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PublicPurposeBusinessLaw: BCorps/ FourthSector - Social Enterprise, Non-profit & Corporate Social Responsibility (CSR) Updates
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PublicPurposeBusinessLaw -
BCorps/ FourthSector - Social Enterprise,
Non-profit & Corporate Social Responsibility (CSR) Updates

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Updates and commentary on topics relating to businesses serving social or public benefit purposes, including the non-profit sector and corporate social responsibility (CSR) developments, as well as the emerging "Fourth Sector" of the economy - added to the for-profit, non-profit, and public/ governmental sectors - comprised of "Benefit Corporations" (also called "B Corps" or "Social Enterprise") and Social Entrepreneurs. These are private, for-profit businesses that serve primarily social or public benefit purposes. The emerging "Fourth Sector" of "B Corps" or "Benefit Corporations" and Social Enterprises is a newly developing field of the law, and we cover legal issues, legislative developments, as well as broader news & developments in this Social Enterprise/ Fourth Sector, in addition to news and updates relating to non-profit entities and corporate social responsibility (CSR).

Overview of Developments in For-Benefit (Fourth Sector) Enterprises

In an article entitled, “The For-Benefit Enterprise,” published in the Harvard Business Review, November 2011 issue, Heerad Sabeti provides an excellent and very interesting overview of recent developments in the emerging “Fourth Sector” of “For-Benefit” enterprises.

As Mr. Sabeti explains, “For-Benefit Enterprise” is a term more and more commonly used to refer to a hybrid form of business enterprise — one that is organized primarily to serve a social benefit purpose, but also generate earned income.

Mr. Sabeti, a co-founder and trustee of the Fourth Sector Network, was in the forefront of recognizing the emergence of this type of hybrid entity, and characterizing it as a “Fourth Sector” apart from but including elements typical of entities in each of our currently recognized three sectors: For-Profit, Nonprofit, and Government.

Forces Driving the Emergence of a Fourth Sector of “For Benefit” Entities

Driven by entrepreneurs motivated to harness the economic engine and energy of private enterprise to serve social and public benefit purposes, the movement toward formally recognizing a separate “Fourth Sector” of For-Benefit Enterprises has been gaining ground. Mr. Sabeti suggests that increasing public dissatisfaction with some of the environmental, ethical, and social costs of our capitalist for-profit model, and recognition of its inadequacy to serve social and public benefit purposes, have helped support the movement toward development of a Fourth Sector of hybrid entities formally and legally recognized as “For Benefit Enterprises.”

Mr. Sabeti touches upon the inadequacy of the for-profit form of corporate organization for For-Benefit Enterprises that exist to serve social or public benefit purposes. The problem stems primarily from the legal fiduciary duty that directors and officers in a for-profit corporation have to maximize profit for shareholders, leaving them open to potential liability to the corporation and its shareholders if they serve social or public purposes at the expense of maximizing shareholder profits. Directors and Officers who have to fear legal liability for failing to maximize shareholder profit in a for-profit entity, are not legally in a position to place priority on a social benefit purpose. This clearly is at odds with serving the social or public benefit mission that founders of a For-Benefit company seek to serve, as a primary corporate purpose.

Similarly, the nonprofit form of organization, with its arcane reporting requirements and rules prohibiting profit for shareholders, is at odds with the co-objective of Social Entrepreneurs of attracting private investment by providing a reasonable profit incentive in order to harnessing the energy of private enterprise to more effectively serve the social aims of the enterprise.

A major challenge for Social Entrepreneurs, therefore, has been trying to exist within the limitations of the only organizational forms that up to now have been available.

Mr. Sabeti points out that, “For-profits and nonprofits exist within supportive ecosystems consisting of well-established laws, accounting standards, financial markets, trained pools of talent, and customized tools and services.” He advocates for the development of similar supportive ecosystems for For-Benefit Enterprises, and points to encouraging developments on this front.

As he mentions, several states have recently passed laws formally recognizing a For-Benefit form of organization, apart from a nonprofit or for-profit entity. In these new types of legally recognized “For Benefit” entities, the fiduciary duties of officers and directors are consistent with serving the social benefit purpose of the enterprise, yet the entity is permitted to make profits, and thereby harness the engine of private business enterprise to serve their social purpose.

