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Tracking Changes in Social Enterprise Law

social-enterprise-law-tracker-01-largeThere’s more than one way to run a mission-driven business. Benefit corporations are allowed in 30 states and the District of Columbia. Two of those states (Maryland and Oregon) also allow benefit limited liability corporations (BLLCs). Social purpose corporations (SPCs) are legal in four states; low-profit limited liability companies (L3Cs) are legal in eight. More forms are in use outside the United States. And we’re not even talking about Certified B Corps.

Sorting this out is the mission of Social Enterprise Law Tracker, a new project from two members of New York University’s Law and Social Enterprise Fellowship program.   “People are approaching the task of running social enterprises in different ways. Several different forms are available in the US, and other countries have even more,” says Rob Esposito, an attorney at Drinker Biddle Reath who launched the site with Shawn Pelsinger in May 2015.

It’s like IPhone vs. Android, VHS vs. Betamax, or alternating vs. direct current.   Social enterprise laws are new. Vermont passed the first L3C law in 2008, and Maryland was the first to allow benefit corporations in 2010. Whenever a big idea emerges, it’s common for several variations on the theme to compete before the market chooses a standard format. Until that happens, there’s a lot of confusion.

The site features an ingenious interactive map (above) that shows how states have passed, considered, failed, and repealed social enterprise laws each year from 2009 to 2016. It has separate maps for benefit corporations, L3Cs, SPCs, and BLLCs, and each map connects to spreadsheets containing detailed information and links for each law. The site also includes links to resources in the field, and it’s free.

Benefit corporations are the most common legal form for social enterprise, but the debate is far from over. The states of Washington and Texas allow SPCs but do not allow benefit corporations. Georgia and Ohio allow neither, but their lawmakers are considering both. Wisconsin’s legislature is currently considering a L3C law. But North Carolina has repealed their L3C law, and this legislation has failed in 18 other states.

L3Cs are faltering because tax laws are unclear, says Esposito. They are for-profit corporations, but they can also accept grants from private foundations in order to advance their social missions. The grants are given under an Internal Revenue Service category called a Program Related Investment (PRI). But the IRS has not published enough detail about which kinds of giving qualify as PRIs, making it difficult and risky for foundations to give in this way. Senator Cory Gardner (R-CO) has introduced a law defining PRIs (S. 2313), but so far it has not passed. In the meantime, says Esposito, “benefit corporations are sort of like Facebook, and L3Cs are like Myspace.”

The next step for the site is mapping social enterprise law in other parts of the world. “By doing the US, we’ve finished about half the work,” says Pelsinger. “But there is a tremendous amount of activity in Europe.” You can see hints of what’s going on in Greece, France, the UK, Spain, and other countries at the site of The European Social Enterprise Law Association (ESELA), which was founded by the European Commission three years ago. But SocEntLawTracker.org is easy to understand, and the ESELA site is not.

Esposito and Pelsinger have built and maintained the site with support from NYU’s Law School, using their own network of contacts to keep up with what’s going on in social enterprise law. They are eager to expand the network by accumulating tips and leads from interested visitors—so check it out.

Arizona CEO: Benefit Corp “A Big Competitive Advantage”

7 (1)Adam (l) and Murray Goodman. Image provided.

“I don’t think our customers really care that we’re a benefit corporation,” says Adam Goodman, the third-generation owner of Goodmans Interior Structures, a furniture and design firm for large commercial clients in the Southwest with annual sales of more than $60 million. “They’re mostly looking at the price and our service, not our legal status. Customer service drives our business, because commercial design deals are hugely complex transactions.”

The company re-wrote its charter in January 2015, the month Arizona’s benefit corporation law took effect. Its mission statement begins with “we will change our community” and goes on for several paragraphs that are full of lofty sentiment. The statement is painted on the wall of the firm’s home office in Phoenix, and employees are encouraged to volunteer at not-for-profit organizations on company time. But you won’t find the mission statement on the company’s website.

“Becoming a benefit corporation was a way of validating that we were doing the right things for the right reasons,” says Goodman. “Our values come mostly from my family.”

