Monday, April 30, 2018

Social Enterprise and the Traditional For-Profit Corporation

My essay on the use of traditional for-profit corporations as a choice of entity for sustainable social enterprise firms was recently published in volume 86 of the UMKC Law Review.  I spoke on this topic at The Bryan Cave/Edward A. Smith Symposium: The Green Economy held at the UMKC School of Law back in October.  The essay is entitled "Let's Not Give Up on Traditional For-Profit Corporations for Sustainable Social Enterprise," and the SSRN abstract is included below:

The past ten years have witnessed the birth of (among other legal business forms) the low-profit limited liability company (commonly known as the L3C), the social purpose corporation, and the benefit corporation. The benefit corporation has become a legal form of entity in over 30 states. The significant number of state legislative adoptions of new social enterprise forms of entity indicates that policy makers believe these alternative forms of entity serve a purpose (whether legal or extra legal).

The rise of specialty forms of entity for social enterprise, however, calls into question, for many, the continuing role of the traditional for-profit corporation (for the sake of brevity and convenience, denominated “TFPC” in this essay) in social enterprises, including green economy ventures. This essay argues that TFPCs continue to be a viable—and in many cases desirable or advisable choice of entity for sustainable social enterprise firms. The arguments presented are founded in legal doctrine, theory, and policy and include both legal and practical elements.

Somehow, I managed to cite to four BLPB co-bloggers in this single essay: Josh, Haskell, Stefan, and Anne.  Evidence of a business law Vulcan mind meld?  You decide . . . .  

Regardless, comments, as always, are welcomed as I continue to think and write about this area of law and practice.

April 30, 2018 in Anne Tucker, Business Associations, Corporate Governance, Corporations, Haskell Murray, Joan Heminway, Joshua P. Fershee, Social Enterprise, Stefan J. Padfield | Permalink | Comments (2)

Monday, February 19, 2018

Social Enterprise and Impact Investing: 2018 Grunin Center Prize and Conference

Mark your calendars!

March 1, 2018 is the deadline for nominations for the inaugural award of the Grunin Prize.

The Grunin Prize has been created to recognize the variety and impact of lawyers’ participation in the ways in which business, whether for-profit or not-for-profit, is increasingly advancing the goals of sustainability and human development.

Lawyers, legal educators, policymakers, in-house counsel, or legal teams that recently have developed innovative, scalable, and social entrepreneurial solutions using existing law, legal education, or the development of new legal structures or metrics are eligible for nomination. And self-nominations are encouraged!

The Grunin Prize will be presented on June 5, 2018 at the IILWG/Grunin Center conference. To learn more about the Grunin Prize and the nomination process, go to http://www.law.nyu.edu/centers/grunin-social-entrepreneurship/grunin-prize.

June 5-6, 2018 are the dates of the Impact Investing Legal Working Group (IILWG)/Grunin Center for Law and Social Entrepreneurship’s 2018 Conference on “Legal Issues in Social Entrepreneurship and Impact Investing – in the US and Beyond.” This year’s IILWG/Grunin Center’s annual conference will take place at NYU School of Law in New York City.

The themes of this year’s conference include:

· Embedding Impact into Deal Structures and Terms
· Policy and Regulation of Impact Investing and Social Entrepreneurship
· Blending and Scaling Capital for Impact
· Building Investment-Ready Social Enterprises
· Mainstreaming Impact

Last year over 250 lawyers and other stakeholders attended this groundbreaking conference for lawyers working in the fields of social entrepreneurship and impact investing. In a post-conference survey of these conference attendees, we learned that:

· Over 99% of survey respondents rated the conference as “excellent” (over 76%) or “very good” (23%);
· Over 84% of survey respondents were very likely to recommend attending this conference to others; and
· Over 64% of survey respondents made 6 or more new connections at this conference.

Come join this growing community of legal practice!

Conference registration will open in April. For more information about the conference, go to http://www.law.nyu.edu/centers/grunin-social-entrepreneurship.

June 7, 2018 is the date of the first Grunin Center Legal Scholars convening. This convening, which is scheduled to take place immediately after the IILWG/Grunin Center Annual Conference, is intended to advance legal scholarship in the fields of social entrepreneurship and impact investing by bringing together legal scholars who are writing and researching in these fields and introducing them to the legal/policy challenges and opportunities that legal practitioners are facing in these fields.

Law school faculty (fulltime and adjunct), other academic personnel working fulltime in law schools who are engaged in legal scholarship, practitioners who are engaging in legal scholarship, and professors who are teaching law in other schools yet are engaging in legal scholarship are invited to join this convening.

If you are interested in joining this community of legal scholars, please contact the Grunin Center (law.gruninsocent@nyu.edu) and we will send you more information about the June 7, 2018 Legal Scholars convening.

Best Regards,

Helen Scott and Deborah Burand
Co-Directors, Grunin Center for Law and Social Entrepreneurship
New York University School of Law
245 Sullivan Street, 5th Floor
New York, NY 10012

February 19, 2018 in Conferences, Corporate Finance, Joan Heminway, Social Enterprise | Permalink | Comments (0)

Tuesday, February 13, 2018

These Reasons Social Benefit Entities Hurt Business and Philanthropy Will Blow Your Mind

I suspect click-bait headline tactics don't work for business law topics, but I guess now we will see. This post is really just to announce that I have a new paper out in Transactions: The Tennessee Journal of Business Law related to our First Annual (I hope) Business Law Prof Blog Conference co-blogger Joan Heminway discussed here. The paper, The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy, is now available here.

