LAW AND SOCIAL ENTREPRENEURSHIP

WHITEWASHING & THE PUBLIC BENEFIT CORPORATION: AN EXAMPLE

Rasmussen College recently converted to a Delaware public benefit corporation. For those who don’t follow the blog regularly, a Delaware public benefit corporation is a for-profit entity “intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.” “‘Public benefit’ means a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.”

What raises red flags for this corporate conversion is the fact that the U.S. Senate Health, Education, Labor and Pensions Committee (HELP) issued a damning report in July 2012 on for-profit colleges including, specifically Rasmussen College. The report, titled For-Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success, can be found here. The report is the result of a 2-year government study on for-profit colleges.

The report notes that the revenues of for-profit colleges come almost entirely from federal taxpayers (to the tune of $32 billion a year) but that the retention rate of students is low, the colleges are not held accountable for ensuring student success, the colleges have seen large increases shareholder returns in recent years, the colleges spend more money on recruiting than education, and that the quality of education provided is abysmal.

I cannot repeat the findings of the 250-page HELP report in total on this blog, but here are some figures from the part of the report that discusses Rasmussen College (full report on Rasmussen here).

• Approximately 80% of Rasmussen’s revenue comes from federal funds (approximately $185 million in 2010).
• Compared to public colleges offering the same programs, the price of tuition is higher at Rasmussen. A Bachelor’s degree in Business Management from Rasmussen College costs $68,668. The University of Minnesota costs $56,240 for a Bachelor’s in Business.
• Rasmussen spent $4,801 per student on instruction in 2009, compared to $6,261 on marketing and $9,017 on profit.
• Rasmussen’s student retention rates were among the lowest of the for-profit colleges surveyed.
• In 2010, with 17,090 students, Rasmussen employed 448 recruiters, 30 career services employees, and 303 student services employees. That means each career counselor was responsible for 570 students and each student services staffer was responsible for 56 students. Meanwhile, the company employed one recruiter for every 38 students. (Recruiting high volumes of students is part of the profit model).

The HELP report on Rasmussen College report concludes:

“Like many others in the sector, Rasmussen’s enrollment increased rapidly over the past decade.
Much of this growth came after the company’s 2003 acquisition by the private equity company
Frontenac. Additionally, Rasmussen has received increasing amounts of Federal financial aid dollars, at least $185 million in 2010, and realized significant increases in profit. However, the company’s programs are costly and students attending Rasmussen have some of the worst retention rates of any company examined by the committee, with more than 63 percent of students leaving with no degree. While Rasmussen has made some minor improvements, including an orientation program, and makes a greater investment in spending on instruction and student services than many for-profit colleges examined, it is unclear whether taxpayers or students are obtaining value from their investment in the company.”

And now, Rasmussen College is a public benefit corporation. This is exactly the type of “whitewashing” or “greenwashing” that lawyers and scholars predicted would occur as the benefit corporation legislation has been passed into law in 19 states and the District of Columbia. Any company can become a public benefit corporation; and the public benefit produced is only enforceable by shareholders. Quite unfortunately, I predict that we’ll see a lot of this in the years ahead.

This is a prime example of how the corporate form—whether a traditional corporation, benefit corporation, or even a nonprofit corporation—does not tell us much about the actual shared value (or lack thereof) that a firm creates. Socially- and environmentally-beneficial firms create shared value because they have investors and managers that pursue shared value and eschew opportunistic, greedy behavior, not because of a state statute governing corporate form. I still think that there are societal benefits to the benefit corporation and hybrid forms like it, but one should not mistake corporate form for actual corporate performance. Even a nonprofit corporation can engage in vice. To assess corporate performance, you need accounting and outcome measurements, and someone or something to hold companies accountable. Rasmussen would presumably fail miserably on GIIRS ratings or SASB standards.

THE BENEFIT CORPORATION’S RIGHT TO THE FREE EXERCISE OF RELIGION

Recently posted on SSRN (hat tip to Steven Bainbridge) is an article analyzing whether a benefit corporation organized for a religious purpose has the right to the free exercise of religion in context of the Hobby Lobby case:

Blurring Lines between Churches and Secular Corporations: The Compelling Case of the Benefit Corporation’s Right to the Free Exercise of Religion by Marc Greendorfer

Abstract:
The United States Supreme Court will soon hear oral arguments on two cases, Sebelius v. Hobby Lobby Stores, Inc. and Conestoga Wood Specialties Corp. v. Sebelius. Both cases present similar questions with regard to the applicability of the First Amendment’s “Free Exercise Clause” to corporations. In Hobby Lobby, the Tenth Circuit found that Free Exercise rights existed for a corporation, without regard to its status as a non-church, profit-seeking entity. In Conestoga, however, the Third Circuit agreed that a corporation could have Free Exercise rights, but such rights did not apply if the corporation happened to be “secular” and “for-profit”, defining characteristics which appear nowhere in the Constitution and which are contrary to recent First Amendment jurisprudence and other precedent, including the seminal case of Citizens United v. Federal Election Commission.

Why would there be such a distinction relating to a right as fundamental as the exercise of religion?