Goodman’s grandparents opened their store in Phoenix in 1954. Murray Goodman, Adam’s father, ran the business before Adam took over around 2003. Adam says that his dad built the business by cultivating trust and long-term relationships with customers.

Adam cites three events that helped him chart his own course as CEO. “I was talking to a potential customer who said that he was always going to go with the cheapest price. That really riled me up,” he says. “I saw that the only way for me to compete was to attract and retain the very best people.

“Around that time, one of our competitors was exposed in the sleaziest kind of scandal you can imagine. It made me wonder how that might reflect on us. And then, at a dealer’s meeting, I got into a casual conversation with the CEO of Herman Miller. He said that the most important thing a CEO can do is provide a sense of purpose for employees, so they feel that they are part of something bigger than themselves. That struck a chord.”

Herman Miller, a global company with sales of more than $2 billion, manufactures about three-quarters of the furniture Goodmans sells. The company has received dozens of awards for being a good environmental steward and treating its employees well, but Adam says that its policies often don’t work for a company his size. He had to find his own way.

Adam announced the company’s new mission statement at the end of 2005 and told his employees that their future prosperity would come from making a deep commitment to the welfare of their communities. He made significant contributions to local not-for-profits and emphasized team-building activities, like occasional happy hours, inside the office.

Not everyone was thrilled with the change.  “A lot of people were like, ‘Can’t we just sell furniture?’ One guy said that he wished he’d worn his boots to the office because the bullshit was so deep,” he says. “I faced a lot of cynicism.” But the company’s leadership team supported the move, so he pushed ahead.

Then the Great Recession forced Goodmans to make significant layoffs. “All the people who made it through the layoffs — our best people — were also on board with the mission,” Adam says. “I think it’s because purpose-driven employees give our customers a better experience.”

Carrying the banner for community-oriented capitalism in Arizona isn’t as lonely as it used to be, he continues. His cousin, Stuart Goodman, led the lobbying effort that convinced the conservative Arizona legislature to pass a strong benefit corporation law in 2014.   “Now I talk to people all the time who are interested in going this route,” he says. “They see the business case for it.

“We regularly get calls from highly qualified job applicants who have heard about us and want to work for us. They don’t even know if we’re hiring. They just want to be part of what we’re doing. That gives us a big competitive advantage.”

 

Bipartisan Support for Benefit Corp Law in Arizona

state-seal

The Arizona legislature is currently considering a bill that would block any Presidential executive order it deems unconstitutional. A few years ago, they passed a law allowing police to question anyone suspected of being an illegal immigrant. The Republican Party has controlled the governor’s office and both legislative chambers since 2009, and conspiracy theories are popular discussion topics in the State Capitol.

Yet in 2015, the Arizona Legislature also enacted a law allowing companies to organize as benefit corporations, which are required to pursue a social benefit and be good environmental stewards while they also make a profit. The laws passed with bipartisan support, according to Stuart Goodman, the lobbyist who led the campaign.

GoodmanR_0Seed Spot, a business incubator in Phoenix, hired Goodman to push a bill that was sponsored by a moderate Republican. “We had two messages,” he says. “One was that this law allows the private sector to provide services ordinarily provided by the public sector. Let’s say that a company wanted to provide meals to the elderly as its social benefit. That will reduce the burden on government.

“Our second argument was freedom of choice. This law protects entrepreneurs who want to pursue social and environmental benefits from shareholders who might sue them for not maximizing short-term profits.”

Support for the law was “a mixed bag,” says Goodman. “The most conservative and the most liberal legislators both opposed it.” Republican Carl Seel was against the bill because he thought it would attract liberals to Arizona, says Goodman. Democrat Debbie McCune Davis voted no because she thought it would be an excuse to further cut social services, and also because she thought corporations didn’t deserve any more legal protections than they already had.

Despite these objections, says Goodman, “A majority came together that was pragmatic and pro-business, and the governor agreed.”

