The latest edition of The Economist has a fascinating article on “Chilecon Valley” that discusses the emergence of a startup community in Chile. The article focuses on a unique program of Startup Chile (a new Chilean governmental body) that gives grants to entrepreneurs in the United States and elsewhere to move to Chile for several months as they work on building their company and developing their technology. The grant recipients are then expected to network with, speak to, and mentor Chilean entrepreneurs.

The article touches on how law can foster or hinder the growth of a startup community, including by liberalizing immigration laws and allowing failed ventures to get a fresh start in bankruptcy.

Chile is making considerable efforts to diversify its economy beyond extractive industries like mining and agriculture. My spouse is co-organizing a fantastic three-day conference in Santiago from November 28 to December 1st that will focus on social entrepreneurship, sustainability, and innovation. The conference includes a fantastic line-up of speakers, including a keynote address by Al Gore, a pitch competition for social entrepreneurship startup companies, and some awesome music, including Devendra Banhart and Denver’s own Devotchka. Several panels will analyze the contribution of law to developing a entrepreneurial ecosystem in Chile.

You can check out my wife’s newly launched blog and website on the Chilean startup community here.

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Thank you Erik for allowing me to write a follow-on post to the Chick-fil-A/Corporate Social Responsibility Masters Forum.

As a native Georgian, I have followed the Chick-fil-A controversy closely.  My former roommate works in Chick-fil-A’s tax department and Chick-fil-A has been my favorite fast food restaurant for many years.  The food is incredibly good (KFC does not even come close) and Chick-fil-A is one of the few companies that still cares about providing excellent customer service.  As Usha noted, Chick-fil-A has a history of giving back to the community.  In addition to her list, Chick-fil-A tends to treat its retail and corporate employees very well, sponsors numerous community activities like local 5Ks, sponsors a values-based education curriculum for grades K-5 (that my wife used this year in her classrooms), and contributes to its WinShape Foundation, which does much more than donate to the organizations at the center of the controversy

The questions I want to raise in this post are:  (1) could Chick-fil-A become a social enterprise after the controversy?; and (2) if Chick-fil-A were already a social enterprise, how would the controversy have impacted the company differently?  These questions are tangentially related to the Masters Forum because some, including Professors Katz and Page (Indiana Law), have asked if social enterprise is the new CSR.

Currently, I am most interested in the benefit corporation form of social enterprise and the certified B corporation.  I explained the differences between the two here and I have posted a draft of my symposium article on benefit corporations here.

Under the law of the 11 states that have passed a benefit corporation statute, I see no serious obstacle to Chick-fil-A converting to a benefit corporation post-controversy.  Chick-fil-A would, in most states, simply need the vote of at least 2/3^rds of its shareholders and an amendment to its articles of incorporation stating that the company is a benefit corporation.  (For the record, I do not have any information to suggest Chick-fil-A is considering such a conversion).

Once a benefit corporation, however, Chick-fil-A would be required to pursue a “general public benefit” purpose, which is defined as:

• “[a] material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”

Shareholders may bring a “benefit enforcement proceeding” for failure to pursue a “general public benefit.”  You can read more about the proceeding in the model legislation, which has a number of very recent changes, some of which respond to issues raised in my draft article.  I need to update my draft accordingly.

Also, the benefit corporation statutes require that the “general public benefit” be accessed against a  “third party standard.”  While there are various third-party standard providers, B Lab, which provides the "certified B corporation" label, is the most well known.  I asked Jay Coen Gilbert, B Lab’s co-founder, my questions and he provided some interesting information:  

• (1) any company that meets B Lab’s standards can become a certified B corporation; (2) B Lab’s independent Standards Advisory Council reserves the right to not certify or de-certify any company that acts inconsistently with the values of the B Corp community as expressed in their Declaration of Interdependence; (3) to date, that right has never been exercised; and (4) there are a number of faith-based companies among the 574 certified B corps.

I, for one, would be very interested to see B Lab’s reaction if Chick-fil-A actually applied to be a certified B corp.  I also wonder whether being formed as a benefit corporation would make Chick-fil-A more (or less) vulnerable to shareholder lawsuits stemming from the controversy (if the company stock were more widely held).  

