October 31, 2005
A Form of Organization Between Nonprofit and Public Corporation
Posted by geoffrey manne

Like Homer Simpson discovering a meal between breakfast and brunch, the British government has recently “discovered” an organizational form between charity and public company. It’s called a Community Interest Company or CIC.

If Henry Hansmann is right that the nondistribution constraint is the defining feature of nonprofit organizations, the CIC is essentially a nonprofit. (“A nonprofit organization is, in essence, an organization that is barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees.” 89 Yale L. J. 835, 835 (1980)). As the British government Fact Sheet on CICs notes, CICs are “restricted from distributing profits and assets to their members. This is known as an ‘asset lock’ – a transparent and entrenched way of ensuring that assets are used to benefit the community.”

What’s unique about the CIC is that it is nevertheless permitted to pay some dividends to investors. Quoth the British government Fact Sheet again, “In order to raise investment, CICs limited by shares will have the option of issuing shares that pay a dividend to investors. The dividend payable on these shares will be subject to a cap, set by the Regulator (after consultation), in order to protect the asset lock.”

There’s more, to be sure. See, e.g., in addition to the links above, here and here.

While there might be some benefit here in providing an off-the-rack form that could have been difficult to contract into otherwise (or not -- more on this in a later post), the form surely seems tailor made to deal with the CSR problem. (On which see here, here, here and here). If corporate directors want to maximize something other than shareholder interests, let them. But why not also make them (permit them to?) identify their organizations accordingly -- call it Whole Foods, CIC –- and subject them to dividend monitoring by regulators (and see how well that goes over).

Part of the stated purpose with the CIC is, in fact, branding, and this might be its real appeal: “The CIC legal form was specifically designed to provide a purpose-built legal framework and a ‘brand’ identity for social enterprises that want to adopt the limited company form.” It’s a way for “socially-conscious” corporations cheaply to identify their consciousness (and a way for the rest of us cheaply to avoid investing in them). (But I will note that some fascinating recent research by Anup Malani and Guy David has suggested that there may be less value in nonprofit branding than we might have thought, and the benefits of a CIC designation may be accordingly limited).

As I said, more on this topic in later posts . . . .

And before I go -- many thanks to Christine, Gordon and Vic for having me here.

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