Friday, September 26, 2014

Yockey on The Compliance Case for Social Enterprise

Joseph Yockey (Iowa) has posted a new paper on social enterprise.  I have not read this one yet, but enjoyed his first article on the subject and have added this second one to my long "want to read" list.  The abstract is below.

Social enterprises generate revenue to solve social, humanitarian, and ecological problems. Their products are not a means to the end of profits, but rather profits are a means to the end of their production. This dynamic presents many of the same corporate governance issues facing other for-profit firms, including legal compliance. I contend, however, that traditional strategies for corporate compliance are incongruent to the social enterprise’s unique normative framework. Specifically, traditional compliance theory, with its prioritization of shareholder interests, stands at odds with the social enterprise’s mission-driven purpose. Attention to this distinction is essential for developing effective compliance and enforcement policies in the future. Indeed, arguably the greatest feature of the social enterprise is its potential to harness organizational characteristics that inspire the values and culture most closely linked with ethical behavior — without resort to more costly or intrusive measures.

 

September 26, 2014 in Business Associations, Corporate Governance, Haskell Murray, Social Enterprise | Permalink | Comments (0)

Impact Investing Legal Symposium

The below is from an e-mail I received earlier this week about an impact investment legal symposium on October 2, 2014 from 8:30 a.m. to noon (eastern):

Bingham, in conjunction with the International Transactions Clinic of the University of Michigan Law School, Aspen Network of Development Entrepreneurs (ANDE) Legal Working Group and Impact Investing Legal Working Group, is proud to present a legal symposium on Building a Legal Community of Practice to Add Still More Value to Impact Investments.

The symposium will be held at Bingham McCutchen LLP's New York offices at 339 Park Avenue or you can attend virtually by registering here.

The panelists include Deborah Burand (Michigan), Jonathan Ng (Ashoka), Keren Raz (Paul Weiss), and many others.   

September 26, 2014 in Business Associations, Conferences, Corporate Governance, Entrepreneurship, Haskell Murray, Social Enterprise | Permalink | Comments (0)

Tuesday, September 23, 2014

March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well? (Part III)

(Note:  This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides.  The previous installments can be found here and here (NLPB) and here and here (BLPB).)

In prior posts we talked about what a benefit corporation is and is not.  In this post, we’ll cover whether the benefit corporation is really necessary at all. 

Under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. (Delaware law warrants inclusion in any discussion of corporate law because the state's law is so influential, even where it is not binding.) 

Back in 2010, Josh Fershee wrote a post questioning the need for such legislation shortly after Maryland passed the first benefit corporation legislation:

I am not sure what think about this benefit corporation legislation.  I can understand how expressly stating such public benefits goals might have value and provide both guidance and cover for a board of directors.  However, I am skeptical it was necessary. 

Not to overstate its binding effects today, but we learned from Dodge v. Ford that if you have a traditional corporation, formed under a traditional certificate of incorporation and bylaws, you are restricted in your ability to “share the wealth” with the general public for purposes of “philanthropic and altruistic” goals.  But that doesn't mean current law doesn't permit such actions in any situation, does it? 

The idea that a corporation could choose to adopt any of a wide range of corporate philosophies is supported by multiple concepts, such as director primacy in carrying out shareholder wealth maximization, the business judgment rule, and the mandate that directors be the ones to lead the entity.  Is it not reasonable for a group of directors to determine that the best way to create a long-term and profitable business is to build customer loyalty to the company via reasonable prices, high wages to employees, generous giving to charity, and thoughtful environmental stewardship?  Suppose that directors even stated in their certificate that the board of directors, in carrying out their duties, must consider the corporate purpose as part of exercising their business judgment. 

Please click below to read more.

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September 23, 2014 in Business Associations, Corporate Governance, Corporate Personality, Corporations, Ethics, Joshua P. Fershee, Religion, Social Enterprise | Permalink | Comments (4)

Sunday, September 14, 2014

Hobby Lobby Redux: 7 Corporate Law/Theory Quotes

This coming Tuesday, I am scheduled to provide a brief overview of the corporate law/theory aspects of Hobby Lobby as part of the University of Akron’s Supreme Court Roundup.  What follows are the seven key quotes from the opinion that I plan to focus on (time permitting) in order to highlight what I see as the key relevant issues raised by the opinion. Comments are appreciated.

Issue 1: Did corporate theory play a role in Hobby Lobby?

While I believe the majority made a pitch for applying a pragmatic, anti-theoretical approach (“When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of … people.” Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751, 2768 (2014)), the following quote strikes me as conveying an underlying aggregate view of corporations:

In holding that Conestoga, as a “secular, for-profit corporation,” lacks RFRA protection, the Third Circuit wrote as follows: “General business corporations do not, separate and apart from the actions or belief systems of their individual owners or employees, exercise religion. They do not pray, worship, observe sacraments or take other religiously-motivated actions separate and apart from the intention and direction of their individual actors.” 724 F.3d, at 385 (emphasis added). All of this is true—but quite beside the point. Corporations, “separate and apart from” the human beings who own, run, and are employed by them, cannot do anything at all.