We at Regent University School of Law, along with a distinguished list of participants that include Glom Master Joan Heminway, will be exploring emerging issues in social enterprise on October 6.  Please join us at this symposium if you can make it to Virginia Beach.

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We have decided to convene a late summer forum of the Conglomerate Masters -- our roster of distinguished corporate and financial law professors -- to discuss the current state of corporate social responsibility.  In particular, we wanted to address the controversy over Chick-fil-A's corporate stance against same sex marriage and to use this Economist blog post as a jumping off-point. 

The Economist blogger contends that Chick-fil-A's culture is in fact a prime example of a firm embracing corporate social responsibility (or "CSR") - albeit not with the politics that one traditionally associates with that movement.  The blogger concludes that the Chick-fil-A example demonstrates that matters of social policy should best be left to democratic institutions.  He or she writes:

Matters of moral truth aside, what's the difference between buying a little social justice with your coffee and buying a little Christian traditionalism with your chicken? There is no difference. Which speaks to my proposition that CSR, when married to norms of ethical consumption, will inevitably incite bouts of culture-war strife. CSR with honest moral content, as opposed to anodyne public-relations campaigns about "values", is a recipe for the politicisation of production and sales. But if we also promote politicised consumption, we're asking consumers to punish companies whose ideas about social responsibility clash with our own. Or, to put it another way, CSR that takes moral disagreement and diversity seriously—that really isn't a way of using corporations as instruments for the enactment of progressive social change that voters can't be convinced to support—asks companies with controversial ideas about social responsibility to screw over their owners and creditors and employees for...what? 

It is a provocative argument.  Although one wonders if the author would have made this same series of arguments in the 1960s: would the author have encouraged civil rights protesters to abandon lunch-counter sit-ins and lobby state legislators instead?

Still, the Chick-fil-A example raises some disquieting questions for CSR, which our Masters may address.  These include:

Is corporate law the most effective or legitimate tool for social change?  If we are worried about environmental degradation, is the solution to broaden the stakeholders to whom a corporation must answer?  Or shouldn't we look instead to environmental law?

Is CSR viewpoint neutral?  When covering CSR in a Corporations course, I ask students whether social activists who are lobbying a corporation to change what they see as immoral employment practices, should be able to put their views to a shareholder vote?  Then I ask whether the answer would or should change based on whether the activists are looking to end racial or gender discrimination or whether they are lobbying a company to stop offering benefits to partners in same sex couples.

At the same time, the current state of legal affairs raises some disquieting questions for opponents of CSR too.  The conclusion in the Economist blog -- leave social policy to democratic institutions and public law -- has a long lineage.  It harkens back to Milton Friedman's arguments that corporations and the states do and should exist in separate spheres; if citizens want to change corporate policy, the argument goes, they should act through the political process and push through public regulation.

But, the separate spheres argument looks more and more outdated, as corporations influence and permeate the sphere of government.  Do arguments to leave regulating the public dimension of corporate behavior out of corporate law and governance -- and leave it to traditional legislative and regulatory bodies -- appear naive in a post-Citizens United (and post-public choice)world?

Also, do these same questions for proponents and critics of CSR apply in equal measure to the growing field of social entrepreneurship?  Can entrepreneurs do well while doing good?  Should we expect them too?  Is social entrepreneurship a workable, stable, and viewpoint neutral concept?  If so, what does it entail?  Does/should CSR apply equally to small businesses and startups as to global corporations?

We look forward to hearing from our Masters...

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There is still so much about benefit corporations (and social enterprise in general) that could be written about.  I was only able to scratch the surface during my short guest blogging stint, but I will continue to explore the issues in an article I am currently writing for American University’s Business Law Review.  I will provide the Glom with an SSRN-link when I post the article.  

Also, on Saturday, October 6, 2012, our main law review here at Regent University School of Law is hosting a symposium on social enterprise.  The symposium will be held on our beautiful campus in Virginia Beach, VA (pictured below).  We already have an impressive group confirmed (listed below) and plan to add one or two additional speakers. 

