Tag Archives: social enterprise

Balancing Innovation with Orientation – An Airport Postscript

Today I was at a business conference in Las Vegas where Bill Clinton and George W. Bush appeared, together, for a wide-ranging, hour-long discussion about the economy, regulation, taxes and education. At one point in the conversation, the two former presidents were asked to talk about how America can do more to encourage innovation. Clinton and W. both agreed that making the research and experimentation tax credit permanent would be a good first step.

This wasn’t terribly surprising, since both presidents had tried (but failed) to make the credit permanent; nor was it surprising that a business audience would greet their comments on this subject with polite applause. I, too, managed to put my hands together and restrained myself from jumping to my feet and exclaiming to the assembly that before we start giving tax credits for research, we need to revisit the idea of “research” embedded in the tax code.

So I did not end up having to explain to the secret service detail or my hosts that I had been agitated on this subject ever since I read Amar Bhidé’s editorial in the Wall Street Journal, and had just yesterday published a blog post on this very subject, where I wondered whether research into the human condition and the social world might not also deserve credit, provide much-needed checks and balances to the scientific and technical research the credit already covers, and yield new ideas of what constitutes true prosperity, real wealth, or sustainable growth.

Now, at the airport, waiting for a redeye back to New York, I am still in the grip of this idea, which, as I admitted in my previous post, probably sounds a little far-fetched. But there is a line of inquiry here I don’t want to lose: that research into culture and society, into language and history, into how people learn and how things change, will balance innovation with – I guess this is the word I would use – orientation: a sense of the right direction, an understanding of limits and where propriety and restraint should be shown, of where judgment needs to be exercised or informed choices need to be made.

Think, to take just a small example, of the concern within business organizations around social media. This goes far beyond the fact that many organizations don’t know what to do about Twitter or Facebook or LinkedIn; that barely scratches the itch.

The conversation has turned from the occasional remark on the role of business in society to anxious chatter about the transformational role that society, or the social, can play in business. There is a growing realization that the social matters enormously to the way people collaborate, the way organizations develop and change, the way business goes to market, and to the bottom line. If, as I might put it, every enterprise is already a social enterprise, why would organizations be reluctant to devote some small portion of their R & D dollars to original research into how peering works, or how social networks function, or how individuals surrender, or refuse to surrender, autonomy in exchange for belonging, or how trust is built or won.

Still sound far-fetched? Maybe. I realize I am talking here in very broad terms, off the top of my head, and I’m also aware that some organizations are already taking these matters seriously, even if they don’t, or can’t officially consider them R & D. Still, it’s fair to say the vast majority are not dedicating resources or sufficient resources to these topics, primarily because, unlike scientific and technical research, they don’t promise to yield new wares, and because they seem soft, mushy, hard to define and pin down.

I realize, too, that the broad trend I am describing here may be a manifestation of a much greater anxiety. It may be that we are trying to harness the constructive power of the social now only because we sense a loss, a lack of social cohesion, the demise of traditional social values and the disintegration of traditional human groups, the atomization of social life and the erosion of trust.

Be that as it may, it is undeniable that how seriously organizations deal with these issues will bear on their performance, on their ability to innovate – broadly, as Bhidé would say — and to orient themselves in an increasingly disorienting world.

Credit Where Credit is Due: The Human Side of R & D

Amar Bhidé argues in a recent op ed that making the R & D tax credit permanent will “not encourage the broad-based innovation that is crucial for widespread prosperity,” and he is skeptical of the idea – which has been around since the credit was first instituted, on a temporary basis, in 1981, and which has been one of the arguments advanced by the Clinton, Bush, and now the Obama administration for making the credit permanent — that there is significant “spillover” or “public benefit” from private investment in research. While his skepticism seems warranted, the question whether corporate investment in “research” can produce “higher returns for society” really turns on how we think about research, innovation and technology, and how we address the broader, unsettled question of the proper role of business in society.

“Research and experimentation” has been a murky area, even after reforms were made to correct abuses of the original 1981 statute, which yielded such triumphs of “research” as Chicken McNuggets or different flavors of soda pop, and creative accounting that wrote off failed ventures as “experiments.” In the 1986 reforms, Congress developed a test – a statement of what qualified as research — to clarify the law on this point. As Robert S. McIntyre noted in a 2002 piece on the credit and its abuses:

The IRS eventually interpreted this “public benefit” or “discovery” test to require that qualifying research must be directed at “obtaining knowledge that exceeds, expands, or refines the common knowledge of skilled professionals in a particular field of science or engineering.” In other words, if everybody already knows what a “research” project is intended to “discover,” then the government won’t foolishly subsidize it with a tax credit.

This excess, expansion, or refinement of “knowledge” – something that goes beyond what “skilled professionals” in “a particular field of science and engineering” already know, or can anticipate or intend – is where the law tells us to look for the public benefits of corporate R & D. True innovation lies in unexpected outcomes. And businesses should be rewarded for advancing technical knowledge, or at least given an incentive to do so, because the advancement of technical knowledge will bring economic prosperity and other benefits.

There are lots of assumptions being made here about the way things work, and it’s not at all clear that things really do – still — work this way. Much of the thinking here and business, society and technology goes back to the post-war era. There are, for instance, connections to the theories of economist Robert Solow about the role of technical progress in growth of industrialized countries. Solow observed that technological advancement is the key force in economic growth – the “residual” after all conventional inputs, including capital and labor, are accounted for. It seems reasonable to conclude from his observation that if we encourage capital-rich companies to invest more in R & D, technological advancement will propel the economy forward — while at the same time delivering new “knowledge” and new “discoveries” (and, the Obama administration hopes, new jobs).

