision.  Transparency as to the priorities makes things clearer to all involved and makes it less likely that the individual will drift from his or her true priorities.   Similarly, directors would benefit from a clear corporate objective that includes specific corporate priorities.

While I would have preferred the proposed Delaware amendments to have made clear that the PBC’s top priority is its specific public benefit purpose, I think requiring PBCs to identify a specific public benefit purpose is a move in the right direction and likely to aid directors in decision making.

In my third and final post, on Delaware’s proposed amendments involving the PBC, I will talk about the social enterprise statutes and branding.

Simon Mainwaring (CEO of We First), Jay Coen Gilbert (Co-Founder of B Lab), and Dave Cobban (Director of Sustainable Business & Innovation for Nike) will host a live Google+ hangout on May 7, 2013 at 4pm eastern (1pm pacific).  You can RSVP for the free event here. 

The text of the announcement reads:

Join us live to discuss how business can become a force of good by partnering with customers to co-create lasting social impact. Submit your questions below or by tagging them with #ProfitToPurpose. Simon Mainwaring, CEO of We First and New York Times bestselling author, will lay out a new sustainable vision for purposeful capitalism. We First provides strategic consulting and training in storytelling and community building to brands like Coca-Cola, 3M, Livestrong and the X Prize Foundation. www.WeFirstWebinar.com.  Jay Coen Gilbert, Co-Founder of B Lab, will share how the +BCorporation movement is building a new sector of the economy. Encompassing more than 700 companies across 60 industries and in 26 nations, B Corps use the power of business to solve social and environmental problems. http://www.bcorporation.net Dave Cobban, Citizen Mobilization Director of Sustainable Business & Innovation of +Nike, will talk about his role and why Nike is focused on changing “the making of making” http://nikemakers.tumblr.com/. He’ll also give an inside look into Nike’s collaborative innovation approach and their partnership with NASA, USAID, and the US Department of State called LAUNCH www.launch.org.

The Marketplace Fairness Act would force internet retailers to collect sales tax from their internet customers. This proposed legislation certainly affects social enterprises, the majority of whom are small businesses, and some of whom may compete with internet Goliaths like Amazon.com and Overstock.com. No matter what spin the Heritage Foundation tries to put on it, the Act would be a step forward in leveling the playing field so that internet retailers and bricks-and-mortar small businesses can compete on unit price and not on sales tax. When internet retailers gain a competitive advantage through a loophole in the law (and not necessarily through innovation or a superior product or service), consumers lose in the long run. A race to the bottom is not sustainable.

It’s interesting to note too that the internet retailers whose gross annual receipts in internet sales that don’t exceed $1 million are exempt from collecting sales tax. This would seem to dispel the claims of retailers like Etsy and eBay that the Act harms their individual sellers who cannot incorporate a complex sales tax system into their home businesses (if individual sellers have sales of $1 million, I’m clearly in the wrong field and will be opening up my Etsy shop soon!)

The Act, or rather, reaction to the Act also raises a broader question that I am researching right now — that is, the intersection of social enterprise, values, and politics. Etsy is a Certified B Corporation. Etsy’s mission statement includes conducting a “mindful, transparent, and humane business”. How does a social enterprise’s embrace of sustainable business practices square with opposition to a sales tax that all brick-and-mortar stores face? (Note: Etsy actually supports the Act but advocates for raising the exemption higher, to the federal definitions of “small business”).

Cross-posted at Conglomerate.

This is the first of three posts analyzing the proposed Delaware Public Benefit Corporation (“PBC”) amendments.  The posts will compare the proposed PBC amendments to the Model Benefit Corporation Legislation (the “Model”).

In a few key areas, the PBC allows more private ordering that the Model.  Perhaps the most striking difference is that the PBC does not require a third party standard for measuring public benefit (a cornerstone requirement of the Model) unless the requirement is included in the PBC’s certificate of incorporation or bylaws (§366(c)).  In some ways, Delaware’s approach in the benefit corporation debate reminds me of how it handled the proxy access debate:  expressly allow, but leave most of the details to the individual corporations.

That said, the PBC is not as flexible as the Flexible Purpose Corporation (“FPC”) (California) or the Social Purpose Corporation (“SPC”) (Washington); the PBC requires that the PBC be operated in a “responsible and sustainable manner” (§362(a)).  That broad general statement in the proposed PBC amendments, which is not present in the FPC or SPC statutes, seems to be one of the main reasons B Lab, the primary force behind the benefit corporation movement, has expressed public support for the PBC.  Whether B Lab is completely supportive of the PBC and all its deviations from the Model is not entirely clear.

Below, I compare and contrast some of the key provisions of the Delaware’s PBC and the Model.

Benefit Director.  PBC – not mentioned.  Model – required for public companies. (§302(a)).

Benefit Officer.  PBC – not mentioned.  Model – optional (§304(a)).