• Cass Brewer (Georgia State Law)
• Bill Callison (partner, Faegre Baker Daniels)
• Joan Heminway (Tennessee Law)
• Lyman Johnson (Washington & Lee Law)
• Michael Pirron (CEO of Impact Makers, a founding certified B Corporation in Virginia)
• Dana Brakman Reiser (Brooklyn Law)
• Kyle Westaway (founder of Westaway Law and co-founder of social enterprise Biographe)

Each of our guests brings a unique perspective and an incredible amount of knowledge to the symposium.  I linked to their profiles because I would have to do 7 separate posts to even touch on all of their many accomplishments.  Two or three Regent law professors (including me) will moderate and contribute.

We at Regent University School of Law are incredibly excited about the upcoming symposium (even if it is still months away) and hope some of the readers will join us.  I will provide more information about the symposium to the permanent Glom bloggers when we get closer to the date.

Feel free to e-mail our excellent symposium editor Rachel Bauer at symposium[at]regent.edu if you would like more information.

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A benefit corporation must "have a purpose of creating general public benefit” and must "pursue or create" a "general public benefit."  The model benefit corporation legislation defines "general public benefit" as:

• "material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation." 

Some states use that exact wording; some have relatively minor variations.  Each benefit corporation may adopt one or more "specific public benefit purposes" by amending its articles, but "[t]he identification of a specific public benefit does not limit the obligation to create a general public benefit."

Should the "general public benefit" be mandatory or would it be better to simply expressly allow more flexibility in corporate purpose?  California evidently could not agree on the answer, as it passed both a benefit corporation statute and a "flexible purpose corporation" statute. 

I understand the argument of the proponents of the benefit corporation statutes and its "general public purpose" mandate to be roughly:

• We want companies that are pursuing "good" in all areas (or that are at least "good" companies if taken as a whole).  For example, we don’t want companies that are treating their employees well, but trashing the environment.

I am sympathetic to that argument as it applies to certifications, but not as it applies to corporate statutes.  If B Lab only wants to certify “good” companies, fine: create your criteria, evaluate the companies and don’t certify any companies that aren’t "good" - taken as a whole.

But what if a corporation’s focus is narrower?  What if the managers and shareholders of the corporation care about shareholder wealth and the homeless, but not the environment?  Personally, I would prefer a corporation that thinks seriously about shareholder wealth and [insert social or environmental benefit], to the corporation that focuses only on shareholder wealth.

Again, I appreciate all of the excellent comments from this post that noted that focusing beyond shareholder wealth can already (often) be done in the corporate context and in the LLC context.  But in practice, I think many of our corporations myopically focus on shareholder wealth maximization. 

In any event, the question from this current post is simply:  Should we mandate a "general public benefit" or just expressly allow more flexibility in our statutes?  Personally, I am leaning in favor of express flexibility.  I would save mandates of this type for brands like B Lab’s certification.  These brands might become powerful enough to shift to the new paradigm the benefit corporation legislation is driving at and that is addressed here. 

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Today, Etsy (a website/company my wife loves) announced that it has become a certified B corporation.

The news is here.

In the announcement, Etsy explains why they decided to become a certified B corporation:

• Why did we become B Corp certified? We believe that business has a higher social purpose beyond simply profit. The B Corp assessment gives us a framework to measure Etsy’s success against rigorous values and responsible practices as we scale as a company. Albert Wenger of Union Square Ventures, a longtime Etsy investor and advisor, puts it this way: “We believe that the best long-term stewards of Internet-based networks and marketplaces will focus on value creation for all participants instead of solely on shareholders. Benefit corporations provide a legal foundation perfectly supporting this much more comprehensive outlook.”

Notice the confusion of the terms.  Certified B corporations, which are the focus of this announcement, are separate from the benefit corporation statutes that "provide a legal foundation."  This is part of the confusion I address in a previous post.

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In addition to redirecting the focus of directors to stakeholders other than just shareholders, marketing/branding has been discussed as a major benefit of organizing under the benefit corporation statutes. (See, e.g., Allen Bromberger, a leading attorney in the social enterprise space, who writes:  “Many observers believe that the advantages benefit corporation status deliver are brand-related.”)

