May 13, 2010
Live Blogging From the University of Kentucky College of Law Developing Ideas Conference
I am currently attending the University of Kentucky College of Law Developing Ideas Conference. Having obtained the required permission, I am posting the idea abstract submitted by Antony Page from the Indiana University School of Law - Indianapolis:
Notion Building: Legal Forms for Social Entrepreneurs
To address the free market’s undersupply of public or collective goods, society employs various approaches and mechanisms—traditionally government and nonprofit organizations. Recently, however, there has been great interest in another response to market failures: the emerging notions or concepts of social enterprise and social entrepreneurship. A growing number of people and entities are coalescing under these banners. This interest is reflected in the 2006 Nobel Peace Prize for Muhammad Yunus, a promoter of microfinance; the formation of social enterprise initiatives by the Obama Administration; the growth of centers for social entrepreneurship at leading business school such as Harvard and Stanford; and media attention, like Business Week's and Fast Company Magazine's top 25 lists or PBS’s series entitled “New Heroes.” Even Bill Gates (“creative capitalism”) and Pope Benedict XVI (“a profoundly new way of understanding business enterprise”) have promoted the notion of business organizations and executives making decisions that are not purely profit-driven.
The notion itself is somewhat vague, referring generally to a person or venture intending simultaneously to make a profit and generate extra-ordinary social benefits, or popularly stated as “doing well by doing good,” or “making money while making a difference.” From a legal perspective, a social entrepreneur is one who founds or develops a (1) a business housed in a (2) single legal entity (3) that is at least partly owned by equity investors, and (4) that seeks to advance a social mission while also (5) generating acceptable returns for investors. Such entities go by a variety of names, including for-profit social enterprises (in contrast to commercial non-profits), companies with a conscience, Fourth Sector organizations and hybrid ventures.
Although business schools and scholars have been quick to focus on social entrepreneurship, legal scholars have lagged behind. This essay aims to bring some clarity to the concepts of social entrepreneurship and social enterprise by examining the underlying organizational law.
Organizational law’s most narrow and technical tasks are to constitute non-governmental organizations and set basic terms and procedures for their internal governance and their relations to organizational outsiders. In recent years, a handful of jurisdictions have begun offering social entrepreneurs an off-the-rack choice of entity beyond the traditional for-profit or nonprofit forms. These include, most notably: the low-profit limited liability company (L3C) recently enacted in Vermont and several other states; the Benefit Corporation, recently enacted in Maryland; the United Kingdom’s Community Interest Company (CIC); and the private sector-created B Corporation.
Specifically, we seek to identify the hybrid venture’s “value proposition,” which, in the jargon of the entrepreneur, “defines the benefits your company's products and services offer to the customer, and express the essence of your business in a way that compels the customer to buy.” What value proposition do the new hybrid legal forms create, or are existing forms adequate? What is their comparative advantage compared to traditional forms (in particular corporations, and donative and commercial nonprofits) in achieving this goal? Assuming hybrids are desirable, what public policies would foster the creation and success of these entities? More broadly, we examine whether organizational law really has anything new to offer the social entrepreneur.
[Some tentative thoughts.] In truth, there seem to be two distinct visions or understandings of the hybrid venture’s value proposition, each pushing the law of social enterprise in a different direction. The first understanding of social enterprise is grounded in charity law and proposes a kind of “nonprofit lite.” It addresses market failure by attracting resources into a legal form that is explicitly committed to generating social value in perpetuity. A key goal is for the organization to survive the social entrepreneur’s exit or loss of enthusiasm. From the “nonprofit lite” perspective, the main challenge of social enterprise law is tweaking the asset lock (the prohibition on distributing residual income) and control mechanisms at the margins, so as to ensure greater access to capital and talent.
The second understanding is grounded in the broader ambitions of social entrepreneurship, which is to increase supply of public goods by transforming markets and preferences thereby create a new more socially-optimal equilibrium. The social entrepreneur looks to fundamental and sustainable change in the way things are done that goes well beyond the venture’s earned income. Ideally, the new equilibrium will require of market participants no (or at least much less) explicit altruism. Because the social enterprise itself may be transitional and need not survive in order to be successful, asset locks and control mechanisms are less important.]
This essay proceeds by identifying potential deficiencies in corporate and non-profit organization law for a typical social entrepreneur, and how law addresses legacy, control, and mission maintenance issues, thereby pointing the way for a distinct regulatory regime to govern and cultivate social entrepreneurs and hybrid ventures. It also surveys various proposals for facilitating the creation and sustainability of social enterprise.