134 S. Ct. at 2768.

 

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September 14, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Religion, Social Enterprise, Stefan J. Padfield, Unincorporated Entities | Permalink | Comments (2)

Wednesday, September 3, 2014

The March of the Benefit Corporation: Next Up, West Virginia (PART II)

(Note:  This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides.  The previous installment can be found here (NLPB) and here (BLPB).)

What It Is:   So now that we’ve told you (in Part I) what the benefit corporation isn’t, we should probably tell you what it is.  The West Virginia statute is based on Model Benefit Corporation Legislation, which (according to B Lab’s website) was drafted originally by Bill Clark from Drinker, Biddle, & Reath LLP.  The statute, a copy of which can be found, not surprisingly, at B Lab’s website, “has evolved based on comments from corporate attorneys in the states in which the legislation has been passed or introduced.”  B Lab specifically states that part of its mission is to pass legislation, such as benefit corporation statutes.

As stated by the drafter’s “White Paper, The Need and Rationale for the Benefit Corporation: Why It is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public” (PDF here), the benefit corporation was designed to be “a new type of corporate legal entity.”  Despite this claim, it’s likely that the entity should be looked at as a modified version of traditional corporation rather than at a new entity. 

To read the rest of the post, please click below. 

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September 3, 2014 in Business Associations, Corporate Governance, Corporations, Entrepreneurship, Joshua P. Fershee, LLCs, Social Enterprise | Permalink | Comments (1)

Tuesday, August 26, 2014

The March of the Benefit Corporation: Next Up, West Virginia (Cross Post)

West Virginia is the latest jurisdiction to adopt benefit corporations – the text of our legislation can be found here.   As with all benefit corporation legislation, the thrust of West Virginia’s statute is to provide a different standard of conduct for the directors of an otherwise for-profit corporation that holds itself out as being formed, at least in part, for a public benefit.  (Current and pending state legislation for benefit corporations can be found here.)

As WVU Law has two members of the ProfBlog family in its ranks (Prof. Josh Fershee (on the Business Law Prof Blog) and Prof. Elaine Waterhouse Wilson (on the Nonprofit Law Prof Blog)), we combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides.  For those of you on the Business Prof blog, some of the information to come on the Business Judgment Rule may be old hat; similarly, the tax discussion for those on the Nonprofit Blog will probably not be earth-shaking.  Hopefully, this series will address something you didn’t know from the other side of the discussion!

Part I: The Benefit Corporation: What It’s Not:  Before going into the details of West Virginia’s legislation (which is similar to statutes in other jurisdictions), however, a little background and clarification is in order for those new to the social enterprise world.  A benefit corporation is different than a B Corporation (or B Corp).  B Lab, which states that it is a “501(c)(3) nonprofit” on its website, essentially evaluates business entities in order to brand them as “Certified B Corps.” 

It wants to be the Good Housekeeping seal of approval for social enterprise organizations.  In order to be a Certified B Corp, organizations must pass performance and legal requirements that demonstrate that it meets certain standards regarding “social and environmental performance, accountability, and transparency.” Thus, a business organized as a benefit corporation could seek certification by B Lab as a B Corp, but a business is not automatically a B Corp because it’s a state-sanctioned benefit corporation – nor is it necessary to be a benefit corporation to be certified by B Labs.  

In fact, it’s not even necessary to be a corporation to be one of the 1000+ Certified B Corps by B Lab. As Haskell Murray has explained,

I have told a number of folks at B Lab that "certified B corporation" is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality.  I am guessing my fellow blogger Professor Josh Fershee would share my concern. [He was right.]

A benefit corporation is similar to, although different from, the low-profit limited liability company (or L3C), which West Virginia has not yet adopted. (An interesting side note: North Carolina abolished its 2010 L3C law as of January 1, 2014.)  The primary difference, of course, is that a benefit corporation is a corporation and an L3C is a limited liability company.  As both the benefit corporation and the L3C are generally not going to be tax-exempt for federal income tax purposes, the state law distinction makes a pretty big difference to the IRS.  The benefit corporation is presumably going to be taxed as a C Corporation, unless it qualifies and makes the election to be an S Corp (and there’s nothing in the legislation that leads us to believe that it couldn’t qualify as an S Corp as a matter of law).   By contrast, the L3C, by default will be taxed as a partnership, although again we see nothing that would prevent it from checking the box to be treated as a C Corp (and even then making an S election).   The choice of entity determination presumably would be made, in part, based upon the planning needs of the individual equity holders and the potential for venture capital or an IPO in the future (both very for-profit type considerations, by the way).  The benefit corporation and the L3C also approach the issue of social enterprise in a very different way, which raises serious operational issues – but more on that later. 