The law has been in effect since January 2015. Five benefit corporations are currently active in Arizona, along with ten Certified B Corps, and more are on the way. “I just talked to a former customer who is considering changing his status,” says Adam Goodman, CEO of Goodmans Interior Structures (and Stuart’s cousin), a benefit corporation based in Phoenix. “People talk to me about it all the time.”

Benefit Vs. Social Purpose: Small Distinction, Big Difference

Corporate lawyers often react negatively to benefit corporations. “I thought the idea was kooky at the first meeting,” says William Clark, a partner at Drinker Biddle & Reath. “The law is impractical and unworkable,” says Michael Hutchings, a partner at DLA Piper in Seattle.

Clark’s first meeting happened in late 2008. His client was Jay Coen Gilbert, the co-founder of B Lab, who hired him to write model legislation for an entirely new kind of corporate form—a benefit corporation, which requires directors to pursue a social mission and minimize their environmental impact while also making a profit.

Gilbert believed in a philosophy of business known as “triple bottom line,” and he wanted a law that would protect business directors who chose to operate their firms in this way.

clark-william-hAt first, Clark was skeptical.  “Lawyers are trained to give directors as much flexibility as possible. We don’t like to restrict what directors can do,” he says. “So why would we require that directors put a triple bottom line in their charter? Why require annual reports on social performance? Why not just make it something you’re allowed to pursue if you want to, instead of requiring it?”

Benefit corporation laws make the triple bottom line into an enforceable contract. They require directors to do things, and they give shareholders enforcement power if directors fail to do them.

In legal terms, laws like these are “prescriptive.” But corporate lawyers usually prefer laws that are “permissive”—those that allow directors to take certain actions if they choose to, without giving any power away to shareholders.

Clark eventually became a convert. He wrote the model legislation Gilbert asked for, and the idea spread quickly. Today, 31 states plus the District of Columbia, Puerto Rico, and Italy allow benefit corporations. But Clark says that most corporate lawyers still prefer permissive laws, and their resistance has diluted the movement’s impact in several states.

michael_hutchingsMichael Hutchings learned about benefit corporations in 2009, when the law came up at the Washington State Bar Association’s Corporate Act Revision Committee, on which he serves. “Our debate was over whether to recommend anything at all,” he said. “We concluded that this corporate form is not necessary for a company that wants to pursue social good.”

The benefit corporation law was a non-starter, he says. “It would be impossible to consider social benefit in every corporate decision, and it would also be impossible to show shareholders that you did,” he says. The committee also thought it overly prescriptive to require considering environmental impact as well as social benefit, and to require an independent third party such as B Lab to make a social audit.

“Legally, it’s unworkable,” he says. “And we didn’t want to pass a law because it’s a piece of someone’s marketing plan.”

The permissive alternative to a benefit corporation law is called a “flexible purpose” or “social purpose” corporation (SPC). This kind of charter allows corporations to designate one or more social purposes. Although it requires their directors to consider these social purposes when making management decisions and to issue an annual social report, it does not require them to consider their environmental impacts, hire an auditor, or release the report to the public.

Washington passed a SPC law in 2012, says Hutchings, because “there was a growing demand for it, and the state bar association thought it might help entrepreneurs who want to work in this way. But we didn’t want to legislate an appropriate level of goodness.”

Laws allowing SPCs have passed in California, Florida, Washington, and Texas. California and Florida have also passed laws allowing benefit corporations; Washington and Texas have not. Legislators in Ohio, Georgia, and several other states are considering both alternatives now.

Clark says that passing both laws is fine, but he predicts that the SPC laws won’t accomplish much. “The problem is that a social purpose corporation doesn’t require its directors to commit to the triple bottom line,” he says. “The directors of social purpose corporations might not even be aware of the distinction.”

About 156 social purpose corporations are active in Washington. Fred Whittlesey, founder and owner of the Compensation Venture Group SPC in Seattle, eagerly publishes his report. He’s also a Certified B Corp.

Becoming an SPC and getting audited by B Lab “is a way of branding the business,” he says. “It lets people know my values.” The distinction between SPCs and benefit corporations, he says, “is highly technical and not very meaningful.”