Personally, I don’t think marketing/branding value is a substantial benefit of merely becoming a benefit corporation.  (I will leave for the comments the normative question of whether the states should be intentionally engaged in the entity branding business at all.)

The benefit corporation statutes do mandate some additional transparency through the required annual benefit report, but the statutes do little to ensure a valuable brand. If I were an investor looking for “blended value” – part monetary return, part “warm glow ” – the benefit corporation statutes alone would not convince me that I am going to get either.

For example, benefit corporations must be measured against a “third party standard,” but the statutes do not say much about the standard and how it should measure the "benefit." The model legislation states that the third party standard must be comprehensive, independent and credible (words lawyers could have fun defining).  But those requirements are not in a number of the actual statutes and even if they are included, investors would still have to do due diligence on the specifics of each third party standard, which ruins most of the benefits of a brand.  One third party standard could be environmentally heavy, one could tilt towards employees, one could be bent liberal, one could be bent conservative, etc.  You just aren't exactly sure what you will get in a benefit corporation.

The branding value on the sales end of things is similarly low. Right now, few customers know what benefit corporations are and as they become better informed they will realize that the benefit corporation statutes do not guarantee them that much.

The B Lab certification and other similar certifications may, however, have some significant branding value. (And there may be a halo effect for non-certified benefit corporations until the ignorance addressed here disappears). If certain investors trust B Lab and agree with its standards, then those investors can rely on the certified B corp. brand.  Also, as noted in an earlier post, I have heard, anecdotally, that being a part of the certified B corporation community and similar communities (like the L3C community) can be quite valuable to companies because of the networking opportunities, services, discounts and resources available to members of those communities.

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In my last post I discussed the traditional corporate paradigm, which focuses on shareholder wealth maximization. Even with my caveats, I received some push-back. I encourage you to read the thoughtful comments (many arguing against the shareholder wealth maximization norm) and Professor Bainbridge’s impressive 7 responsive, detailed posts, linked to here (many defending the shareholder wealth maximization norm, at least as it applies to directors' duties).

While the distinguished commenters represented a wide range of views, they did appear to acknowledge the existence of a persistent belief that U.S. corporate law (primarily DE) directs for-profit directors to focus on shareholder wealth maximization. That persistent belief might be as powerful as any “reality.” (Bill Callison referred to it as the "conventional wisdom.")  Just ask your average corporate director to explain the end to which the law says his/her powers should be employed. I would bet a pretty penny that the vast majority will mention some form of the phrase “shareholder wealth maximization.”

Benefit corporation statutes are designed to break the persistent belief that directors should primarily focus on shareholder wealth maximization in their governance of corporations. 

Outside of breaking this persistent belief, I agree with my commenters that social enterprise statutes, including the benefit corporation statutes, may not be necessary. As Professor Manesh correctly noted in the comments, the Delaware LLC is flexible enough to meet many, if not all, of a social entrepreneurs’ needs. (See, e.g., Professor Cass Brewer's Using LLCs for Quasi-Charitable Endeavors (a/k/a "Social Enterprise")). In some states, with more flexible notions as to the beneficiaries of director fiduciary duties, the corporate form might also be an appropriate vehicle for social entrepreneurs.

The designers of the benefit corporation statutes leave the old corporate paradigm behind and make crystal clear the importance of non-shareholder stakeholders  The benefit corporation statutes mandate the consideration of various corporate stakeholders in directorial decisions. I will save addressing the question of whether the mandate is wise or realistic for another time.  Also, I leave open the possibility that there are more elegant solutions to the persistent belief problem than the current benefit corporation statutes. 

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Volumes have been written on corporate purpose governance.  A blog post cannot do justice to even a fraction of the writing in this space.  However, I hope we can agree, as a matter of positive Delaware corporate law (and the law of states that follow Delaware’s lead), that the primary purpose of the traditional corporation is to maximize shareholder wealth.  Some would argue that the guiding principle of corporate governance is shareholder wealth maximization.

