LAW AND SOCIAL ENTREPRENEURSHIP

PLUM ORGANICS’ QUEST TO DO GOOD POSES LEGAL RISK TO CAMPBELL SOUP

This was originally posted at SFGate

Days after completing the biggest deal of his life, Neil Grimmer was about to ask his new employer to do something that could expose it to shareholder lawsuits.

It was June 2013 and food giant Campbell Soup Co. had just paid millions of dollars to buy Plum Organics in Emeryville, the healthy baby food maker founded and led by Grimmer. In his first sit-down with Mark Alexander, president of Campbell North America, Grimmer made his unexpected request.

“I was nervous,” Grimmer recalled. “He was, after all, my new boss.”

Would Campbell allow Plum to change its legal status to a benefit corporation, also known as a B corp? The new designation meant the company would legally be required to offer a benefit to society in addition to generating profits for investors. In theory, at least, shareholders could sue the board of directors and management if they failed to meet these requirements.

Reincorporating Plum into a B corp added an extra element of unpredictability to the acquisition. And generally speaking, major corporations don’t like unpredictability. Or trial lawyers.

Socially conscious firms

Plum is certainly not the first company to try to integrate social good with profits.

California is home to a number of these socially conscious firms, including Clif Bar & Co. in Emeryville and apparel maker Patagonia in Ventura — both of which have adopted B corp designation.

When Grimmer, a former vice president of strategy and innovation for Clif Bar, started Plum Organics in 2007, he wanted to create a company with a commitment to healthy foods and environmental sustainability. But he also wanted to enshrine those ideals into the business’ very being.

“It was really clear to create a true health product, you needed to build a foundation for a healthy company,” Grimmer said.

In 2012, Plum and other like-minded companies started to lobby lawmakers in Delaware — a traditional corporate hub due to its business-friendly laws — to create B corps.

B corps pay taxes just like other for-profit enterprises. But such a designation also legally requires B corps to produce profits and a “positive” benefit to society, such as providing goods and services to low-income neighborhoods, protecting the environment or promoting arts and sciences.

“Having B corps allow investors and officers to create a contract to how the business will be carried out, that company will not prioritize making money over the public benefit,” saidHeidi Christianson, an attorney with Nilan Johnson Lewis law firm in Minneapolis. As chairwoman of the Minnesota Bar Association’s business law section, Nilan helped write Minnesota’s version of B corps.

In some ways, the B corp is meant to legally protect the board of directors and officers from shareholders who might want to sue the company for pursuing a social agenda instead of making money for investors, Christianson said.

On the flip side, shareholders can also sue those companies if they fail to provide those social benefits. But how courts will manage such lawsuits remains an open question.

“As yet, there is no case law addressing the obligations of benefit corporations, and the statutes do not speak to how courts should analyze such claims,” according to a recent article published in the Wake Forest Law Review.

4th largest baby food maker

As Delaware debated B corps, Plum Organics continued to flourish. The company grew into the fourth largest maker of baby food in the United States with gross sales of $93 million in fiscal 2012. Plum’s success attracted the notice of Campbell, which agreed to the buy the company for an undisclosed sum.

But in May 2013, three weeks before the deal was scheduled to close, Grimmer got word that Delaware approved legislation establishing B corps.

Grimmer had not mentioned anything about B corps to Campbell. But after the deal closed, Grimmer decided to immediately broach the subject with Alexander at their first meeting.

“That sounds like something Plum would do,” Grimmer recalled Alexander saying.

Alexander took Grimmer’s request to Campbell CEO Denise Morrison. Three weeks later, Campbell gave him the go-ahead to establish a B corp.

“Campbell was supportive of Plum reincorporating as a Public Benefit Corporation, as their mission-driven business is one of the many attributes that we liked and that we believe made Plum a great match with Campbell,” company spokeswoman Carla Burigatto wrote in an e-mail. “Plus, we’re both consumer-centric companies with deep social responsibility commitments.”

Such a move carries enormous risk for Campbell. Should Plum fail to live up to its obligations as a B corp, shareholders can theoretically sue Campbell. And investors might question why Campbell would operate an arm that doesn’t necessarily put profits first.

