This presentation was given on April 3, 2014 at Harvard Business Law Journal Symposium on Benefit Corporations.
As I have noted in other work, the social enterprise spectrum theoretically lies between two extremes. On one end of the spectrum are organizations that pursue social and environmental missions and eschew profit motives, as some nonprofit organizations do. On the other end of the spectrum are organizations that focus solely on profit-maximization and disregard social and environmental missions—these are often called profit-maximizing businesses. I think that mainstream media ungraciously labels all businesses between these two extremes as social enterprise and fails to acknowledge that there are significant distinctions between business models at different points along the spectrum. Closer to the profit-maximizing side of the spectrum, you might find corporate philanthropy or corporate social responsibility initiatives. Closer to the nonprofit side of the spectrum, you might find nonprofit organizations using an earned income strategy to sustain a set of social services. Within this wide spectrum, I have seen mainstream media label two particular business models as “social enterprise”—the stakeholder governance model and the “buy-one-give-one” model—which I’ll briefly describe here.
The first model is the stakeholder governance model (also called the stakeholder relationship management model) which is espoused by communitarian and team production scholars and has emerged as a prototypical business model of social enterprise. Social entrepreneurs who employ this model have shifted away from the singular focus of creating shareholder value and embraced a holistic notion that a business’s constituents all deserve a fair return on their investments, whether investments of capital, labor, natural resources, or other factors of production. I believe that this is the type of business model that B Lab, along with other social and environmental impact accounting firms, assess and certify as the gold standard in “doing business well”. [Please correct me if I’m wrong.] One might look to Greyston Bakery, the iconic social enterprise, as an example. Greyston Bakery is a Yonkers, New York-based bakery that dedicates itself to community renewal by providing sustainable employment—including fair wages, benefits, and equity participation—to low-income community members and reinvesting significant profits in the Greyston Foundation, which provides jobs, job training, affordable housing, youth services, and health care to the Yonkers community. Greyston Bakery’s motto is, “We don’t hire people to bake brownies. We bake brownies to hire people.” Greyston became the first social enterprise to register as a benefit corporation in New York when the legislation passed earlier this year. Greyston seemingly treats its factors of production—labor, capital, and land—in an equitable and sustainable manner (although it seems to emphasize labor). This is the essence of the stakeholder governance model, and possibly what many “true believers” in social enterprise think of when they use the term.
The second business model of social enterprise is quite the opposite. It is the “buy one, give one” or “BOGO” business model. Under the BOGO model, a for-profit company sells products or services in a developed nation and donates similar (but different) products or services in a developing nation. The social entrepreneurs employing the BOGO model seem to be less concerned with transforming corporate governance structures and are seemingly focused on the impact that their businesses have on ameliorating an immediate social, health, or environmental problem. The most prominent example of the BOGO model is TOMS, a Los Angeles based shoe company founded by Blake Mycoskie. For every pair of TOMS shoes sold at a luxury retail store in developed countries, the company works with humanitary organizations to identify and give a free pair of shoes to children in developing countries. Other social enterprises that have followed TOMS lead include Warby Parker which donates eye glasses and Baby Teresa which donates baby clothes. Consumers in the developed world can now purchase a wide range of clothes and household goods using the BOGO model.
The BOGO business model is based on charitable philanthropy and has many critics, including me. Corporate philanthropy is a term often used in a derogatory manner by social entrepreneurs and development social scientists that embrace sustainability. The Chinese proverb tells us that “if you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.” The BOGO model relies on marked-up prices in developed countries to pay for the creation of similar products and services in developing countries. The BOGO model also floods developing markets with free products thereby diminishing the need and capacity of a developing country to manufacture and produce its own products for its own markets. To me, the model also relies heavily on the charitable heartstrings of individuals in developed countries who wish to contribute to a social or environmental issue and feel guilty about their own consumerism and privilege. To many, the BOGO business model is not “true” social enterprise.