To be clear, my argument is not that I don't like social enterprise. My argument is that as well-intentioned as social enterprise entity types are, they are not likely to facilitate social enterprise, and they may actually get in the way of social-enterprise goals.  I have been blogging about this specifically since at least 2014 (and more generally before that), and last year I made this very argument on a much smaller scale.  Anyway, I hope you'll forgive the self-promotion and give the paper a look.  Here's the abstract: 

Social benefit entities, such as benefit corporations and low-profit limited liability companies (or L3Cs) were designed to support and encourage socially responsible business. Unfortunately, instead of helping, the emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, all to the detriment of employees, society, and, yes, shareholders.

The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.

February 13, 2018 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Joshua P. Fershee, Law and Economics, Lawyering, Legislation, LLCs, Management, Research/Scholarhip, Shareholders, Social Enterprise, Unincorporated Entities | Permalink | Comments (0)

Monday, February 12, 2018

Sending Advanced Business Law Students on Document "Treasure Hunts"

Just a quick post today about a teaching technique I have been using that offers significant opportunities for exploration, especially in small class environments.

I am again teaching Advanced Business Associations this semester.  The course allows students to review and expand their knowledge of business firm management and control issues in various contexts (public corporations, closely held corporations, benefit corporations, and unincorporated business entities), mergers and acquisitions, and corporate and securities litigation.  I have reported on this course in the past, including in this post and this one.

At the conclusion of each unit, I have students locate (go off on a treasure hunt, of sorts) and post on the course management website (I use TWEN) a practice document related to the matters covered in that unit.  Today we concluded our unit on benefit corporations.  Each student (I only have five this semester) was required to, among other things, post the actual corporate charter (not a template or form) of a benefit corporation.  Although the Advanced Business Associations course features training presentations by representatives of Lexis/Nexis, Westlaw, and Bloomberg that include locating precedent documents of various kinds, the students have not yet had this training.

In our discussions about this part of today's assignment, we learned a number of things.  Here are a few:

  • New articles, blog posts, and other secondary materials can be a good starting place in locating firms with particular attributes.
  • The word "charter" can mean different things to different people.
  • Journalists do not understand the difference between a benefit corporation and a B corporation.
  • In research geared toward locating precedents for planning and drafting, googling descriptive terms is likely to yield fewer targeted results than googling the terms used an actual exemplar document.
  • Corporate charters for privately held firms can be difficult to find--especially in certain specific jurisdictions, even when you know the firm's name and other identifying attributes.
  • "If at first you don't succeed, try, try, again." Three of the five students posted more than one document before they found an appropriate example.
  • The corporate charters the students posted include exculpation and indemnification.
  • Patagonia's charter is pretty cool.  It has a detailed, specific benefit purpose, a prohibition on redemptions, and a right of first offer.  It also requires a unanimous vote on certain fundamental/basic corporate changes, redemptions, and bylaw amendments.
  • There is a law firm in California that is a professional corporation organized as a benefit corporation "to pursue the specific public benefit of promoting the principles and practices of conscious capitalism through the practice of law."  Also pretty cool.

The discussion was rich.  The students accomplished the required task and reflected responsibly and valuably on their individual search experiences during our class meeting.  They learned from each other as well as from me; benefit corporations seemed to come alive for them as we spoke.  We accomplished a lot in 75 minutes!

Do any of you use a similar teaching technique?  Have you adapted it for use in a large-class (over 50 students) environment?  If so, let me know.  I would like to evolve my "treasure hunt" for business law drafting precedents for use in a larger class setting.

February 12, 2018 in Business Associations, Joan Heminway, Research/Scholarhip, Social Enterprise, Teaching | Permalink | Comments (2)

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.

January 19, 2018 in Corporate Governance, CSR, Current Affairs, Haskell Murray, Social Enterprise | Permalink | Comments (3)

Friday, January 12, 2018

Overnighters - Purpose, Priorities, and Process

The-overnighters

Over the break, I watched the documentary Overnighters on Netflix. 

In short, the documentary chronicles the story of a pastor who opens the church to migrant workers in North Dakota during the energy boom in that state. The pastor faces pushback from his congregation, neighbors, and city officials who do not appreciate having these men - some with criminal records - housed so close. 

In my opinion, the pastor is right, and the congregants are wrong, about the purpose of a church. The church should be in a community to serve, especially its needy neighbors. That said, the logistics of how to serve may be up for debate. Also, it is at least arguable that by serving the migrant workers the church strayed from serving its congregation. It would have been helpful if the church had a clear statement on its purpose and priorities. Many social enterprises have extremely vague purpose statements, which I do not think are very helpful. Benefit corporations are often required by statue to "benefit society and the environment." A purpose statement like that would not have helped the church in Overnighters much at all. A statement that showed that those in need would be prioritized over the comfort of the congregants (or vice-versa) would have been more helpful.  

The more valid complaint from the congregation, is the claim that an appropriate process for initiating the housing program was not followed. Sometimes even if stakeholders agree on the ultimate action taken by the organization, the stakeholders will still be upset if they are not included, or listened to, in the decision making process. I think this complaint is likely also found in businesses. Assuring the proper processes are set forth and followed can be quite important for businesses, especially in closely-held and family run businesses, where the stakeholders are deeply invested. 

