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WHAT DO INVESTORS THINK ABOUT BENEFIT CORPORATIONS?

An abridged version of this article ran in The Guardian Sustainable Business section. Click here for that version.

 

A quiet corporate revolution for good is sweeping across America. The Benefit Corporation, a new class of corporation for sustainable business, is being passed into law in states across the US. The Benefit Corporation is being adopted by state legislatures at light speed, with twenty states passing legislation in just over three years. By comparison, it took the LLC well over a decade to reach the twenty-state mark. In an age of intense partisanship, the law is gaining popular support across the aisle, including unanimous passage in the notoriously divided New York legislature.

The Benefit Corporation is a new class of corporation that broadens the purpose of a corporation and introduces unprecedented transparency and accountability. Traditional corporations operate under the legal duty to maximize shareholder value, which forces entrepreneurs to purse profit at the expense of purpose. The Benefit Corporation broadens the mandate of the corporation from a narrow of view shareholder maximization to consider all stakeholders in its decision-making, essentially codifying triple bottom line accounting. The Benefit Corporation’s social and environmental performance is measured by an objective third party standard and must be reported to the public every year in an annual Benefit Report.

On August 1st, Delaware followed suit and passed their own version of the Benefit Corporation, the Public Benefit Corporation. Delaware, widely seen as the most important state in corporate law, is where most venture-backed and fortune 500 companies are incorporated. One such Delaware corporation, Method Inc., a home cleaning products company, was one of the first companies to convert to a Benefit Corporation in Delaware. Adam Lowry, cofounder and Chief Greenskeeper, noted, “We started the business to show that business could be a positive force on society, and now have a legal form that is inline with our ethic.”

This new corporate form mandates that entrepreneurs take into consideration their social and environmental impact, which could have a negative financial impact on returns to shareholders. An essential question for entrepreneurs who are creating a sustainable business, but also need the financial backing of investors is:

What do investors think about the Benefit Corporation?

SHIFT FROM TECHNOLOGICAL INNOVATION TO SOCIAL INNOVATION 

As a partner at Union Square Ventures (USV), Albert Wenger has invested in some of the most successful tech companies including Twitter and Tumblr. He considers himself a pure tech venture capitalist, not an impact investor, and yet he is strongly in favor of the Benefit Corporation.

Mr. Wenger believes that the current version of capitalism has been incredibly efficient at creating and distributing a high volume of stuff at an increasingly cheaper price. Technical innovation has ensured that everything from computers to clothing is getting cheaper and much more widely available. “The problem of technological innovation is not the primary problem that we still need to solve. The primary problems are the very large-scale problems: giving people access to good education, quality healthcare, poverty alleviation and not destroying our planet. So the big change is that there was a time period where we really had to address technological innovation and where this type of capitalism that we had was quite good at bringing that technological innovation into the marketplace. I don’t think that’s our biggest set of problems anymore.” Since the biggest questions of the future cannot be solved simply by the current shareholder maximization-centered version of capitalism, Mr. Wenger believes we have to usher in a new version of capitalism that will shift the focus from purely technological innovation to social innovation and the Benefit Corporation is a great vehicle to do that.

PROTECTION FROM SHORT-TERMISM

Another key shift that Mr. Wenger sees is a shift away from hierarchical systems to networks – think Etsy and Shapeways for production and Tumblr and Twitter for communication. Indeed we are already seeing that with social media disrupting the traditional journalism and Amazon disrupting retail.

Mr. Wenger says, “So from our perspective, because we believe in the power of networks, we think Benefit Corporations are particularly important because we believe with great power comes great responsibility.” If you operate a very large network, there will be a temptation for management or newer shareholder to extract too much value too soon from the network. This tension between extracting value in the short-term and building a healthy long-term comes into clear focus when you look at the divergence between management timeframes, investor timeframes, and market place timeframes. Mr. Wenger notes, “Etsy (a USV portfolio company) could and should exist for decades or longer, but individual managers may only work at a company for 5 years or 10 years. Investors may be looking to exit even quicker. So you have very different time horizons.” There is a fundamental disconnect between the incentives for short-term profit maximization and long-term value creation. The Benefit Corporation empowers management, directors and shareholders to set a long-term vision for the health of their company and make those decisions that align with those goals without the interference of short-term focused shareholders forcing them to extract value too soon. A good example of this according to Mr. Wenger is the Myspace acquisition, “News Corp. bought it, and paid what they thought was a reasonably high price for it and then proceeded to want to recover that price very quickly. So they tried to monetize the network very, very heavily, ultimately contributing to its collapse.”

