Sunday, August 6, 2017
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
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.
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.
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
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.
Tuesday, June 20, 2017
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.
Friday, June 2, 2017
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."
Monday, May 29, 2017
Memorial Day Reflections: Choosing the Non-Profit Corporate Form for Organizations Helping the Families of Fallen Warriors
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 Foundation, That 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.
Wednesday, May 24, 2017
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 email@example.com.
Friday, May 19, 2017
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.
Monday, May 15, 2017
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:
- 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)
- 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”)
- 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)
- 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?
Friday, May 12, 2017
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.
Monday, April 17, 2017
As Haskell earlier announced here at the BLPB, The first U.S. benefit corporation went public back in February--just before publication of my paper from last summer's 8th Annual Berle Symposium (about which I and other BLPB participants contemporaneously wrote here, here, and here). Although I was able to mark the closing of Laureate Education, Inc.'s public offering in last-minute footnotes, my paper for the symposium treats the publicly held benefit corporation as a future likelihood, rather than a reality. Now, the actual experiment has begun. It is time to test the "visioning" in this paper, which I recently posted to SSRN. Here is the abstract.
Benefit corporations have enjoyed legislative and, to a lesser extent, popular success over the past few years. This article anticipates what recently (at the eve of its publication) became a reality: the advent of a publicly held U.S. benefit corporation — a corporation with public equity holders that is organized under a specialized U.S. state statute requiring corporations to serve both shareholder wealth aims and social or environmental objectives. Specifically, the article undertakes to identify and comment on the structure and function of U.S. benefit corporations and the unique litigation risks to which a publicly held U.S. benefit corporation may be subject. In doing so, the article links the importance of a publicly held benefit corporation's public benefit purpose to litigation risk management from several perspectives. In sum, the distinctive features of the benefit corporation form, taken together with key attendant litigation risks for publicly held U.S. benefit corporations (in each case, as identified in this article), confirm and underscore the key role that corporate purpose plays in benefit corporation law.
Ultimately, this article brings together a number of things I wanted to think and write about, all in one paper. While many of the observations and conclusions may seem obvious, I found the exploration helpful to my thinking about benefit corporation law and litigation risk management. Perhaps you will, too . . . .
April 17, 2017 in Anne Tucker, Business Associations, Corporate Governance, Corporations, Current Affairs, Haskell Murray, Joan Heminway, Litigation, Management, Social Enterprise | Permalink | Comments (0)
Friday, March 24, 2017
In the latest Impact Esq. newsletter, Kyle included a link to the Kickstarter’s 2016 Benefit Statement. Kyle wrote that he had “never seen [a benefit report] as strong as Kickstarter’s.” Personally, I am not sure I would go that far. I think Greyston Bakery’s Report and Patagonia’s Report are at least as good. I do think the Kickstarter report is relatively good, but the bar is incredibly low, as many benefit corporations are ignoring the statutory reporting requirement or doing a pathetically bad job at reporting.
While the Kickstarter report is more detailed than most, it still reads mostly like a PR piece to me. The vast majority of the report is listing cherry-picked, positive statistics. That said, Kickstarter did note a few areas for possible improvement, which is extremely rare in benefit report. Kickstarter stated that they could do more to promote “sustainability,” that they could do more to encourage staff to “take advantage of the paid time off we provide for volunteering,” and that they wanted to “encourage greater transparency from creators, better educate backers about the risks and rewards of this system, and further empower our Integrity team in their work to keep Kickstarter safe and trusted.” These “goals” for improvement are quite vague, and I would have liked to see more specific goals.
A few other things to note:
- University of Pennsylvania produced a study, which was cited and used in the report. I think involving universities in the creation of these reports could be a good idea, though possible conflicts should be considered.
- “Including both salary and equity, our CEO's total compensation equaled 5.52x the median total compensation of all non-CEO, non-founder employees in 2016. For context, a 2015 study examining the executive pay gap found that the average CEO earns 204 times that of the median worker for the same company.” I would be interested in how Kickstarter’s number compares to companies in their industry, especially direct competitors. I imagine the CEO/Employee compensation ratio is lower in the technology industry, where the market demands fairly high employee compensation, but even considering the industry, Kickstarter's ratio still seems quite low.
