How current legislation could help jump start social businesses
Imagine that you care deeply about the problems caused by invasive Asian Carp in the Mississippi River and its tributaries. You want to make an impact. What do you do? Certainly you could take preventative measures when fishing yourself, politically support increased DNR funding for containment, or educate others by writing a book.
But what about starting 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 is incongruous. It is widely understood that while businesses can have very positive social impacts through what they sell, how they source, and what they share, businesses officially 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 not impact.
This legislative session, however, a bipartisan group of lawmakers has introduced the Minnesota Public Benefit Corporation Act (MPBCA). If passed into law, this bill will enable entrepreneurs to create a new type of hybrid entity (commonly referred to as a “social business”) that has an official social purpose like a nonprofit and owners who can profit like a business. The question is, how would this new entity help you better achieve your goals?
In our 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 our collective interests, and managers would be required by their 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, year-long process of drafting that has involved the input and leadership of our region’s best lawyers, academics, entrepreneurs, and impact investors. Additionally, twenty-one other states have already passed similar legislation with many others considering it. In other words, the hook has been set for the MPBCA. All we need is for our politicians to reel it in.