According to the Conestoga court, it all comes down to profit. A legal entity that exists to produce profits for those who organized it can’t exercise religion, but one that exists without an interest in profits miraculously is vested with the right to exercise religion. In Hobby Lobby, the court summarized (and subsequently rejected) the government’s position as being a black and white distinction between non-profit religious organizations, which have Free Exercise rights, and for-profit secular organizations, which have no such rights. The government made the same argument in Conestoga, and in that case the majority adopted the government’s position. Not only is the government’s distinction arbitrary and without logical or legal basis, it is utterly at odds with recent developments in corporate law.

The advent of the “Benefit Corporation” (or “B-Corp”) has formally established a gray area between the black of the non-profit religious organization and the white of the for-profit secular organization with respect to First Amendment rights generally and Free Exercise rights specifically. Indeed, a corporation organized as a B-Corp can be religious and formed for purposes other than the sole pursuit of profit. Such a creature was apparently beyond the knowledge of the Conestoga court. Well, not the entire Conestoga court. Judge Kent Jordan, in his meticulously argued dissent, touched upon the radical upheaval in the law occasioned by the recent establishment of the B-Corp in many states, pointing out that a B-Corp, like a religious non-profit corporation, is a legal entity that exists for purposes other than the solitary pursuit of profit; in fact, B-Corps can be formed in furtherance of religious purposes, much like a religious non-profit.

The purpose of this paper is to elaborate on Judge Jordan’s discussion of B-Corps in his Conestoga dissent and further, to argue that not only should Free Exercise rights apply to corporations that have a religious purpose, such as B-Corps, but also such rights should exist for what I refer to as “de-facto B-Corps.”

PLERHOPLES ON “REPRESENTING SOCIAL ENTERPRISE”

Alicia Plerhoples is leading an innovative Social Enterprise and Nonprofit Clinic at Georgetown University Law Center.  She presented her “Representing Social Enterprise” article at AALS in 2013, and her article was recently published by the Clinical Law Review.  I recommend the article to all those interested in social enterprise and/or clinical education.  The article will be helpful to the academic, practitioner, and clinician (perhaps because Professor Plerhoples has experience in all three roles).   “Representing Social Enterprise” includes a deep discussion of the models of social enterprise, thoughtful analysis of the corporate governance issues that are likely to arise when representing social enterprises, and interesting insights into Georgetown’s clinic.

The abstract is reproduced below and the entire article can be found on SSRN here:

“This article explores the representation of social enterprises — i.e., nonprofit and for-profit organizations whose managers strategically and purposefully work to create social, environmental, and economic value or achieve a social good through business techniques — in the Social Enterprise & Nonprofit Law Clinic at Georgetown University Law Center. The choice to represent social enterprise clients facilitates a curriculum that explicitly focuses on the business models, governance tools, and legal mechanisms that these organizations use to accomplish sustainability and charitable objectives. By serving social enterprise clients, clinic students learn to solve novel and unstructured problems and engage in information sharing and knowledge creation essential to legal advocacy. Legal issues unique to social enterprises compel clinic students to question corporate law and its underlying normative values and employ transactional lawyering for public interest purposes.”

Cross-posted at Business Law Prof. Blog.

DELAWARE PUBLIC BENEFIT CORPORATIONS: THE FIRST 90 DAYS

I’ve just finished up a draft of an article that presents original research on the companies that opted into the Delaware public benefit corporation form within the first three months that the statutory amendments to the DGCL became effective. In the article I analyze the companies with respect to the following characteristics: (1) year of incorporation as a proxy for corporate age, (2) industry, (3) charitable activities, (4) identified specific public benefit, and (5) adoption of model legislation options not required by the Delaware statute. The article is forthcoming in the U.C. Davis Business Law Journal and a draft is available on SSRN here. The abstract follows.

Abstract

The Delaware legislature recently shocked the sustainable business and social enterprise sector. On August 1, 2013, amendments to the Delaware General Corporation Law became effective, allowing entities to incorporate as a public benefit corporation, a new hybrid corporate form that requires managers to balance shareholders’ financial interests with the best interests of stakeholders materially affected by the corporation’s conduct, and produce a public benefit. For a state that has long ruled U.S. corporate law and whose judiciary has frequently invoked shareholder primacy, the adoption of the public benefit corporation form has been hailed as a victory by sustainable business and social enterprise proponents. And yet, the significance of this victory in Delaware is premature. Information about the number and types of companies opting into the public benefit corporation form has been preliminary and speculative. This article fills that gap. In this article, I present original descriptive research on the 53 public benefit corporations that incorporated or converted in Delaware within the first three months of the amended corporate statute’s effectiveness. Based on publicly available documents and information, I analyze these first public benefit corporations with respect to the following characteristics: (1) year of incorporation as a proxy for corporate age, (2) industry, (3) charitable activities, (4) identified specific public benefit, and (5) adoption of model legislation options not required by the Delaware statute. My analysis returns the following results: 75% of public benefit corporations are likely new corporations in their early stages of operation; 32% of public benefit corporations provide professional services (e.g., consulting, legal, financial, architectural design), the technology, healthcare, and education sectors each represent 11% of public benefit corporations, 10% of public benefit corporations produce consumer retail products; approximately 40% of public benefit corporations could have alternatively incorporated as a charitable nonprofit exempt from federal income taxes. This article discusses these and other findings to assist in understanding the public benefit corporation and how it has been employed within the first three months of its adoption.