The documentary is depressing and does not paint a pretty picture of human nature, but I do think things would have worked out a bit better for most of those involved if purpose, priorities, and process were paid more attention.  Of course, that is much easier written than done. 

January 12, 2018 in Corporate Governance, Current Affairs, Haskell Murray, Real Property, Social Enterprise | Permalink | Comments (0)

Friday, December 1, 2017

Etsy to Drop B Corp Certification

I have written about Etsy in at least three past posts: (1) Etsy becoming a certified B Corp, (2) Etsy going public, and (3) Delaware amending it's public benefit corporation laws (likely, in part, to help Etsy convert to a PBC, which Etsy would need to do to maintain its certification because it incorporated in a non-constituency statute state that does have a benefit corporation statute (Delaware)).

In May, some questioned whether Etsy would keep its social focus after a "management shakeup." In September, B Lab granted Etsy an extension on converting to a PBC. That article claims that B Lab would reset the deadline for conversion to 2019, if Etsy re-certified as a B Corp by the end of 2017 and would commit to converting to a PBC.

The 2019 date was 4 years from the 2015 Delaware PBC amendments (instead of 4 years from Etsy's first certification). One of B Lab's co-founder reportedly said that the statutory amendments were needed because the original 2013 version of the Delaware PBC law was "perfectly fine for private companies and unworkable for public companies."

Just a few days ago, however, Etsy announced that it would abandon its B Corp certification and not reincorporate as a Delaware PBC. Josh Silverman (CEO since the May shakeup) is quoted in that New York Times article as saying "Etsy’s greatest potential for impact is helping sellers — many of whom are women running small businesses — increase their sales." He sounds a lot like Milton Friedman's article The Social Responsibility of Business is to Increase its Profits. Mr. Silverman also said that Etsy "had the best of intentions, but wasn’t great at tying that [sales] to impact....Being good doesn’t cut the mustard.”

Other than the New York Times article, the press around Etsy's announcement to let its B corp certification lapse seems to be relatively light. In the short-term at least, this move probably hurts B Lab and the social enterprise community more than it hurts Etsy given how few big companies are certified. In the long-term, however, Etsy may experience significant negative consequences, as it seems that this move to drop its certification is being done in conjunction with Etsy shedding a lot of the culture that made it a beloved company.  

Update: Perhaps Etsy is bracing for competition from Amazon. (Or maybe, and this is complete speculation on my part, Etsy is trying to make itself a more attractive acquisition target for Amazon, if Amazon realizes it cannot replicate Etsy on its own. Now, it is debatable whether Etsy is more valuable with or without its B Corp certification). 

December 1, 2017 in Corporations, CSR, Current Affairs, Delaware, Haskell Murray, Social Enterprise | Permalink | Comments (3)

Friday, October 27, 2017

Aliens and Public Benefit Corporations

Download

A former student brought this fundraising website to my attention: To the Stars Academy of Arts and Sciences ("TTS Academy). (Image above from a Creative Commons search).

This article describes TTS Academy as follows: "Former Blink-182 singer and guitarist Tom DeLonge is taking his fascination with/conspiracy theories about UFOs to their logical conclusion point: He's partnering with former government officials on a public benefit corporation studying 'exotic technologies' from Unidentified Aerial Phenomenon (UAP) that the consortium says can 'revolutionize the human experience.'" 

Remember the Blink-182 song Aliens Exist

I couldn't make this up. And I did spend some time trying to determine if it was a joke, but TTS Academy's 63-page offering circular suggests that it is no joke. And TTS Academy appears to have already raised over $500,000

According to the organization's website, Tom DeLonge of Blink-182 fame is in fact the CEO and President. Supposedly, DeLonge has teamed with former Department of Defense official Luis Elizondo who confirmed to HuffPost that the TTS Academy is planning to "provide never before released footage from real US Government systems...not blurry, amateur photos, but real data and real videos." Rolling Stone reports that "DeLonge has long been interested in UFO and extraterrestrial research. After parting ways with Blink-182 in 2015, he delved deeper into the subject, releasing the book Sekret Machines: Gods earlier this year and he's also working on a movie that is related to those interests called Strange Times." TTS Academy is a Public Benefit Corporation, formed in Delaware. 

The TTS Academy website states: "To The Stars Academy is a Public Benefit Corporation (PBC), which means our public benefit purpose is a core founding principle of our corporate charter alongside the traditional goal of maximizing profit for shareholders." Hmm... How does one pursue a public benefit purpose and seek to maximize profit for shareholders? A main point of benefit corporations is liberate companies from the perceived restrictions of shareholder wealth maximization. 

The website continues: "Our public purpose: Education - Community - Sustainability - Transparency. PBCs have enjoyed a surge in popularity as the public becomes more interested in corporate responsibility, transparency, and more recently, the concept of impact investing.* It’s clear that an expanding portion of the general population is looking to make an impact on the world around them, not only through volunteering, or speaking out on social media, but through financial decision making.** We believe raising resources through Regulation A+ crowdfunding will allow us to expedite expansion of TTS Academy’s PBC initiatives, like promoting citizen science, enhancing traditional education with science, engineering and art-related programming, supporting veterans and their families, and promoting underrepresented people in film." Color me skeptical. 