For-profit businesses that also have a social mission are still mostly small and managed by their founders, who almost always belong to the social movement B Lab is leading. So the corporate distinction isn’t well known, and to a non-lawyer it might not seem important—yet. But Steve Piersanti, president of the publishing firm Berrett-Koehler, sees a big difference.

Berrett-Koehler is a California benefit corporation whose social mission has been audited and certified by B Lab. “A social purpose corporation could devote itself to anything,” says Piersanti. “It could be a factory that dumps toxic waste while serving society by giving away free handguns. That would be a perfectly legal SPC. The movement we’re part of is about something much bigger.” –Brad Edmondson

For-Profit Colleges as Benefit Corporations: Where’s the School Spirit?

rasmussen-collegeFor-profit colleges are a $25 billion industry that gets no respect. They claim just 5 percent of the $500 billion Americans spend every year on higher education. Their critics call them “dropout factories” that burden students with debt and get billions in federal and state support while returning little value.

In the last few years, six for-profit colleges have re-chartered themselves to become benefit corporations, with a dual mission to pursue a public benefit while also making a profit. Are they greenwashingB Labs, the independent social auditing firm that awards B Corp Certification and also promotes the movement for chartered benefit corporations, doesn’t think so. But changing that image might take a while.

Critics of for-profit education cite a 2012 report by former Iowa Sen. Tom Harkin, which analyzed 30 for-profit colleges and found that their associate’s degrees cost four times as much as did similar degrees from public schools. Harkin also found that 63 percent of students enrolled in associate programs at for-profits in 2008-09 had dropped out a year later. The expenses and yields for other degrees were also poor in comparison to public and not-for-profit schools.

Two years ago, B Labs convened a diverse group of educators to develop specific social auditing standards for higher education. The group released the standards last September. A few weeks later, Laureate Education and Alliant University passed the audit to become the first for-profit colleges that are both benefit corporations and Certified B Corps.

“People say that for-profit colleges cannot keep students at the center of their operations, but the benefit corporation structure requires that they do,” says Dan Osusky, a standards manager at B Labs. “The key to making this succeed is getting colleges to publish measures of accountability and performance.”

Other for-profit colleges are talking the talk. “We’re a 115-year-old company, and being a public benefit corporation is in our DNA,” says Trenda Boyum-Breen, president of Rasmussen College, a regionally accredited institution serving 14,000 students online and at 24 campuses. It grants degrees in business, nursing and other job-oriented disciplines.

About 75 percent of Rasmussen students are women and over the age of 25. More than a fifth are African American. “For-profit colleges have a powerful opportunity to encourage upward social mobility,” Osusky of B Labs says.

Rasmussen registered as a public-benefit corporation (PBC) in Delaware two years ago. “We saw it as a way to distinguish ourselves,” says Dr. Boyum-Breen, president of Rasmussen, who is also a first-generation college graduate. “A PBC is the sweet-spot that allows us to deliver education for the public good while also having the efficiency and flexibility of a for-profit business.”

That all sounds good. But Rasmussen is privately owned, so it doesn’t release information on its revenues, its expenses or the names of major shareholders. Boyum-Breen says the college is consulting with B Lab, but it hasn’t yet been certified. And Delaware law only requires that PBCs give their shareholders a statement regarding the progress of their social goals once every two years. The statement does not have to be done by an independent third party, and it doesn’t have to be public.

“This is a controversial industry, and some for-profit colleges have questionable reputations,” says Osusky, who adds that the best way forward is for the industry to adopt specific performance standards, greater legal accountability and public transparency. “Controversial industries are where the need is greatest to distinguish between good and bad actors,” he continues.

Boyum-Breen, who became Rasmussen’s president 10 months ago, says the college’s directors will see its first internally-produced social statement at their meeting in March. She says that parts of the statement will also be released to the public and that the college will continue to work with B Labs.

