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Public Benefit Corporations doing well by doing good

Date Published: 03/06/2014

Author: Dane Smith & Jeffrey Ochs

ST. PAUL LEGAL LEDGER CAPITOL REPORT

Minnesota’s distinctiveness as a home to innovation and invention is a favorite theme for those in the business of marketing our state to potential employers and investors.

Post-It notes, snowmobiles, indoor shopping malls, water-skiing, the Pacemaker and other momentous advances in technology are among our best known material inventions.

Perhaps less famous but more impactful have been innovations in process — entirely new ways of doing things pioneered by the Mayo Clinic, by U of M scientists in global agricultural productivity and iron processing, in urban regional planning by the Metropolitan Council, in the co-operative movement, in expanding affordable health care, and by education policy leaders through public school choice and charter schools.

One of our next best opportunities to sustain this reputation is through authorization of a new creature called the “Public Benefit Corporation,’’ a hybrid between for-profit business and nonprofit organizations. Other states actually have moved ahead of us in legalizing these entities, and Minnesota is the kind of state that could quickly become a leader in creative implementation.

Here’s an example of how a public benefit corporation might work in Minnesota:

Imagine that you care deeply about the problems caused by invasive Asian carp in the Mississippi River and its tributaries. What are your current options? Certainly you could take preventative measures when fishing yourself, support increased DNR funding for containment, join various nonprofit causes pushing those policies or regulations, or educate others by writing books or commentary.

But what if you could start a business that would responsibly fish Asian Carp to extinction in area rivers and sell them to high-end restaurants in China where they are valued as a delicacy?

For many, the idea of starting a business to deliberately address a social issue or community need is incongruous. It is widely understood that while businesses often do have very positive social impacts through what they sell, how they source, and what they share, for-profit firms legally exist for the purpose of making money, and over time courts have upheld this view. With a few exceptions, managers of business corporations must make decisions with the goal of maximizing financial value for shareholders. Success is measured in dollars and profits, not social impact.
A bipartisan group of lawmakers who are backing the Minnesota Public Benefit Corporation Act (MPBCA) hopes to bring more flexibility and public purpose to our way of doing business in Minnesota. If enacted, the new law will enable entrepreneurs to create hybrid entities (commonly referred to as a “social business”) that have an official social purpose, like that of a nonprofit institution, and owners who can profit, like those who own a conventional business.

In our carp fishing scenario, a traditional business corporation could certainly fish Asian Carp in a given area while it is profitable, and in so doing, it would also be creating social value. But as the Asian Carp population declines and the cost to catch the next fish increases, profits would also decrease. At some point, the company’s economic interests would diverge from the public mission, and managers would be required under legal fiduciary duty to shareholders to discontinue the activity, leaving some Asian Carp in the stream and failing to end the problem.

Today, if you wanted to create a social business committed to solving the Asian Carp problem, even if it did not maximize profits, you could technically do so. The easiest way is to own the entire company yourself, which means that you can make every decision without worrying about lawsuits from other owners who disagree. The problem with this approach is that very few individuals have the ability to fully capitalize their own business, and when you introduce partners and outside investment, the potential for disagreement and legal action rises considerably.

To address this concern, you currently have only one option: to contractually modify the existing business corporation or LLC form to include a social purpose before taking on investors. The problem here is that such contracts add considerable expense to a start-up, and because there have been very few cases where such arrangements have been litigated, the legal uncertainty is still significant, which deters investors.

Most importantly, neither a wholly-owned nor contractually modified social business is differentiated in the broader marketplace. They currently carry the “Inc.”, “Corp.”, and “LLC” labels associated with the private sector, and customers, vendors, and investors struggle to identify and understand them. Additionally, nonprofits and governments, which could gain by partnering with social businesses, instead approach them with skepticism and strain to find “the catch.”

The MPBCA addresses all of these challenges by creating standardized, user-friendly legal forms for social businesses that also provide marketplace differentiation. In exchange, the MPBCA requires social businesses to declare their social purpose publicly and to report their efforts and outcomes to the Secretary of State each year. Entrepreneurs save money and gain legitimacy, while society facilitates private investment in solving public problems.

This innovative legislation is the result of a rigorous, yearlong process of drafting that has involved the input and leadership of our region’s best lawyers, academics, entrepreneurs, and impact investors. More than 20 of the 50 states have already passed similar legislation, and many others are considering it.

This is no panacea. Public benefit corporations will not immediately revolutionize our society or solve all our problems overnight. Most of our enterprises in Minnesota likely will continue to be sorted in to conventional for-profit, nonprofit and governmental organizations. But if a public benefit corporation solves or contributes to resolution of just one significant social or environmental problem, it will be worth it.

And if legislators are looking for thematic harmony in a session that has been dubbed the “UnSession’’ by Gov. Mark Dayton, the case could be made that we need to undo or reduce the overly restrictive regulations that separate private purpose from public purpose in our endeavors.

The public benefit corporation builds on the powerful principle of doing well for ourselves by doing good for others. That’s a classic Minnesota impulse, one of the key secrets to success in our distinctively enterprising, innovative and community-minded state.

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Dane Smith is the president of Growth & Justice, a nonprofit research and advocacy organization that seeks a broader prosperity for Minnesota. Jeffrey Ochs is an entrepreneur and a board member of the Social Enterprise Alliance-Twin Cities.


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