As Professor Christine Hurt noted way back in 2014/15, the crowdfunding and social enterprise circles may overlap significantly. Professor Hurt wrote, "for-profit social entrepreneurship may find equity crowdfunding both appealing and available. For-profit social entrepreneurs may be able to use the crowdfunding vehicle to brand themselves as pro-social, attracting individual and institutional cause investors who may operate outside of traditional capital markets and may look for intangible returns. Just as charitable crowdfunders rebut the conventional wisdom that donors expect tax-deductibility, prosocial equity crowdfunders may rebut the conventional wisdom that early equity investors expect high returns or an exit mechanism." Not sure if she, or any of us, predicted exactly this type of company. 

October 27, 2017 in Business Associations, Corporations, Crowdfunding, Haskell Murray, Social Enterprise, Technology, Web/Tech | Permalink | Comments (0)

Friday, October 13, 2017

Nonprofit v. Benefit Corporation v. Traditional For-Profit Hospitals

Earlier this week, my two-year old daughter was in the pediatric ICU with a virus that attacked her lungs. We spent two nights at The Monroe Carell Jr. Children's Hospital at Vanderbilt (“Vanderbilt Children’s). Thankfully, she was released Wednesday afternoon and is doing well. Unfortunately, many of the children on her floor had been in the hospital for weeks or months and were not afforded such a quick recovery. There cannot be many places more sad than the pediatric ICU.

Since returning home, I confirmed that Vanderbilt Children’s is a nonprofit organization, as I suspected. I do wonder whether the hospital would be operated the same if it were a benefit corporation or as a traditional corporation.

Some of the decisions made at the hospital seems like they would have been indefensible from a shareholder perspective, if the hospital had been for-profit. Vanderbilt Children’s has a captive market, with no serious competitors that I know of in the immediate area. Yet, the hospital doesn’t charge for parking. If they did, I don’t think it would impact anyone’s decision to choose them because, again, there aren’t really other options, and the care is the important part anyway. The food court was pretty reasonably priced, and they probably could have charged double without seriously impacting demand; the people at the hospital valued time with their children more than a few dollars. The hospital was beautifully decorated with art aimed at children – for example, with a big duck on the elevator ceiling, which my daughter absolutely loved. There were stars on the ceiling of the hospital rooms, cartoons on TVs in every room, etc. All of this presumably cost more than a drab room, and perhaps it was all donated, but assuming it actually cost more, I am not sure those things would result in any financial return on investment.

As we have discussed many times on this blog, even in the traditional for-profit setting, the business judgment rule likely protects the decisions of the board of directors, even if the promised ROI seems poor. But at what point – especially when the board knows there will be no return on the investment at all - is it waste? (Note: Question sparked by a discussion that Stefan Padfied, Josh Fershee, and I had in Knoxville after a session at the UTK business law conference this year). And, in any event, the Dodge and eBay cases may lead to some doubt in the way a case may play out. And even if the law is highly unlikely to enforce shareholder wealth maximization, the norm in traditional for-profit corporations may lead to directorial decisions that we find problematic as a society, especially in a hospital setting.

Now, maybe the Hippocratic Oath, community expectations, and various regulations make it so nonprofit and forprofit hospitals operate similarly. As a father of a patient, however, even as a free market inclined professor, I would prefer hospitals to be nonprofit and clearly focused on care first. Also, some forprofit hospitals are supposedly considering going the benefit corporation route, which may be a step in the right direction – at least they have an obligation to consider various stakeholders (even if, currently, the statutory enforcement mechanisms are extremely weak) and at least there are some reporting requirements (even if , currently, reporting compliance is miserable low in the states I have examined and the statutory language is painfully vague).

I am not sure I have ever been in a situation where I would have paid everything I had, and had no other good options for the immediate need, and yet I still did not feel taken advantage of by the organization. There is much more that could be said on these issues, but I do wonder whether organizational form was important here. And, if so, what is the solution? Require hospitals to be nonprofits (or at least benefit corporations, if those statutes were amended to add more teeth)?

October 13, 2017 in Business Associations, Corporate Governance, Corporations, CSR, Delaware, Ethics, Family, Haskell Murray, Social Enterprise | Permalink | Comments (7)

Friday, October 6, 2017

Stonyfield's Struggles and Successes as a Social Business

Yesterday, I listened to How I Built This' podcast on Gary Hirshberg of Stonyfield Yogurt.

I assume most readers are familiar with Stonyfield Yogurt, and perhaps a bit of its story, but I think the podcast goes far beyond what is generally known. 

The main thing that stuck out in the podcast was how many struggles Stonyfield faced. Most of the companies featured on How I Built This struggle for a few months or even a few years, but Stonyfield seemed to face more than its share of challenges for well over a decade. The yogurt seemed pretty popular early on, but production, distribution, and cash flow problems haunted them. Stonyfield also had a tough time sticking with their organic commitment, abandoning organic for a few years when they outsourced production and couldn't convince the farmers to follow their practices. With friends and family members' patient investing (including Gary's mother and mother-in-law), Stonyfield finally found financial success after raising money for its own production facility, readopting organic, and finding broader distribution.

After about 20 years, Stonyfield sold the vast majority of the company to large multinational Group Danone. Gary explained that some investors were looking for liquidity and that he felt it was time to pay them back for their commitment. Gary was able to negotiate some control rights for himself (unspecified in the podcast) and stayed on as chairman. While this sale was a big payday for investors, it is unclear how much of the original commitment to the environment and community remained. Also, the podcast did not mention that Danone announced, a few months ago, that it would sell Stonyfield

Personally, I am a fan of Stonyfield's yogurt and it will be interesting to follow their story under new ownership. I also think students and faculty members could benefit from listening to stories like this to remind us that success is rarely easy and quick. 