She is also pushing changes that promise to lower the cost of a degree. More than three quarters of her students have already attended college somewhere else without graduating. Rasmussen’s Flex Choice, which combines classwork with online study to allow students to pass course units based on their prior experiences, was expanded to all degree programs in January.

“There’s a great opportunity here for a business to generate public good,” she says. “An organization’s tax status doesn’t determine whether it is good or not.”

Maybe so. But you can’t assess a company’s performance until you measure it, and you can’t trust those measurements unless someone or something holds the company accountable.

The First Benefit Corporation IPO Is Coming, And That’s A Big Deal

Laureate-04Get ready for the first-ever public stock offering by a chartered benefit corporation. This ain’t no friendly neighborhood organic coffee roaster, either. Laureate Education promises to operate as a triple-bottom-line business, but this is a much bigger, more complicated deal.

Laureate is the world’s largest for-profit operator of online and campus-based higher education. It owns, controls, or manages 88 institutions that enroll more than one million students, 90 percent of whom live outside the United States. It has been growing rapidly and in 2014, its revenues exceeded $4.4 billion. It’s a 16-year-old company but it announced its new charter as a Delaware Benefit Corporation just four months ago, on the same day it registered for its IPO.

Laureate’s current owners aren’t the kind of folks you’ll find at a typical B Corp meet-up. Kohlberg Kravis Roberts (KKR) one of the world’s biggest private equity firms, owns most of its stock.   Point72, another venture capital behemoth, owns a big chunk. So does the International Finance Corporation, which is the private-sector arm of the World Bank.

Last year, the first Certified B Corp held an IPO when Etsy went public. But Etsy doesn’t have a dual purpose written into its corporate charter. At least, not yet.

KKR’s leaders are Henry Kravis and his cousin George R. Roberts, who gained fame for their scorched-earth takeover of Nabisco in the late 1980s. They’re old-school corporate raiders. Now they own a benefit corporation, and that could be a big deal.

Laureate registered as a benefit corporation so IPO investors will know that it takes its social mission seriously, according to founder and CEO Doug Becker. “We recognize that some investors in public companies are highly focused on short-term results,” he writes in the company’s prospectus, “and we hope that it is very clear to them that this is not our approach. With the benefit of a long-term view, we will balance the needs of stockholders with the needs of students, employees, and communities in which we operate, and we believe that this approach will deliver the best results for our investors.”

SEC laws prohibit Becker and KKR from talking about the IPO. But others are taking notice. “KKR could be just the tip of the iceberg,” says Luke Stephan, a partner at Keene Advisors in Newton, MA, a small firm that specializes in advising business owners who are selling their companies. Many Keene clients bring their social consciences to their businesses, and Keene itself is pursuing B Corp certification.

“If the Laureate IPO is successful, it will provide a roadmap for institutional investors, family offices and individual investors who want to invest capital in businesses that generate a good return and make valuable contributions to society at large,” Stephan writes. “And it will provide a strong counterpoint to skeptics that believe that businesses cannot access institutional capital unless they focus exclusively on maximizing value for shareholders.”

“Laureate is a real validation of the value side of the equation,” says Rick Alexander, legal advisor to B Lab. “About $6 trillion in investment funds are earmarked for social impact in some way. That’s a huge target. But benefit corporations are a new idea, and a lot of investment professionals are not convinced that they will give a good return. Many of them just don’t know about us.

“KKR is a high-profile company, so the Laureate IPO could convince a lot of people that they’re safe to invest in. The essence of the idea is that by serving the interests of stakeholders as well as shareholders, you create value that companies focused only on their shareholders do not create.”

Switching its status might also help Laureate answer the many critics of for-profit higher education. According to a 2012 US Senate committee report that examined 30 companies, including Laureate, the sector spent an average of 41 percent of its revenue on marketing, advertising, recruiting and admissions, and profit distribution. They spent just 18 percent on instruction. The report argues that making federal grants and loans to students at for-profit colleges is a bad deal, both for the students and the government.