- “Kickstarter overall team demographics: 53% women; 47% men. 70% White/Caucasian; 12% Asian; 12% two or more races; 4% Hispanic or Latino; 2% Black/African American.” This seems to be a good bit more diverse, especially as to gender, than other technology companies who have released similar data.
- “Everyone who works at Kickstarter receives an annual Education Stipend to explore their interests outside the office. In 2016, our employees used their stipends towards blacksmithing classes, a bookmaking class, a synthesizer, pottery courses, an herbal medicine workshop, art supplies, improv classes, a neon light making seminar, and embroidery.” I didn’t see how much the education stipend was, but this seems like a good perk.
- “We donated 5% of our after-tax profits to six organizations working to build a more creative and equitable world.” Profits are easier to manipulate than revenues; I’d like to see a revenue floor (as Patagonia does – donating the greater of 10% of profits and 1% of revenues). That said 5% of profits can be significant and does show some commitment to these causes.
Friday, March 10, 2017
On of the many interesting things discussed during the social enterprise law workshop at Notre Dame Law School was the "FairShares Model." Nina Boeger (University of Bristol-UK) brought the model to the group's attention, and the model was new news to me.
The FairShares Model was "created during a research programme on democratising charities, co-operatives and social enterprises involving academics at Sheffield Hallam University and Manchester Metropolitan University in the UK."
The FairShares Model cites the "Social Enterprise Europe Ltd" when noting that social enterprises "aim to generate sustainable sources of income, but measure their success through:
Specifying their purpose(s) and evaluating the impact(s) of their trading activities;
Conducting ethical reviews of their product/service choices and production/consumption practices;
- Promoting socialized and democratic ownership, governance and management."
To address theses aims, the FairShares Model offers social audits and suggests the issuing some combination of (1) founder shares, (2) labour shares, (3) investor shares, (4) user shares.
While I agree that significant corporate governance changes should be considered, at first glance this model seems a bit unwieldy if all four types of shares are issued. Still, I am interested in learning more.
Friday, March 3, 2017
With co-editor Joan Heminway (and Anne Tucker via Skype), I am at Notre Dame for a symposium on social enterprise law. I will be presenting on aforthcoming book chapter, which builds on my stakeholder advisory board idea. My article Adopting Stakeholder Advisory Boards article was recently published in the American Business Law Journal and I posted it to SSRN this week. The abstract is reproduced below.
Over the past decade, interest in socially responsible business has grown exponentially. The social business movement seeks to have firms focus on the interests of all corporate stakeholders, rather than solely the financial interests of shareholders. Coupled with the social business movement of the past decade has been the passage of social enterprise statutes by over thirty states. The social enterprise statutes provide legal frameworks for firms that seek profit alongside broader social and environmental ends. A plethora of social enterprise legal forms have been created in the United States since 2008, including benefit corporations, public benefit corporations, benefit LLCs, low-profit limited liability companies (L3Cs), general benefit corporations, specific benefit corporations, sustainable business corporations, and social purpose corporations.
Despite the interest in social business and the passage of numerous social enterprise laws, the basic corporate governance framework has stayed largely the same. In both socially-focused traditional companies and in newly formed social enterprises, the corporate governance system is one that empowers directors, officers, and shareholders, but largely ignores other stakeholders such as employees, customers, vendors, creditors, the environment, and the community at large.
This Article explores the shortcomings of the current corporate governance framework, reveals inadequacies in previous proposals to focus firms on all stakeholders, and proposes a stakeholder advisory board as a solution. As proposed, the stakeholder advisory board will give all major stakeholders a more direct voice in firm governance and will grant more stakeholders limited but significantly powers, without harmfully disrupting the efficiency of the board of directors. If adopted, the stakeholder advisory board will better align the corporate governance framework with the recent social business movement by including representatives of all stakeholder groups in decision-making. This proposal suggests mandating adoption of a stakeholder advisory board for large social enterprises, and encourages the voluntary adoption of a stakeholder advisory board by all firms that take their social commitments seriously.
