His first post is available here.
It is good to see more and more scholars enter the conversation around social enterprise law.
Professor Yockey’s recent article, Does Social Enterprise Law Matter?, is available on SSRN.
“Harvard Business School (HBS) is now accepting applicants for the role of Director, Social Enterprise Initiative. HBS pioneered the concept of “social enterprise” with the founding of its Social Enterprise Initiative in 1993. From the outset, SEI adopted a problem-focused approach toward understanding the management and leadership challenges facing organizations involved in creating social value regardless of whether their structure is as a nonprofit or for profit and regardless of where they operate on the spectrum from a grant-funded organization to a commercial enterprise. As the Initiative commemorates its 20th anniversary, it has established a significant role within the HBS community through the engagement of its key constituencies—faculty, students, alumni, and practitioners. For more information, visit: http://www.hbs.edu/socialenterprise.”
More information about the position here.
More information here.
More information available at the Business Law Professor Blog.
Over at the Business Law Professor Blog, I have a post examining my purchasing habits, providing a few links to further reading on consumer behavior, and profiling a glorious picture of my well-loved Patagonia shoes.
Here, Professor Bainbridge kindly asks for my thoughts on Keith Paul Bishop’s article Would Hobby Lobby Stores, Inc. Have A Stronger Case As A Flexible Purpose Corporation?
I agree with Bishop’s conclusion that the question is still open. Both the Flexible Purpose Corporation (“FPC“) and the Benefit Corporation version of social enterprise legal forms are quite new and each became available in California as of January 1, 2012. The FPC is only available in California (though Washington state’s social purpose corporation is similar in many respects) and the Benefit Corporation legislation has passed in 20 U.S. jurisdictions (19 states and Washington D.C.), starting with Maryland in 2010. As the name suggests, the FPC allows managers more flexibility in choosing their particular corporate purpose(s), whereas most of the Benefit Corporation statutes require a “general public benefit purpose” to benefit “society and the environment” when “taken as a whole” but also allow additional “specific public benefit purpose(s).” Delaware’s version of the benefit corporation law (called a “public benefit corporation”) requires the choosing of one or more specific public benefit purposes.
Converting to an FPC or a Benefit Corporation, without more, likely would not be much help to companies fighting the HHS mandate. The statutes are simply too broad, and I think courts would want more evidence regarding the corporation’s stance on the issue. Obviously, people would disagree on whether a “socially focused” corporation would oppose certain types of contraceptives. And it seems that the majority (though certainly not all) of those in the social enterprise area lean left of the political center. But, if an FPC or Benefit Corporation made its particular social/religious purpose(s) clear in its articles of incorporation, including enough information to determine a stance against certain types of contraceptives, I think the entity’s argument could be strengthened.
In some states, like Oregon and Texas, relatively recent amendments to their state corporation statutes make clear that a social purpose can be included in the articles of incorporation of a traditional corporation. In other states, whether such a social purpose would be acceptable in a traditional corporation is a debatable question, and thus social enterprise legal forms would clear the way toward including a social/religious purpose that would suggest (or clearly state) opposition to the mandate.
In short, the social enterprise forms, without customization, are likely insufficient, but use of a social enterprise form, with language in the articles of incorporation that suggest that the corporation would be opposed to the mandate, could strengthen the argument of those fighting the HHS mandate. In some states, as mentioned above, a social enterprise form would likely be unnecessary, and a traditional corporation with customized language could be used.
I think the question posed by Keith Paul Bishop and Professor Bainbridge is an interesting one and would love to hear additional thoughts from others, especially any Constitutional Law scholars.
Cross-posted at Business Law Prof Blog.
After meeting Colin Mayer (Oxford) and hearing him present at Vanderbilt’s 2013 Law and Business Conference, I purchased and read his recent book, Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in it. The book is organized in three parts: (1) how the corporation is failing us; (2) why it is happening; (3) what we should do about it. While the first two parts contain some helpful background and interesting case studies, I found the third part the most useful. In the third part, Professor Mayer suggests:
“These three straightforward adaptations of current arrangements – establishing corporate values, permitting the creation of a board of trustees to act as their custodians, and allowing for time dependent shares – together solve the fundamental problems of breaches of trust in relation to current and future generations.” (pg. 247)
In discussing corporate values, Professor Mayer writes:
“Corporate social responsibility was rightly dismissed as empty rhetoric and jettisoned when recession forced a return to more traditional shareholder value. Why should I trust an organization that is owned and controlled by anonymous, opportunistic, self-interested wealth seekers? Without commitment, there is no reason why there should be any trust in the corporation, however much its fine promotional material suggests otherwise. Values need value. They need to be valuable to those upholding them and costly to those who do not. They need to inflict pain on those who abuse them and gain on those who do not.” (pg. 244)
While Professor Mayer was writing about corporations generally, and not benefit corporations specifically, the same commitment concern is present with these new corporate forms (called benefit corporations or public benefit corporations) that claim to be focused on society and the environment.