Nonetheless, this issue is not as clear as it seems. Greyston Foundation, the nonprofit arm of Greyston Bakery, is also corporate philanthropy—profits from the bakery are donated to the foundation for charitable services. What really distinguishes the two models? Would TOMS Shoes be a “true” social enterprise if it adopted a stakeholder governance model for its internal governance structure? If so, it would seem that I am comparing apples to oranges—internal corporate governance to business strategy. That is, one might consider the internal workings of a business—the corporate governance—as the feature that distinguishes regular businesses or nonprofits from social enterprise. Those businesses that adopt a stakeholder governance model of corporate governance are social enterprises, those that do not are not social enterprises, even if they do adopt a business strategy that performs charitable or philanthropic work. What’s your take? Is that distinction too simplistic? What governance or business models have I overlooked?
[Disclaimer: my interest in these business models is partly for an article that I am writing, to be presented at a panel of the Nonprofit Law and Philanthropy Section of the American Association of Law Schools Annual Meeting on January 6, 2013.]
A draft of my recent article on benefit corporations, prepared for a symposium at American University- Washington College of Law, is available on SSRN. Entitled Choose Your Own Master: Social Enterprise, Certifications and Benefit Corporation Statutes, the article argues for requiring benefit corporation to prioritize among its stakeholders and for allowing benefit corporations to choose a narrower purpose than “general public benefit.” After the article was posted to SSRN, some of the minor suggestions in the article, such as providing the ability to opt-into directorial liability and restrictions on derivative standing, were accepted in the most recent version of the model benefit corporation legislation. The article will be updated this semester and is scheduled for publication in late 2012 or early 2013.
The current abstract, which will also be updated before publication, reads as follows:
In the wake of the most recent financial crisis, interest in social enterprise has increased exponentially. Disillusioned with the perceived shareholder wealth focus of corporate law, entrepreneurs, investors, customers and governments have become more receptive to new paradigms. In the past four years, 17 states have passed one or more of five different types of social enterprise statutes and many additional states are considering similar legislation.
Focusing primarily on the benefit corporation form, this article examines three main issues: (1) whether social enterprise statutes are potentially useful, (2) how social enterprise law can be improved, and (3) whether social enterprises will be sustainable. First, regarding usefulness, this article recognizes the traditional legal framework already provides social entrepreneurs most of the flexibility they seek, but posits that the social enterprise statutes may better combat perceptions of a shareholder wealth maximization norm arising from existing for-profit corporation law (especially in Delaware). As a potential alternative to social enterprise statutes, the article suggests that states like Delaware could simply amend their existing corporate codes to expressly allow for a societal or environmental-focused objective in a corporation’s charter. Second, regarding improvements to social enterprise law, the article suggests: (i) statutorily requiring social entrepreneurs to choose their own primary master; (ii) recognizing modified versions of traditional corporate law concepts; (iii) lowering transaction and uncertainty costs; and (iv) eliminating certain mandatory rules. Third, regarding sustainability, the article concludes that intensive social enterprise branding efforts should be left to the private sector organizations like B Lab; and social investors, perhaps using new vehicles such as crowdfunding and social impact bonds, must fill the funding gap left by hesitant traditional investors.
Over the last year, I’ve been lecturing at Harvard Law and Stanford Law about structuring social enterprises for impact. I always have people asking me to see the slides, but have never publicly shared the slides. Today I’m releasing those slides to the public.
This is meant to be an introductory presentation that touches on the possible legal structures for social entrepreneurs. The presentation discusses Corporation, B Corp Certification, Benefit Corporation, Flexible Purpose Corporation, L3C and Nonprofit legal structures. Within each legal structure, the presentation touches on Formation, Management, Taxation and Capital.
Click below to access the presentation. Leave your feedback in the comments section. Thanks!
Originally posted in The Economist
By: Matthew Bishop
He likes to do things differently. Yvon Chouinard changed his favourite sport, mountaineering, by introducing reusable pitons (the metal spikes you bang into the rock face and attach a rope to). Climbers often used to leave pitons in the cliff, which is environmentally messy, another of Mr Chouinard’s peeves.
