Earlier this week, National Public Radio aired a story about efforts by lawyers in seven states to “rewrite laws” on behalf of social entrepreneurs.
Right now, according to April Dembosky’s report, social entrepreneurs operate in a state of legal limbo: in the eyes of the law, social enterprises are for-profit entities, but they have a non-profit ethos, a concern for doing good or simply doing less or no harm.
The law may respect and admire, but it doesn’t have to recognize that ethos; social enterprise is not – or not yet — a legitimate corporate form. The law in most states currently says that shareholders have the right to sue if your desire to do good compromises their ability to do well, or better than they are already doing. And shareholder value will always trump “social values” in a court of law.
But now there are now serious efforts, mainly in Vermont and California, to create the legal framework for a new, “for-benefit” corporate form. These efforts seek to undo what is commonly called “shareholder primacy” in the for-profit corporation and challenge the idea that the sole duty of corporate directors is to make decisions in the best interests of shareholders – or, as it’s usually put, to “maximize profits” or “maximize shareholder value.” Advocates say that corporations should also have a duty to various stakeholders, including employees and consumers as well as to society as a whole, and that this duty should be on par with, or sometimes trump, fiduciary duties – or, at the very least, that shareholders ought to take into account the costs corporations socialize (e.g., the degradation of the environment) for the sake of shareholder profits.
There is already a for-benefit certification companies can earn. Think of it as a Good Housekeeping Seal for politically progressive investors, job seekers and consumers. But the for-benefit legal movement wants to do much more. For this reason, the movement represents more than another extension of the corporate social responsibility movement, more than a new chapter in the old debate about the public purpose of the corporation that dates back (at least) to the Berle-Dodd debates of the 1930s. The newly-chartered for-benefit corporation or “B-Corp” would, presumably, use “the power of business to solve social and environmental problems.” It would have a legal mandate to do so. In other words, the B-Corp would be a legally chartered, for-profit agent of social change or social “benefit”; its directors would be bound by law to take stakeholder interests and social benefits into account when faced with a decision.
To illustrate the need for the new corporate form, Dembosky looked briefly back to Unilever’s 2000 takeover of Ben & Jerry’s Homemade Ice Cream. As a case study, it’s a bit hackneyed, but as I went back to review it I discovered some distortions in Dembosky’s reporting, and came up against a number of questions about the for-benefit movement, and social enterprise in general, that I’ve run into before.
Ben & Jerry’s is widely regarded as a sort of ur-social enterprise, an early experiment in “hippy capitalism”. The company was founded in 1978. By 2000, Ben & Jerry’s had grown far bigger than its founders ever imagined it would. They needed to raise cash. The company had not solved its distribution problems: Ben & Jerry were still hitching a ride on other “super premium” ice cream distribution networks (mainly Haagen Dazs and Dreyer’s). Ben Cohen and Jerry Greenfield no longer saw eye to eye. All this made the company vulnerable and the target of speculation.
Still, the company was well past its hippy phase, and this is probably the first place where Dembosky’s story starts to distort the picture.
To hear her tell it, these really cool social entrepreneurs were just making their ice cream and trying to make the world a better place when the Unilever harpy swooped down upon them and carried them away, arms flailing.
First of all, Unilever was already part of a buyout offer engineered by Ben Cohen himself in March of 2000. He had teamed up with Unilever and Meadowbrook Lane Capital; Meadowbrook, a socially responsible investment firm, had put together a group of investors that included Bodyshop founder Anita Roddick. This unlikely trio offered $38 per share; Ben & Jerry’s was then trading at around $30. A shareholder who was privy to the board’s deliberations told the New York Times that the board had approved the deal (over Jerry Greenfield’s angry objections).
But then, in April, things took an unexpected turn. Unilever offered $43.60 per share – a 25 percent premium, almost nine dollars over the then-current share price — for a total offer of $326 million in cash.
Why the aggressive offer? Not because Unilever admired the social mission Cohen and Greenfield had set for their company, except insofar as it added to the buzz of the Ben & Jerry’s brand. Unilever had a nationwide distribution network already in place in the United States and access to European markets; and the company was faced with growing pains of its own: the consensus among analysts was that the company’s “longer-term fundamental growth rate” was “not inspiring.” It needed to enter new markets and find new areas of growth.
When the offer came in, Ben & Jerry’s Board of Directors was in no position to refuse, or stand on principle. This much Dembosky had right. However they may have felt about Unilever, however much they may have feared for the social mission of the ice cream company, they were prudent – and they were right — to reject the lower offer from the Cohen-Roddick group in favor of the higher cash offer.
To do otherwise would be to risk being sued by shareholders, and to be accused of neglecting their duty of care – even if the Cohen-Meadowbrook-Unilever group could somehow have proven that they and they alone could keep the ice cream company true to its social mission.
