A partner in Allen Matkins’ Corporate and Securities practice group, poses an interesting question here, as it relates to the current Hobby Lobby case before SCOTUS.
D.C. GETS FIRST BENEFIT CORPORATION
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.
SOCIAL ENTREPRENEUR RINGS OPENING NYSE BELL FOR TWITTER
Story in today’s Times Dealbook by Professor Steven Davidoff.
DELAWARE PUBLIC BENEFIT CORPORATIONS – SPECIFIC PUBLIC BENEFIT PURPOSE(S)
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.
MICROLOANS AND CASH TRANSFERS FOR THE POOR
Social business is not just for folks in developing countries at the base of the pyramid. According to this NY Times article, 45 million Americans live below the poverty line and could benefit from the same microfinance strategies used in developing countries. Grameen America operates 11 offices in the U.S. and has provided $100 million in loans to Americans. Notably, the same social shaming techniques are used for Grameen America microloans as in developing countries — borrowers must form a group and borrow, and one’s ability to borrow more in the future depends on the group’s repayment of the loans. The microloans must be used for entrepreneurial work, but no collateral is required.
A second NY Times article reports on research from Innovations for Poverty Action that found that giving poor Kenyan farmers money (as in cold, hard cash) improved their happiness and decreased stress. Additionally, the Kenyan families ate better and increased their livestock holdings by 51%. Education and health did not improve, but the cash transfers also did not lead to increased spending on alcohol and tobacco.
Should we be relying on microloans or cash transfers as an anti-poverty strategy in the United States? How does our differing perception of poor people in the U.S. versus developing countries affect our willingness to use one strategy versus the other?
Microloans used for entrepreneurial activities are likely to be more well-received in the U.S. because it is a sustainable strategy (the money is repaid and then loaned again) and because it is meant to motivate the recipient to work hard to put the loan to good use (and improve the recipient’s work ethic). Americans overwhelming regard poor people in the U.S. as poor based on their own failings (see Five Stereotypes about Poor People and Education in yesterday’s Washington Post) whereas poor people in developing countries are thought of as the “deserving poor” — people who are poor because of the lack of access to opportunity around them. As I’ve written about before, social enterprise may be so appealing to Americans — and state legislators — because of the American “pull-yourself-up-by-your-bootstrap” culture. Social enterprise softens this motto somewhat — social enterprise seems to offer “a hand up, not a hand out.”
B CORPS IN SOUTH AMERICA
B Lab has exported its brand abroad. Sistema B is the South American equivalent / partner of B Lab and certifies B Corps there. Sistema B is based in Chile but has certified companies in Brazil, Chile, Colombia, and Argentina. According to a blog post on B Lab’s website, B Lab is also working to replicate itself in Australia and in Europe.
My brief thoughts from the nonprofit perspective: Many countries have a different take on charities and NGOs than the U.S. does. Some do not allow NGOs to engage in any business activities and nonprofit status is available only for traditional charities. In the U.S., the IRS scrutinizes entities that apply for tax-exemption and have activities of a “commerical hue.” Nonetheless, under U.S. tax law, tax-exempt organizations are allowed to engage in business activities to a certain extent. It may be that countries that do not have a dynamic nonprofit sector (i.e., one that does not allow for hybrid operations or charitable activities beyond traditional concepts of “charity”) could benefit from B Corp certification, and perhaps even benefit from benefit corporation or other hybrid entity legislation.
WASHINGTON POST: BALANCED COVERAGE OF BENEFIT CORPORATIONS?
This article on benefit corporations in today’s Washington Post is the best one that I’ve seen in mainstream media (i.e., not academic or practice-based articles). Newspaper articles obviously aren’t able to go into the same depth as an academic article but I am still always surprised about the misinformation that is in mainstream media articles about benefit corporations. Often those articles don’t make a distinction between B Corp certification and benefit corporation; they tout shareholder wealth maximization up as well-established law; and they claim that the benefit corporation is a panacea. This article tries to express the nuances of all of these claims, although the title is still a bit sensationalist. Find the article here.