In a relatively recent Delaware Court of Chancery case, involving craigslist and its minority shareholder eBay, (cited ad nauseam in social enterprise circles: eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010)) former-Chancellor Chandler ordered rescission of certain of craiglist’s takeover defenses and stated:

• Promoting, protecting, or pursuing nonstockholder considerations must lead at some point to value for stockholders. When director decisions are reviewed under the business judgment rule, this Court will not question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value. Under the Unocal standard, however, the directors must act within the range of reasonableness.
• Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
• Directors of a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistently with the directors' fiduciary duties under Delaware law.

Too many promoters of benefit corporations gloss over (or ignore) the fact that the eBay case was decided in the narrow takeover defense context and evaluated under the enhanced scrutiny of Unocal.  With most day-to-day decisions, the business judgment rule obviously provides significant cover for directors who wish to do social good in the corporate context.  Under the facts of eBay, however, the benefit corporation could have been useful to the founders of craigslist and could have altered the outcome of the case (if Delaware had a benefit corporation statute). 

To me, the eBay case is Bainbridgian.  (And as a new academic, I find myself becoming more and more Bainbridgian as well).  The case spells out what I am calling the "traditional paradigm" of corporate law.  In eBay, former-Chancellor Chandler appears to recognize the shareholder wealth maximization norm, but also recognizes the strength of the abstention version of the business judgment rule.

Social entrepreneurs do not want to live under the rule of shareholder wealth maximization, even if they will be left alone by courts, in most situations, due to the business judgment rule.

In my next post, I will discuss the new paradigm created by the benefit corporation statutes.

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Before jumping into the “corporate governance” section of my benefit corporation posts, I want to make clear something that most of the readers probably already know, but that some in the popular media consistently fail to articulate.  There is a difference between “certified B corporations” and “benefit corporations,” even though both are sometimes referred to as “B Corps.”

Certified B corporations are certified by the nonprofit organization B Lab.  B Lab likens its certification of companies to the certification of coffee as “Fair Trade” or the certification of buildings as “LEED certified."  A company can take the initial B Impact Assessment for free. Becoming a certified B corporation, however, is not free (though I have heard anecdotally that the benefits of being part of the certified B corporation community can exceed the cost of the certification fees because B Lab has negotiated significant discounts with various vendors).  Interested readers can find details about the process of becoming a certified B corporation here. 

Benefit corporations are formed under the state law of one of the seven states that have passed benefit corporation statutes (California, Hawaii, Maryland, New Jersey, New York, Vermont and my state of residence - Virginia.)  (See my chart comparing the benefit corporation state statutes here.)  Benefit corporations must be measured against a “third party standard” but the standard does not have to be B Lab’s standard.   

A company can be both a certified B corporation and a benefit corporation, but there are plenty of examples of companies that are one but not the other.  Currently, there are 521 certified B corporations with total revenue of about $2.9 billion.  I am trying to track down the exact number of benefit corporations, but everyone’s best estimate seems to between 50 and 100 total benefit corporations.  Remember, however, that all of the statutes are relatively new and that both the California and New York statutes just became effective a few months ago.

Unless otherwise noted, my posts will focus on "benefit corporations."

Bonus tip: It is "B Lab" not "B Labs"

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    Thank you for the introduction, Usha.  I read the Conglomerate as a judicial clerk and as a practitioner; and I have continued reading the blog as a new academic. I appreciate the invitation and opportunity to guest blog.

    As Usha noted, I will be blogging primarily about social enterprise.  A few weeks ago, I presented on one of the main social enterprise forms in the U.S. - benefit corporations - at a wonderful symposium hosted by American University Washington College of Law.

    While benefit corporations have not yet received the same severe beatings that its social enterprise cousin the L3C has in law reviews (see, e.g., Daniel Kleinberger, Carter Bishop and Bill Callison & Allan Vestal), most academics I know express doubt that the benefit corporation form will be significantly useful.  I maintain a healthy skepticism and recognize a number of areas that could use improvement, but I am more optimistic than most.  For readers interested benefit corporations, I recommend Professor Dana Brakman Reiser’s article Benefit Corporations -- A Sustainable Form of Organization?, 46 Wake Forest L. Rev. 591 (2011).

    Currently, I have an extremely rough draft of the article I owe American University’s Business Law Review by July.  I am still making structural changes to the article.  One such change involves my recent decision to tackle the admittedly difficult question of whether benefit corporations will be beneficial.  Originally, I had decided to sidestep this question and focus only on how benefit corporations should be governed and how we might improve on the seven state statutes that have been passed. 