“The public benefit commitment and requirement exist along with the business priorities — a Benefit Corporation balances economic interests of shareholders and the public benefit that it names,” Burigatto said.

That said, analysts say B corps can provide a boost to reputation, softening capitalism’s otherwise sharp edges.

Campbell didn’t exactly broadcast the news of Plum’s new structure. But Grimm thinks the move will ultimately pay for both companies.

“Consumers are ready to understand the difference between brands that do good marketing and companies that actually do good in the world,” he said.

M&A UNDER DELAWARE’S PUBLIC BENEFIT CORPORATION STATUTE: A HYPOTHETICAL TOUR

From the Harvard Law Review – Volume 4, Issue 2

Noting the enthusiastic initial response to Delaware’s 2013 public benefit corporation statute, this Article presents a series of hypotheticals as vehicles for comment on issues that are likely to arise in the context of mergers and acquisitions of public benefit corporations. The Article first examines appraisal rights, concluding that such rights will be generally available to stockholders in public benefit corporations, and noting the potential for ambiguity in defining “fair value” where the corporation’s purposes extend to public purposes as well as private profit. Next, the Article examines whether and to what extent “Revlon” duties and limitations on deal protection devices may be relaxed or modified in the context of the sale of a public benefit corporation. Finally, the Article examines whether and to what extent a commitment to promote the specified public purposes of a public benefit corporation can be made enforceable against the buyer of the corporation

Full article can be found here

FLEXIBLE PURPOSE CORPORATIONS CHANGE THEIR NAME

As of January 1, 2015, California flexible purpose corporations will be deemed “social purpose corporations” to more appropriately reflect their purpose. The Corporate Flexibility Act of 2011 will be renamed the Social Purposes Corporation Act. The major substantive law change is that previously directors did not have to consider the social purpose of the corporation when making decisions. As I explained in my 2012 journal article on FPCs (Can an Old Dog Learn New Tricks? found here), consideration of the social purpose was permissive. The amendment now requires directors of FPCs/SPCs to consider the social purpose of the corporation in making decisions. The prior statute also exempted FPCs with less than 100 shareholders from providing a special purpose report; that exemption is now gone. The full amendment to the California FPC statute can be found here. Overall, these amendments make the new California social purpose corporations look a lot more like Delaware public benefit corporations. Indeed, Delaware public benefit corporations are now more similar to CA SPCs. Although not widely known, Delaware PBCs have a lot less in common with benefit corporation in other states (such as NY or DC).

SOCIAL ENTERPRISE LAW UPDATE AND MAP

For those keeping count: Currently, twenty-two states plus D.C. authorize benefit corporations. Four more benefit corporation states are scheduled to come online by January 1, 2015. In addition, four states authorize flexible/social purpose corporations, and eight states authorize low-profit limited liability companies. Thus, since January 1, 2014, the number of benefit corporation states has increased by seven while the number of flexible/social purpose corporation states has increased by one. There has been no increase in low-profit limited liability company states. In the aggregate, the US now has 31 states with some form of social enterprise legislation on the books. (But for North Carolina’s 2014 repeal of L3C legislation, there would be 32 states with social enterprise legislation on the books.)

For ease of reference, I have listed below each state that has passed social enterprise legislation thus far this year, and in each case I have included a hyperlink to brief but helpful commentary. Moreover, I highlight below certain unique aspects of each state’s new law. [Professor Haskell Murray’s chart provides much more detail in this regard as does a legislative status map and chart prepared by Smith Moore Leatherwood.]

Connecticut

As previously reported on SocEntLaw, Connecticut’s benefit corporation legislation contains a unique “legacy-preservation provision” that is similar to the “asset lock” required for UK community interest companies. Invoking Connecticut’s legacy-preservation provision theoretically assures that a Connecticut benefit corporation’s assets are forever dedicated to charitable purposes or to other benefit corporations with similar “legacy-preservation provisions.” Connecticut’s benefit corporation statute is not effective until October 1, 2014.