Finally, let’s be clear – a benefit corporation is not a nonprofit corporation.  A benefit corporation is organized at least, in some part, to profit to its owners.  The “nondistribution constraint” famously identified by Prof. Henry Hansmann (The Role of Nonprofit Enterprise, 89 Yale Law Journal 5 (1980), p. 835, 838 – JSTOR link here) as the hallmark of a nonprofit entity does not apply to the benefit corporation.  Rather, the shareholders of a benefit corporation intend to get something out of the entity other than warm and fuzzy do-gooder feelings – and that something usually involves cash.

In the next installments:

Part II – The Benefit Corporation: What It Is.

Part III – So Why Bother?  Isn’t the Business Judgment Rule Alive and Well?

Part IV – So Why Bother, Redux? Maybe It’s a Tax Thing?

Part V - Random Thoughts and Conclusions

EWW & JPF

August 26, 2014 in Business Associations, Corporations, Entrepreneurship, Joshua P. Fershee, LLCs, Social Enterprise | Permalink | Comments (2) | TrackBack (0)

Sunday, July 27, 2014

An Updated Draft of “Corporate Social Responsibility & Concession Theory” and Some Further Thoughts on Hobby Lobby

I have posted an updated draft of my latest piece, “Corporate Social Responsibility & Concession Theory” (forthcoming __ Wm. & Mary Bus. L. Rev. __) on SSRN (here). Here is the abstract:

This Essay examines three related propositions: (1) Voluntary corporate social responsibility (CSR) fails to effectively advance the agenda of a meaningful segment of CSR proponents; (2) None of the three dominant corporate governance theories – director primacy, shareholder primacy, or team production theory – support mandatory CSR as a normative matter; and, (3) Corporate personality theory, specifically concession theory, can be a meaningful source of leverage in advancing mandatory CSR in the face of opposition from the three primary corporate governance theories. In examining these propositions, this Essay makes the additional claims that Citizens United: (A) supports the proposition that corporate personality theory matters; (B) undermines one of the key supports of the shareholder wealth maximization norm; and (C) highlights the political nature of this debate. Finally, I note that the Supreme Court’s recent Hobby Lobby decision does not undermine my CSR claims, contrary to the suggestions of some commentators.

I expect to have at least one more meaningful round of edits, so all comments are welcome and appreciated.

As to the last point of the abstract, let me explain why I don’t think Hobby Lobby has meaningfully expanded the ability of corporations to pursue socially responsible actions lacking in any colorable shareholder wealth justification, which, in light of the business judgment rule, is where I believe much of the interesting CSR action is taking place. I’ll first briefly go through my understanding of what the Court held in Hobby Lobby, and then see if anything new is added to our understanding of corporations’ ability to pursue CSR activities. My analysis proceeds roughly as follows:

1. Are corporations capable of exercising religion?

As a matter of statutory construction, determining whether corporations can exercise religion for purposes of the RFRA requires looking to the Dictionary Act, which includes corporations under the definition of "person" unless the context indicates otherwise. I agree with Justice Ginsburg that the context of exercising religion is one that properly excludes corporations. In addition, due to my view of the corporation as being fundamentally a creature of the state, I have Establishment Clause concerns about allowing the recipients of the state’s corporate subsidy to further religious ends via that grant. (I address some of the related unconstitutional conditions arguments here.) But in the end, the Court said corporations can exercise religion, so that’s likely the final word till a Justice retires.

2. Is the exercise of religion by corporations ultra vires?

Given that the Court has deemed corporations capable of exercising religion, the next question is whether they have been granted the power to do so by the state legislatures that created them. In other words, is the exercise of religion ultra vires? When Justice Alito says that “the laws … permit for-profit corporations to pursue ‘any lawful purpose’ or ‘act,’ including the pursuit of profit in conformity with the owners' religious principles,” I believe he is best understood as affirming that religious exercise, like charitable giving, is not ultra vires, nothing more.

3. Can corporations sacrifice shareholder wealth to further religious exercise?

So, corporations have the ability to exercise religion and it is not ultra vires for them to do so. None of that, however, should change the fact that if the religious exercise does not somehow advance shareholder wealth and any shareholder legitimately complains, then a viable waste or fiduciary duty claim has been asserted. Alito seems to recognize this point when he qualifies his conclusion about the viability of abandoning profit-maximization with: “So long as its owners agree ….” As Jay Brown put it (here), “this is a rule of unanimity…. it doesn't actually alter the board's legal duties.” In other words, I agree with my co-blogger Josh Fershee when he argues (here) that Hobby Lobby should not be read to create some new First Amendment defense for controlling shareholders or directors facing viable claims of waste of corporate assets or duty of loyalty violations.