It is no discredit to Solow to say that his thinking exemplified and helped fuel the technological optimism of the postwar period. He famously calculated that four-fifths of the growth in US output per worker could be attributed to technical advances. Now, certain technical advances have led to a decline in US productivity, or threaten US workers with obsolescence. This is just a small instance of the way in which our experience challenges our faith in technology.

Belief in the “residual” power of technology to fuel economic growth and materially benefit society has survived well beyond the industrialized national economies Solow studied for a number of reasons. Corporations do not simply – or cynically — want to encourage the belief that tax breaks they receive will somehow benefit the larger society; corporations, too, are creatures of technology and wholly captive to technological optimism. More broadly, the notion that technology can deliver economic as well as social benefits is still something Americans believe, or want to believe, despite lots of evidence to the contrary. We’ve staked our whole way of life on the idea.

Of course, Bhidé doesn’t go this far. Instead, he argues, we need a more “inclusive” view of innovation – one that takes into account “innovations in design, marketing, logistics and organization” – if we are to get beyond the narrow (and, to his mind, mistaken) view that increased R & D spending is going to correct market failures or produce beneficial outcomes.

But that broader view is not something we should expect scientists and engineers, or lawmakers and the IRS, to deliver. Nor is it a subject on which we should simply defer to professors of business or economists — who will never settle the matter anyway. Part of the trouble, in my view, is not simply with the idea of innovation. It’s with the idea of “research” as something that produces only scientific and technical knowledge, or as an activity to be undertaken solely by scientists and engineers (aided and abetted, perhaps, by economists and professors of business administration).

It seems to me that if we are going to provide incentives for research, we can try to do better than hope for spillovers or accidental benefits from the lab-work of scientists and engineers. Why not broaden the scope of the research we encourage and underwrite with tax credits to include other kinds of research that might benefit the public? What would the corporate R & D picture look like then? How might organizations capture research into the human condition or the social world, and develop its discoveries and perspectives to improve their own performance, or obtain a truer and more complete picture of the world? How would their performance measures change, along with measures of prosperity, or real wealth?

You have to wonder why these considerations don’t really have a place in the conversation, and even seem out of bounds, far-fetched. It’s worth remembering, in this context, that to “credit” something is to put stock in it, believe in it, lend it credence. Are we now so captive to the story of scientific and technical progress that we think other forms of research could never benefit the public or contribute to the common wealth?

This much is clear. Scientific research unchecked by critical judgment, historical perspective, the broad study of culture and society, or meaningful public debate, is bound to lack human scale and a vital connection to the very “public” it is supposed to benefit. And the study of the choices we make, or how we make them, or what it is like to live in this moment, at this particular time and in this particular place, is bound to yield some richer understanding of what it will take to make the right choices tomorrow.

A Response From Bill Carvalho – On Sustainability and Sardines

This afternoon I received an email from Bill Carvalho, President of Wild Planet Foods, in response to my Sunday post about sardines and sustainability. I’ve included the full text of Carvalho’s very thoughtful email as a comment below my original post. I wanted to cite a couple of paragraphs from the letter here, and didn’t want to give the impression that I was taking his words out of context.

Carvalho takes time in his note to address all my points, even the point about creating “a fairer, and more equitable world order,” in the phrase of the Georgetown Agreement. “In my personal opinion,” Carvalho writes, “that requires much more than social and ecological audits; that would require that we all submit ourselves to a moral audit, something that we can leave for another conversation.” I hope someday we can have that conversation, here in New York, or there in Eureka, California, or maybe in Vietnam.

Who knows how that would all turn out. I don’t know about Carvalho’s qualifications as a father confessor (or, for that matter, my own); but he is a good correspondent: for the most part he doesn’t dodge tough questions or deliberately confuse things. He sets me straight about carbon footprints. And he even offers some insight concerning the Wild Planet canning facility in Vietnam.

We do consider the effects of our decisions on the environment and desire to treat our customers and business partners with dignity and respect. The one cannery we use near Ho Chi Min City [sic] is owned by a long-time acquaintance who lives in the San Diego area. We selected this facility for the same reasons we choose business partners here in the US: trust in their integrity and confidence in their competence. The facility is a small enterprise by global standards which is precisely what we needed in order to teach them the specialized handling techniques needed to produce the superior quality products featured in our line. Our increase in activity at their plant has meant the creation of many dozens of new jobs in highly respectable conditions. It is interesting that the cannery provides meals for all workers daily and also owns an apartment building in which they provide housing for many employees. Your comments on how a cannery can be an economical boon to a region or community are exactly what has happened in the case of our friend’s cannery in Vietnam. I don’t think it is out of line for U.S. residents to provide economic benefits to Vietnamese residents given the history between these two countries that has not been exactly mutually beneficial.

That last sentence requires some careful parsing and further thought. Luckily, there will be more on this point from Wild Planet soon:

We have decided to a post detailed explanation of our selection of our processing partner and address issues of carbon footprint on our website and that should be up shortly. We have also decided to fully disclose the processing country on our packaging. We were not seeking to conceal data from consumers and are comfortable explaining these points as we have nothing to hide.

For my part, I am going to start researching a trip to Ho Chi Minh City. I would like to meet and interview some of the cannery workers, visit the apartment block where they live, and see the cannery in Ho Chi Minh where they pack the sustainably caught California sardines. Who knows if I’ll get there anytime soon. But maybe, if I’m lucky, or persistent, I will.

Goodness Has a New Flavor, Maybe a New Form


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.

Not quite.

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.