Florida

Florida adopted both benefit corporation and a social purpose corporation statutes effective July 1, 2014. Thus, Florida becomes the fourth state with a flexible/social purpose corporation statute.

Minnesota

Minnesota joins Delaware and Colorado as one of the states that requires a special designation in the name of a general benefit corporation or a specific benefit corporation. Minnesota’s special designations are as follows: “GBC” or “SBC.” So, along with Delaware and Colorado “PBCs,” we now will have “GBCs,” “SBCs,” and “PBCs” in the social enterprise world. Minnesota’s statute becomes effective January 1, 2015.

Nebraska

The Nebraska benefit corporation statute follows very closely the B-Lab model legislation and took effect on April 2, 2014.

New Hampshire

A New Hampshire benefit corporation may be administratively dissolved if it neglects to file is required annual benefit report. The New Hampshire statute becomes effective January 1, 2015.

Utah

Utah’s benefit corporation statute also follows closely the B-Lab model legislation and is effective immediately. Moreover, the Utah Department of Commerce has created a very user-friendly guide to forming benefit corporations in Utah.

West Virginia

Effective July 1, 2014, West Virginia’s benefit corporation statute generally follows the B-Lab model legislation, but among other things relaxes the “independence” tests for adopting third-party standards and does not require the annual benefit report to disclose director compensation.

 

Finally, I have updated and posted to SSRN my social enterprise entity comparison chart listing all states with any form of social enterprise legislation (including citations to the relevant statutes).

Stay tuned: It will be interesting to see where the US stands as of the end of 2014 with regard to social enterprise legislation.

A REAL LIFE BATTLE OVER SHAREHOLDER VERSUS STAKEHOLDER PRIMACY

A real life battle over shareholder versus stakeholder primacy is playing out in New England. Market Basket, a family-owned supermarket chain with 71 stores and $4.6 billion in sales, reportedly is at the center of a “bet the company” dispute between management and shareholders. The dispute is particularly interesting for followers of social enterprise because it is being framed as a battle between the “shareholder model” and the “stakeholder model” of the corporation. I suspect that we will be learning much more about Market Basket in the coming days, but for now you can view NPR News Hour’s coverage here.

THE SUPREME COURT’S FIRST BRUSH WITH SOCIAL ENTERPRISE

This was originally posted on ssireview.org

Last month, the US Supreme Court published its highly anticipated opinion in Burwell v. Hobby Lobby Stores, Inc., a consolidation of cases challenging the Patient Protection and Affordable Care Act’s contraceptive mandate. In a 5-4 decision, the Supreme Court held that the contraceptive mandate, as applied to “closely held” corporations (majority owned by five or fewer individuals) like Hobby Lobby, violates the Religious Freedom and Restoration Act (RFRA), because it substantially burdens a corporation’s exercise of religion. The effect of this decision is that closely held corporations, which account for 90 percent of all US companies and 52 percent of all private employment in the United States, are now free to deny contraceptive health care coverage to their female employees based on religious objections. Because most social enterprises are closely held corporations, Hobby Lobby applies with equal force to corporate forms like benefit corporations.

In January, we cautioned that the Supreme Court might invoke the emerging body of social enterprise law as a justification for finding that for-profit corporations may mix profit and religious purpose to the detriment of women’s health. As we predicted, Hobby Lobby was the first Supreme Court decision to acknowledge social enterprise, specifically the benefit corporation form, which is available to social entrepreneurs in more than half the States. Recognition by the nation’s highest court is indisputably a watershed moment for social enterprise law. However, the context in which the court mentions these new corporate forms is troubling, and the court’s broader comments regarding corporate social responsibility raise important questions about whether there is truly a need for emerging corporate forms like the benefit corporation.