Benefit Report (Preparing).  PBC – no less than biennially (§366(b) & (c)).  Model – annually (§401(c)).

Benefit Report (Public Posting).  PBC – optional (§366(c)).   Model – required to post benefit report on company website; if no website must provide the benefit report for free to anyone who asks for a copy (§402).

Identification of Specific Public Benefit Purpose(s).  PBC – required (§362(a)).  Model – optional (§201(b)).

Minimum Ownership for Shareholder Standing in Derivative Lawsuits.  PBC – 2%; or if the PBC is publicly traded then the lesser of 2% and $2 million in market value (§367).  Model – 2% (§305(b)(2)(i)).

Third Party Standard.  PBC – optional (§366(c)).  Model – mandatory (§§102 & 402).

Third Party Certification.  PBC – optional (§366(c)).  Model – optional (§401(c)).

The only area above where the PBC is less flexible than the Model is in requiring the identification of specific public benefit purpose(s), which will be discussed in the next post on director guidance.

Over at the American Constitution Society’s blog, I just posted some thoughts about how advocates can use corporate law to advance workers’ rights. Social enterprise falls clearly into this category. There are many social enterprise business models in which “social” is synonymous with employees. FareStart, a Seattle restaurant, is an obvious example (I’ve had the pleasure of eating there). FareStart’s employees are homeless and disadvantaged individuals, and are part of a culinary job training and job placement program. The restaurant operates purely for the benefit of its employees. But it seems to me that there are many other social enterprise business models—those where employees are not the beneficiaries—that loose sight of workers’ rights in their own operations because they are so focused on making an impact on some other constituency, like communities in developing countries, or the environment.

Here are my brief thoughts on this issue from the ACS blog:

“Despite the small trend towards social enterprise and “stakeholder governance,” the movement seems to engage environmental and philanthropic concerns far more than worker concerns. For example, social impact reports of companies tend to highlight environmentally-friendly business operations like recycling, low water usage, and carbon-neutral footprints. These reports also highlight corporate giving to charitable causes. Rarely do they discuss the livelihoods of their own workers. The worker voice is absent from social impact reports, or if the worker voice is included, it is only to highlight some minimal effort to engage and support workers—like paying a minimum wage—which only legitimizes a subpar standard. Unions and worker rights groups should challenge prioritization of other stakeholders by engaging with those who claim to support corporate law reforms to “make business better”. The worker voice needs to be inserted into the social enterprise movement, promotion of the benefit corporation statute, and into social impact reporting.”

In some ways, this is an issue similar to one that has been discussed for a long time in the nonprofit world—that is, low salaries and general mistreatment of nonprofit employees. Because the nonprofit employee is working for a charity, it is assumed that she (and it usually is a “she”) will work long hours for little money and no benefits. Let’s hope that type of thinking has not migrated to the social enterprise world. Social enterprises need to remember than “social” does not just mean societal impact; it’s an issue that is much closer to home than that.

Professor Haskell Murray (Regent) has been busy!

First, his most recent article, Defending Patagonia: Mergers & Acquisitions with Benefit Corporations, will be published soon in the Hastings Business Law Journal. In the article, Professor Murray analyzes whether and how the Revlon and Unocal line of cases will be interpreted and applied to mergers and acquisitions involving benefit corporations. This is completely unchartered territory, so Professor Murray cleverly uses Patagonia, a well-known benefit corporation, as an example to illustrate his analysis. The article is very interesting and informative, and it may be found on SSRN here.

Second, Professor Murray and his wife, Katie, just welcomed their first born into the family! David McGahan Murray was born healthy and happy on April 3, 2013. Young David weighed in at a solid 8lbs 9oz, so all the NFL scouts have been alerted. Congrats Haskell and Katie!

The Ewing Marion Kauffman Foundation and the University of Missouri-Kansas City (UMKC), in collaboration with the United States Association for Small Business and Entrepreneurship (USASBE), are sponsoring the 2013 Midwest Symposium on Social Entrepreneurship from May 20-21 in Kansas City, Missouri. This Symposium will offer a forum for academics, as well as interested practitioners, to (i) advance their understanding of social entrepreneurship, (ii) exchange knowledge and experience regarding entrepreneurship in general, and (iii) shape the future of the emerging field of social enterprise.

The Symposium begins with Opening Remarks at 8:30 a.m. on Monday, May 20, followed by morning and afternoon workshops, as well as presentations at a luncheon and early evening reception that day. The Tuesday, May 21, schedule includes a morning workshop, luncheon presentations, and, in the afternoon, a business plan competition showcasing socially entrepreneurial initiatives developed by students participating in The Aaron L. Levitt Social Entrepreneurship Challenge. All workshops and events will take place at the Ewing Marion Kauffman Foundation Conference Center (4801 Rockhill Road, Kansas City, Missouri, 64110). As linked above, further information and registration details may be found here.