Social Enterprise, Corporate Objectives, and the Corporate Governance Narrative

• Published date: 01 June 2015
• Date: 01 June 2015
• DOI: http://doi.org/10.1111/ablj.12045

Social Enterprise, Corporate

Objectives, and the Corporate

Governance Narrative

Justin Blount* and Patricia Nunley**

INTRODUCTION

Throughout history, both practitioners and academics, in fields such as

business, law, and economics, have debated various aspects of the corpo-

rate entity, such as why corporations exist, the proper objective of the

corporation, and the structure of corporate law in the United States.

While this debate is well established, a more recent corporate entity

development is the rise of the “social enterprise.” While there is no con-

sensus definition of this term, we believe that it is best understood, for

purposes of legal analysis, as “an organization that utilizes an earned

income strategy to accomplish a primary organizational mission of creat-

ing value for one or more stakeholders besides the organizations’ share-

holders or owners.”

1

In practice, this means that social enterprises are

organizations that have a primary objective of creating value for some

constituent other than the shareholders (i.e., their primary objective is

not maximization of shareholder wealth), but they pursue this objective

*Assistant Professor of Business Law in the Rusche College of Business at Stephen F. Aus-

tin State University in Nacogdoches, Texas.

**Associate Professor in the Hankamer School of Business at Baylor University in Waco,

Texas.

1

Justin Blount & Patricia Nunley, What Is a “Social” Business and Why Does the Answer Mat-

ter?,8B

ROOK.J.CORP.FIN.&COM. L. 278, 303–04 (2014)(citing Felipe M. Santos, A Positive

Theory of Social Entrepreneurship, 111 J. BUS.ETHICS 335, 341 (2012)).

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C2015 The Authors

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C2015 Academy of Legal Studies in Business

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American Business Law Journal

Volume 52, Issue 2, 201–254, Summer 2015

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through a traditional business-like strategy of earning income, rather

than relying solely on others’ benevolence.

For example, the company d.light design, Inc. (d.light), is organized

as a for-profit corporation but describes itself as “a for-profit social

enterprise whose purpose is to create new freedoms for customers with-

out access to reliable power so they can enjoy a brighter future.”

2

D.light furthers this mission by selling affordable solar powered lanterns

in the developing world to replace more dangerous and less effective

kerosene lanterns.

3

D.light does seek to generate a profit, but the pri-

mary reason for generating this profit is to further its mission of provid-

ing light to these developing areas, not to generate significant wealth

for its shareholders.

4

Advocates of social enterprise have referred to the social enterprise

movement as a “New Enlightenment” in solving societal problems

5

and

as a new “Fourth Sector” of society.

6

Social enterprise advocates also

engage in the corporate governance debate because many have argued

that, since social enterprises appear to adopt aspects of both for-profit

and not-for-profit entities, the development of new “hybrid” entity

structures is necessary to accommodate their needs.

7

Others have

2

See Who We Are, D.LIGHT DESIGN, http://www.dlightdesign.com/who-we-are/ (last visited

Apr. 19, 2014).

3

Id.

4

Id.

5

David Bornstein, The Rise of the Social Entrepreneur, N.Y. TIMES OPINIONATOR BLOG (Nov.

13, 2012, 9:30PM), http://opinionator.blogs.nytimes.com/2012/11/13/the-rise-of-social-

entrepreneur/.

6

See HEERAD SABETI &THE FOURTH SECTOR NETWORK CONCEPT WORKING GROUP,THE EMERG-

ING FOURTH SECTOR:EXECUTIVE SUMMARY 2–3 (2009), available at http://www.aspeninstitute.

org/sites/default/files/content/docs/pubs/4th%20sector%20paper%20-%20exec%20summar-

y%20FINAL.pdf (describing the current three organization sectors of society as business,

government, and nonprofit, and stating that hybrid organizations acting as social enter-

prises are the new fourth sector).

7

See, e.g., J. Haskell Murray & Edward I. Hwang, Purpose with Profit: Governance, Enforce-

ment, Capital-Raising and Capital Locking in Low-Profit Limited Liability Companies,66U.M

IAMI

L. REV. 1, 7 (2011) (discussing the “Low Profit Limited Liability Corporation,” a hybrid

entity designed to attract private foundation funds); William H. Clark, Jr. & Elizabeth K.

Babson, How Benefit Corporations are Redefining the Purpose of Business Corporations,38W

M.

MITCHELL L. REV. 817, 818 (2012) (noting that at the time of its publishing, seven states

had passed legislation allowing the formation of “benefit corporations,” and five other

202 Vol. 52 / American Business Law Journal

argued that new entity structures are not necessary because existing cor-

porate law is sufficiently flexible to accommodate the needs of social

enterprises.

8

Due to the flexibility afforded by the business judgment

rule, the prevailing corporate objective of shareholder wealth maximiza-

tion does not act as a significant constraint on any company wishing to

pursue a strategy that focuses on creating value for nonshareholder

stakeholders.

9

Additionally, those desiring to operate a social enterprise

are free to draft certificates of incorporation that specifically set forth a

corporate objective different from the generally accepted corporate

objective of the maximization of shareholder wealth.

10

Despite these

arguments, we acknowledge a popular perception still exists that for-

profit corporations cannot lawfully pursue any objective other than the

maximization of shareholder wealth.

11

Thus, we have previously posited

that rather than advocating for the creation of new business entity

forms, proponents of social enterprise should pursue a more nuanced

approach to changing corporate law—one that focuses on making

states had introduced legislation to do so); SABETI &THE FOURTH SECTOR NETWORK CONCEPT

WORKING GROUP,supra note 6, at 4–5 (advocating certain core characteristics of an arche-

typal “For-Benefit” organization).

8

See Blount & Nunley, supra note 1, at 304–08; see also Janet E. Kerr, Sustainability Meets

Profitability: The Convenient Truth of How the Business Judgment Rule Protects a Board’s Decision

to Engage in Social Entrepreneurship,29C

ARDOZO L. REV. 623, 659–67 (2007) (discussing how

a business strategy of engaging in social entrepreneurship does not violate the fiduciary

duty standards of a traditional for-profit corporation); Justin Blount & Kwabena Offei-

Danso, The Benefit Corporation: A Questionable Solution to a Non-Existent Problem,44S

T.

MARY’SL.J. 617, 659–63 (2013).

9

Blount & Nunley, supra note 1, at 306.

10

Id at 308.

11

See, e.g., Lyman Johnson, Pluralism in Corporate Form: Corporate Law and Benefit Corps., 25

REGENT U. L. REV. 269, 276 (2013) (“As this author has earlier noted, the above statements

about the need for Benefit Corp. legislation result from ‘the perception that for-profit cor-

porations must/should serve shareholder interests exclusively or primarily.’ And conse-

quently, these perceptions, which stem from ‘conventional wisdom,’ however faulty or ill-

founded that wisdom may be, ‘are the key for law reform.’ Law reform, after all, typically

takes place against a perception of need for corrective action, whether grounded rightly or

wrongly.”) (citations omitted); see also THOMAS J. BILLITTERI,MIXING MISSION AND BUSINESS:

DOES SOCIAL ENTERPRISE NEED ANEW LEGAL APPROACH? 15 (2007), available at http://www.

aspeninstitute.org/sites/default/files/content/docs/pubs/New_Legal_Forms_Report_FINAL.

pdf (quoting a document outlining a Minnesota proposal for a “Socially Responsible Cor-

poration” as stating “Corporations would no longer be required by law, as they are now,

to maximize short-term profits”).

2015 / Social Enterprise 203