LAW AND SOCIAL ENTREPRENEURSHIP

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.