In the area of corporate religious rights, the law has traditionally distinguished between nonprofit corporations and for-profit corporations; the former possess free exercise rights, while the latter do not. However, in Hobby Lobby, the court rejected this distinction, emphasizing that under state corporate law, for-profit corporations may be formed for “any lawful purpose,” and that there was “no apparent reason” why such corporations could not pursue both financial and religious purposes. In support of this view, the majority opinion references the recent success of benefit corporation legislation. In Justice Alito’s words:

In fact, recognizing the inherent compatibility between establishing a for-profit corporation and pursuing nonprofit goals, States have increasingly adopted laws formally recognizing hybrid corporate forms. Over half of the States, for instance, now recognize the “benefit corporation,” a dual-purpose entity that seeks to achieve both a benefit for the public and a profit for its owners.

 

Benefit corporations are a new corporate form designed to accommodate for-profit entities that seek to produce both financial and social or environmental returns. To that end, each benefit corporation is required by law to pursue a “general public benefit,” with the option to identify one or more “specific public benefits” it intends to create, such as improving human health, or promoting the arts, sciences, or advancement of knowledge.

The Model Benefit Corporation Act is the basis for the overwhelming majority of the 27 benefit corporation statutes enacted thus far. The Model Act enumerates several specific public benefits; however, religious benefits are not among them. In fact, the word “religion” does not appear anywhere in the Model Act. Despite this, in a footnote, Justice Alito finds support for the majority view by citing to the definition of “specific public benefit” from the South Carolina Benefit Corporation Act. While Justice Alito is correct in observing that over half the states have enacted this legislation, he carefully selects an outlier as his example. Interestingly, South Carolina’s Benefit Corporation Act is one of very few that have departed from the Model Act’s definition to explicitly include “religious” purposes. In fact, when Justice Alito authored his opinion, only four states had enacted benefit corporation statutes that permitted the pursuit of a religious purpose. With dozens of statutes to choose from, the court appears to have deliberately selected the least representative definition of specific public benefit in an effort to suggest that benefit corporations are analogous to Hobby Lobby because they, too, are for-profit corporations that pursue religious goals.

This suggestion confuses the pursuit of religious purposes with the sustainable, socially responsible goals benefit corporations were intended to produce. The absence of religion from the laundry list of specific public benefits in nearly all benefit corporation acts supports this claim. According to B Lab’s database, only 20 percent of all benefit corporations are registered in states that permit the selection of a religious corporate purpose, and few, if any, have taken advantage of this option. Thus, the Court’s suggestion that benefit corporations pursue religious purposes is, in theory, possible in only a small minority of jurisdictions, and mischaracterizes the current use of this new corporate form.

Furthermore, the Supreme Court’s reference to a specific religious purpose overlooks a crucial element of benefit corporation law—namely, that benefit corporations are bound by an overriding obligation to pursue a “general public benefit,” which acts as a check on the pursuit of any specific benefit. As William H. Clark, Jr., the principal drafter of the Model Benefit Corporation Act, has explained, this check ensures that benefit corporations are not, for example, “reducing waste while increasing carbon emissions, or reducing both while remaining indifferent to the creation of economic opportunity for low-income individuals or underserved communities.” In other words, the pursuit of a specific public benefit, even a religious one, cannot absolve a benefit corporation from the obligation to create a general public benefit. Thus, even in those few jurisdictions that permit benefit corporations to align themselves with a particular religious purpose, such a purpose may not, as Justice Alito suggests, be pursued at all costs, but rather is circumscribed by the broader purpose of creating a general public benefit.

Perhaps most importantly, the court weighed in on the longstanding corporate social responsibility debate and decisively rejected the notion popularized by Milton Friedman that the only social responsibility of business is to maximize shareholder wealth. Justice Alito candidly states that this understanding of corporate social responsibility “flies in the face of modern corporate law,” and emphasized that “modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.” As Professor Lyman Johnson recently observed, this means “business corporations … can pursue a whole host of objectives other than making money. Those objectives include various humanitarian, social, and environmental objectives of the sort progressives have long championed.”

The court’s rejection of strict shareholder wealth maximization calls into question the rationale for creating specialized, blended-value forms like the benefit corporation. Indeed, the principal argument for social enterprise forms rests on the assumption that corporate law and its duty to maximize shareholder wealth could not accommodate for-profit, mission-driven entities. If, as Hobby Lobby suggests, shareholder wealth maximization is not an accurate statement of law, specialized forms like the benefit corporation may well be redundant. If the devout owners of a traditional, closely held corporation like Hobby Lobby are free to adopt an additional, religious corporate purpose, it stands to reason that social entrepreneurs should be equally free to use the traditional for-profit form to pursue any number of social or environmental benefits.