October 6, 2017 in Business Associations, Corporate Governance, Corporations, CSR, Current Affairs, Entrepreneurship, Haskell Murray, Shareholders, Social Enterprise | Permalink | Comments (1)

Sunday, August 6, 2017

The Inclusive Capitalism Shareholder Proposal

My latest paper, The Inclusive Capitalism Shareholder Proposal, 17 U.C. Davis Bus. L.J. 147 (2017), is now available on Westlaw. Here is the abstract:

When it comes to the long-term well being of our society, it is difficult to overstate the importance of addressing poverty and economic inequality. In Capital in the Twenty-First Century, Thomas Piketty famously argued that growing economic inequality is inherent in capitalist systems because the return to capital inevitably exceeds the national growth rate. Proponents of “Inclusive Capitalism” can be understood to respond to this issue by advocating for broadening the distribution of the acquisition of capital with the earnings of capital. This paper advances the relevant discussion by explaining how shareholder proposals may be used to increase understanding of Inclusive Capitalism, and thereby further the likelihood that Inclusive Capitalism will be implemented. In addition, even if the suggested proposals are rejected, the shareholder proposal process can be expected to facilitate a better understanding of the strengths and weaknesses of Inclusive Capitalism, as well as foster useful new lines of communication for addressing both poverty and economic inequality.

August 6, 2017 in Corporate Finance, Corporate Governance, CSR, Financial Markets, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Stefan J. Padfield | Permalink | Comments (0)

Tuesday, August 1, 2017

More on Corporations, Accountability, and the Proper Locus of Power

My colleague, Joan Heminway, yesterday posted Democratic Norms and the Corporation: The Core Notion of Accountability. She raises some interesting points (as usual), and she argues: "In my view, more work can be done in corporate legal scholarship to push on the importance of accountability as a corporate norm and explore further analogies between political accountability and corporate accountability."

I have not done a lot of reading in this area, but I am inclined to agree that it seems like an area that warrants more discussion and research.  The post opens with some thought-provoking writing by Daniel Greenwood, including this:  

Most fundamentally, corporate law and our major business corporations treat the people most analogous to the governed, those most concerned with corporate decisions, as mere helots. Employees in the American corporate law system have no political rights at all—not only no vote, but not even virtual representation in the boardroom legislature.
Joan correctly observes, "Whether you agree with Daniel or not on the substance, his views are transparent and his belief and energy are palpable." Although I admit I have not spent a lot of time with his writing, but my initial take is that I do not agree with his premise. That is, employees do have political rights, and they have them where they belong: in local, state, and federal elections.  Employees, in most instances, do not have political rights within their employment at all.  Whether you work for the government, a nonprofit, or a small sole proprietorship, you don't generally have political rights as to your employment.  You may have some say in an employee-owned entity, and you may have some votes via union membership, but even there, those votes aren't really as to your employment specifically. 
 
The idea of seeking democratic norms via the corporate entity itself strikes me as flawed.  If people don't like how corporations (or other entities) operate, then it would seem to me the political process can solve that via appropriate legislation or regulation. That is, make laws that allow entities to do more social good if they are so inclined. Or even require entities to do so, if that's the will of the people (this is not a recommendation, merely an observation).  Scholars like Greenwood and others continue to make assertions that entities cannot make socially responsible choices. He states, " The law bars [corporations], in the absence of unanimous consent, from making fundamental value choices, for example, from balancing the pursuit of profit against other potential corporate goals, such as quality products, interests of non-shareholder participants or even the actual financial interests of the real human beings who own the shares."  And judges and scholars, like Chancellor Chandler and Chief Justice Strine, have reinforced this view, which, I maintain, is wrong (or should be).  
 
Professor Bainbridge has explained, "The fact that corporate law does not intend to promote corporate social responsibility, but rather merely allows it to exist behind the shield of the business judgment rule becomes significant in -- and is confirmed by -- cases where the business judgment rule does not apply." Todd Henderson similarly argued, and I agree, 
Those on the right, like Milton Friedman, argue that the shareholder-wealth-maximization requirement prohibits firms from acting in ways that benefit, say, local communities or the environment, at the expense of the bottom line. Those on the left, like Franken, argue that the duty to shareholders makes corporations untrustworthy and dangerous. They are both wrong.
I don't disagree with Joan (or with Greenwood, for that matter), that accountability matters, but I do think we should frame accountability properly, and put accountability where it belongs.  That is political accountability and corporate accountability are different. As I see it, corporations are not directly accountable to citizens (employees or not) in this sense (they are in contract and tort, of course). Corporations are accountable to their shareholders, and to some degree to legislators and regulators who can modify the rules based on how corporations act.  Politicians, on the other hand, are accountable to the citizens.  If citizens are not happy with how entities behave, they can take that to their politicians, who can then choose to act (or not) on their behalf.  
 
I think entities should consider the needs of employees, and I believe entities would be well served to listen to their employees. I happen to think that is good business. But I think the idea that employees have a right to a formal voice at the highest levels within the entity is flawed, until such time as the business itself or legislators or regulators decide to make that the rule. (I do not, to be clear, think that would be a good rule for legislators or regulators to make for private entities.) The proper balance of laws and regulations is a separate question from this discussion, though. Here, the key is that accountability -- or, as Prof. Bainbridge says, "the power to decide" -- remains in the right place.  I am inclined to think the power structure is correct right now, and whether that power is being used correctly is an entirely different, and separate, issue.  