Notably, Plum Organic’s founder acknowledges that being a benefit corporation is all about branding.
DELAWARE PUBLIC BENEFIT CORPORATIONS │ 10/5/13 │ CHARLESTON, SC
On October 5th, I will be presenting on Delaware’s Public Benefit Corporation law at the Southeastern Law Scholars Conference in one of my favorite cities, Charleston, SC.
The abstract from my proposal (and forthcoming journal article) follows:
“Systems should exist to serve society. Right now our capitalist system is not serving society; it’s serving shareholders. And we can’t run around expecting different outcomes until we change the rules of the game.” -Jay Coen Gilbert (Co-founder, B-Lab)
“Delaware, the leading incorporation state, engages in significant, and continual, legal innovation. . . . Delaware is not the only state to be continually revising its corporation code: other states invariably follow suit, revising their codes to follow Delaware’s innovations.” -Roberta Romano (Professor, Yale Law School)
B Lab co-founder Jay Coen Gilbert provided the introductory quote in his 2010 TEDx Talk in Philadelphia on certified B corporations. Since 2010, B Lab has been quite active. Not only has the non-profit organization privately certified over 800 companies, but B Lab has also taken the lead in successfully convincing 19 states and Washington, D.C. to pass benefit corporation statutes: in their words, “changing the rules of the game.” After eighteen months of lobbying and negotiation, B Lab even convinced Delaware, the recognized pacesetter in U.S. corporate law, to amend its corporate statute. Delaware, however, cut its own path in regard to the benefit corporation form. Delaware is quite sensitive to issues involving corporate law and often acts quickly to protect its strong market position. While most of the other states appear to have worked from the Model Benefit Corporation Legislation (the “Model”) and stayed relatively close it, Delaware seems to have merely consulted the Model and created a largely new social enterprise form that Delaware calls a public benefit corporation (“PBC”). This article builds on the author’s previous work on benefit corporations, compares the Model and the PBC amendments, and offers suggestions for improving the law.
This article proceeds in five primary parts. Part I of this article provides a brief overview of benefit corporations, the PBC amendments, and the legal side of the social enterprise movement more generally. Part II claims that the PBC amendments allow more private ordering than does the Model, and argues that most of the PBC provisions providing additional flexibility are positive developments. Part III posits that the PBC provides superior guidance to directors, but also makes suggestions for providing additional clarity. Part IV dissects the branding aspect of both the Model and the PBC, decides that the Model provides for slightly better branding, but opines that the social enterprise branding efforts are best left to the private market. Part V briefly examines remaining governance and ethical challenges facing those associated with PBCs and sets the stage for future research. The article concludes with a summary of the article’s main points and projections related to the future of social enterprise legislation in wake of Delaware’s innovations.
SHAREHOLDER WEALTH MAXIMIZATION IN MAINSTREAM MEDIA
Here’s an article in the Business section of the Washington Post that some of you may find interesting: How the Cult of Shareholder Value Wrecked American business by Stephen Pearlstein. Pearlstein references solutions to SWM like impact investing and the benefit corporation. He sets forth regulatory and legal reforms that would encourage long-term corporate decision-making, including:
– The capital gains tax could be recalibrated so that short-term trading profits are taxed the same as wages and salary, while gains from investments held for long periods are taxed more lightly than they are now, or not at all. A small transaction tax could also dampen enthusiasm for short-term trading.
– The Securities and Exchange Commission could adopt rules that discourage corporations from giving quarterly earnings projections or guidance, while accounting regulators could insist that corporate financial reports better reflect long-term costs and benefits and measure long-term value creation.
– States could make it easier for corporations to adopt governance rules that give long-term shareholders more power in selecting directors, approving mergers and takeovers and setting executive compensation.