Assuming all the foregoing is correct, I don’t see anything new in Hobby Lobby vis-à-vis a corporation’s ability to engage in CSR activities. Obviously, it doesn’t take much to satisfy the business judgment rule, but that’s not the issue. If there is any new ground here it should arguably create a defense where no rational business purpose is asserted (I don’t believe Hobby Lobby has redefined “business” for purposes of the waste doctrine). That’s precisely what makes benefit corporations special and necessary – they provide such a defense for corporations pursuing activities with a public benefit but open to the challenge that there is no concomitant shareholder wealth benefit. As Robert T. Esposito & Shawn Pelsinger put it (here), “the principal argument for social enterprise forms rests on the assumption that corporate law and its duty to maximize shareholder wealth could not accommodate for-profit, mission-driven entities.”

So, has Hobby Lobby somehow meaningfully shifted the playing field when it comes to CSR? I don’t think so.

July 27, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporations, Current Affairs, Religion, Social Enterprise, Stefan J. Padfield | Permalink | Comments (1)

Friday, July 18, 2014

Woulfe on Connecticut Benefit Corporation Law

James Woulfe, who was involved in the legislative process around Connecticut benefit corporations, and I have had a number of interesting conversations about social enterprise law over the past few years.  Recently, I asked James to share his thoughts on the new Connecticut benefit corporation law for the blog.  His contribution is below.

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After two previous tries, Connecticut recently became the 24th state in the Union to pass benefit corporation legislation. While some may argue that the fact it took Connecticut so long to pass the bill is a sign of problems with the legislature, our state’s business climate, etc., coming a little late to the game was actually an asset. Waiting to pass the legislation gave lawmakers an opportunity to take a look at national and international trends in social enterprise legal structures, and experiment. As a result, Connecticut tweaked the “model” benefit corporation legislation passed in other states, and included an innovative first in the nation clause in Connecticut’s statute, called a “legacy preservation provision.”

Connecticut’s legacy preservation provision gives social entrepreneurs the opportunity to preserve their company’s status as a benefit corporation in perpetuity, despite changes in company leadership or ownership. In other words, the (optional) provision locks in the company’s social or environmental mission as a fundamental part of its legal operating structure. The provision may be adopted following a waiting period of two years and unanimous approval from all shareholders, regardless of their voting rights. Once the provision is adopted, it requires the company, if liquidated, to distribute all assets after the settling of debts to one or more benefit corporations or 501(c)3 organizations with similar social missions.  

To learn more about Connecticut’s benefit corporation statute, and to take a look at the specific language of the legacy preservation provision, you can visit CTBenefitCorp.com.

About the Author:

James Woulfe is the Public Policy and Impact Investing Specialist at reSET - Social Enterprise Trust, a Hartford, Connecticut-based 501(c)3 non-profit organization whose mission is to promote, preserve and protect social enterprise as a viable concept and a business reality. You can contact James at Jwoulfe@socialenterprisetrust.org.

Cross-posted at SocEntLaw.

July 18, 2014 in Business Associations, Haskell Murray, Social Enterprise | Permalink | Comments (0)

Monday, July 7, 2014

Delaware Public Benefit Corporation Count as of 6/30/14

For those interested, the Delaware secretary of state's office informs me that there were 145 Delaware public benefit corporations (PBCs) as of 6/30/14.

I do not recognize the vast majority of the PBCs on the list, but better known PBCs include Method Products and Plum Organics

July 7, 2014 in Business Associations, Delaware, Haskell Murray, Social Enterprise | Permalink | Comments (0)

Monday, June 30, 2014

Does Hobby Lobby Create a First Amendment Out for Fiduciary Duties?

So, the Hobby Lobby decision is out.  I wrote my thoughts here and here after oral arguments, and I think the court got this wrong.  Not the concept, but the execution. 

Rather than try to rehash what is now done, I will pose a different question: How does one reconcile this religious exercise with the profit-seeking mandate that the Delaware court imposes from time to time.  As Chancellor Chandler noted in eBay v. Newmark (more here):

The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. 

Note that “purely” is not an entirely accurate modifier here.  Craigslist made a profit and had some ventures that raised money.  They just did not monetize the majority of the endeavors

So what about an entity that operates for purely religious ends? Hobby Lobby and those similarly situated seem to be saying that religion trumps profit (see, e.g., Chik_Fil-A closing on Sundays).  This is not the argument that our business model is stronger because of our choices, which I have argued before should be protected, but this is saying we choose religion over profit. 

As Chancellor Chandler noted in eBay, if there are no shareholders to complain, then perhaps it is not an issue.  Still, as soon as a shareholder disagrees, will decisions such as limiting healthcare options (thus limiting the talent pool for employees) or closing on Sunday?  It seems to me the Hobby Lobby decision has opened the door for several fiduciary duty fights down the road. 

Can a corporation now choose to give a majority of its funds to a church, even if it harms the entity?  I think no, but I hope, for the sake of businesses everywhere, the Court did not just create a First Amendment out to such fiduciary duties.