August 1, 2017 in Business Associations, Corporations, CSR, Delaware, Joan Heminway, Joshua P. Fershee, Legislation, Management, Research/Scholarhip, Shareholders, Social Enterprise | Permalink | Comments (1)

Tuesday, July 18, 2017

Long Live Director Primacy: Social Benefit Entities and the Downfall of Social Responsibility

The more I read about social enterprise entities, the less I like about them.  In 2014, my colleague Elaine Wilson and I wrote March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well?  We observed:

Regardless of jurisdiction, there may be value in having an entity that plainly states the entity’s benefit purpose, but in most instances, it does not seem necessary (and is perhaps even redundant). Furthermore, the existence of the benefit corporation opens the door to further scrutiny of the decisions of corporate directors who take into account public benefit as part of their business planning, which erodes director primacy, which limits director options, which can, ultimately, harm businesses by stifling innovation and creativity.  In other words, this raises the question: does the existence of the benefit corporation as an alternative entity mean that traditional business corporations will be held to an even stricter, profit-maximization standard?

I am more firmly convinced this is the path we are on.  The emergence of social enterprise enabling statutes and the demise of director primacy threaten to greatly, and gravely, limit the scope of business decisions directors can make for traditional for-profit entities, threatening both social responsibility and economic growth. Recent Delaware cases, as well as other writings from Delaware judges, suggest that shareholder wealth maximization has become a more singular and narrow obligation of for-profit entities, and that other types of entities (such as non profits or benefit corporations) are the only proper entity forms for companies seeking to pursue paths beyond pure, and blatant, profit seeking. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, to the detriment of employees, society, and, yes, shareholders. 

I know there are some who believe that I see the sky falling when it's just a little rain. Perhaps. I would certainly concede that the problems I see can be addressed through law, if necessary.  I am just not a big fan of passing some more laws and regulations, so we can pass more laws to fix the things we added.  My view of entity purpose remains committed to the principle of director primacy.  Directors are obligated to run the entity for the benefit of the shareholders, but, absent fraud, illegality, or self-dealing, the directors decide what actions are for the benefit of shareholders. Period, full stop.  

July 18, 2017 in Corporations, Delaware, Joshua P. Fershee, Legislation, Management, Shareholders, Social Enterprise | Permalink | Comments (4)

Tuesday, June 20, 2017

Summer "Work" Reading: Straight Man, by Richard Russo

A friend who is a member of a university faculty (non-law) some years ago recommended that I read Straight Man, by Richard Russo. I am forever thankful.  The book is a novel set in a small town in Pennsylvania and follows the trials and tribulations of an English-department faculty member at a college besieged by budget challenges, a dysfunctional department, and his own lack of motivation.   

The book is funny -- sometimes laugh-out-loud funny -- and for anyone on a faculty, I am willing to wager that, despite occasional absurdity, this faculty will feel like it could be yours.  The main character is sympathetic, to a point, but he is also part of the problem.  It is a fast read, and it's one I come back to every couple years.  Perhaps it is just a guilty pleasure, but the universality of the characters and the bit of hope that emerges are things I find to be comforting in some way. It may be that the book serves as a reminder that we're not alone in our craziness.  Everyone who has taught for a while knows a Hank, a Finny, a Gracie DuBois, Jacob Rose, a Billy Quigley.  

The book also a good reminder of traps we, as faculty (and administrators), can fall into, and hopefully, help us avoid them. If you need a break from research and heavy reading, I highly recommend you put this in the rotation. 

Here's the Amazon.com Review: 

First Jane Smiley came out of the comedy closet with Moo, a campus satire par excellence, and now Richard Russo has gotten in on the groves-of-academe game. Straight Man is hilarious sport, with a serious side. William Henry Devereaux Jr., is almost 50 and stuck forever as chair of English at West Central Pennsylvania University. It is April and fear of layoffs--even among the tenured--has reached mock-epic proportions; Hank has yet to receive his department budget and finds himself increasingly offering comments such as "Always understate necrophilia" to his writing students. Then there are his possible prostate problems and the prospect of his father's arrival. Devereaux Sr., "then and now, an academic opportunist," has always been a high-profile professor and a low-profile parent.

Though Hank tries to apply William of Occam's rational approach (choose simplicity) to each increasingly absurd situation, and even has a dog named after the philosopher, he does seem to cause most of his own enormous difficulties. Not least when he grabs a goose and threatens to off a duck (sic) a day until he gets his budget. The fact that he is also wearing a fake nose and glasses and doing so in front of a TV camera complicates matters even further. Hank tries to explain to one class that comedy and tragedy don't go together, but finds the argument "runs contrary to their experience. Indeed it may run contrary to my own." It runs decidedly against Richard Russo's approach in Straight Man, and the result is a hilarious and touching novel.

June 20, 2017 in Books, Joshua P. Fershee, Law School, Social Enterprise, Teaching | Permalink | Comments (0)

Friday, June 2, 2017

"Even Bank Robbers Can Tithe"

One of the most striking lines in Provost Jeff Van Duzer's talk at the Nashville Institute of Faith and Work a few months ago was his statement that "even bank robbers can tithe."

See a somewhat similar version of that talk here.