    In subsequent blog posts (and in my forthcoming article), I will examine the purported usefulness of the benefit corporation as outlined in the Benefit Corporation White Paper.  The White Paper states that the benefit corporation legislation was drafted to address, among other things, corporate purpose, accountability and transparency.  I plan to address each part of the trio in separate posts.  

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Last Friday, I had the great opportunity to present at the UC-Irvine Business Law as Public Interest Law Symposium. I was very happy to talk about microfinance and my course, Law of Microfinance, but I tried to put microfinance in the broader context of social entrepreneurship.

In talking about social entrepreneurship, I tried to distinguish it from the study of and advocacy for corporate social responsibility. To be honest, I've just never gotten that excited about teaching or writing in the area of CSR. But, I am excited about social entrepreneurship, a term I will use here to describe corporations whose primary product seeks to help solve a current social problem. So, here are some comparisons:

1. CSR focuses on companies that make widgets, but who do so in an enlightened way; Social entrepreneurship envisions companies that make a completely different kind of widget. If I advocate CSR, then I like companies who are just ordinary for-profit companies making everyday products for average consumers. In fact, most of the companies who are heralded for "good CSR" make products for rich people or at least premium products that are a splurge for the average person: Ben & Jerry's ice cream; Burt's Bees; Toms shoes. In making these products, which are more expensive than their competitors, they brand themselves as "giving back" or being enlightened to employees, communities or the environment. These companies don't seem to be losing money by "doing well and doing good," though their profit margins arguably might be lower than otherwise.

Social entrepreneurs start for-profit companies in a sphere usually inhabited only by not-for-profits and try to do something that can't be done by NGOs because of capital scarcity or knowhow scarcity. Social E's make a different kind of widget that isn't needed by rich people, but by the needy: affordable clean  water, light sources, hygiene products, sanitation, etc.

2.  CSR works with a perceived tension between shareholders (who presumably want profits) and stakeholders (employees, communities, environment); SE focuses on the client/customer.  SE isn't about selling something and giving a percentage of that to "the needy" or having great benefits of employees or trying to have "green" office buildings.  SE seeks to fill true needs of the needy at an affordable cost.  I have no reason to believe that the founder of Toms shoes isn't an amazing person.  And, he may be laughing that he's convinced young women that it's hip to buy extremely low-cost shoes at a high multiple of that cost so that an identical pair can be given to poor children in foreign countries.  SE tries to figure out how to make a shoe that a poor child can buy for $1.

3.  For shareholders interested in social investing, CSR is fine, but it has no pre-commitment device at all.  To avoid "mission drift," then investing in a company that has as its business plan "doing good," not "doing well and doing good, seems better."  If you invest in a company that says it makes "everyday clothing with a conscience" or food "sourced locally" or "free trade" coffee, you have very little recourse if the company decides that this way is too expensive and so changes course.  If you invest in a company that is producing low-cost filtration systems to sell clean water at very low cost to communities in Africa, then that company is probably not going to start selling cosmetics in the Western World.  Mission drift is easy when a company is making mainstream products, with a non-legal commitment to do so in an enlightened way.  In an SE company, mission drift would be the same as a tectonic shift.

4.  CSR seems to harnass public opinions and preferences to reform profit-seeking corporations; SE seeks to harnass profit-seeking capital to reform problems the public ignores. 

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Today's WSJ discusses a new corporate form.  Yes, you read that right, a new corporate form!  A few states, beginning with my home state Maryland in October 2010, now allow firms to incorporate as benefit corporations.  As Glom readers know, I'm interested in how entity choice can be an expression of identity.  I was eager to learn more.

So what are benefit corporations?  Although they are for-profit entities, they have as a purpose creating a "general public benefit": '"a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promotes a combination of specific public benefits."  "Specific public benefits" include, among other activities,  providing beneficial products or services, promoting economic opportunity beyond regular job-creation, preserving the environment, improving human health, and promoting the arts, sciences, or advancement of knowledge.  Each year the corporations send shareholders an annual benefit report describing the benefits they have accomplished.