Which is, by the way, exactly what the Cohen-Meadowbrook-Unilever group had done when making their offer. As the Times reported, Meadowbrook Lane “pledged to create a ‘social performance plan’ that would place women and minorities on the board, pay about 7.5 percent of the company’s pretax profits into the Ben & Jerry’s Foundation and provide venture capital to other ‘progressively minded enterprises,’ among other social efforts.”
(Missing from this list – at least as reported by the Times — was the original Ben & Jerry’s compensation scheme, whereby no executive would earn more than seven times what an entry-level employee learned. The company had abandoned that policy in 1995, and apparently there was no going back. But all the ideas in the Meadowbrook package were, and — most people will tell you — still are, very fine sentiments. Whether they are good business practice is open to debate; whether they are to be dignified with the phrase “social mission” or “social responsibility” is even harder to decide.)
In the end, none of this stuff really mattered to the merger agreement. None of it influenced the Board’s deliberations or could make up the difference in the offers. So, when the deal was done, Cohen and Greenfield issued a joint statement celebrating Unilever’s commitment “to pursue and expand a social mission that continues to be an essential part of Ben & Jerry’s,” and the European multinational mumbled something about nurturing community values. None of this talk was binding or even very credible. At the time, it all seemed a little discouraging.
By December of the same year, Ben Cohen was threatening to quit unless Unilever appointed a CEO with the right “business mentality”: “otherwise,” he was quoted as saying, “I’m not interested in hanging around and supporting what I’m sure is a destruction of the company.” It’s worth noting that while making these threats Cohen was angling to have his own choice for CEO, Ben & Jerry’s director Pierre Ferarri, assume the role. He lost that battle. But over time, it seems, the guys from Unilever started to get the idea – or at least they learned how to keep up Ben & Jerry’s “socially responsible” brand.
The company continued to make decisions in keeping with the social agenda Cohen and Greenfield had set for it. It switched to “eco-pint” packaging in 2001. On Earth Day of 2005, Ben & Jerry’s protested oil drilling in the Arctic National Wildlife Refuge by delivering a half-ton “Baked Alaska” to the Capitol. In the same year, the company committed to fair trade; and just last month, Ben & Jerry’s announced that its entire “global flavor portfolio” would use only “fair trade ingredients” by the year 2013, engaging with “smallholders, who grow nuts, bananas, vanilla, cocoa and other Fair Trade-certified ingredients.” And in September of 2009, Ben & Jerry’s changed the name of Chubby Hubby to Hubby Hubby, in support of gay marriage.
All’s well that ends well, I suppose. But surely there are larger lessons here. What are we to make of the real buyout story, and what does it tell us about the efforts now underway to create a new corporate form?
For Dembosky, the moral of the story, or at least the good news, is that the new for-benefit corporate form will allow – or legally require — a social enterprise to stay true to its mission and its values. It will attract a different kind of investor, one who cares about balancing profits with social costs and social responsibilities. That may be true. But questions remain. Consider what would have happened if Ben & Jerry’s had been legally incorporated as a B-Corp back in 1978, at its founding. How would its for-benefit incorporation have affected its growth? Would it have been possible for the company to make those early distribution deals with Haagen-Dazs or Dreyer’s, without requiring those companies to undergo an intrusive social audit? A fussy shareholder could have demanded it; any early deals or alliances could have been subject to the same additional scrutiny. It sounds cumbersome, and a little absurd.
I’m no lawyer, but I don’t really see how legally-binding social commitments wouldn’t hang over all legally-binding deals or contracts that the B-corporation makes (unless of course the “social values” inscribed into the B-Corp charter are easily manipulated or ignored when it’s convenient to do so). The Meadowbrook Lane social performance plan would have been legally binding, written right into the merger agreement. It’s unclear whether under those conditions Ben Cohen would have been able to bring Unilever to the table at all. Jerry Greenfield might have liked that just fine. But would Unilever have agreed to be bound by the social mission of a Vermont ice cream company? It’s hard to see how that deal would have shaped up under these circumstances, but it’s clear that B-Corp charter would have altered the merger equation. Couldn’t shareholders have objected — as Greenfield did — that Unilever would compromise the company’s social mission, and held the merger up on those grounds?
There are broader and more interesting questions here, too. One has to do with the phrase “for-benefit” itself, and whether it can stand up to very close legal scrutiny, or survive a legal challenge. Current definitions of for-benefit corporations don’t really help in this regard. The Vermont Benefit Corporation Act defines “public benefit” as “a material positive impact on society and the environment, as measured by a third-party standard, through activities that promote some combination of specific public benefits.” That is sufficiently vague as to open the door to all kinds of arguments; and it’s also worth noting that the proposed legislation sets out “no criteria to qualify to be a ‘benefit corporation’.” The company is required only to file “annual reports about its community-oriented work.”