Jeff Van Duzer's point seemed to be that you cannot be a truly socially responsible company simply by giving some money to good causes. I think he was exactly right. He went on to explain that socially responsible businesses should focus on creating good products and good jobs. 

This week I was thinking about Jeff Van Duzer's talk when I considered, for about the one hundredth time, how to define social enterprises.

Think about Ben & Jerry's, a company that comes up at almost every social enterprise conference. While I can think of some good that ice cream does, I wonder if Ben & Jerry's main products are, on the whole, socially beneficial. We have a serious, deadly obesity problem in the country, and Ben & Jerry's products seem to be contributing to this problem. Perhaps Ben & Jerry's ice cream is more healthy than most options or uses more natural ingredients (I am unsure if this is true), but are Ben & Jerry's core products a net benefit to society? Perhaps Ben & Jerry's tip the scale in the social direction by providing good jobs with good benefits. However, Ben & Jerry's is best known for their giving and advocacy, which any business (no matter how socially destructive) could do.

The same arguments could be made against Hershey and Mars Corp., both of which are also well known for their focus on social responsibility. Are there certain industries that social enterprises should avoid altogether? Or should social enterprises enter all industries and try to make them incrementally better?

As a consumer, I am becoming more convinced that providing good products should among the very highest priorities. High quality products and thoughtful customer service is becoming increasingly difficult to find.

Given that I have two young children, Melissa & Doug toys come to mind as a company that is doing it right. Their products are durable and well-designed. Their products are designed to encourage Free Play, Creativity, Imagination, Learning, Discovery. Little Tikes is an older, but similar, company. I have never heard Melissa & Doug or Little Tikes referred to as "social enterprises," but, in my opinion, both companies benefit society much more than many of the frequently mentioned "social enterprises." 

June 2, 2017 in Corporations, CSR, Current Affairs, Haskell Murray, Social Enterprise | Permalink | Comments (5)

Monday, May 29, 2017

Memorial Day Reflections: Choosing the Non-Profit Corporate Form for Organizations Helping the Families of Fallen Warriors

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Wikipedia tells us what most (if not all) of us already knew: "Memorial Day is a federal holiday in the United States for remembering the people who died while serving in the country's armed forces."  As I have often noted in conversations and communications with friends, regardless of one's views on the appropriateness of war in general or in specific circumstances, most of us understand the importance of honoring those who have lost their lives in serving their country.  My dad, father-in-law, secretarial/administrative assistant, and many friends and students have served in the U.S. armed forces and survived the experience.  Others have not been so lucky.  I dedicate this post to all of them.

Last week, I had the pleasure of presenting at and attending a conference on Legal Issues in Social Entrepreneurship and Impact Investing—In the US and Beyond (also featuring co-blogger Anne Tucker).  My presentation was part of a panel on securities crowdfunding as impact investing.  But I attended many other presentations and participated in a lunch table talk on choosing the right entity for social enterprise and a brainstorming session on how legal education can better support social entrepreneurship and impact investing.  The conference was fabulous, and I learned a lot by listening to the great folks invited by the organizers--including others on my panel.

As I reflected on the holiday today in light of last week's conference, my thoughts turned to organizations serving the families of fallen warriors and what types of formal entity structures they had chosen.  These organizations are mission-driven and socially conscious.  They exist, at least in part, to serve society.  All of the ones I could think of or easily find in a Web search (among them Children of Fallen Patriots FoundationThat Others May Live Foundation, and Travis Manion Foundation--although I do not intend to endorse any specific organization) are organized as non-profit corporations under various state laws and qualified as exempt from federal income taxes under Section 501(c)(3) of the U.S. Internal Revenue Code.  One might ask why.  

Continue reading

May 29, 2017 in Anne Tucker, Business Associations, Conferences, Joan Heminway, Nonprofits, Social Enterprise, Teaching | Permalink | Comments (0)

Wednesday, May 24, 2017

Should social entrepreneurs form nonprofits or benefit corporations?

On June 8, I will answer this and other questions during an interactive session for a group of social entrepreneurs at Venture Cafe in Miami. Fortunately, I will have an accountant with me to talk through some of the tax issues. I was invited by the director of Radical Partners, a social impact accelerator. We estimate that 75% of the audience members will work for a nonprofit and the rest will work in traditional for profit entities with a social mission.

Many entrepreneurs in South Florida have an interest in benefit corporations, but don't really know much about them. Our job is to provide some guidance on entity selection and demystify these relatively new entities. Some of the issues I plan to address in my 20 minutes are:

1) the differences between nonprofits, for profits, and benefit corporations

2) the differences between benefit and social purpose corporations (focusing on Florida law)

3) the biggest myths about benefit corporations (such as perceived tax benefits)

4) tax issues (for the accountant)

5) director duties

6) funding- changing funding model from donors to investors; going public

7) reporting, auditing, and certification requirements

8) benefit enforcement proceedings

9) the role of B Lab and the difference between a B Corp and a benefit corporation (currently 15 Florida companies are certified through B Lab)

10) transparency and accountability issues

We plan to leave about 45 minutes for questions. Not many lawyers in Florida have experience with benefit or social purpose corporations, so I am seeking guidance from our readers. If you are a practitioner and have dealt with these entities in your states, I'm interested in your thoughts. Are a lot of your clients asking about these entities? Have they converted? How do you help them decide whether this change is good for them? I'm also fortunate to have colleagues on this blog who are real thought leaders in the area, and am looking forward to their comments. Personally, I believe that for many business owners, benefit corporations may provide a perceived marketing edge, but not much more, Author Tina Ho has raised concerns about greenwashing. If I'm wrong, let me know below or send me an email at mweldon@law.miami.edu.