INVESTOR ALLIGNMENT

After a long career in investment, including serving as co-Chairman for the $21 billion asset management firm Genworth, Ron Cordes has shifted his focus from simply investing in great companies, to investing in great companies that have a positive social and environmental impact. These days he’s looking to maximize both profit and purpose, and is one of the leaders in the impact investing movement.

Most investment rounds include multiple investors and, more often than not, they have never met each other – the other investors are simply names on a capitalization table. There is no way to understand the other investors’ motives for making the investment. Typically, the investor would have to rely on the CEO of the company to bring together a group of investors that are aligned around a common mission.

This works well so long as the company is meeting or exceeding their financial projections, but, Mr. Cordes notes, “growing a business is never a linear path. So it’s always two steps forward, one step back. Markets and economies are at play. Crashes like 2008 happen, and generally issue occur that were unexpected in a negative way. Investors sometimes react in unusual ways. They may say, ‘wait a minute, that was great when we were performing well. But now we’re down here and you’re asking me to put extra money up and you’re saying we still have this employee and stakeholder engagement policy.'” For individual investors to continue to support the social and environmental mission of a company even when the company is struggling financially is challenging. In another instance, a shareholder may transfer the stock to someone else, say in the event of death or divorce. Now all of a sudden, there is a new person in control of voting those shares who may or may not align with the mission of the company.

“Things like that can happen,” says Mr. Cordes. “If the values are not codified, you’re going to be relying on the collective good intentions of the group, which is hard. So if I’m a shareholder and I truly don’t know the other shareholders, then the Benefit Corporation at least says, okay I’m not going to have that issue come out of the left field here, because everybody is signing up to the baseline goals. If in any point somebody was wrong and misread the intentions of an investor, you have it in writing and baked into the articles, which gives you a recourse that you don’t have otherwise.”

INVESTOR SKEPTICISM

Though it sounds lovely to pursue profit and purpose, David S. Rose, angel investor and entrepreneur who has founded or funded over 75 companies, says that when the rubber meets the road, you need to choose profit or purpose, but you can’t build a successful company trying to pursue both simultaneously.

Mr. Rose says, “It’s wonderful to think that one can have one’s cake and eat it too. That one can benefit society, make a lot of money, make everybody happy, end wars, cure cancer. In the real world however things tend to optimize in one area. It is nearly impossible to try and truly optimize for a double bottom-line. But in the case of making money and creating social good the underlying challenge is that starting a new venture is insanely tough. It’s really, really difficult. Given the fact that the majority of new business fail when entrepreneurs are busting their rear ends to try and make it succeed economically, to then overlay on top of that a secondary goal is really, really challenging.”

For Mr. Rose, there is a clear dividing line either an organization is primarily pursuing profit or primarily pursuing purpose, a company has to choose one or they will fail. “When the rubber meets the road in the real world, I think you have to choose, because if a company is going to prioritize the public benefit by 0.1%, then ultimately it cannot survive. It will go out of business.”

Mr. Rose believes in doing good through business. He just believes the only way to do that is to give clear priority to profit over purpose. In fact, he has invested in, and serves as the chairman of the board for Porti Familia – a company bringing modern healthcare to the slums of Lima, Peru – a company that is certainly doing a great deal of good in the world. His other investors are some of the biggest impact investment funds in the world, such as Acumen and responsAbility. Rose says, “we all agree that the company is doing good things, but I invested in it not to do good things – I can give money to charity for that. I invested in this company to make money, and oh, by the way, it’s making money in a good way by doing good things.”

So, when it comes to the Benefit Corporation, which is designed for companies pursuing both profit and purpose simultaneously, his conclusion is, “I don’t think Benefit Corporations are evil. I just think that they are ultimately naïve, because in the real world, you have to choose. You can’t have your cake and eat it too.”

FINAL ANALYSIS

In the end, it’s difficult to make a general statement for the entire investment community because every investor is different, and is driven by unique blend of motivations. But there seems to be openness from some leading investors to the new corporate structure. Mr. Wenger and his team at USV are looking forward to working with Benefit Corporations. “We are actively encouraging some portfolio companies to pursue the Benefit Corporation structure. It certainly would never stop us from investing.”

The best-case scenario is for entrepreneurs and investors to have clear alignment on both profit and purpose. The Benefit Corporation is a ready-made legal structure that helps codify that alignment from the outset and protects the company from mission drift in the long term. Method is an example that, Mr. Lowry says, “I’m very luck that I have mission-aligned investors. All the directors, officers and investors involved in Method, want to ensure that our mission is preserved forever into the future, so we are all excited about a new corporate form that gives directors the rights and protections to pursue a triple bottom line.”

WHAT SHOULD MY PRIVATE FOUNDATION DO FOR THE HOLIDAYS?

First and foremost, let me wish everyone who reads SocEntLaw the safest and happiest of holidays.