I suppose the “third-party standard” is meant to be reassuring; but it is bound to raise the question who will guard the guardians. That question doesn’t matter all that much when “for-benefit” is simply a certification or thumbs up from the progressive business community, or from the non-profit B-Lab; but when it’s a matter of corporate law, you can expect that someone is eventually going to point out that the third party needs to be checked and balanced, and that the for-benefit corporation is essentially chartered to pursue what looks very much like a political agenda.
Of course it’s nothing too offensive – a concern for the environment, fair dealing, civil rights, workers’ rights. If it were a Ben & Jerry’s flavor, it would be Progressive Passionfruit, or Vibrant Vanilla: easily digestible, soft, kind of sweet. Hope and Change. But what about other flavors, other political agendas to the right or the left of the B-Corporation’s Unitarian progressivism? To put the question bluntly, is B-corporation law essentially legislating an idea of what constitutes a “social benefit,” and therefore deciding for the rest of us what is good? How — outside Vermont – can that stand without a quarrel? What about other ideas of how businesses benefit society? How long before Milton Friedman rises from the grave to tell us that increasing profits is the highest social responsibility of a business? Or what happens to the idea of social “benefits” (for example) when the American religious right gets into the social enterprise game?
What bothers me most about all this is that behind the Unitarian progressivism of the B-corporation, behind much of the talk about social enterprise and delivering social benefits through business, lurks another 19th century idea: benevolent corporate paternalism, which, as I suggested in a recent post, now manifests itself in a more politically correct, palatable way, so kind and soft and sweet and full of concern that it might be better termed benevolent corporate maternalism.
By chartering corporations to deliver social benefits, isn’t society also surrendering power? Instead of rewriting the laws to create for-benefit, for-profit companies, why don’t states more strictly enforce the existing laws, or enact laws on behalf of communities and the environment? The rise of the social enterprise may actually signal society’s loss of its power to regulate and restrict business. These fledgling efforts to rewrite the law may — albeit inadvertently — usher in a new era of lawlessness, in which companies can do whatever they want, as long as they can claim to be doing good.
Hi Louis, Jay from B Lab here. Thanks for your thoughtful post about the Benefit Corp legislation we are advancing. I'd like to address a couple of points you made. Perhaps most importantly, our non profit organization B Lab has no political agenda. The proposed Benefit Corp legislation is written allowing for entrepreneurs and investors of our political stripes to participate without prejudice. Moreover, adopting Benefit Corp legal status, like adopting current C corp, S corp or LLC status, is simply a choice. No company is being asked to do anything they don't want to do and no investor is being forced to invest in a company they don't believe in. Interestingly, we have been criticized from the left that the definition of public benefit and the requirement to 'consider' both shareholder and other stakeholder interests are too broad, and that the transparency requirements are not prescriptive enough. Maybe so, only time will tell. Our approach has been to create an enabling legal infrastructure not a new regulatory framework. Redefining fiduciary duty is not a small difference between a Benefit Corp and traditional corporations. While it intentionally doesn't prescribe a company to be carbon-neutral or serve the poor or be employee-owned, it does change the dynamics of Boardroom conversation when shareholders have the right of action to hold directors accountable to consider the impact of their actions on shareholders as well as employees, community, and environment. There are many legal precedents for such 'broad' language. Look at the constitution as a start, or the prudent man rule for investors, etc. As for the analysis of the Ben & Jerry's deal, there is much that could come of a good forensic analysis here, but one of the most useful things to note is that Ben & Jerry's directors felt forced to sell when they didn't want to despite the existence of the 'Ben & Jerry's law' that was put on the books in Vermont two years prior to the Unilever sale to provide legal protection to companies in exactly this scenario. One major purpose of the Benefit Corp legislation is to provide greater clarity to directors that they have legal protection to consider both financial and non-financial interests even in a competitive sale scenario. Benefit Corps may choose to sell to the highest bidder, and perhaps Ben & Jerry's would have sold even if they were a Benefit Corp, but importantly they could not then say we were forced to do so. It would also be useful to those disappointed by the sale of businesses like Ben & Jerry's — not to mention useful to their acquirers — to have independent, comprehensive, comparable third party standards of social and environmental performance against which to measure the 'good' being created. This is exactly what Benefit Corps commit to providing. The creation of a marketplace of companies using recognized standards for assessing their non financial performance will do for the emerging asset class of impact investments what GAAP standards and S&P ratings do for traditional capital markets — ie make them more effective. Again, thanks for your thoughtful post. I look forward to continuing the conversation. Jay Coen Gilbert
Love this topic. Great analysis. I'm actually a lawyer in NYC that's focusing on the emerging legal structures in blended value companies (social enterprise).As it turns out, I am launching a blog http://www.socentlaw.com this week that focuses solely on this issue. I will be authoring many blog posts, but want it to be a space where many voices/perspectives are heard to maximize discussion. I'd love to repost this post onto my blog if you're good with that. Shoot me an email at firstname.lastname@example.org Thanks, I look forward to hearing from you.
