Thursday, September 2, 2010

New Corporate Forms

2010 will likely be remembered as the year in which states began looking at their powers in chartering companies in a new light. And for the entrepreneur looking for the opportunity to blend the values of doing well and doing good, this is very good news indeed.

First, a little reminder. As I've said before, we must move past the idea that organizational structures are "either" about maximizing value for shareholders, "or" they are about having a positive social impact. This "either-or" calculus is damaging in so many ways, but that's for another post.

Second, we need to take on board what is and isn't wrong with our current organizational structures. As I've noted before, the binary thinking of the structural choices force entrepreneurs to choose, and drive binary thinking that leaves investors thinking in terms, either of a $1 million investment or the $10,000 charitable contribution. I remember my first meeting seven years ago with John Sage, founder of Pura Vida Coffee – a fair trade, shade grown, organic coffee company that gives back to the coffee growing regions of the world – when he described his efforts to obtain funding from sophisticated private investors. By his account, investors were all focused either on their “return on investment,” or the social impact and leverage of their charitable donation. As John put it, “when I explain the possibility that in Pura Vida their money might do both – offering a possible return on investment, while also providing funding for at-risk children in coffee growing regions of the world – they respond by saying simply ‘you’re making my head hurt,’ and then move on to the next item on their desk.”

Even further, corporations that have long undertaken corporate philanthropy; supporting the arts, education and contributing to programs to alleviate the conditions of poverty, also produce a positive social impact by employing people, producing efficiencies in the use of capital, improving lives, helping alleviate poverty and starvation, not to mention creating wealth (both for executives at the top of a corporation, but also workers holding equity in IRA’s, mutual funds and pension funds), but they are still limited. Even CSR programs that are entering their third decade of wide-spread adoption, with more and more positive measurable impact on communities, extreme poverty, and reducing negative stress on the planet and the environment, still represent a very small portion of the total corporate activity.

Perhaps an example would help. First, the idea of limits on corporate philanthropy exists, in some respects, because tax policy only rewards a deduction for up to 10% of corporate profits donated to philanthropy. But the law places other limits as well. Would directors find protection under the rubric of the business judgment rule if they decided to give away 50% of corporate profits to help at-risk children in the developing world? Certainly, at some point, directors find themselves exposed to arguments of wasting corporate assets. Thus, the law has a barrier on how much good a typical for-profit corporation can undertake, at least in terms of giving away profit. So too, most states limit special purposes that corporations may undertake, if it creates a trade-off to the primacy of maximizing returns for shareholders.

And yet, “Why not create an entity unfettered by the “for profit” and “non-profit” rules, thereby permitting the establishment of corporations for broader benefits, or what I like to refer to as “for-benefit corporations”? Unfortunately, until recently, no system existed that brought integrity to the corporate organizational form.

This year, both Maryland and Vermont adopted laws, and California is considering similar legislation allowing corporations focusing on profitability, to also elaborate purposes such as creating a flourishing environment for the people working for the corporation and for other constituents, such as the community in which the corporation does business, as well as the planet.

Imagine: Businesses seeking profit and the well-being of the planet and its people. People, planet, profit. It may seem idealistic to many, but there are companies already achieving some success without the “for-benefit” corporate form. The time has come to give these like-minded entrepreneurs and investors a corporate form that actually works towards their blended value pursuits.

For those concerned that directors and management might hide poor economic performance behind corporate purposes where results are harder to measure, all three of the statutory options require transparency far beyond anything previously on the books, thereby permitting far greater opportunity for investors and consumers alike to weed out the “green-washers” – those companies who are determined to spend time and effort on great marketing, rather than on really doing good.

Likewise, the statutes do not permit companies to opt-in or to opt-out of the “for-benefit” form without shareholder approval, typically at a supermajority level. Thus, businesses adopting this form will have an explicit understanding between shareholders and management that transcends the model of the traditional selfish shareholder.

In my next posts, I plan to review each statute and then provide a comparison of all three.  Stay tuned!

*Todd Johnson is a partner at the law firm of Jones Day, where he founded their Silicon Valley Office and runs their Renewable Energy and Sustainability Practice. The views expressed in this column are solely his personal views, not the views of Jones Day or its clients, and the information provided as to his affiliation with Jones Day is solely for purposes of identification and may not and should not be construed to imply endorsement or even support by Jones Day of the views expressed herein.

© R. Todd Johnson, 2010. The thoughts, ideas and words expressed in this column are the property of R. Todd Johnson and may not be otherwise used or reprinted without express permission from Todd.


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