Ordinary corporations become benefit corporations by amending their charters, and according to the WSJ "hundreds of existing businesses" plan to reincorporate as benefit corporations in the coming months--Patagonia already has, and Ben & Jerry's will soon. 

On one hand, it's hard to see the need for the benefit corporation.  The WSJ quotes William Clark, a partner at Drinker, Biddle & Reath LLP, observing that the form's structure "tells directors that it's their duty to consider other interests, rather than say they 'may' consider them."   Sure, this codifies a rejection of shareholder wealth maximization as a governing principle, but all corporate law scholars know that shareholder wealth maximization is squishy. Garden variety corporations can donate to charity or go "green" and plausibly claim that they are, ultimately, increasing shareholder wealth. So why do we need a benefit corporation?  Charles Elson doesn't think we do--he's quoted as saying "for an investor, this is a terrible idea." 

I'm not sure if we need benefit corporations either, but I see the appeal. Again, I think entity matters.  Choosing the benefit corporation form is a kind of credible commitment--it signals to shareholders more powerfully than any slogan can that maximizing wealth isn't the ultimate goal of this particular corporation.  I think, at first blush at least, that this idea sounds a whole lot better than the L3C.  Like Bill Callison, I'm skeptical of that form--largely because it presupposes non-profit minded investors living cheek by jowl with investors who are looking to make a market return. Not only does that seems like a recipe for owner vs. owner conflict--it also dilutes the "warm glow" for nonprofit participants to know that some of their fellows are just looking to make a buck.

In contrast, with the benefit corporation all shareholders are on the same page.  The public benefit corporation won't generate the same kind of warm glow that a nonprofit would, but it may generate enough to succeed.  We'll see...

 Update: J. Haskell Murray has a chart comparing the various state benefit corporation statutes.

Update 2: Bill Callison reminds me that he posted on benefit corps last year.  Sorry, Bill--I'm getting old!

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Two economists at the Kauffman Foundation, Robert Litan and Tim Kane, have started Growthology, a new blog on entrepreneurship and economic growth.  Gotta love the name.  The Kauffman Foundation announcement is here.

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On June 15, Bill Gates announced that he will transition away from his day-to-day activities with Microsoft to a full-time role with the Bill and Melinda Gates Foundation. Yesterday, Warren Buffett announced that he will donate much of his vast fortune to the Gates Foundation, with smaller amounts going to various Buffett foundations.

Prior to Buffet's gift, which will be made in installments, the Gates Foundation had assets of nearly $30 billion -- over double the amount in the next largest philanthropic foundation in the U.S. (Ford Foundation). Last year, the Gates Foundation gave $1.25 billion in grants -- much more than any other foundation -- and the Buffett gift eventually will more than double that amount. According to Buffet, "We agreed with Andrew Carnegie, who said that huge fortunes that flow in large part from society should in large part be returned to society."

I started writing this post many hours ago, in the wee hours of the morning, but I got stuck right here. What are we to think of this? There is, of course, a substantial "wow" factor associated with these developments. Mostly, we are wowed that anyone has $30 billion to give away, but I am also wowed that Bill Gates would devote his full time and energy to his foundation. That is impressive.

But the big story here has to do with the role of philanthropic foundations in performing what might be considered "governmental" functions. Peter Dobkin Hall has written extensively about philanthropy in the U.S., and his essay "Philanthropy, The Welfare State, and the Transformation of American Public and Private Institutions, 1945-2000" offers some interesting thoughts that seem relevant here:

Constrained by deep-seated hostility to "big government," policymakers and legislators devised governmental mechanisms that enabled them to achieve these ends without creating European-style central state bureaucracies. While centralizing revenue gathering (through universalization of income taxation) and policymaking in the federal government, the actual tasks of implementing policies was allocated to states, localities, and private sector actors.

Among those policies, of course, is tax policy, which encourages the formation of foundations by people like Gates and Buffett. The NYT noted that the Gates Foundation distributed over twice as much last year as the United Nations Educational, Scientific and Cultural Organization (UNESCO). That's before the Buffett gift!

All of which makes me wonder: is this a rational way to organize the world?

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