Of course, the very existence of the benefit corporation movement itself is evidence of the contrary. Justice Alito’s version of the corporate legal landscape overstates the ease with which “modern” corporate law has discarded the principle of shareholder wealth maximization. In fact, efforts to advance a “social” business purpose have been underway for nearly a century, from E. Merrick Dodd’s “social institution” theory of the 1930s, to Howard Bowen’s 1953 publication of Social Responsibilities of the Businessman, to the wave of constituency statutes in the 1980s that allowed directors to consider non-shareholder interests in more than 30 states. Over the past century, however, US courts have overwhelmingly chosen shareholder wealth maximization as the guiding principle in corporate dispute resolution, especially when a corporation is for sale. This reality was a critical driver of the movement to draft the Model Benefit Corporation Act and establish benefit corporations and other innovative forms like the L3C, the flexible purpose corporation, and the social purpose corporation. To suggest that a majority of state legislatures needlessly drafted, debated, and enacted social enterprise legislation when traditional corporations were already entitled to jointly pursue profit and purpose ignores a century of US corporate jurisprudence.

Justice Alito’s tidy conclusion that each US jurisdiction permits a corporation to pursue “any lawful purpose” fails to see the forest for the trees. Corporate charters have long provided that corporations are organized “for any lawful purpose,” and yet those very same corporations have found themselves subject to the requirement to maximize shareholder wealth. Social enterprise advocates across the United States may welcome Justice Alito’s assessment of state-level corporate law, but it grossly oversimplifies the incremental legal progress achieved by advocates of corporate social responsibility over the past century. Instead, in drafting benefit corporation statutes, state legislatures have directly responded to existing corporate jurisprudence by carving out specific social and environmental purposes considered worthy of a departure from shareholder wealth maximization. With rare exception, religion simply isn’t on the list.

The Hobby Lobby decision has been both hailed as a victory for religious freedom, and denounced as a blow to women’s health and reproductive rights. We should also recognize that it is the Supreme Court’s first attempt to grapple with the difficult issues of corporate purpose raised by social enterprise and its corporate forms. That this emerging body of law remains susceptible to misinterpretation, even by Justices of the Supreme Court, should encourage lawyers, policymakers and social entrepreneurs to redouble their efforts to reach a consensus on the boundaries of social enterprise, and to craft more precise metrics and economic incentives for sustainable organizations that seek to use the power of business to achieve social and environmental goals.

IRS DEBUTS STREAMLINED FORM 1023-EZ APPLICATION FOR RECOGNITION OF EXEMPTION UNDER SECTION 501(C)(3)

This was originally posted on lawforchange.org

In hopes of reducing the long backlog of exemption applications and ostensibly freeing up resources for more robust enforcement, the Internal Revenue Service released on Tuesday a new short-form tax exemption application, Form 1023-EZ, for certain small charities. The release also includes instructions for completing the form.

To be eligible to use the new form, an applicant must not have had annual gross receipts exceeding $50,000 in any of the past 3 years; must project that its annual gross receipts will not exceed $50,000 in any of the next 3 years; and must not have total assets in excess of $250,000. Other restrictions apply: churches, schools, hospitals and medical research organizations, foreign entities, supporting organizations, and a host of other specialized entities are ineligible to use the abbreviated application. The instructions include a 7-page “Eligibility Worksheet” with 26 questions; if the answer to any is “Yes,” then the organization is not eligible to use Form 1023-EZ.

An applicant must submit Form 1023-EZ electronically. Submission requires payment of a user fee of $400, reduced from $850 for many applicants using the full Form 1023.

Unlike its much more detailed sibling, the Form 1023-EZ asks the applicant to attest to a series of conclusory statements about its governing documents, purposes, and activities, but does not require elaboration or attachments. Applicants using the new form do not have to provide any details about, for example, their relationships with insiders or their finances.