Monday, February 27, 2017
Later this week, I will head to Indiana to present at and attend a social enterprise law conference at The Law School at the University of Notre Dame. The conference includes presentations by participating authors in the forthcoming Cambridge Handbook of Social Enterprise Law, edited by Ben Means and Joe Yockey. The range of presentations/chapters is impressive. Fellow BLPB editors Haskell Murray and Anne Tucker also are conference presenters and book contributors.
Interestingly (at least for me), my chapter relates to Haskell's post from last Friday. The title of my chapter is "Financing Social Enterprise: Is the Crowd the Answer?" Set forth below is the précis I submitted for distribution to the conference participants.
Crowdfunding is an open call for financial backing: the solicitation of funding from, and the provision of funding by, an undifferentiated, unrestricted mass of individuals (the “crowd”), commonly over the Internet. Crowdfunding in its various forms (e.g., donative, reward, presale, and securities crowdfunding) may implicate many different areas of law and intersects in the business setting with choice of entity as well as business finance (comprising funding, restructuring, and investment exit considerations, including mergers and acquisitions). In operation, crowdfunding uses technology to transform traditional fundraising processes by, among other things, increasing the base of potential funders for a business or project. The crowdfunding movement—if we can label it as such—has principally been a populist adventure in which the public at large has clamored for participation rights in markets from which they had been largely excluded.
Similarly, the current popularity of social enterprise, including the movement toward benefit corporations and the legislative adoption of other social enterprise business entities, also stems from populist roots. By focusing on a double or triple bottom line—serving social or environmental objectives as well as shareholder financial wealth—social enterprises represent a distinct approach to organizing and conducting business operations. Reacting to a perceived gap in the markets for business forms, charters, and tax benefits, social enterprise (and, in particular, benefit corporations) offer venturers business formation and operation alternatives not available in a market environment oriented narrowly around the maximization or absence of the private inurement of financial value to business owners, principals, or employees.
Perhaps it is unsurprising then, that social enterprise has been relatively quick to engage crowdfunding as a means of financing new and ongoing ventures. In addition, early data in the United States for offerings conducted under Regulation CF (promulgated under the CROWDFUND Act, Title III of the JOBS Act) indicates a relatively high incidence of securities crowdfunding by social enterprise firms. The common account of crowdfunding and social enterprise as grassroots movements striking out against structures deemed to be elitist or exclusive may underlie the use of crowdfunding by social enterprise firms in funding their operations.
Yet, social enterprise’s early-adopter status and general significance in the crowdfunding realm is understudied and undertheorized to date. This chapter offers information that aims to address in part that deficit in the literature by illuminating and commenting on the history, present experience, and future prospects of financing social enterprise through crowdfunding—especially securities crowdfunding. The chapter has a modest objective: to make salient observations about crowdfunding social enterprise initiatives the based on doctrine, policy, theory, and practice.
Specifically, to achieve this objective, the chapter begins by briefly tracing the populist-oriented foundations of the current manifestations of crowdfunding and social enterprise. Next, the chapter addresses the financing of social enterprise through crowdfunding, focusing on the relatively recent advent of securities crowdfunding (including specifically the May 2016 introduction of offerings under Regulation CF in the United States). The remainder of the chapter reflects on these foundational matters by contextualizing crowdfunded social enterprise as a part of the overall market for social enterprise finance and making related observations about litigation risk and possible impacts of securities crowdfunding on social enterprise (and vice versa).
Please let me know if you have thoughts on any of the matters I am covering in my chapter or resources to recommend in finishing writing the chapter that I may not have found. I seem to find new articles that touch on the subject of the chapter every week. I will have more to say on my chapter and the other chapters of the Handbook after the conference and as the book proceeds toward publication.
Friday, February 24, 2017
One of the many questions surrounding benefit corporations is whether their choice of legal entity form will scare away investors.
