The three “breakout” sessions I attended today discussed very similar ground in terms of how to structure social enterprises and build business models that are accessible to investment, financially sustainable, and socially optimal.
I’ll start by mentioning the institutional challenges that social ventures run up against – particularly corporate structure. Our corporate structures in the US were adopted out of common law from England. Milton Freidman wrote that the role of company managers is to maximize profit, and the role of company owners is to decide what to do with that profit. This represents the traditional post-WWII school of thought, that today we can see is a major misconception of reality. But it is this school of thought that has guided the laws and frameworks governing corporations. In most states, for-profit businesses and have legal obligation to maximize profits, which inhibits them from practicing necessary discretion when it comes to social and environmental costs of doing business.
The biggest challenge in reforming corporate statutes is that it’s a state-by-state battle. B-Labs introduced B-Corporation, which I’ve written about in the past, which takes more of a branding approach in labeling businesses that operate behind a specific social mission first, before profit maximization. While this is just a label, it B-Corp creates a universal set of standards that can transcend state lines. Businesses still face the institutional challenges of being stuck within an outdated corporate structure that limits or restricts their ability to raise patient capital or “program related investments” (PRIs) from foundations.
During a different panel discussion on “Value Chains”, Ella Silverman of World for Good, Inc. and World For Good Development Foundation talked about they set up two distinct organs to manage the aforementioned challenges. They are able to house the primary business operations under their corporate entity, and offset some of the high costs of their social-end work through the non-profit “Development Foundation”. The non-profit end also allowed them to bring in donor money to help subsidize some of the costs of doing research on “The Wage Guide”, for example, through which they introduced a metric-based approach to determining “fair wages” across the value chain for products not traded on a public exchange. I thought this was a fascinating approach to creating a “hybrid” model.
Another initiative has been the L3C (Low-profit Limited Liability Company), which builds off the LLC structure but allows for better financial stability, fewer financial/fundraising constraints, the opportunity to sell products and services, and placing “social mission” before profit maximization while complying with IRS rules. You’ll have to Google it to learn a little more details, but it seems very touch-and-go – one person described it a mere semantics.
It was interesting hearing today the perspective of the foundation/grantmaker side, and the legal challenges they face when putting money into for-profit business models – such as acquiring a “letter of qualified counsel” convincing the IRS that the PRI satisfies IRS requirements for “charitable” contributions. It’s really fascinating, and this is really where policymakers need to be moving forward in creating corporate structures and tax policies that allow for patient capital to be investing in for-profit social ventures.
Also, I liked what one of the panelists (Rick Zwetsch) said about how L3C got started: If you look at the foundation portfolios over the last couple of years, they have depleted by almost 50%. So L3C was founded under the assumption that these investors are going to want to shift away from pure grantmaking, towards more of an investment strategy where they can earn interest and re-grow their assets while achieving their social mission.