June 30, 2014 in Business Associations, Corporations, Current Affairs, Joshua P. Fershee, Religion, Securities Regulation, Social Enterprise | Permalink | Comments (3)

Friday, June 27, 2014

Easterly on The Tyranny of Experts

On Steve Bradford’s recommendation, I chose William Easterly’s (NYU) The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor (2014) as the book for my annual beach trip with the in-laws and cousins. (Last year was Daniel Kahneman's (Princeton) Thinking, Fast and Slow – and yes, my wife’s side of the family makes fun of my beach reading material).  Easterly is an author I have wanted to read for a while now, and I still need to read some of his earlier books. 

Easterly

More after the break.

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June 27, 2014 in Books, Ethics, Haskell Murray, Social Enterprise | Permalink | Comments (0)

Tuesday, June 10, 2014

Starting in the Right Place: The Poverty Debate as a Regulatory Debate

A few weeks ago, Tim Carney wrote a piece in the Washington Examiner that is stuck in my mind. The piece titled Conservatives, big government and the duty to care for the poor discusses what Carney sees as a shift in the rhetoric conservatives are using in reference to the poor and other vulnerable populations.  Carney notes that Senate Minority Leader Mitch McConnell (R-KY) recently referenced a “shared responsibility for the weak.”  Carney continues:

Step away from policy debates and think about that phrase. Do you have a responsibility to help the weak? Do you have a responsibility to feed the hungry? To aid the poor?

 I think I do. I think everyone does. The Catholic Church teaches us we do.

Conservatives sometimes shy away from this idea, though. One reason is a strong (and overblown) distaste to "helping the lazy." Another reason is that conservatives fear it implies the Left’s answer: big federal programs.

But, in fact, you can grant that you have a duty to the poor and the weak, and then have a really good debate:

Is that duty individual, or some sort of a communal duty?

Does the government have the legitimate right to transfer wealth to satisfy that duty, or is it solely an individual responsibility to fulfill that duty.

If aiding the poor is a legitimate government role, at what level is the aid appropriately delivered — local, state, federal?

I really don't see this as a new debate, but I agree it is a shift from the poverty debate I have seen over the past decade or so. This shift, though, goes back (at least) to the debates of what I remember in the 1980s and early 1990s. The question then, as I recall my vigorous (sometimes informed) college and early career discussions, was not whether the poor needed help. The question was how best to provide that help.  (I'll note that even then, conservatives were likely to call me liberal, and liberals often called me conservative. Some things remain the same, I guess.)  

Carney frames the conversation appropriately, and asks the right questions because it starts with the right assumption: that helping the poor is required.  He notes: 

Then there’s plenty of very practical debates: Are federal programs inevitably too bloated and inflexible? Or alternatively, maybe only the federal government has the economies of scale (and ability to make its own money) needed to run a safety net, particularly in economic downturns.

So, what does this have to do with business law? Well, in part, if we agree there is a duty, we must talk about whose duty it is.  Is it individual? Is it a communal governmental duty? A communal non-governmental duty?  Is it a duty of all people, including corporate persons?  To what extent? 

Further, the role of government in protecting the weak extends beyond poverty programs. It applies to securities regulation, environmental regulation, and tax policy, all of which are directly, or at least very closely, related to business law.  In all of these cases, I think the question of the poverty debate carries through: how do we carry out, as Sen. McConnell put it, our “shared responsibility for the weak?”

The conversation that follows that question is a good one because it does not reduce all arguments to some version of "caveat emptor" or only the "government/market will fix it."  Instead, the questions can be, for example: Does less regulation increase risks to vulnerable parties or increase access to opportunities for such parties?  If the answer is both, as it often is, how do we balance those risks and opportunities?  

The market is often the best solution, but one still needs to explain why that's true, rather than blindly relying on some amorphous, all-knowing "market."  And as those of us who work closely with regulated industries know, we need to acknowledge that all markets have rules (public and/or private), and those rules impact how effective that market will be and for whom. As such, the poverty debate is also largely a regulatory debate.  In all cases, if we start in the right place, better policy is likely to follow.  

 

June 10, 2014 in Ethics, Joshua P. Fershee, Securities Regulation, Social Enterprise | Permalink | Comments (1) | TrackBack (0)

Friday, May 23, 2014

McDonnell on Fiduciary Duty in Benefit Corporations

Brett McDonnell (Minnesota) recently posted a new article entitled Committing to Doing Good and Doing Well: Fiduciary Duty in Benefit Corporations.  I have not read the article yet, but it is printed and in my stack for the summer.  The abstract is below. 

Can someone running a business do good while doing well? Can they benefit society and the environment while still making money? Supporters of social enterprises believe the answer is yes, as these companies aim at both making money for shareholders while also pursuing other social benefits. Since 2010, states have begun to enact statutes creating the “benefit corporation” as a new legal form designed to fit social enterprises. Benefit corporations proclaim to the world that they will pursue both social good and profits, and those who run them have a fiduciary duty to consider a broad range of social interests as they make their decisions rather than a duty to focus solely on increasing shareholder value. Does this novel fiduciary duty effectively commit these businesses to doing good? How will courts actually apply this duty in practice? Will this new duty accomplish its goals without unduly high costs?

