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Nonprofits Worry About California's Effort to Create Social-Business Units

by CCE Staff on 06/15/11

Chronicle of Philanthropy, May 19, 2011 (Page 9)

by Ben Gose

 

Lawmakers in California are considering two bills that would create new corporate structures for businesses that blend profits with social and environmental goals.

But as these new structures gain momentum, the California Association of Nonprofits is asking the state legislature to slown down and consider how any changes to corporate forms might affect charities.

Some proponents of the bills say passage would help California become a leader in experimenting with new for-profit structures and could bring billions of new capital to bear on social and environmental problems.

But Kenneth M. Larsen, director of public policy at the California Association of Nonprofits, says the legislature should proceed with the same cautions required of scientists.

"If you go into an experiment, you have to take a look at the risks to the subjects, and in this case, the nonprofits are some of the subjects," Mr. Larsen says.  "You want to make sure that you do no harm."

2 Options

One bill, first introduced a year ago by state Senator Mark DeSaulnier, would allow the creation of "flexible-purpose corporations" that seek both profits and at least one broader social or environmental goal.

The structure would shield board members from claims that they have violated their fiduciary duties by pursing the social or environmental goal and is expected to appeal to companies with large numbers of shareholders, including publicly traded companies.

The second bill, introduced in February by Jared Huffman, a state assembly member,w ould allow the creation of benefit or B Corporations.  This structure would go even further than the flexible-purpose legislation and require corporate directors to pursue a broad set of social and environmental objectives in addition to profits.

The B Corporation appeals to social entrepeneurs and privately held companies that would like to be held to a higher standard, at a time when it has become trendy for corporations to boast about their socially conscious activities.

Charities Are Concerned

Already, four other states - Maryland, New Jersey, Vermont, and Virginia - have passed laws creating B Corporations.

R. Todd Johnson a lawyer in Silicon Valley who worked on the language for the flexible-purpose legislation thinks the legislature should pass both bills and let the market sort out which approach is best.

"We are in this very rare moment where we have this opportunity for experimentation," Mr. Johnson says.  "I think no one should be holding too tightly to one particular form because we're not going to know for two to four years which one is best."

Neither California bill would provide any tax advantages to corporations that also pursue social or environmental goals, but some charity leaders are concerned that such tax advantages may be sought eventually, Mr. Larsen says.

Philadelphia, for example, has already passed modest tax breaks for B Corporations.

The fear is that some wealthy Americans would take money they would otherwise have given to charity and invest it in for-profit corporations pursuing social goals.

"How can we be sure that investments in flexible-purpose corporations are not being made in lieu of charitable contributions?" Mr. Larsen wrote in a letter this month to Christine Kehoe, chair of the state's Senate Appropriations Committee.

Not Against Change

Advocates for the new corporate structures argue that charitable donations might in fact rise, since companies that explicitly pursue social or environmental goals also tend to be generous with their corporate philanthropy.

"Both pieces of legislation are creating more choices for investors in how they invest their dollars and have nothing to do with how they allocate their philanthropy," says Jay Coen Gilbert, a co-founder of B Lab, a nonprofit group based outside Philadelphia that is pushing the B Corporation legislation in California and other states.

Mr. Larsen says his association's main goal is to slow down the process and encourage lawmakers to hear from a broader swath of nonprofit leaders.

"We're not against change, but we think it needs to be change for the good and that more voices need to be heard," he says.

The federal government is also starting to explore whether a new legale structure is needed at the national level for organizations that operate in the gray zone between nonprofit group and for-profit business.

Diana Aviv, president of Independent Sector, a coalition of charities and foundations, says Congressional staff members have asked her gorup to offer recommendations on the question, motivated partly by last year's health-care overhaul, which created a new type of health-insurance entity.

These will operate as member-run nonprofits that have a social mission - cutting costs and improving the health of their customers - but will also be able to raise money from private investors.

Ms. Aviv gathered a group of legal and nonprofit experts together last month to discuss possible receommendations about the legal framework for such "hybrid" businesses, but she says they concluded it was premature to make proposals.

She says they raised a number of questions about the businesses, including whether they can be effective since they have two potentially incompatible goals - to serve the public good while also benefitting investors.  She added: "Some in the room felt very strongly that we can't serve two masters." 

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