In business, Mr Chouinard, the founder of PatagoniaOriginally posted in The Economist He likes to do things differently. Yvon Chouinard changed his favourite sport, mountaineering, by introducing reusable pitons (the metal spikes you bang into the rock face and attach a rope to). Climbers often used to leave pitons in the cliff, which is environmentally messy, another of Mr Chouinard’s peeves. In business, Mr Chouinard, the founder of Patagonia, an outdoor-clothing firm, says he believes that well-treated employees perform better. (He wrote a book called: “Let My People Go Surfing”.) Before it was fashionable, Mr Chouinard preached a philosophy of sustainability and long-term profitability that he calls “the slow company”.
On January 3rd Patagonia was anything but slow in becoming the first firm to take advantage of a new California law designed to give businesses greater freedom to pursue strategies which they believe benefit society as a whole rather than having to concentrate on maximising profits for the next financial quarter. According to Mr Chouinard, the new “benefit corporation”—usually referred to as a B Corp— creates the legal framework for firms like his to remain true to their social goals. To qualify as a B Corp, a firm must have an explicit social or environmental mission, and a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders. It must also publish independently verified reports on its social and environmental impact alongside its financial results. Other than that, it can go about business as usual.
The B Corp is a deliberate effort to change the nature of business by changing corporate law, led by B Lab, a non-profit outfit based in Pennsylvania. California is the sixth state to allow B Corps; the first was Maryland, in April 2010. Patagonia was followed immediately by another 11 Californian firms, including Give Something Back Office Supplies, Green Retirement Plans and DopeHut, a clothing retailer. Across America, there are now several hundred B Corps. Before Patagonia, the best-known was probably Seventh Generation, a maker of green detergents, paper towels and other household products.
California’s B Corp legislation took effect alongside a new law creating the “flexible purpose company” (FlexC), which allows a firm to adopt a specific social or environmental goal, rather than the broader obligations of a B Corp. Another option in America is the low-profit limited liability (LC3) company, which can raise money for socially beneficial purposes while making little or no profit. The idea of a legal framework for firms that put profits second is not confined to America. Britain, for example, has since 2005 allowed people to form “community interest companies”. Similar laws are brewing in several European countries.
The impetus for all this comes from people like Mr Chouinard, who believe that existing laws governing corporations and charities are too restrictive. For-profit firms, they argue, often face pressure to abandon social goals in favour of increasing profits. Non-profit firms and charities are needlessly restricted in their ability to raise capital when they need to grow. This prevents socially minded organisations from pursuing their goals as efficiently as possible. Existing laws for co-operatives and mutual companies are inadequate. Hence the need for B Corps and other novel structures, goes the argument. There is no tax advantage to being a B Corp, but there is to some of the new legal structures.
Whether these new legal forms will change business that much remains to be seen. Supporters of existing corporate law say it does not prevent firms, if they so wish, from setting social and environmental goals or rigorously reporting on their performance in delivering them—and that pursuing profit is often the best way to benefit society. Nor is it clear how much difference in practice will be made by the obligation of a B Corp to weigh interests other than profits. How does one measure such things? What counts for more: a clean lake or a happy neighbour? .
Mr Chouinard argues that making a firm’s social mission explicit in its legal structure makes it harder for a new boss or owner to abandon it. Perhaps so. B Corps will be tested in the market. Anyone who feels inspired by a B Corp’s mission is free to invest in its shares, or work for it.
On June 16th and 17th, New York Senate and Assembly unanimously (62-0 in the Senate and 139-0 in the Assembly) passed a bill that, when signed by Gov. Cuomo, will make New York the 5th state to allow businesses to organize as a Benefit Corporation.
“Benefit Corporations require companies to have a legal responsibility to stakeholders as well as shareholders so they can have a positive impact on their surrounding communities,” said Speaker Sheldon Silver (D-Manhattan). “This legislation demonstrates that profit and social responsibility are not mutually exclusive and that socially and environmentally-friendly business practices can enhance a company’s strength and profitability.”
Under the legislation (A4692-A/Silver) companies organizing as a benefit corporation would be required to pursue a general public benefit, defined as a positive material impact on society and the environment as assessed against a third party standard. The third party standard would include a comprehensive report card, used to measure a corporation’s material positive impact. The report card would score how the corporation handles employees, consumers, the community, the environment, and overall corporate accountability and transparency.
