LAW AND SOCIAL ENTREPRENEURSHIP

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”).