Next, I want to share something that, as the Grinch would say, has me “puzzled and puzzled ‘till [my] puzzler [is] sore.”*

Specifically, I cannot figure out why the Brewer Family Foundation’s tax lawyer, Ebenezer Scrooge, is insisting that the Foundation may buy $500,000 of stock in BP or give $500,000 to GreenPeace to celebrate the season, but that the Foundation cannot risk investing the same amount in SunSleigh, Inc. a “social enterprise” developing an affordable solar-powered car. I think old Ebenezer finally has lost it, and the Foundation needs a new tax lawyer.

Let me explain. Although not huge in terms of value, the imaginary Brewer Family Foundation’s mission is nonetheless a big one: to save the world, especially the environment. The Foundation’s endowment is $100 million and as required for tax purposes every year the Foundation distributes to charity at least 5% of the value of the Foundation’s assets. We’ve already met our 5% goal this year, but because our endowment is really well managed and generating an average 10% annual return, we’re feeling more generous than usual this December and have an extra $500,000 to spend. We’ve narrowed down our choices to the following three:

• Buying stock in BP (because we think BP stock is a really good investment right now even though it runs contrary to our mission of protecting the environment); or
• Giving money to GreenPeace expressly because we think GreenPeace hates oil companies and cares about the environment more than any other charity (except, of course, the Foundation); or
• Investing in SunSleigh, a local, privately-held company raising money to develop an affordable solar-powered car.

Personally, I would like the Foundation to invest the extra $500,000 in SunSleigh, but Ebenezer says we can’t.

More background: As I mentioned, SunSleigh is a private “social enterprise” company located here in Atlanta that is developing an affordable solar-powered car. A $500,000 investment in SunSleigh would equate to 1% of the SunSleigh stock. Like the Foundation, the owners of SunSleigh are so committed to the environment that they plan to sell the SunSleigh for as little as possible so long as they can generate a 2% return on invested capital. No doubt the investment will be very risky, and the Foundation might lose all $500,000, but in my well-considered judgment, SunSleigh really could help save the environment if it is successful. In fact, I sincerely and realistically believe that the Foundation might do more to save the planet by investing in SunSleigh than it could ever accomplish through all of its other investments and annual grants to environmental charities like GreenPeace. Moreover, SunSleigh really needs the Foundation’s $500,000 because it has been unable to attract normal investment capital due to SunSleigh’s commitment to keep the car’s costs low and pay only a 2% dividend forever.

So, I called my favorite tax lawyer, Ebenezer Scrooge, just to make sure that I was on solid legal and tax ground if the Brewer Family Foundation invested $500,000 in SunSleigh. After grilling me on all the particulars of the Foundation’s assets, mission, tax filings, annual distributions, and SunSleigh’s ownership, business plan, and stock offering—which, by the way, were all fine and legally compliant as far as Ebenezer was concerned—I was extremely disappointed to hear Ebenezer tell me that if the Foundation invested $500,000 in SunSleigh it could face a $50,000 penalty tax. Even more outrageous, Ebenezer said that I personally might have to pay a $50,000 tax as well. Further, if the Foundation invested in SunSleigh and lost the $500,000, then according to Ebenezer the IRS conceivably could revoke the Brewer Family Foundation’s tax exempt status.

I couldn’t believe my ears! After listening at length to Ebenezer explain in detail the complicated and confusing tax law applicable to private foundations, and after getting more and more frustrated, I finally said somewhat angrily to Ebenezer: “You mean to tell me that, in carrying out the Foundation’s mission to protect the environment, for a mere one-half of one percent of the foundation’s assets the tax law would prefer that I buy stock in BP or give the same amount of money to GreenPeace instead of investing in an idea that could make both BP and GreenPeace obsolete?”

Ebenezer sheepishly said, “Yes, that’s right.”

Then, I exclaimed, “You and the tax law are nuttier than a Christmas fruitcake.” I immediately hung up the phone and poured myself a spiked glass of eggnog to calm my nerves.

Do you know why Ebenezer probably is right? Revisit SocEntLaw in the future for the answer.