As previously reported, we now have our first publicly traded benefit corporation. And in this week's news certified B corp and benefit corporation Data.world announced a 18.7 million dollar raise. This raise ranks in the top-ten largest raises by a benefit corporation, according to the information I have seen on benefit corporations. I compiled the publicly available information I was able to uncover on social enterprise raises (including by benefit corporations) in a forthcoming symposium article for the Seattle University Law Review. It is quite possible that there are raises that have been kept quiet and that I have not seen. This Data.world news was announced days after final edits and will not be in my article.
As is often the case in social enterprise news, this news could be seen as encouraging or discouraging for supporters of the benefit corporation form.
On one hand, this is a fairly sizeable raise and a bit of evidence that not all serious investors are scared away by a legal form that mandates a general public benefit purpose.
On the other hand, the mere fact that a raise of under $20 million dollars is big news in the benefit corporation world (commanding its own announcement e-mail from benefit corporation proponent organization B Lab) shows that the benefit corporation form has yet to go mainstream. A raise under $20 million dollars hardly qualifies as news in the traditional financial world. And, as mentioned, to date, there have only been a handful of raises of this size for companies using the social enterprise forms.
Still, I think it is fair to say that benefit corporations have already come further than harsh critics originally thought was possible. The benefit corporation form still needs to evolve significantly, in my opinion, but the form is still growing and the positive news for the form has not yet stopped.
Friday, February 10, 2017
Laureate Education recently became the first standalone publicly traded benefit corporation. They are organized under Delaware's public benefit corporation (PBC) law, are also a certified B corporation, and will be trading as LAUR on NASDAQ.
Plum Organics, also a Delaware PBC, is a wholly owned subsidiary of publicly-traded Campbell Soup Company. And Etsy is a publicly traded certified-B corporation, but is organized under traditional Delaware corporation law.
Whether the for-profit educator Laureate will hurt or help the popularity of benefit corporations remains to be seen, but some for-profit educators have not been getting good press lately.
Inside Higher Ed reports on Laureate Education's IPO as a benefit corporation below:
The largest U.S.-based for-profit college chain became the first benefit corporation to go public Wednesday morning.
Laureate Education, which has more than a million students at 71 institutions across 25 countries, had been privately traded since 2007. Several major for-profit higher education companies have over the last decade bounced back and forth between publicly and privately held status; also yesterday, by coincidence, the Apollo Group, owner of the University of Phoenix, formally went back into private hands….In its public debut, the company raised $490 million….
Becker said the move to become the first benefit corporation that is public is one way to show that Laureate is putting quality first.“There is certainly plenty of skepticism about whether for-profit companies can add value to society, and I feel strongly we can,” Becker said, adding that Laureate received certification from the nonprofit group B Lab after years of “rigorous” evaluations….
But the certification and the move to becoming a benefit corporation doesn’t prove a for-profit will not make bad decisions or commit risky actions that hurt students, said Bob Shireman, a senior fellow at the Century Foundation and for-profit critic.
"The one thing that being a benefit corporation does is reduce the likelihood that shareholders would sue the corporation for failing to operate in the shareholders' financial interest," Shireman said. "So it makes a marginal difference, and there's no evidence that benefit corporations, in the 10 or so years they've existed in the economy, cause better behavior."
Companies and investors could make better choices and decisions for their students without needing a benefit corporation model to do that, Shireman said, adding that the legal protection it provides is small.
"What's more important are what commitments are being made under the rubric of being a benefit corporation," he said. "How is that going to be measured and enforced … and how can they be changed or overruled by stockholders."
Head of Legal Policy at B Lab Rick Alexander, also authored a post on Laureate Education. For those who do not know, B Lab is the nonprofit responsible for the B Corp Certification and an important force behind the benefit corporation legislation that has passed in 30 states.
Friday, January 13, 2017
Over at the Harvard Law School Forum on Corporate Governance and Financial Regulation, Rick Alexander has a post on benefit corporations. I plan to post some comments on Rick's post next week, when I have a bit more time, but for now, I will just bring our readers' attention to the post and include a small portion of his post below:
Benefit corporations dovetail with the movement to require corporations to act more sustainably. However, the sustainability movement often treats the symptom (irresponsible behavior), not the root cause—the focus on individual corporate financial performance. Proponents of corporate responsibility often emphasize “responsible” actions that increase share value, by protecting reputation or decreasing costs. Enlightened self-interest is an excellent idea, but it is not enough. As long as investment managers and corporate executives are rewarded for maximizing the share value of individual companies, they will have incentives to impose costs and risks on everyone else.
