April 07, 2006
Social Entrepreneurship & the IPO
Posted by Elizabeth Brown

David Vogel of the University of California, Berkeley, has produced an interesting book on corporate social responsibility (CSR) entitled The Market for Virtue.  The goal of the book is “to assess the impact of civil regulation, or the market for virtue, on important corporate policies and practices that are associated with contemporary definitions of corporate social responsibility.” 

Vogel notes that a major driver of CSR recently is the argument that good corporate citizenship is good for business. He provides evidence that socially responsible firms are not necessarily more profitable or less profitable than firms that do not factor CSR concerns into their business decisions.  He argues that the business case for CSR is strongest in firms who have specifically made CSR part of their business plan for attracting customers, employees and investors and for highly visible international companies which are targeted by activists. Most businesses do not fall into either camp.

I was particularly interested in the book’s discussion of the phenomenon of social entrepreneurship (businesses started for the purpose of achieving social or environmental goals) and of socially responsible investing (SRI).  I am interested in these topics because I don’t think that law schools or business schools do enough to make their graduates aware of how much the goals of a private socially concerned business will change due to market forces if it decides to go public. 

Most business associations casebooks discuss why a corporation may want to go public for financial reasons.  I have not found one that discusses how going public may force the business to change or reprioritize its goals.  Businesses, like the Body Shop and Ben & Jerry’s, have weakened their commitments to the social and environmental goals that their founders embraced after they went public or were acquired by a public corporation. The market pressure for public companies to make the maximum profit possible usually is the force behind these shifts.  Social entrepreneurs cannot rely on SRI to save the businesses’ CSR commitments. Most SRI funds currently promise their clients that the fund will equal or exceed the rate of return of mainstream investment funds. SRI funds have not shown a willingness to invest in companies that earn less because they have chosen to be more responsible. As a result, some social entrepreneurs have refused to take their companies public or allow them to be acquired because they didn’t want the businesses to lose their ability to promote the social or environmental goals that lead the business to be founded in the first place.

I think that lawyers who are counseling social entrepreneurs need to be aware of these issues and need to bring it to their clients’ attention when helping their clients decide whether to take the business public or not. While I try to raise these issues in my Business Associations and Securities Regulations course (in part because some of my students are joint JD/MBAs and may be taking classes at the University of St. Thomas has a School of Entrepreneurship), I would be interested in learning to what extent corporate or business law courses at other law schools do this.  I also would be interested in hearing from lawyers about how they discuss these issues with their clients when they are making the decision about whether or not to go public or to allow the business to be acquired by a public company.

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