Why are there social enterprises?

Some time ago, I wrote a Five-minute General Counsel post on how to approach the question of whether a social enterprise fits a founder’s needs. In that post, I focused on the issue of whether the concept of fiduciary duties and the prudent investor standard were as anathema to “social” goals as some people think.

John “Monty” Montgomery is a lawyer I worked for at Brobeck in Palo Alto. I’ve referred clients to him, had him to work for my clients, and maybe even had him and his team do work for me when I was outside the practice. Monty’s a good guy and has spent a lot of time thinking about how social enterprises work and why, precisely, we need them. In turn, that explains in which situations it’s the right choice for a founder and board.

For example, in a post on Laureate Education, Monty pulls out the one useful rationale that I see: clarifying in the charter that the corporation can have these other objectives and balance them, via the liability safe harbor. I’ve always maintained that the business judgment rule gives directors the protection they’re seeking, but I acknowledge that eliminating liability in this way is almost certainly preferable to winning the lawsuit if it comes. If that’s the balancing you seek – a bit more certainty by putting a permanent thumb on the scale, then it’s a good choice for your company.

For example, sometimes, people can expect to much, turning a “should”or “can” into a “will.” This post describes the failings of VW’s governance structures in allowing – or even encouraging – the EPA emissions test fraud to take place. The problem isn’t that VW lacked authority to follow the law. It isn’t that VW needed authority to make some kind of moral decision that committing securities fraud and breaching fiduciary duties would be a bad idea as a strategy for increasing shareholder value. No one needs a separate authority to make choices to follow the law or break the law. No director’s going to get sued for saying “I voted to comply with the law.”

And so these statutes that allow for alternative structures are best, in my mind, by providing a safe harbor for directors so that they don’t have to potentially justify why polluting less than the law allows is a good thing. Think of it this way: it would be really hard to challenge a sports or event sponsorship, or an earth day sponsorship as advertising. If a “green” image is justifiable, is it really conceivable that being green wouldn’t be?

So what’s next? Companies are signing up for these different entities – B corps, L3Cs, and others. These structures impose different kinds of costs, both explicit and implicit, on a business. If there’s enough interest, we’ll do a wrap-up of the current options. Are you thinking of a social enterprise? What do you think it will add to your company? Please share your ideas in the comments.

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