 

This article is among the first to analyze in detail the fiduciary duty provisions in several versions of these new benefit corporation statutes. It compares duties in benefit corporations to duties in traditional corporations in the leading categories of fiduciary duty cases. It argues that there is likely to be a modest “flattening” in the risk of liability for directors and officers of benefit corporations. That is, as compared to the level of risk in ordinary corporations, the risk of being held personally liable will be bigger for decisions where that risk is weakest in ordinary corporations, while the risk of liability will be smaller for decisions where that risk is highest in ordinary corporations.

 

The article then asks whether the statutes strike the proper balance in holding directors and officers accountable. The statutes could be too strong if they scare off investors and managers. They could be too weak if they allow managers to proclaim their virtue while ignoring their duties with no fear of legal sanctions. Neither possibility can be dismissed, but this paper argues that the statutes have got it just right. They create enough risk of liability that managers must pay attention to their legal duties, allowing courts to help shape norms of appropriate behavior, while not imposing such high risk that this promising new business form becomes unattractive.

May 23, 2014 in Business Associations, Corporate Governance, Haskell Murray, Social Enterprise | Permalink | Comments (0)

Friday, May 16, 2014

1000 Certified B Corporations

As of earlier this week, B Lab has now certified 1,000 entities as "certified B corporations."

Given over 1 million entities in Delaware alone, coupled with the fact that B Lab seems willing to certify any type of entity, anywhere in the world, (if the company scores above an 80 on B Lab's 200 point survey and pays a fee) 1,000 is a relatively small number. Every movement has to start somewhere, however.

As a side note, I have told a number of folks at B Lab that "certified B corporation" is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality.  I am guessing my fellow blogger Professor Josh Fershee would share my concern.   

The number of benefit corporations is more difficult to pin down, but is somewhere in the neighborhood of 400 (including public benefit corporations in Delaware and Colorado).

For the major differences between certified B corporations and benefit corporations, see here. Confusingly, both are sometimes called "B Corps."

While the numbers are currently small, and I have critiques for some of the ways both the certified B corporation and benefit corporation movements are proceeding, I do think the larger social enterprise/social business movement is here to stay.  Therefore, in my writing, I have been attempting to find ways to improve both the certification process and the social enterprise law.  For what it is worth, I have fewer criticisms for the certification process; I think the market will sort out most of the invaluable kinks over time.  Even though I have a number of criticisms for the social enterprise laws, I think the laws may lead to some positive, society-focused norms, if the social enterprises can find a significant number of investors to go along with them.

May 16, 2014 in Business Associations, Haskell Murray, Social Enterprise | Permalink | Comments (1)

Sunday, May 4, 2014

ICYMI: Tweets From the Past Week (May 5, 2014)

May 4, 2014 in Business School, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Securities Regulation, Social Enterprise, Stefan J. Padfield, Teaching | Permalink | Comments (0)

Friday, May 2, 2014

Empirical Research on Hybrid Entities

For those interested in some empirical research on the new hybrid entities (a/k/a social enterprise):

There are still relatively few of these hybrid entities being formed, but they have definitely started a lot of conversations.  

May 2, 2014 in Business Associations, Haskell Murray, Social Enterprise | Permalink | Comments (0)

Friday, April 25, 2014

Social Enterprise Law Bibliography

As the amount written on social enterprise law increases, I thought it might be useful to create a list of journal articles.  That list is now posted on SSRN here

The list is limited to law review articles and purposefully excludes student authored articles, except for one LLM thesis.  (I may be persuaded to include some of the better student notes in the future).  I stayed away from general CSR articles and focused on articles regarding the new social enterprise legal forms.  I stuck mainly to legal academics, but included some of the major practitioner authors.

The list is undoubtedly incomplete, and I welcome suggestions for additions. 

April 25, 2014 in Haskell Murray, Social Enterprise | Permalink | Comments (0)

Tuesday, April 22, 2014

How the Same-Sex Marriage Debate Can Lead to Better Businesses

Over at realclearpolitics.com, a number of leading thinkers, including some leading business law folks such as Richard Epstein and Jonathan Adler, among others, have signed a public statement: Freedom to Marry, Freedom to Dissent: Why We Must Have Both.  Following is a portion of the statement:

The last few years have brought an astonishing moral and political transformation in the American debate over same-sex marriage and gay equality. This has been a triumph not only for LGBT Americans but for the American idea. But the breakthrough has brought with it rapidly rising expectations among some supporters of gay marriage that the debate should now be over. As one advocate recently put it, “It would be enough for me if those people who are so ignorant or intransigent as to still be anti-gay in 2014 would simply shut up.”