As one possible solution to the commitment problem, Professor Mayer suggests time dependent shares. Time dependent shares would provide greater voting power to shareholders who commit to hold shares for a longer period of time. This feature, Professor Mayer argues, would focus the managers on long term value, which could benefit all stakeholders. Professor Mayer does not favor requiring time dependent shares for all corporations, but suggests that time dependent shares might be useful for those firms that need or desire long-term investment and commitment. I am still thinking through all the possible implications of time dependent shares, especially in the M&A context, but appreciate the effort to fight short-termism and focus management on longer term goals for the corporation.
Interested readers can find Firm Commitment through Oxford University Press.
Cross-Posted at Business Law Prof Blog.
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.
Over the past few weeks, a handful of attorneys and academics have asked me exactly how specific the specific public benefit purpose(s) required by §362(a) of the DGCL for Delaware public benefit corporations (“PBCs”) must be. Section 362(a) reads, in pertinent part:
“In the certificate of incorporation, a public benefit corporation shall. . . Identify within its statement of business or purpose . .1 or more specific public benefits to be promoted by the corporation”
Some of the early Delaware PBCs have used the general public benefit language from the benefit corporation’s Model Legislation to describe their specific public benefit purpose(s). (See, e.g.,Farmingo, PBC; Ian Martin, PBC; Method Products, PBC; New Leaf Paper, Public Benefit Corporation; and RSF Capital Management, PBC). For those who are unfamiliar, the general public benefit language from the Model Legislation reads:
“A material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”
At least one early Delaware PBC has added the following to the general public benefit language
“specific public benefit . . .may be further specified from time to time in the Bylaws of the Corporation . . . or a resolution or resolutions of the Board of Directors of the Corporation.” (Socratic Labs, PBC).
Some Delaware PBCs have been more specific in their certificates of incorporation:
“for the specific public benefit of furthering universal access to the Internet” (Unifi Communications, PBC)
“giving people access to, and the benefit of, health knowledge that is as complete and unbiased as possible.” (Profile Health Systems, PBC)
In my personal opinion, using only the Model Act’s general public benefit purpose as a Delaware PBC’s specific public purpose is a bit risky and possibly conflicts with the drafters’ intent. To be clear, I have not yet spoken with the drafters on this issue, and will update this post if I do. However, if the drafters had intended to allow the general public benefit language to suffice, then I think they would have simply followed the lead of the Model Legislation and would have defined and used the term “general public benefit”.
Further, the FAQ about Public Benefit Corporations circulated by the drafters contained the following question and answer.
Q: “Why does the statute require both the identification of a specific benefit or benefits andthat the corporation be managed for the best interests of all those materially affected by the corporations conduct?” (emphasis in original)
A: “….The requirement of a specific public benefit is intended to provide focus to the directors in managing toward responsibility and sustainability, and giving investors notice of, and some control over, specific public purposes the corporation serves.”
I would argue that the Model Act’s general public benefit language does not give directors the desired focus, and if the specific purpose is regulated to the bylaws then shareholders may not have the notice and control the drafters seemed to have desired.
That said, the Model Legislation’s general public benefit language is more specific than “any lawful purpose” and Section 362(a) has no limit on the number of specific purposes that can be listed, so a Delaware PBC could conceivably list all of the specific interests the Model Legislation requires directors to consider and achieve the same lack of focus as listing the Model Legislation’s general public benefit language.
I have spoken to a few people in the Delaware Secretary of State’s office in an attempt to understand their stance on the specific public benefit issue. The main take-aways from those conversations were:
(1) they are aware of the controversy surrounding whether the Model Legislation’s general public benefit purpose suffices as a specific public benefit under the statute;
(2) they are currently accepting the Model Legislation’s general public benefit language as a valid specific public benefit, until it is formally challenged or they are told to do otherwise;
(3) they will not accept “any lawful purpose” language as a specific public benefit.
Also, for those who are interested, there were 49 public benefit corporations formed in Delaware between the August 1, 2013 effective date and October 16, 2013.
Thanks to Boston attorney Bruce Landay for excellent, in-depth conversation on this topic and for some of the certificates of incorporation cited in this post. As an academic, it is always nice to connect with attorneys who practice in my areas of interest. Thanks to Alicia Plerhoples at Georgetown Law who also provided some of the certificates of incorporation cited in this post.
Cross-posted at the Conglomerate.