Friday, January 19, 2018

Comment Responses, Benefit Corps., and Planned Obsolescence

On a previous post about Etsy dropping its B corp. certification, because of the B Lab requirement to convert to a public benefit corporation, I received the following comments:

  • "I simply believe that, in most ways, being a public benefit entity is more about a marketing strategy than a business plan." (Tom N.)
  • "I had my students read the NY Times articles on Etsy as a part of their last class in my clinic this semester (thanks to my fellow Joe Pileri who alerted me to the article). We represent social enterprises in the clinic so this was a perfect wrap-up. The questions that I posed to my students: what social enterprise isn't a soft target like Etsy? Won't they all eventually cave to profit maximization?" (Alicia Plerhopes)
  • "I agree with To[m] N ... Also, no theory of CSR actually requires an explicit weighting of the various stakeholders of a firm, so in reality, if the interests of shareholders are receiving the greatest weight, then Milton Friedman was right all along!" (Enrique)

I wanted to respond to these thoughtful comments, briefly, above the line.

Tom, I think the marketing benefits of becoming a PBC, currently, are weak. How many of your non-lawyer friends know what a public benefit corporation is? Even among lawyers, if they know what the form is, their knowledge is usually limited, and they are usually quite skeptical. But I agree, that simply becoming a PBC, without more, does not get you very far and will not substitute for a good business plan. Becoming a PBC, however, may help in takeover situations and it may help change the shareholder wealth maximization norm among directors.

Alicia, You are right, I think, that publicly traded benefit corporations would often be soft targets. That said, their PBC status, in connection with other takeover defenses, could help them fend off unwanted advances. Given the history of social enterprise sell-outs, however, one does wonder how long these companies, public or private, can stay on mission.

Enrique, You may be correct on most theories of CSR not requiring an explicit weighting of stakeholder interests, but the benefit corporation statutes do generally require “consideration” or “balancing” of stakeholder interests. You are right, however, that the statutes do not give instructions on how much weight is to be given to each stakeholder group. The benefit corporation statutes do generally say that the purpose of benefit corporations must be to materially benefit “society and the environment;” and some of the statutes say/suggest that shareholders can not be the predominant interest.

While I am not a big proponent of the current benefit corporation statutes, I do commend the drafters for moving the conversation forward and taking action. And hopefully we can agree that something needs to be done about the current state and focus of many American businesses. This holiday season confirmed to me how cheaply most things are made these days and how poor customer service has become. Toys from my childhood era are outlasting most of the toys my wife and I buy our children. Appliances now seem to last 1/5 of the time they lasted a generation ago. Ignoring or mistreating the customer has become the rule. Even Apple, which I think of as one of the positive exceptions, is now being accused on planned obsolescence, and their customer service has declined over the years, in my view. Maybe the above makes sense from a purely financial perspective; maybe customers buy mainly on price. But I would argue that what made Apple great was holding themselves to an even higher standard of quality and innovation than their customers did initially. I am not sure if benefit corporation law will help businesses make more quality products, and treat their employees and customers better, but I do think we should give businesses the latitude to explore.

http://lawprofessors.typepad.com/business_law/2018/01/comment-responses-benefit-corps-and-planned-obsolescence.html

Corporate Governance, CSR, Current Affairs, Haskell Murray, Social Enterprise | Permalink

Comments

While I'm generally in agreement with you on all of this, I wanted to push back a little bit on the PR issue raised by Tom. Social enterprise status isn't much of thing among the general public or with lawyers, but I'm not sure those are the right constituencies to consider. Social enterprise status is definitely a thing with funding sources - private foundations, angel investors, newly growing social impact investing funds. If you consider the history of the L3C, that was the whole point - to get PRI status from private foundations for equity investments, which of course, then didn't work out so well. So I sort of agree with Tom on this, but I would say its more of a (flawed) funding strategy than a marketing strategy

Posted by: Elaine Wilson | Jan 19, 2018 8:45:31 AM

Elaine, Thanks for the comment. When I think of PR, I think of a customer-focus. Perhaps Tom meant PR to go beyond customers and include funders. That said, I am not sure if social enterprise status is a help or a hinderance with funders. Perhaps you agree with your inclusion of "flawed" funding strategy. Yes, there are an increasing number of funders interested in social enterprise, but it seems to me that most funders remain skeptical. But maybe that is changing, considering BlackRock's recent letter on socially-focused businesses. Also, I agree that L3Cs were started, in large part, to attract foundation money, but I am not sure if many L3Cs were successful in that endeavor. In short, if your reason for choosing a social enterprise entity type is to attract more capital, I am not sure if that is a smart strategy. I also think that while funders are becoming more interested in socially focused businesses, I have not met any for whom being a benefit corporation would make or break the deal. The social investors I talk to seem more interested in the business plan and how you plan to benefit society than in which legal form you choose. Again, maybe this is changing and maybe there are investors who are insisting on certain legal forms. If you know of any such investors, I would definitely love to talk to them. To date, however, the number of benefit corporations that have raised serious money is pretty limited (though increasing).

Posted by: Haskell Murray | Jan 19, 2018 8:59:44 AM

Thanks for the follow-up. As for non-lawyer friends, I’d say there is about a 30 year window (15 back, 15 forward) into which my social circle falls. In that group, few – if any - would know about a public benefit entity. In fact, I think you might find it surprising how few practicing attorneys have paid attention to the movement. Just like consumers, attorneys are concerned with their cases at hand and I find it amazing how little attention is paid to what they categorize as “extraneous” issues, developments and concerns comprised in the legal community.

I adhere to my position that the pre-existing corporate framework would have readily accommodated the “public benefit” status without the adoption of a new model.

Working with start-ups and entrepreneurs, they may have some philanthropic intent but ultimately their intent is return on investment and the philanthropy arises from what they consider surplus.

However, there is a “social consciousness” movement out there (not necessarily in my social circle). With regional and cultural differences that social consciousness differs. That has lead to marketing “socially responsible investment” for individuals, groups and funds. In recent times, we’ve seen this emerge as investment groups tend to vest or divest in industries or businesses. For instance, NYC has recently announced that its pension funds will divest from fossil fuels (which, I’m sure, will only accentuate public pension funding issues and perhaps create some slack for acquisition).

For those enamored with “socially responsible investment,” the B Corp may be “an attraction.” Not to be argumentative, I still think that status as a public benefit entity is more about marketing to niche “angel investors” and socially responsible investment groups.

Posted by: Tom N | Jan 20, 2018 7:14:29 AM

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