See, for example, our previous posts on Social Enterprise/ Public Benefit Corporation Movement Gaining Momentum in the U.S. and on New York Becomes Fifth State to Pass Law Authorizing For-Profit Public Benefit Corporations.

Examples of Some For-Benefit Enterprises

In his article, Mr. Sabeti provides several interesting current examples of For-Benefit Enterprises. Here are a few that he mentions:

  • Community Operated and Oriented Plans (COOPs), a new hybrid kind of health insurance entity, was encouraged under the Patient Protection and Affordable Care Act (the “Affordable Care Act”) as a means of increasing competition in the health insurance market. The Affordable Care Act appropriated $6 billion in start-up loans for this new type of entity, which incorporates elements of nonprofit, for-profit, cooperative, and public models. The Affordable Care Act sets a goal of each state having at least one COOP by 2014.
  • Riversimple, a British start-up, driven by a social purpose to foster the production of cars powered by hydrogen fuel cells, licenses its designs to an open-source foundation, making it possible for manufacturers anywhere in the world to develop and produce the cars.
  • Cafédirect, the UK’s largest “fair-trade purveyor” of hot drinks, was founded by a worker-owned cooperative, an international confederation of nonprofits, a public limited company, and an NGO. The suppliers of Cafédirect hold 5% of the company’s shares and are represented on its board.
  • Novo Nordisk, a large Danish pharmaceutical company was founded with the social mission to rid the world of diabetes. Although it is a publicly traded for-profit company, it is controlled by a nonprofit foundation, which, under Danish law, assures that profits can be used for humanitarian purposes and avoids placing pressure for short-term profit maximization on officers and directors, according to Mr. Sabeti.

Associations and Support Groups Fostering the Development of the Fourth Sector

Mr. Sabeti also mentions several associations, institutions and resources that support and encourage the development of the Fourth Sector of For Benefit Enterprise, such as:

  • The Global Impact Investing Network, supporting and connecting so-called “impact investors,” historically known as “socially responsible investors;”
  • Lex Mundi Pro Bono Foundation, providing lawyers who specialize in representing social enterprises and pro bono publico causes
  • Bridgespan and the Monitor Institute, organizations of management consultants focusing on meeting the challenges of delivering “blended value” (both economic profit and social or environmental value) and developing metrix to value social and public value produced by blended enterprises;
  • Business Schools Programs Supporting Social Entrepreneurship, such as Duke University’s Center for the Advancement of Social Entrepreneurship, Fellowship programs at Ashoka, the Schwab Foundation for Social Entrepreneurship, and Harvard Kennedy School’s Center for Public Leadership.
  • Developing Systems for Measuring and Certifying Quality and Value in the Social/ Public Benefit Arena, such the LEED certification program for green buildings, ISO 14000 environmental management standards, and Green Plus, and B Corporation certifications.
  • Associations and organizations that Support Social Entrepreneurs and Social/ For-Benefit Enterprise, such as Social Enterprise UK, Social Venture Network, conferences like the Skoll World Forum on Social Entrepreneurship and SOCAP.

Conclusion

In conclusion of his article, Mr. Sabeti writes,

“As entrepreneurs continue to prove that for-benefit organizations can balance economic, social, and environmental performance, demand for such organizations will grow. For-benefits cannot replace for-profits, governments, or nonprofits; a resilient, competitive 21st-centure economy needs all four sectors. But they can fill the gaps created by the failure of the three-sector model. As their DNA takes hold, the entire system will evolve. It will become clear that in organizing their enterprises for benefit, entrepreneurs have been the architects of a new, more sustainable capitalism.”

More Information

An excerpt and reprint of the article, The For-Benefit Enterprise, by Heerad Sabeti, is available from the Harvard Business Review.

For more information about the emerging Fourth Sector, visit the Fourth Sector Network’s website at www.FourthSector.net.

See also Barnhart Law PLC’s Public Purpose Business Law Blog.

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Constance R. Barnhart
Attorney At Law, Managing Member
Barnhart Law PLC

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