Certain organizations whose exempt status is automatically revoked for failure to file annual returns for three consecutive years can use the new form to apply for reinstatement. This option is available only for organizations that otherwise meet the Form 1023-EZ eligibility requirements and that seek either retroactive reinstatement within 15 months of revocation or reinstatement only from the postmark date of the reinstatement application. (These eligibility requirements correspond to the reinstatement procedures set forth in Sections 4 and 7, respectively, of Rev. Proc. 2014-11.)

We may have more to say about the implications, for individual charities and for the nonprofit sector as a whole, of the approach the IRS has taken to “streamlining” the exemption application process. For now, though, small charities that are looking for a faster path to exemption, or that want to recover after automatic revocation, should be aware of this new option.

SOCIAL ENTERPRISE AS A TOOL FOR COMMUNITY DEVELOPMENT │ABA AFFORDABLE HOUSE FORUM │WASHINGTON, DC │ May 21-23

The ABA’s Forum on Affordable Housing and Community Development Law Annual Conference is taking place this week in Washington, D.C. The Forum is full of great panels and workshops. I’ll be on a panel to discuss “Social Enterprise as a Tool for Community Development” with Bill Callison from Faegre Baker Daniels LLP and Jonathan Ng, general counsel of Ashoka. More info and registration here.

ITUNES PODCAST SERIES ON CORPORATE SOCIAL RESPONSIBILITY

David Yosifon (Santa Clara Law) has prepared an excellent iTunes podcast series on Corporate Social Responsibility in which he discusses the role of the corporation in a series of conversations with law professors including Steven Bainbridge, Robert Rhee, Kent Greenfield, Eugene Volokh, and myself. The series can be heard here: https://itunes.apple.com/us/podcast/corporate-social-responsibility/id807976212?mt=2. You can also subscribe to it as more conversations are added. In my podcast with David, we discuss the Delaware public benefit corporation, including results from my recent empirical research: Delaware Public Benefit Corporations 90 Days Out: Who’s Opting In?.

 

THE ROLE OF SOCIAL ENTERPRISE AND HYBRID ORGANIZATIONS

This post, originally posted in on the Harvard Corporate Governance Forum, is a summary of the main claims I make in my recent paper, The Law of Social Enterprise and Hybrid Organizations, which was recently posted on SSRN as a Yale Law & Economics Research Paper. The goal of this paper is to advance an economic theory of social enterprise that can inform legal policy. I am also working now on a policy paper that will make policy recommendations in light of the theory.

In my paper, The Role of Social Enterprise and Hybrid Organizations, which was recently made available on SSRN, I advance a theory of hybrid organizations that combine profit-seeking and social missions.

Recent years have brought remarkable growth in hybrid organizations, including firms that pursue corporate social responsibility (“CSR”) policies, socially responsible investment firms, and environmentally-friendly firms. In addition, much attention has focused on a broad but vaguely defined group of hybrid organizations which are commonly referred to as “social enterprises”; these include microfinance institutions, businesses that sell fair trade products, work integration firms, and companies that sell affordable products in developing countries (e.g., eyeglasses and bed-nets). Despite popular enthusiasm for hybrid organizations, legal reforms to facilitate their formation and growth—including, in particular, special enabling statutes for hybrid firms (e.g., the Low-Profit LLC and the Benefit Corporation)—have largely been ineffective. This failure stems in large part from the lack of a theory that identifies the structural and functional elements that make some types of hybrid organizations more effective than others. Rather, legal and economic scholars tend to treat different forms of hybrids, especially social enterprises and firms implementing CSR policies, as essentially the same form of enterprise, i.e., firms with a mixed profit and social mission.

However, defining hybrids by reference to their mission is problematic because verifying and measuring social missions is virtually impossible. Instead, I define hybrid organizations, including social enterprises, as commercial firms that channel subsidies to a class of beneficiaries. If there is no subsidy, the firm is simply a standard profit-maximizing firm. In this respect, I take a broad view of subsidies, to include not only government subsidies and donations, but also premium prices and subsidized investments at below-market rates. For example, a consumer may pay a premium for products if the firm has a strong CSR agenda, or if its products are sourced from fair trade producers. To evaluate hybrid organizations, we thus need to ask what forms of organization utilize subsidies more effectively than others.

