September 21, 2011
“Social Enterprise” and Benefit Corporations
Posted by Bill Callison

 “Social enterprise” has been defined as “’an organization or venture that achieves its primary social or environmental mission using business methods,’ typically by operating a revenue-generating business.”  (See Katz & Page, The Role of Social Enterprise, 35 Vt. L. Rev. 59 (2010)).  Nonprofits generally address social problems.  For-profits generally deal in a world of shareholder/owner wealth maximization.  Some perceive that neither form (Platonic or otherwise) fully addresses the needs of “social entrepreneurs,” who “seek social change on a large scale, characteristically through earned income strategies.”  (Katz & Page).

And up pop things like L3Cs (which I dissed in a prior posting) and “benefit corporations” (which I gingerly embrace – in a form different from that proposed by B Labs – today).

 Fundamentally, a benefit corporation is a corporation that allows a modification of shareholder primacy/shareholder wealth maximization principles.  A hoary chestnut that has been debated through the ages (see e.g., Green, Shareholders as Stakeholders:  Changing Metaphors of Corporate Governance, 50 Wash. & Lee L. Rev. 1409 (1993); Bainbridge, In Defense of the Shareholder Wealth Maximization Norm:  A Reply to Professor Green, 50 Wash. & Lee L. Rev. 1423 (1993); Page & Katz, Is Social Enterprise the New Corporate Social Responsibility?, 34 Seattle U.L. Rev. 1351 (2011); and countless others).  Since I am a pseudo-academic in these postings I now get to use the two key words of all academic discussions – “positive” “normative”.  Enough academic speak.

 Although in my view the best way to allow “social enterprise” in a corporation form is to craft statutory language allowing shareholders (presumably through the articles) to modify director and officer fiduciary standards and enable the corporation to confer social benefits (as defined in the provision, or as left broadly undefined), that may reduce shareholder wealth, benefit corporation legislation appears to move in a more complex direction.  My good friend Bob Keatinge refers to corporate law as a Procrustean Bed -- I needed to Google it, but it basically means one size fits all, and never mind the limbs that need to be cut off to make the body fit.  Here, I think the solution is to allow the shareholders to agree on enlarging the sphere of things directors can consider (make the bed bigger, so to speak).  I am a simple guy, and complex solutions to what seem to me to be simple problems give me heartburn.

The principal promoter of benefit corporation legislation is B Labs.  A copy of a “model” benefit corporation statute sponsored by B Labs can be found at http://www.bcorporation.net/publicpolicy.  Several years ago B labs suggested that Colorado explore and adopt the first benefit corporation legislation.  B Labs representatives met with the Colorado corporate laws drafting committee, which ultimately found the legislation undesirable (i.e., problem-ridden) and demurred.  Undaunted (and after other states climbed onto the bandwagon), B Labs found Colorado support elsewhere and attempted to push legislation in the 2011 session.  The Colorado corporate committee (which has numerous sophisticated, thoughtful, and long-term players) worked on a compromise bill, and ultimately nothing passed in 2011.  I suspect that Mrs. Lincoln may get to see this play again in Denver in the future.

 The Colorado drafting committee identified numerous issues in the B Labs legislation, but ultimately focused on three fundamental disagreements with the B Labs proposed legislation.

1.         The B Labs legislation did not afford dissenters’ rights to shareholders of existing corporations that elect to become a benefit corporation (thereby changing the fundamental nature of the investment).  The Colorado-based alternative would have provided dissenters’ rights.  I think B Labs may have come around on this issue.

 2.         The B Labs bill contained a  definition of “public benefit,” which is the essence of the benefit corporation, required benefit corporations to meet specific third-party standards which fundamentally are  established by B Labs.  We perceived a problem with having B Labs (or the legislature for that matter) become the arbiter of social responsibility, and allowing it to profit from the certification process.  We believed that it is the shareholders of the corporation (and not some outside force) that should define what “public benefit” means, the specific public benefit sought, and how the benefit should be pursued – for example, limiting the social benefit to cleaning the river behind the plant as opposed to promoting global environmental health.  Truth, Justice and the American Way may be a standard for Superman, but it might not universally fit the bill for corporations.

 3.         The B Labs bill provided a new and muddled standard for directors’ action that included requiring them to consider various constituencies’ interests:  employees; customers; “community and societal considerations,” including communities in which customers and suppliers are located; and the local and global environment.  The proposed statute provided that directors could not give priority to shareholder interests over those of other constituencies – thereby providing directors a defense if they chose to favor another constituency over shareholders.  “Hey; global environmental considerations forced us to buy new Teslas for key people.” Again, the Colorado drafters did not think such heavy-handed protections were warranted.

Fundamentally, the Colorado committee encouraged a bottom-up, grass roots, shareholder-driven approach.  The national forces wanted a top-down, paternalistic approach.  The verdict is still out.

 Moral to the story:  When people approach you with “socially beneficial” business organization gifts, unwrap them (and try the clothes on) before accepting.  You may find that the gift is a mule rather than a horse, and perhaps one does not want to look in a mule’s mouth.

 Another moral to the story:  Colorado’s corporate legislative drafting group includes at least two very good academics (and more, if one defines the term broadly), and their participation in the process was invaluable.  They help us unbundle and understand problems from a unique perspective.  Be involved. 

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