 

May 24, 2017 in Corporate Personality, Corporations, CSR, Entrepreneurship, Marcia Narine Weldon, Nonprofits, Social Enterprise | Permalink | Comments (2)

Friday, May 19, 2017

Summer Reading: Visions of Vocation by Steven Garber

In last week’s post, I mentioned Dr. Steven Garber. Recently, I finished his 2014 book Visions of Vocation: Common Grace for the Common Good. This book is among a handful of  books in the faith & work area that I have read over the past few months.

Visions of Vocation is beautifully written, lyrical and rich. Garber’s weaves philosophy, literature, and personal stories throughout the book’s 255 pages.

Garber’s thesis in this talk, which echoes in much of his work, is that “vocation is integral, not incidental to the Missio Dei (mission of God)." Garber says the book Visions of Vocation grew out of these questions: Can you know the world and still love the world? & What will you do with what you know? The first question hits home, as the flaws of jobs and people often become more vivid over time.  After the second question, Garber shows how stoicism and cynicism are unsatisfying responses.  

Garber offers no easy answers, which is, perhaps, on purpose. These are difficult questions in a difficult area, and easy answers may not exist. I finished the book still hoping for some clear principles for integrating faith and work, but maybe the stirring questions were the point. The stories of folks at International Justice Mission and Elevation Burger, among others, do help in thinking about how faith and work fit together, as do the references to Walker Percy and Wendell Berry.

Again, this is not a book that provides a few simple steps or quick takeaways, but for a number of days after finishing it, I am still pondering its contents. For that reason, I think the book was well worth reading.

May 19, 2017 in Entrepreneurship, Haskell Murray, Religion, Social Enterprise | Permalink | Comments (0)

Monday, May 15, 2017

Creating a More Productive Space for Social Entrepreneurship - A Unique Birthday Present

Today, I am spending my birthday attending and presenting at the Fifth Annual Midwest Symposium on Social Entrepreneurship in Kansas City, Missouri.  I owe my presence here to my entrepreneurship colleagues and friends Tony Luppino (UMKC Law) and John Tyler (Kauffman Foundation).  Thanks for the awesome birthday present, guys.

There's so much I have to say about just the first day of this event.  (I also will be here and presenting tomorrow.)  The proceedings so far have been incredibly thought-provoking and instructive.  Most intriguing has been the focus around creating an ecosystem for social entrepreneurship.  Of course, law and lawyers have roles in that.  Hence, this blog post . . . .

Specifically, I want to devote today's post to the four essential action-elements necessary to generate a successful, sustained future for social entrepreneurship as posited and described by Mark Beam, Maverick in Residence at the Kauffman Foundation, in his kick-off keynote presentation this morning.  (As an aside, I will note that Mark started his talk with a brief recounting of the origin of the word "maverick," which was independently fascinating.)  Here are Mark's four elements, as I captured them in my notes (likely imperfectly), together with a bit of summary definitional commentary.  He contended that, to build a sustainable ecosystem for social entrepreneurship, we must:

  1. Redefine work (recognizing entrepreneurship as work; taking into account the power and effects of technology, but knowing it needs to serve us and the human potential)
  2. Nurture entrepreneurial ecosystems that mimic and integrate natural systems (e.g., helping people to help themselves; moving resources from the “haves” to the “have-nots”)
  3. Evolve our capacity to serve more of the entrepreneurial community through ecosystem design (referring to three megatrends outlined by Kauffman Foundation CEO Wendy Guillies--demography, geography, and technology; opening up entrepreneurship to all to increase business, start-ups employment, productivity)
  4. Tell new stories (relating anecdotes that connect us; “we create the future through the stories we tell ourselves”—visioning the future through stories)

That may not sound like much, but trust me.  The talk (beautifully delivered with amazing graphics, photography, and media content) was much better than my quick summary of the outtakes.

What Mark said made a lot of sense to me based on my related experience and work.  But I found myself thinking about the role of the lawyer in these action items.  How can lawyers--especially business lawyers--who support social enterprise help social entrepreneurship to productively move forward?

Continue reading

May 15, 2017 in Conferences, Entrepreneurship, Joan Heminway, Social Enterprise | Permalink | Comments (4)

Friday, May 12, 2017

Mutuality in Business - University of Oxford & Mars Corporation

From a Facebook post by Dr. Steven Garber, I recently learned of the mutuality in business project by Mars Corporation and University of Oxford.

Quoting from the website:

A collaborative project with the Mars Corporation exploring mutuality as a new principle for organising business. Mutuality - a principle that emphasises the fair distribution of the burdens and benefits of a firm’s activities - is seen as a promising new organising value with the potential to strengthen relationships and improve sustainability.

"Mutuality in business" seems to be yet another term for social responsibility in business. We already have so many terms for the social business concept - blended value, business for good, CSR, creative capitalism, multi-stakeholder governance, natural capitalism, shared value capitalism, social entrepreneurship, social enterprise, social innovation, sustainability, triple bottom line. Many people are trying to create, differentiate, and mark their corner in this social business space.

Despite the addition of yet another social business term, the information at the website is interesting, especially the research projects

May 12, 2017 in Business Associations, Business School, CSR, Haskell Murray, Social Enterprise | Permalink | Comments (0)