Alumni of Walden University, which is owned by Laureate and has many campuses in the United States, have accumulated the second-highest amount of federal loans of any school in the country, according to a 2014 study by the Brookings Institution. And only 44 percent of its undergraduates had started to repay their loans three years after leaving the school, a level far below the national average.

Laureate is not the first for-profit school to become a benefit corporation. But it is the first to sign up for B Lab’s rigorous social audit program, which it passed in 2015. It also participates in B Lab’s Higher Education Standards Working Group. So, is Laureate using B Lab to clean up its image while it prepares to go public? Sure. And is that a bad thing? Only if it doesn’t walk the talk.

Living Wage Movement Is Now Amazingly Normal

Image 2_Colin with FinalistsJM Family President & CEO Colin Brown (l) with finalists in the company’s first ever Pinewood Derby Car Championship, benefiting United Way.

The living wage movement went mainstream in 2015. Just ask the Floridian Of The Year.

Last year started with Wal-Mart, responding to nationwide protests, announcing that it was immediately raising its minimum wage to $9 an hour, with $10 planned for February 2016. Big deal, said the movement’s activists. They had already shifted their focus to local and state governments. They demanded that the minimum wage be raised to a “living wage” of $15 an hour—with a union.

As the year wore on, the Fight for $15 movement took off faster than even its organizers had hoped. By the end of the year, activists were busy in 270 cities. All three Democratic presidential candidates voiced their support. Fourteen city, county, and state governments approved $15 minimum wage laws, with notable victories in New York, Massachusetts, New York City, Los Angeles, Pittsburgh, Chicago, San Francisco, Rochester, Buffalo, Seattle, Milwaukee, and Santa Fe, according to a tally kept by the National Employment Law Project (NEPL).

While $15 makes an easy-to-understand political goal, the actual wage needed to lead a dignified life depends on where you live and who lives with you. FIguring all that out is the goal of the Living Wage Calculator, which is maintained by Amy K. Glasmeier at the Massachusetts Institute of Technology. Glasmeier’s team scored a big victory in late 2014, when IKEA announced it would use the MIT site to gradually adjust its starting wages up to a living wage, with an initial hike to $12 an hour. A year later, IKEA reported that the decision had been good for the company, and expanded it to include operations in the United Kingdom.

But the movement’s biggest win might have come in December, when the mainstream business magazine Florida Trend named its “Floridian of the Year.” Colin Brown, CEO of JM Family Enterprises, got the honor for quietly implementing a $16 hourly minimum wage for his company’s 4,100 employees.

The amazing thing was how normal it all seemed. Brown, a 66-year-old lawyer educated at a military academy and Duke University, runs a franchised Toyota distributorship in southeast Florida. He is on the board of directors for his local United Way, a business roundtable, and a statewide good government association. He loves the Pinewood Derby.

Brown is about as mainstream as it gets. But he “has a very definite moral compass,” says a colleague in the Florida Trend article. “He’s going to decide what’s right, not what makes the most money.”

The Fight for $15 has 16 more legislative or ballot proposals pending in another 15 jurisdictions this year, according to the NEPL. And with friends like Colin Brown, the sky’s the limit.

Is B Corp Star New Belgium For Sale? Does It Matter?

New-Belgium-Bottle-Caps-deege@fermentariumDOTcom-Flickr-630x4721New Belgium Brewing might be in play.

On Friday, a report citing unnamed sources said the craft brewer, best known for its Fat Tire Ale, was working with the advisory firm Lazard Middle Market on a possible sale.

It’s a significant moment for the Certified B Corp movement, since New Belgium is one of the largest B Corps on a rapidly growing list of more then 1,500 firms. Reuters reported that New Belgium, which is owned by its employees, is looking for a buyer who would pay more than $1 billion for the company.

The report comes during a wave of acquisitions in the craft beer industry. Several small brewers that are well known for socially responsible practices were sold in 2015—but so far, the new owners aren’t backing off from policies the original owners made.

In March, Full Sail Brewing, which also was owned by its employees, sold to a private equity firm. Many employees got five or six-figure buyout checks and also got to keep their jobs. In 2014, Triple Pundit named Full Sail one of the top ten sustainable US breweries. Nine months after the sale, Full Sail’s website still prominently features a video that describes its efforts at water conservation.

