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The Gravitational Force of Social Entrepreneurship

3p Contributor | Wednesday March 28th, 2012 | 3 Comments

By Steve Tiell

A cleansing wave of corporate reform is washing over America. One by one, states are adopting new legislation that gives corporate directors legal protections for making decisions to maximizestakeholder value in addition to shareholder value. These new corporate structures are spawning an ecosystem of entrepreneurs and investors eager to build firms that simultaneously scale profits and social or environmental impact.

I am a social entrepreneur. My current venture, Spud Flower, is a Flexible Purpose Corporation (FPC) with a mission to enable economic mobility for our nation’s youth. Spud Flower’s social platform engages family and friends to help children save for college. Our FPC structure allows us to make a profit and make decisions that will maximize social impact. This dual-honed mandate has a gravitation pull that attracts top talent as co-founders, employees, and advisors; and provides access to a growing army of social impact investors while also persuading potential partners to accept meetings they may not ordinarily consider – often, these same people become advocates.

As billions of dollars migrate annually from traditional investments to some form of socially responsible investing, venture capital is no exception. Impact-focused VC firms are becoming more common and impact-focused investment advisors are matching clients with mission-aligned social enterprises.

At the same time, non-profit organizations are being pushed by foundations and family offices to find ways to become more self-sufficient. Philanthropic capital is diminished by the recent economic turmoil and is being reallocated to include mission- and program-related investments. The promise of making a market- or below market-rate return through MRIs and PRIs is immensely attractive to philanthropic organizations because there’s some rate of return, whereas grants are a guaranteed 100% financial loss. As money managers and boutique firms become more skilled at designing MRIs and PRIs, more philanthropic funds are being allocated to those pools and less is available for traditional grants. This feedback loop ultimately ends with philanthropic dollars – once exclusively dedicated to grant making – being split between grants, PRIs to non-profits, and MRIs to non-profits and for-profit social enterprises.

This blurring of the line between corporations and non-profits will surely culminate in a roar of opinions as philanthropic organizations learn the nuances, scale, and impact that mission related investments can have. The evolution of corporate charters making all of this possible would surely be met with praise from America’s founding fathers – who, rallying against the aristocratic, exclusionary policies of the British East India Company, setup corporate structures in the New World to ensure corporations would only serve the public good. In America’s early days, the process of receiving a corporate charter was far from routine and required a business to achieve a specific social purpose, such as building bridges. Allowing the shareholders of a corporation to make a profit was simply a means to attaining the greater social benefit. As such, much of the private business activity during this time operated through partnerships or trusts. With growing legal and private-sector pressures in the latter half of the 19th century, states seized on the opportunity to generate more revenue and appease vocal corporate advocates and began issuing corporate charters where the only requirement was to maximize shareholder returns. This is the system we’re all familiar with today.

The return to corporate charters requiring social benefit is marked by Vermont’s ratification of the nation’s first low-profit limited liability corporation (L3C) in 2008. Today, a total of 9 states have passed L3C legislation; while L3Cs are a great start, the inherited LLC framework does little to attract the investment capital necessary to scale a business. Enter the Benefit Corporation.

In 2010, Maryland was the first state to establish a charter for a Benefit Corporation as its own legal entity. Today, there are seven states with Benefit Corporation legislation on their books and four more with legislation pending. Out of these seven states, California is the only state to ratify two new types of corporate structures – the Benefit Corporation and Flexible Purpose Corporation.

The push to pass legislation establishing Benefit Corporations was largely fueled by B Lab, a non-profit 501(c)(3) established in 2006 that advocated for companies to take the environment, community, employees and suppliers into account in their decision making. B Lab created a certification and auditing scheme that companies could follow to become a “certified B Corporation.” In the eyes of the law, however, this designation was meaningless. Shareholders could still sue corporate directors for failing to put shareholder returns above all else. Early B Lab adopters would go through the arduous process of amending their corporate charters to include these additional stakeholders in an attempt to shield corporate directors from lawsuits, but it wasn’t until Social Benefit Corporations were ratified under law that directors truly received the protections they sought. The pioneering efforts from B Lab provided the model legislation states used to create Social Benefit legislation, so there are many similarities between states. In addition to directors being required to take the environment, community, employees and suppliers into account when making decisions, Social Benefit Corporations are also required to publicly publish a report assessing their performance against a third party standard. B Lab is currently the only firm offering this third party assessment and becoming a B Lab certified company can cost $500 to $25,000 annually.

California Flexible Purpose Corporations are similar and allow founders to choose a specific mission to pursue in addition to profits. This special purpose can be anything that generally benefits society and becomes part of the corporate charter and “broadens the duties of its board of directors, from solely maximizing shareholder value to also pursuing an additional purpose.” FPCs must also outline goals to achieve their purpose and publish an annual report disclosing progress on achieving those goals.

These new corporate structures provide a wave of opportunity for the private sector to create as much meaningful social impact in the next century as they did profits over the past century. If we can realize only a fraction of that promise, then our society will be much closer to the utopia our founding fathers envisioned — and create profitable, sustainable companies in the process.

At Spud Flower, we’re thrilled to have so much passion supporting our work. After all, the most frequently cited reason for people going out of their way to help us is because they would like to use Spud Flower to help their kids save for college.

Steven Tiell is co-founder and CEO of Spud Flower. Prior to starting Spud Flower, he served as Social Entrepreneur in Residence at Olazul, an ecological aquaculture NGO and spent the previous three years consulting with governments and corporations to help make cities more sustainable.


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  • JeffMowatt

    Interestingly FPC seems congruent with P-CED which began with a white paper making the case for business with a primary social purpose. In our 2004 business plan for the UK we said:

    “Profits can be set aside in part to address social needs, and often
    have been by way of small percentages of annual profits set aside for
    charitable and philanthropic causes by corporations. This need not
    necessarily be a small percentage. In fact, there is no reason why an
    enterprise cannot exist for the primary purpose of generating profit for
    social needs — i.e., a P-CED, or social, enterprise. This was seen to
    be the potential solution toward correcting the traditional model of
    capitalism, even if only in small-scale enterprises on an experimental
    basis.

    Enterprise for the primary objective of poverty relief, localized
    community economic development, and social support became the business
    model which guided P-CED’s efforts and development at a time in the US
    when terms such as ‘social enterprise’ and ‘social capitalism’ had not
    yet been coined.

    Traditional capitalism is an insufficient economic model allowing
    monetary outcomes as the bottom line with little regard to social needs.
    Bottom line must be taken one step further by at least some companies,
    past profit, to people. How profits are used is equally as important
    as creation of profits. Where profits can be brought to bear by willing
    individuals and companies to social benefit, so much the better.
    Moreover, this activity must be recognized and supported at government
    policy level as a badly needed, essential, and entirely legitimate
    enterprise activity.”

       
    From there we applied to model to tackle poverty and childcare conditions in Eastern Europe. Our evolution is described in the article You’ We, Me, Ethics and People -Centered Economics.

     

  • Kdejert

    Correction: Maryland, following its efforts on the Benefit Corporation law, ratified the Benefit LLC corporate structure in 2011. The two distinct corporate entities were recognized by the state well before California did theirs.

    Great article overall.

  • Steven Tiell

     Thanks for the clarifications, Erik.