I really appreciate the thoughtful comments.I assume that Jay meant to say the proposed legislation will allow "entrepreneurs and investors" of all "political stripes" to participate without prejudice, not just investors and entrepreneurs who share his or B Lab's politics. Simple slip of the pen. But you're going to have to build an awfully big tent if you are going to let everybody in; and that big tent might turn out to be a Pandora's box. As I tried to suggest in my post, I think the B-Corp certification is a fine idea. I am uncertain about legal charters. I understand and appreciate the criticism from the left you mention, and wondered in my post about the tension between the social and the entrepreneurial: would the social features of the charter just be easily manipulated or ignored when convenient for the entrepreneur? Yes, it's important to change the dynamics of boardroom conversations. My concern is that "social" considerations could become cumbersome, controversial, politically fraught, and make reaching a decision even more difficult. Speaking of cumbersome, I wonder, by the way, what sort of oversight agency would be required for these 3rd party standards. And where would that agency reside? How would its appointees be selected, reviewed, and confirmed? We may ultimately need an endangered species act of sorts, to protect the entrepreneurs from the social engineers.
There are some great comments here.In this last comment you wrote, "My concern is that "social" considerations could become cumbersome, controversial, politically fraught, and make reaching a decision even more difficult."Isn't that the point? Whether or not a company is legally recognized as a B Corp, as members of the public, we should encourage boards to focus deliberation on sticky, difficult, and cumbersome issues instead of defaulting to what makes the shareholders the most money. I've been exposed to my share of co-creation and consensus building and it can certainly be frustrating; and the reason we put up with the messiness was to reach an outcome that worked well for the stakeholders.I liked your comment in the original post, "By chartering corporations to deliver social benefits, isn't society also surrendering power? Instead of rewriting the laws to create for-benefit, for-profit companies, why don’t states more strictly enforce the existing laws, or enact laws on behalf of communities and the environment?" This makes sense, yet I can't help but wonder, given the need for legislators to point at something new they helped pass to get re-elected…if it'll be politically more effective to "create" instead of "enforce". I'm not saying it's ideal, though it may be reality.Thanks to all that have contributed. Oh, and I also interpreted the "our" in Jay's comment as "all".
Point well taken, Wayne: good deliberation, and sound business judgment, probably should be difficult. (And I want to think more about what "business judgment" would look like in this scenario.) But I still have to wonder how legally chartered B-companies would really function — what those boardroom deliberations would look like, how important decisions could be reached in a timely way, and whether the "social" features of their charter would be of any consequence when push came to shove. An important question, one I don't consider in my original post, is whether there is a certain scale of enterprise best suited to the "social" or B-charter. Anyway, you're right: these comments are a good start on a longer conversation.
Hi Louis,You'll find the same concept, modifying the company charter to reflect a primary social purpose in the P-CED founding paper which was delivered to the Committee to Re-Elect the President in 1996.From there, it was deployed in the wake of Russia's 1998 economic collapse to source a microfinance initiative in Russia.http://en.wikipedia.org/wiki/Inclusive_capitalism#People-Centered_Economic_DevelopmentFounder Terry Hallman and I got together and introduced the model to the UK in 2004, where since it's been deployed to fund an humanitarian mission in Ukraine.In 2006, we published a microeconomic 'Marshall Plan' based on this social business model and the impacts created since can be veiwed in the links on the following page.http://people-centered.net/About.aspx
The legality of this approach hasn't been a problem in the UK. In fact, a year later with the arrival of the Community Interest Company model the modification of the charter to reflect a commitment of profit to the community was the way to go.The point made at the beginning was that the business operates as 'profit for purpose' in the free market with the chartered agreed by the shareholders, who will then have nothing to object to.The core argument was and still is, whethee capitalism as practised, disenfranchising the impoverished to the point of fighting for their survival could be justified.It argued that people are real, whereas debt based on manipulating abstract numbers was imagined:http://www.p-ced.com/1/about/background/With the conclusion that:"Economics, and indeed human civilization, can only be measured and calibrated in terms of human beings. Everything in economics has to be adjusted for people, first, and abandoning the illusory numerical analyses that inevitably put numbers ahead of people, capitalism ahead of democracy, and degradation ahead of compassion."