In October, Lagunitas Brewing Company announced that it had sold a 50 percent stake to Heinekin, one of the largest brewers in the world. Lagunitas has generous donation, sponsorship, and environmental programs that are integral to the brand. But its new owner, which is based in the Netherlands, also places a high value on sustainability. Heinekin is making aggressive efforts to limit water use and also supports human rights in the countries where it does business.

Neither Full Sail nor Lagunitas was a B Corp, however. And New Belgium has been an enthusiastic supporter of B Lab, the non-profit group that performs voluntary audits of environmental, personnel, and community practices to certify that subscribing businesses are “a force for good in the world.”

In response to the Reuters report, New Belgium co-founder and board chairwoman Kim Jordan said that “New Belgium Brewing’s board of directors has an obligation to have ongoing dialogue with the capital markets with the goal of making sure that we remain strong as leaders in the craft brewing industry. There is no deal pending at this time.”

The prospect of a sale raises difficult issues for Jordan and other New Belgium board members. The company’s identity is tied to employee ownership and progressive stances on climate change, the living wage movement, bicycle advocacy, and other issues. Its B Corp certification, which it gained in 2013, burnishes that reputation.

To an old-fashioned investor, B Corp certification might look like an unnecessary drag on the bottom line. An unethical buyer might make promises to get New Belgium’s employee shareholders to approve a sale, without intending to keep them.

The Full Sail and Lagunitas stories, although unfinished, fuel hope that a new kind of investor might recognize that walking the talk on sustainability is what makes the brand worth buying in the first place. We’ll keep watching.

Hundreds Of B Corps Are Sitting Ducks. Here’s Why.

wall-street-douglasMichael Douglas as the financier Gordon Gekko in Wall Street (1987).

Entrepreneurs who are growing the Certified B Corps movement need to learn from their elders’ mistakes. But B Corps in 18 states have no defense against corporate predators. And in 11 of these states, they’re fooling themselves.

At the end of 2015, 31 states have passed laws establishing benefit corporations. These are different than B Corps, which subscribe to a voluntary certification program maintained by a not-for-profit group called B Lab.

Benefit corporations have taken the next step by writing their double bottom line into their articles of incorporation. They exist to make a profit for their shareholders, but also to benefit their stakeholders—employees, suppliers, customers, and neighbors. In most states, benefit corporations are also required to prove their social impact in public reports.

The first law establishing benefit corporations was passed by Maryland in 2010. While the movement is spreading rapidly, 19 states have not yet passed a version of this law. But Georgia, Iowa, Kentucky, Maine, Missouri, New Mexico, North Dakota, Ohio, South Dakota, Wisconsin, and Wyoming have an older law on the books that some view as a substitute. It’s known as a non-shareholder constituency statute, and it explicitly permits corporate directors to consider the effects of their decisions on stakeholders as well as shareholders.

Constituency statutes might sound good, but they don’t protect mission-driven businesses. “They haven’t been cited in many court decisions,” says William Clark, an attorney who helped draft the original legislation for benefit corporations. “When push comes to shove, the shareholders always win. So there’s a real question at this point about what constituency statutes mean.” And thereby hangs a tale.

The current crop of community-minded business people emerged when baby boomers started opening shops in the 1970s. The founders of Ben & Jerry’s, The Body Shop, Tom’s of Maine, Stonyfield Yogurt, and others succeeded by positioning their products as healthy, values-led alternatives to similar products made by big, greedy corporations. But when the big, greedy corporations offered to buy them out, the hippie capitalists couldn’t come up with a better alternative.