The third party standard would provide points for each positive impact – for example, paying a living wage, providing health benefits, or using renewable materials. In addition to pursuing a general public benefit, a corporation could pursue a specific public benefit encompassing the environment, the arts and sciences, public health, under-served communities, employees, or other benefits for society.
The bill, sponsored by Senator Daniel Squadron (D-Brooklyn) in the Senate, will now be sent to the Governor to be signed.
New laws take effect in Vermont and Virginia today, giving ethical business a boost. If Vermont’s law had been around 11 years ago, Ben Cohen and Jerry Greenfield might not have had to sell their ice cream company.
Back then, Unilever made the highest bid for Ben and Jerry’s, so the laws of shareholder responsibility forced the hippie founders to sell, even though they wanted to keep control. Now, with today’s law, a new kind of corporation is created that prevents exactly that, the Benefit Corporation. Vermont and Virginia join Maryland and New Jersey in recognizing the new form of company. More than a dozen other states are taking steps to catch up.
“This new class of corporation is a milestone for two reasons,” says Kyle Westaway, a lawyer who studies corporate forms and represented Launcht, the first company to file and officially become a Benefit Corporation in Vermont. The law, he says, “broadens the goals of the corporation from [just] profit to: profit, people and planet. Secondly, the Benefit Corporation increases transparency and accountability, by using an independent third party to verify that a business is acting in a socially and environmentally conscious fashion.”
Each Benefit Corporation must adhere to third party certification meeting certain environmental, social, or other non-financial standards. Many use the similarly named B-Corp Certification and Impact Assessment, which we’ve covered multiple times on GOOD.
B-Corp certification is similar to Fair Trade or Organic, but deals with all aspects of how the company does business. Rigorous as the B-Corp label is, it’s still a stamp from a nonprofit. Benefit Corporations are recognized by the state as a distinct new category of company. Like B-Corps, Benefit Corporations are required to consider the environment, community, and employees in business decisions along with company profit. A typical company—like Ben and Jerry’s circa 2000—is required to maximize returns to shareholders at all costs. With Benefit Corporation status, there’s recourse if a future investor or CEO veers from the company’s ethical principles. Just like shareholders were able to force Ben and Jerry to sell because shareholder value was paramount, with a Benefit Corporation, shareholders, or the founders, could claim that environmental and social impacts weren’t fully considered, even in court.
Ben and Jerry themselves issued a statement when the law passed saying they were thrilled. “Giving entrepreneurs and directors the legal protection to build values-based companies and retain the discretion to make decisions based upon both financial and social factors is a first step forward.”
Four B-Corps have already signed up and re-incorporated as Benefit Corporations in Vermont. Clean Yield Asset Management, Merritt & Merritt & Moulton, StartUp Owl, and Launcht, which did so even though it is based in New York.
“Frankly, I was born in Vermont and endorse many of Vermont’s policies and want Launcht’s state taxes to support a state I really like,” explains founder Freeman White on why he decided to pull a reverse-Delaware and incorporate his company out of state. “If our only responsibility was to our shareholders, we were concerned about loosing our core values. By establishing ourselves as a Benefit Corporation, we intentionally put ourselves on the hook to live up to our values … and by virtue of our legal structure we will be able to protect these values as we scale.” Launcht is a for-profit platform that helps nonprofits or other organizations crowdfund good projects. So it also mattered to White that his clients see Launcht as a trusted brand, even if the founders plan to cash out in a few years.
“If we were just a C-Corp we would be fighting the stereotypes some of our users, both founders and funders, might have about such corporations. My co-founder and I wanted ownership, so we can take advantage of the upside of potential exit opportunities in 3-5 years, thus we didn’t go the 501c3 [nonprofit] route,” he says.
Right now, being a Benefit Corporation is a statement to the world and a promise to yourself that the company does business with high social and environmental standards, and will continue to do so. Down the road though, being a distinct legal category of business could enable pretty incredible possibilities like preferential tax rates for more socially focused businesses. If that happened—politicians and B-Corp advocates are mum on this—then we could see persuasive new incentives and legal tools remake businesses of all stripes.