Friday, November 25, 2016
It is not secret that Patagonia is one of the companies that I admire most; it may be my favorite company and is certainly in my top-five.
Patagonia's decision regarding its Black Friday sales adds to the reason I like the company. Patagonia will donate 100% of its Black Friday sales to grassroots environmental groups.
As I read it, the donations will be 100% of revenue, not profits, and the donations are estimated to be millions of dollars.
Patagonia is both a California benefit corporation and B corporation certified, but unlike many social enterprises, Patagonia often does things like the above that don't appear to be done just for the PR, and may actually hurt the company in the very short-term.
That said, Patagonia definitely has a good PR team and is probably getting millions of dollars of exposure out of this decision. And their apparel is quite expensive, so they may be able to afford to do things like this, based, in part, on the margins and goodwill built over time.
Thursday, November 24, 2016
Happy Thanksgiving from the Dominican Republic. I'm blogging from the Fathom Adonia, Carnival's fledgling social impact cruise line. I've spent the past few days in Puerto Plata teaching English in schools and local communities. Other passengers worked on reforestation projects, built water filtration systems, installed concrete floors in homes, worked with women on cocoa farms, and learned how to recycle paper with local workers. Passengers can also do typical excursions such as zip lining and snorkeling, or can lounge around in the $80 million dollar Amber Cove built up like a resort. But most people come on this cruise for the volunteer activities and don't expect frills (our bus got stuck in the mud and we needed pig farmers in a truck to help push us out on the way back from teaching English 75 minutes outside of town). Fathom has restaurants, a spa, dancing, bars, onboard activities such as wine and paint, extremely friendly staff, and enthusiastic, young "impact guides" but no Vegas-style shows and only carries approximately 700 passengers.
Carnival has banked on profiting from people's stated desire to do good in the world. Lots of surveys support this idea in theory. However, as regular readers of this blog know, I have written several posts skeptical of those who claim to care about corporate social responsibility, but choose to buy based on convenience, quality, and price. I have also repeatedly and publicly acknowledged that I am one of those people who selectively boycotts products and vendors. Although the idea of a social impact cruise line excited me, I wondered about whether It would succeed when I first heard of it because most people I know want to relax and not work on a vacation.
Unfortunately, it appears that Carnival's bet may not be paying off. Yesterday, the Miami Herald had an article discussing the future of the social impact product. Apparently, the Fathom, which also goes to Cuba, may stop doing these impact cruises, although Carnival promises that passengers will have "voluntourism" opportunities on its other cruise lines. Carnival also plans to continue its trips to Cuba on a different line starting next summer.
This change in direction, if true, does not surprise me. The Fathom trips to the Dominican Republic have never sold out, even at prices that are one third the price of the Cuba trip- my husband and I paid less than $1000 between the two of us for a seven day cruise, and were upgraded because they had capacity. We learned from one of Fathom's partners on the ground that there have been layoffs in Puerto Plata because they don't have enough volunteers traveling on the ship. Fathom has even had to cancel some of the sailings altogether.
Although the trips have not been popular with the masses, everyone that I have met on this trip has raved about their activities (particularly the English teaching) and the interactions with the warm Dominican people. Carnival may have hoped that word of mouth would suffice and that they wouldn't need heavy marketing. It's possible that Carnival believed all of the surveys of millennials who claim they want to change the world. Either way, it appears that there won't be a cruise line dedicated to social impact after next summer. That will be a huge loss for Puerto Plata and for those who want this kind of experience and are willing to pay to work with reputable, caring organizations.
I'm pulling for Fathom to survive in some form and for this idea to spread to other cruise lines. My husband and I both found that teaching English to 5th graders in a crowded classroom in a rain storm was the best Thanksgiving we have ever spent. When the students and volunteers spoke about the expeierence at the end of today's tutoring, there wasn't a dry eye in the house. That may not be profitable for Carnival, but it was priceless for those of us who experienced it.