The 1980s were an era when most corporate managers and lawyers gleefully took cover behind Milton Friedman and other “free market” economists. The actor Michael Douglas captured this slimy worldview in 1987, in the movie Wall Street, with his Oscar-winning portrayal of the corporate raider Gordon Gekko. “Greed, for lack of a better word, is good,” said Gekko. “Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”

Gekko’s speech came on the heels of Revlon v. MacAndrews, a Delaware Supreme Court decision that triggered a feeding frenzy among corporate predators. The Court held that once buyers begin bidding up the price of a publicly traded stock, corporate directors must disregard the interests of stakeholders and focus only on maximizing shareholder profits. The Revlon decision never made it to the US Supreme Court, and lawyers are still arguing about it. But when it passed in 1986, it was seen as the law of the land.

Lots of community minded business people were horrified by Gekko and Revlon. They devised constituency statutes to give corporate directors a way to fight back. Pennsylvania was the first state to pass one, in 1983. Others followed quickly and today, 32 states have them on the books.

But this wasn’t really a legal dispute. It was a clash of worldviews, and the well-meaning hippies never had a chance against Gekko. The directors of Ben & Jerry’s were forced to sell to Unilever in 2000, even thought the Vermont legislature passed a constituency statute in 1998. One big reason for the sale (described in my book) was the threat of multiple lawsuits from profit-hungry shareholders.

“With the exception of Connecticut, constituency statutes are not mandatory,” says Clark. “They simply allow directors to consider other interests.” In other words, constituency statutes codify a large body of corporate law that says directors have the right to serve stakeholders as well as shareholders. But this legal right doesn’t mean much, once the money starts talking.

Constituency statutes were the best we could do until the late 2000s, when Clark and several business people developed a better idea. Benefit corporations are legally required to pursue a double bottom line. They are now building enormous amounts of good will and loyalty by treating their employees, suppliers, customers, and neighbors well. They are also publicizing their good works as a way of distinguishing themselves from their competition. Many benefit corporations are highly profitable for this reason.

If a profit-only corporation buys a benefit corporation, it could change the charter or absorb the assets. But a move like that would also endanger the very thing that makes the acquisition attractive.

Changing a benefit corporation’s policies runs a serious risk of losing a lucrative market segment. This is because so many consumers will pay more for products that reflect their commitments to fair trade, a living wage, and other causes.  These activist consumers are the ultimate guardians of the socially responsible business movement. Benefit corporations are their best choice, because benefit corporations are finding ways to grow sustainably without abandoning their stakeholders.

Why Milton Friedman Would Have Been OK With Benefit Corporations

FriedmanWikipediaIn the mid-20th century, corporate CEOs and board members often described themselves as the custodians of a public trust. Like statesmen, their job was to balance competing interests in ways that were wise and fair. Milton Friedman (1912-2006) the son of immigrant shopkeepers, saw that they were lying, and he hated their elitism. He attacked it like a bare-knuckle fighter.

Friedman led a group of economists at the University of Chicago who argued that corporations should be managed only for the benefit of shareholders, and that stakeholders—employees, suppliers, customers, and neighbors—should be rewarded only if it also puts more money into shareholders’ pockets. Friedman and his pals said that a corporation is not a government or a charity, and its social responsibility is simply to increase shareholder profits.

The “shareholders first” argument was radical when it was introduced in the 1960s, and Friedman did not pull any punches. In 1970, he wrote in The New York Times that executives who believe they should serve the broader community are playing around with their investors’ money. They are guilty of “hypocritical window-dressing,” he said, and have a “schizophrenic character.”

Friedman won the Nobel Prize in 1976, advised President Reagan on economic policy in the 1980s, and wrote several blockbusters, including Free To Choose (1980). Thirty-five years later, greedy people still use his writing to justify their immoral acts. But if you’ll go back and read that 1970 article, it’s also clear that he would not have objected to the idea of a corporation whose charter directs it to pursue both profits and social benefits. Friedman wrote:

“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for example, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.

“In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them.”

Friedman understood that corporations are just social and legal organizations, and that they can have any goals they are chartered to pursue. He insisted that shareholder profits should be a corporation’s only goal merely because an alternative had not yet been devised. He was the uber-capitalist, so he probably would not have invested in a benefit corporation—but he wouldn’t have objected to it, either. It was honest. People should be free to choose.