It could change how investments are made too. Impact investing is a growing field, where money managers steer their funds to good causes that earn a financial return as well as make a social impact, just like many potential Benefit Corporations. By requiring these companies to get certified by a third party, the law will enable investors to measure and compare companies on non-financial performance according to a single standard, or a small number of them. So that means, down the road, a company that serves the poor with affordable health services could attract new investment that supports the cause, even if its profit margins were lower than those of other healthcare providers, because it couldprove its social value.
That’s all a bit down the road, but we get a hint of the potential from the Green Mountain State. Small as it is, Vermont is a big player when it comes to values-infused companies, Seventh Generation chief among them. But even the flag bearer of better business stumbled. Founder Jeffrey Hollender was notoriously ousted in part because he disagreed with some of the new investors on just how far to take social responsibility, as he explained at length to GOOD in his first public comments after the ouster.
Chris Miller, of Seventh Generation’s Corporate Consciousness team tells GOOD it’s looking likely they’ll reincorporate as a Benefit Corporation, “we are a founding member of B-Corps, and our bylaws were changed to reflect that, so we think it’s a really logical next step.”
Even a $150 million a year business has cause to plan ahead to protect values. “It’s an important way for us to ensure that the things that we care about around our business are here for years to come as the company evolves, as we grow, as we go through leadership changes.” The change requires a shareholder vote.
Jay Coen Gilbert of B-Lab, the nonprofit leading the charge for all of this, says today’s milestone shows this is an “accelerating movement.” But he points out, even if this is happening in a state already famous for businesses such as Ben and Jerry’s and Seventh Generation, there are way bigger moments on the horizon.
New York and California are the on the cusp of enacting Benefit Corporation laws and that could cause a snowball effect if a critical mass of companies sign on and spread the word about the concept. California’s version of the bill has passed the assembly and could come up for a Senate vote soon. New York’s bill is waiting for the governor’s signature.
As for Ben and Jerry’s, the company, they say they support the law, but signing up doesn’t make sense. Spokesman Sean Greenwood tells GOOD, “To the best of my understanding, we’ve spent considerable time talking with our Leadership Team and our independent board of directors about the Benefit Corporation law and if it makes sense for Ben and Jerry’s to pursue.” He says that because the company has a unique governance arrangement already, it would require considerable legal restructuring. An independent board of directors was created to help keep the company quirky, independent, and honest even as it remains a wholly-owned Unilever subsidiary, an uncommon structure in business.
“Still, we applaud the effort for the businesses in Vermont to continue to lead the way with two scoops of progressive values and vision. We will support the Benefit Corporation law with our voice and our practices of daily business operations.”
Ben and Jerry, the people, did not respond for a request for comment in time for publication.
By: Alex Goldmark. Originally Posted in GOOD.
Photo: David Glover
With a stroke of the pen Gov. Chris Christie made NJ the third state to enact Benefit Corporation legislation. S-2170, the benefit corporation legislation, passed the both houses of the New Jersey state legislature unanimously. Not a single vote was cast against this legislation.
This version of the Benefit Corporation is unique from Maryland’s version in 3 distinct ways:
1. Appointing of a Benefit Director. The Benefit Director is an independent member of the board of directors that is responsible for monitoring and reporting on the success and/or failure of that Benefit Corporation in meeting it’s General Public Benefit and Specific Public Benefits. He is responsible for issuing an annual Benefit Report .
2. The Benefit Report. This annual report must be available to the public, sent to the shareholders and filed with the NJ Secretary of State for a filing fee of $70. The filing with the Secretary of State adds additional cost and administrative burden, but more importantly, this is the first time we have seen states, interested in the publication of the Benefit Report.
3. Benefit Enforcement Proceeding. If the directors of a Benefit Corporation are not acting to further the General Public Benefit or the Specific Public Benefit, a claim can be brought against them in a Benefit Enforcement Proceeding only by:
(1) Directly by the benefit corporation; or
(2) Derivatively by:
(a) a shareholder;
(b) a director;
(c) a person or group of persons that owns beneficially or of record 10% or more of the equity interests in an entity of which the benefit corporation is a subsidiary; or
(d) such other persons as may be specified in the certificate of incorporation or by-laws of the benefit corporation.
Photo by: Marty.FM