The theory in the paper focuses on social enterprises, such as microfinance institutions and work-integration firms, and distinguishes them from all other forms of hybrid organization. Social enterprises have been relatively effective in addressing complex development problems, such as increasing access to capital, improving employment opportunities, and enhancing consumer welfare. The key common characteristic of social enterprises is that they transact with their beneficiaries as patrons, i.e., the beneficiaries are either purchasers of the firms’ goods or services, or suppliers of input (including labor) to the firm. For example, microfinance institutions make loans to low-income borrowers, and work integration firms employ disadvantaged workers. Transactions with the patron-beneficiaries are costly either because of information asymmetries with respect to the beneficiaries’ abilities, or because beneficiaries lack sufficient abilities to transact with commercial firms; hence, the need for a subsidy.

The essence of the theory is that social enterprises perform a measurement role. The financial viability of social enterprises depends in large part on the performance of their patron-beneficiaries. For example, microfinance institutions are financially dependent on the ability of their borrowers to repay their loans. Thus, social enterprises have incentives to measure or gather information on their patron-beneficiaries’ attributes (e.g., workers’ skills or borrowers’ creditworthiness) in order to ensure that they are capable of performing their duties and tasks under their transactional relationship with the social enterprise firm. This information enables social enterprises to allocate subsidies (e.g., a training subsidy) to their beneficiaries (e.g., disadvantaged workers) effectively. In particular, social enterprises have the ability and incentives to tailor the form and amount of subsidies to their beneficiaries’ abilities and preferences as well as the commercial needs of their business.

The measurement function makes social enterprises relatively efficient vehicles for allocating subsidies to promote development goals. For example, microfinance institutions have grown substantially in the last few decades and now provide financial services to millions of low-income customers in developing countries. The relative success of microfinance contrasts with the limited effectiveness of traditional donative organizations, including governments and aid agencies, in spurring development. This paper argues that a possible reason for this is that donative organizations transfer subsidies to external beneficiaries rather than transact with them as patrons. Thus, they have limited incentives and means to gather information on the effectiveness of the subsidies they allocate. Social enterprises should also be contrasted with other forms of hybrid organizations, especially firms that engage in CSR policies. Similar to donative organizations, CSR initiatives typically involve the allocation of subsidy to external beneficiaries. In fact, firms that engage in CSR not only have limited means and incentives to measure the social impact of their policies, but they also have incentives to exaggerate it to enhance their reputations.

The article also describes the various types of commitment devices that social enterprises adopt in order to commit to transacting with their beneficiaries. Social enterprises may form as both for-profits and nonprofits. When social enterprises form as for-profits, there is a risk that their owners will expropriate the subsidies they receive to address a development mission. Commitment devices generally involve a nonprofit or a government agency assuming responsibility for ensuring that the for-profit social enterprise transacts with a class of patron-beneficiaries, such as borrowers or workers. Commitment devices may take the form of certification by a nonprofit in accordance with certain standards (e.g., Fair Trade certification), a contract with a nonprofit, or control by a nonprofit through ownership or voting rights. These commitment devices seem to work well due to their simplicity. Whereas social rating mechanisms, such as the Global Reporting Initiative or B-Corp certification, attempt with questionable success to measure the overall social impact of corporations, these commitment devices verify structural elements (i.e., transactions with patron-beneficiaries) which can be observed at relatively low costs. The transactions with their beneficiaries ensure that social enterprises haveincentives to utilize subsidies effectively.

Finally, the measurement function of social enterprises may serve the basis for designing a new social enterprise legal form and reforming corporate subsidy programs to promote development, including the Small Business Act and the Work Opportunity Tax Credit. In future work, I consider the policy implications in greater depth; this article focuses on laying out the structural and theoretical underpinnings of social enterprises and other hybrid organizations.

The full article is available for download here.

Any comments are welcome.