* “And the Grinch, with his Grinch-feet ice cold in the snow, stood puzzling and puzzling, how could it be so? It came without ribbons. It came without tags. It came without packages, boxes or bags. And he puzzled and puzzled ’till his puzzler was sore. Then the Grinch thought of something he hadn’t before. What if Christmas, he thought, doesn’t come from a store. What if Christmas, perhaps, means a little bit more.”
― Dr. Seuss, How the Grinch Stole Christmas

INTRODUCING GIIRS – RATINGS AND ANALYTICS PLATFORM FOR IMPACT INVESTING

 

Today at the Clinton Global Initative, B Lab announces the launch of GIIRS Ratings & Analytics, and the commitment of 15 GIIRS Pioneer Investors who declare as part of their impact investing strategy an investment preference for GIIRS-rated funds and companies. Andrew Kassoy will be on a panel at 3:45 EDT Tuesday entitled Financing Inclusive Jobs: Impact Investing and the Triple Bottom Line, moderated by Adam Davidson (NPR’s Planet Money), with Cheryl Dorsey (Echoing Green) and Christina Leijonhufvud (J.P. Morgan). Please tune-in to watch this panel live as Andrew discusses the GIIRS Launch and Pioneer Investor commitment – live-streaming will be available here.GIIRS Impact Ratings provide investors for the first time with a comprehensive, comparable, and third party verified assessment of companies’ and funds’ social and environmental impact. The GIIRS Analytics platform gives investors uniquely powerful tools to analyze aggregated, verified and comparable data on the social and environmental impact of companies and funds across geography, sector, organizational maturity, and size. The launch of GIIRS Ratings & Analytics follows a successful global beta test with more than 200 companies across 30 countries from 25 leading impact investing funds (the GIIRS Pioneer Companies and Funds, respectively).The GIIRS Pioneer Investors are a diverse group of global private equity investors and credit providers, including mainstream global financial institutions, foundations, family offices, leaders in social finance, and a multilateral development bank. They include: Annie E Casey Foundation, Armonia LLC, Calvert Foundation, Farm Capital Services LLC, Gatsby Charitable Foundation, Impact Investing Foundation, Inter-American Development Bank, J.P. Morgan, KL Felicitas Foundation, Prudential Financial, Inc., The Rockefeller Foundation, RSF Social Finance, Skoll Foundation,The Tony Elumelu Foundation and W.K. Kellogg Foundation. GIIRS expects to announce additional GIIRS Pioneer Investors in the coming months.

“These Pioneer Investors recognize that we can’t build an industry for impact investments without credible, comparable metrics on impact,” said Andrew Kassoy, co-founder of B Lab, the non-profit organization powering GIIRS. “GIIRS has the potential to catalyze hundreds of billions of dollars of sidelined investment capital to flow to the world’s most inspiring and talented entrepreneurs. These businesses demonstrably create high quality jobs that increase economic opportunity here and abroad.”

GIIRS also announces today that three GIIRS Pioneer Funders – Deloitte, Prudential Financial, Inc., and The Rockefeller Foundation – have committed a combined $9 million in funding to accelerate industry adoption of the robust GIIRS Ratings & Analytics platform.

With the support of GIIRS Pioneer Investors and Funders, in five years GIIRS aims to provide Impact Ratings for more than 2,500 companies and over 350 funds, and to provide over 150 institutional and high net worth investors with the ability to benchmark social and environmental impact for the first time the same way financial performance is benchmarked today. By providing credible, comparable and verified impact ratings and creating a powerful analytics platform, GIIRS provides the needed capital markets infrastructure to drive $1 trillion toward impact investments in 10 years.

“The Inter-American Development Bank is committed to supporting entrepreneurs across Latin America and the Caribbean who show great potential to effect change in their societies,” said IDB Executive Vice President Julie T. Katzman. “GIIRS Ratings & Analytics provides tools to clearly measure the impact of our investments in venture capital funds – both at the level of the fund and the individual company.”

“Prudential is proud to be one of the GIIRS Pioneer Investors. We are also one of the first companies to have a devoted impact investment portfolio, reflecting our ongoing support of initiatives that provide positive, sustainable impact,” said Ommeed Sathe, Director, Social Investments at Prudential. “Earlier this year we were lead investor in an innovative new technology platform to create an automated infrastructure to monitor impact investments. This and our groundbreaking work with GIIRS and B-Lab underscores our commitment to creating an investment infrastructure that will nurture the growth of the entire impact investing field.”

GIIRS Pioneer Investors recognize that government and non-profits are necessary but insufficient to solve our most challenging social and environmental problems. As entrepreneurs around the world develop market-based solutions, they need investment capital to help them scale. Increasing interest in impact investing requires improved capital markets infrastructure, including generally accepted standards for defining, measuring, and comparing positive social and environmental impact. Without credible third party standards, there are significant barriers- to-scale including: a fragmented market where each investor defines impact differently, high due diligence and transaction costs, limited understanding by investors of how to manage for impact, and a weak policy environment due to a dearth of information. GIIRS helps remove these barriers to growth and attracts mainstream capital to the impact investment space.

 

Photo: Buck Forester

THE BENEFIT CORPORATION: CAN BUSINESS BE ABOUT MORE THAN PROFIT?

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 ManagementMerritt & Merritt & MoultonStartUp 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