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The site features an ingenious interactive map (above) that shows how states have passed, considered, failed, and repealed social enterprise laws each year from 2009 to 2016.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 But North Carolina has repealed their L3C law, and this legislation has failed in 18 other states.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

reSET to Benefit Corporations: If You’re Serious, Come To Connecticut

kateKate Emery believes that social entrepreneurs must control their desire for profits. “The folks we work with have different values than mainstream business people do,” she says. “People often suggest that we push to give social enterprises some kind of tax advantage. But saving money on taxes is the wrong reason for doing this.”

Emery is the CEO of the Social Enterprise Trust (reSET), a Connecticut not-for-profit that works with entrepreneurs, and also the sole owner of The Walker Group, a technology consulting firm based in Farmington, Connecticut. She went to great lengths to protect her own social enterprise.

The Walker Group was growing rapidly in 2007, and Emery wanted to ensure that its profits would be divided equally between its owner, employees, and social mission. But Connecticut laws did not allow benefit corporations in 2007, so there was nothing to prevent a new owner from switching the firm to business as usual. Building a company with a social mission was her life’s work, and she wanted it to be her legacy.

Emery started The Social Enterprise Trust and gave it a “golden share” that has voting rights to prevent The Walker Group from changing its structure. Then she used one-third of Walker’s profits to grow the Trust into a statewide organization for social entrepreneurs. Lobbying the state legislature for a benefit corporation as one of its main goals.

A year ago, Connecticut became the 25th state to adopt a law allowing benefit corporations. Now 31 states have such laws, and five more are working on them. But Emery is proud to say that Connecticut’s law is the most comprehensive.

Benefit corporations write their social missions into their charters, so investors, employees, and customers know what they’re getting into. State laws differ, but they all require the company to pursue a dual mission and release annual reports on both financial and social performance.

Connecticut’s benefit corporation law is the only one with a “legacy preservation provision.” This clause allows Connecticut benefit corporations to protect their status in perpetuity after they have been chartered for two years. If a benefit corporation dissolves after adopting the legacy provision, its assets must be distributed to a not-for-profit organization or to another benefit corporation that also has a legacy clause.

Not everybody thinks the legacy provision is a good idea. “Ninety-nine out of 100 lawyers would advise against taking this step,” says Emery, “because it ties the hands of future boards.” But social entrepreneurs have what Emery calls “intentionality.” They are like donors to a land trust who voluntarily give up the development rights to their land in order to preserve its natural integrity forever.

Emery was surprised at another opponent of the legacy clause: B Labs, the national not-for-profit that runs a rigorous social auditing program and promotes the idea of benefit corporations internationally. “They wanted all the state laws to be the same,” she says. “But we wanted to be the leader.”

Emery doesn’t know many Connecticut benefit corporations will make their status permanent when the law allows it in October 2016. “It might not be too many,” she says. “But I want Connecticut to be the social enterprise state. This gives us an opportunity to tell social entrepreneurs that if this is your intention, this is what you need to do. Come to Connecticut and flip the switch.”

Certified B Corps Are Only Halfway Done

steve-piersanti-started-berrett-koehlerSteven Piersanti founded Berrett Koehler Publishers 24 years ago, shortly after he was fired. Piersanti, an executive at Jossey Bass, refused an order from the company’s new owner, billionaire investor Robert Maxwell, to lay off eight valued employees. He was fired for insubordination.

After the news got around, Piersanti was deluged with offers of support from authors, suppliers, and investors who were also dismayed by Maxwell’s emphasis on maximizing short-term profits at the expense of everything else. Piersanti started Berrett Koehler (BK) to represent the interests of all stakeholders in the publishing process. Today the company has a large catalog of books (including one of mine) on progressive business practices and work/life issues.

Four years ago, BK hired B Labs to audit over 280 of its social, environmental, and employment practices. BK wanted to demonstrate that it met a high standard for corporate citizenship and was creating social benefits as well as profits. When it passed the audit, BK became one of over 1,450 “certified B Corps” which are audited every two years. But that wasn’t enough for Piersanti.

On October 21, BK also changed its California corporate charter to become a benefit corporation. BK’s articles of incorporation now require directors to balance the interests of employees, customers, and other stakeholders with those of shareholders in all company decisions. BK and other benefit corporations must produce a public benefit as well as profits, and they must also report to the public on exactly how those benefits are being produced.

“The audit and the chartering need to work hand in hand,” says Piersanti. “Neither one is sufficient if you’re really committed to running a business that also pursues social goals.

“The B Labs audit is rigorous, but it is also voluntary. You could pass the audit in October, elect new leadership in November, and abandon all the policies that made you a certified B Corp in December. On the other hand, becoming a chartered benefit corporation creates legal obligations that are far more likely to survive hard times or changes in leadership. But those obligations are vague, and there’s no penalty if you don’t meet them.

“If you’re a chartered benefit corporation but you don’t undergo the audit, you could say in your papers that handing out free guns to everyone is your public benefit. If you take the audit, you can’t get away with that. The audit is the state of the art, and the charter means you’re not going back, but you have to do them both or it won’t really work.”

Piersanti, who is 62, says he had an eye on his own legacy when he took BK through the two-part process. “Succession planning is important to any business,” he says. “But if your business has a mission, you need to be concerned with more than finding the right people for the right positions. You also need to pay attention to the institution and how it’s structured, or else the mission won’t survive you.”