There is a revolution underway in the world of corporations. Or it is an evolution? Either way, it is has brought about a new and different set of rules for companies that choose to engage in social causes.
The landscape of the for-profit business is changing. Evolving from the traditional ways that boards and shareholders of businesses have operated — in pursuit of profit — a new class of entrepreneurs is shedding some of that pressure to focus on social and environmental causes.
But who are these new corporate leaders, and what are their missions? What follows is a glimpse into the worlds of the social entrepreneur — a world of making money but also making change.
The Rules of Better: Corporations and Progressive Ideas
Kyle Westaway, founder of Westaway Law and a social entrepreneur himself, recently spoke to a room of some 30 to 40 social-cause startup hopefuls at inVenture in Manhattan. They came together to hear about this revolution, one that Westaway said started to formalize some two and a half years ago.
Kyle Westaway talks about social entrepreneurship at InVenture on December 10.
Photo by James O'Brien
"You're trying to hold onto profit and purpose simultaneously," Westaway said of the way new legal structures are coming into play. "It is the future, I think, of business. People like you are changing the face of what a market economy can be and will be in the future."
The way they're doing this is manifold. There are flexible-purpose corporations in California, benefit LLCs in Maryland, and even third-party certification (called B Corp certification) just about anywhere for the traditional company that wants to be recognized for its social cause. Then there's the benefit corporation and the L3C.
the new corporate models, these two new legal structures are specifically built
to foreground companies that in addition to making a profit, are dedicated to making the planet a better place to live. Let's look at both the benefit corporation and the L3C.
Benefit Corporation: Matter Inc.
Photo by Matter Inc.
Matter Inc., of New Orleans, is an industrial design and consulting studio that creates stylish home products and progressive toys. One product they sell is the sleek Bird Project bird-shaped soap that encapsulates a small ceramic bird keepsake made of Louisiana clay. Another big seller is their literacy-themed Rabbits for Reading puppet.
All of Matter Inc.'s products are locally sourced and made of sustainable materials, but even more to the point: a portion of the money that Matter Inc makes from sales is poured back into the community. Matter Inc. has already provided $20,000 back to the community, and its founders expect to give $400,000 by the end of 2013.
To do this, they've structured themselves as a benefit corporation — a new class of company that has emerged in 11 U.S. states.
A benefit corporation works under a mandate broader than maximizing shareholders' value. It is guided by the concept of general public benefit. That is, society and the environment must materially benefit from what a company such as Matter Inc. does and a third party must verify that material benefit annually.
transparency. Benefit corporations file a yearly report that is
available to the public. The report describes what the company has done to make social and environment improvements to its communities.
"The benefit-corporation structure perfectly reinforces what we set out to achieve in forming our social-mission design company," Director Tippy Tippens said. "As a triple bottom-line business — people, planet, profits — we appreciate a formal business structure which requires us to formally define and create an annual report of our results and goals."
For Matter Inc. doing good is good for business. Tippens said that the benefit corporation is on track to become a $1 million company by 2014.
L3C: A 'Missing' Link
L3C is another potential option for companies that want to focus their profits to
improve local communities--but this classification differs a bit from the benefit corp model discussed in referencing Matter Inc.
"L3C is a new class of LLC," said Westaway. "It's called the low-profit limited-liability company."
Being an L3C, or a low-profit limited-liability company, doesn't mean that there's a cap on the profits a corporation can make, it simply puts a business's social cause — think of it as a purpose mandate — above the profit mandate. A core idea of the L3C: the company should be able to plug into philanthropy for its capital; it's not confined to private capital to make its way.
This process is anchored to what's known as 'Program Related Investments.' Foundations that typically feed nonprofits make contributions to L3C corporations; the foundations then promote the L3C corp's purpose and become stakeholders in the business, eventually benefiting from its future profits.
While this model sounds good in theory, there are real-world application issues that are making it difficult for companies to implement it. It's expensive for a foundation to hire experts to research and make certain that a for-profit meets the social-cause prerequisites that the IRS mandates. The idea of the L3C structure is to allow foundations to circumnavigate the cost of that due diligence.
"The key to that was that the IRS would bless the L3C structure and say: L3Cs are PRI-eligible," Westaway said. "The problem is, the IRS did not do that. So, you have this structure that was designed to kind of hack the existing tax code, but it hasn't really effectively done it, to this point in time."
And so, at least one social-enterprise structure is waiting for its finishing piece to fall into place.
The Quiet Corporate Revolution
"The advent of the emerging legal structures is a quiet corporate revolution that is sweeping the United States and laying the groundwork for a new version of capitalism," Westaway said in an interview following the talk.
And what is that new version of capitalism?
"Conscious capitalism," Westaway said. "Whereby businesses are platforms for a broader definition of value creation and have positive social and environmental impact as well as financial success."
For companies like Matter Inc., the revolution aims to generate profits and shareholder value, but in doing so their founders and directors want to create social good along the way.