 

The signatories of this statement are grateful to our friends and allies for their enthusiasm. But we are concerned that recent events, including the resignation of the CEO of Mozilla under pressure because of an anti-same-sex- marriage donation he made in 2008, signal an eagerness by some supporters of same-sex marriage to punish rather than to criticize or to persuade those who disagree. We reject that deeply illiberal impulse, which is both wrong in principle and poor as politics.

For those who don’t know, former Mozilla CEO Brendan Eich resigned following the public outcry when it was revealed that he had donated $1,000 to support Proposition 8, a 2008 California ballot initiative and constitutional amendment designed to ban same-sex marriage in the state.

To be clear on my stance: I strongly support same-sex marriage, and I fundamentally disagree with Prop 8.   Still, punishing people, as opposed to criticizing people, for contrary and even wrong-headed political views is neither productive nor proper. (Nonetheless, there are multiple examples of people who felt Eich needed to resign. See, e.g.,  here, here, and here.) 

Admittedly, if it’s clear that the head of any organization, whether it is a profit or nonprofit entity, doesn’t further the goals of the organization, then there is a bad fit. Furthermore, this isn’t about Mr. Eich’s free speech rights in that there is no government actor here. This was a private response to a private person’s actions. Mozilla has the power to act to replace Mr. Eich, and members of the public have a right to call for his ouster.  It just doesn’t make it inherently right or wise.

Certainly, one can imagine a scenario where a CEO’s prior political or organizational giving would create problems for the organization.  For example, an environmental organization may not be comfortable with a CEO who had given money to a group fighting climate legislation. But, in that circumstance, the hiring body, and likely the CEO, would, or at least should, have known that support for climate change initiatives would be expected as part of the job.  Top employees often become the face of the organization, and that comes with job, but if a particular political view is deemed necessary for the job, it would help if the CEO knew it during the interview process.  

Even if Mozilla was responsible for the mistake (in hiring someone with political views that were not accepted to many employees and customers), as an entity, the company was not improper to respond in what it deemed to be in the best interest as the organization.  Just as important, though, is the community response to Mozilla as an entity.  The free market allows us all to choose with whom we wish to do business.  But when we make such decisions, we need to be careful about who we are punishing and why.

People have a right to be upset and to protest Mr. Eich’s views.  I think Prop 8 was dead wrong, and I don’t like that anyone supported it.  Still, I don't think calling for Mr. Eich or anyone else to lose their job is proper simply because I disagree with their views.   I would feel differently if there were evidence that Mr. Eich discriminated against gay employees. There just doesn't seem to be any support for that proposition.

We need to be careful to avoid a world where every portion of what we do becomes politicized and polarized.  Although there are core values each of us holds, we should also recognize that not everyone shares all of our core values, all of the time.  Nor can they.  My wife and I agree on a lot of things, and it is a big reason why we’re together.  Still, some of my best learning has been when we don’t agree. Sometimes I change my mind, and other times I don’t, but even then I have learned more about my views and why I hold them. 

I don’t want to live in a world where politicians and news outlets and companies operate in lockstep to a specific set of ideals.  There are too many examples of that already to make me comfortable.  I don’t want to choose only from a Republican burger joint or a Democratic sub shop. We need more.  We need a populist pizza place, and a libertarian ice cream shop, and everything in between.  In my view, the litmus test should be whether people do a good job at doing their job, and whether they treat others well (employees and customers), regardless of their ideological differences.  

Open public discourse is a right under our Constitution, but it is not socially required. When respectful and thoughtful, open discourse helps all of us be better citizens and better people. If we commit ourselves as individuals to respecting others and listening, even when (and especially when) we disagree, good things will follow.  It is one thing to dismiss views with which we disagree; it is another to dismiss, out of hand, the people who hold such views.  For all the complaints about the evils of business, I have a suspicion that if we expected more of ourselves, businesses would follow our lead.

April 22, 2014 in Corporations, Current Affairs, Joshua P. Fershee, Religion, Social Enterprise | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 15, 2014

Corporations and Governments Don't Actually Do Anything

They really don't. 

To be clear, this is not a post bashing corporations (or government). It's not really extolling the virtues of corporations, either. Instead, it's just to make the point that, notwithstanding Citizens United or Hobby Lobby and other cases of their ilk, the idea that corporations are people is still a legal fiction.  A useful and important one, but a fiction nonetheless.  

On April 11, Corey Booker posted the following on Facebook:

In awful years past, corporations polluted the Passaic river to the point that it ended the days where people could eat from it, swim in it, and use it as a thriving recreation source. Today we announced a massive initiative to clean the Passaic river and bring it back to life again. The tremendous clean up effort will create hundreds of jobs and slowly over time restore one of New Jersey's great rivers to its past strength and glory.

The river needs the clean-up, and I applaud the effort. Still, the reality is corporations did not pollute the Passaic River, at least not literally.  People working for the corporation did. It is agency law that allows a corporation to act in the first place, because the fictional corporate person needs a natural person to act.  (For a simple explanation, see here.) The corporation is liable for the harm caused by its agents. (And, in certain cases, the individuals would also be liable directly if their actions were, for example, illegal.)

Government doesn't really do anything, either.  The clean-up proposal that Booker was referencing is a $1.7 billion Superfund river remediation project that was proposed by the EPA.  Of course, government works through agents, too, and there are real people behind the proposal.  Real people, through concerted action between corporations and government will actually do the clean up, too.  

This is a point I have made before, but I think it's an important one.  We need to remember that people are at the root of all corporate and government actions.  This is important in two directions. First, for those criticizing a corporate or government action, it is critical for them to remember that there are people carrying out the action.  A corporation or a government may act in an inappropriate manner, but it is also likely that the person carrying out the action is doing so with the intent to do well in the capacity in which they were fired.

Second, for people working for corporations or governments it is equally critical that they recognize that the their employer doesn't carry out actions without their help.  That is, people who work for corporations or governments must recognize that they are carrying out the will of the entity they represent (and they should hold themselves responsible for doing do).  Perhaps it is their boss who gave them the order (also a natural person), or even the board of directors (a group of natural people), but the charge is in fact, if not legally, being given by natural people.   

Why does this matter?  When we vilify or exalt the action of entities (like corporations or governments) we disconnect ourselves from the realities of the world, or at least our responsibilities within it.  We become more susceptible to Groupthink in either direction.  We are able to shirk our responsibilities -- as employees, as agents, as lawyers, as voters, as shareholders, as people -- to make decisions the are conscious of the world around us.  In our daily lives and in our representative capacities, we all must make difficult decisions from time to time.

Sometimes, tough decisions require a cost-benefit analysis that means someone else will be worse off because of our decision.  It's hard, but it's what people do. Often, it's what we must do.  In doing so, though, it is essential that we hold ourselves and other people accountable as people for what we've done. Regardless of the rhetoric we often hear, the amalgamations of people who make up both governments and corporations have done some amazing and impressive things.  Both have also done some horrendous and outrageous things.  The people in charge, and the people who follow, are accountable in both circumstances. 

In this instance, I am making a conceptual argument, not a legal one.  There are legal regimes, sometimes effective, sometimes not, for holding both entities and their agents accountable for their actions (and rewarding them, where appropriate).  How we think about corporations and governments and each other, though, has a broader impact.  Without us -- all of us -- there are no corporations and there is no government.  If we remember that, our responses to challenges are more likely to be more targeted, more effective, and more reasonable.  Just because we don't always agree, doesn't mean we aren't all in this together.  Whether we like it or not, we are, and it's time we acted like it. 

April 15, 2014 in Corporations, Current Affairs, Ethics, Joshua P. Fershee, Social Enterprise | Permalink | Comments (1) | TrackBack (0)

Friday, March 28, 2014

Networking, Selfishness, and Friends in Business

Recently, I came across a post on the Wall Street Journal’s website by Warby Parker co-founder Neil Blumenthal entitled My Advice? Stop “Networking.”

This short post caught my eye for two reasons.

First, Warby Parker is a certified B corporation and one of the more visible (they sell glasses… humor is not my strong suit) and successful companies in the for-profit social enterprise movement. 

Second, since my move to a business school last fall, I have heard the term “networking” with increasing frequency.  Sure, “networking” is discussed in law schools and there are some networking events, but in business schools the term “networking” is ubiquitous and the events focused on “networking” are constant. 

"Networking" has some negative connotations, but I think Blumenthal’s attack is misplaced.  Instead of attacking “networking,” Blumenthal would have done better to attack “selfishness.”  

There is nothing wrong, and much good, in the dictionary definition of “networking”:

the exchange of information or services among individuals, groups, or institutions; specifically: the cultivation of productive relationships for employment or business.

Networking can be a wonderful thing, for everyone involved, if you can keep the selfishness at a minimum.  Unfortunately, many people network in a selfish manner. 

Blumenthal also writes about breaking down the walls between our work and personal lives, but sometimes those walls are healthy.  He writes about the joys of involving friends in business, but sometimes involving friends in business is unwise.  

Those of us in the corporate law world have seen and read about countless businesses that turned friend against friend, mentor against mentee, and family member against family member. 

I am thankful that my professional and personal contacts overlap significantly.  Just yesterday, I had two long phone conversations with people I consider both professional contacts and valued personal friends.  That said, I am also thankful that I have friends who have nothing to do with work and some professional contacts who never venture outside of my work circles. 

In short, while I understand Blumenthal’s negative reaction to “networking,” I think "selfishness" is the real problem.  Further, I understand the great happiness he may be experiencing by involving friends in his business, but I also hope he recognizes that business may put great strain on those personal relationships. 

March 28, 2014 in Business Associations, Business School, Haskell Murray, Law School, Social Enterprise | Permalink | Comments (2)