Hybrid Corporations: What Business Are You In?

The new "it" thing in social enterprise is hybrid corporations. There are B corporations--benefit corporations--whose mandates are to serve the public good and also increase shareholder value. There are also L3Cs, low-profit limited liability corporations with a similar dual purpose. Translation: for-profit companies whose boards and managers are not expected to fully maximize the company's financial value.

Here's my fundamental problem with this: If you're running the company, day in and day out, what is driving you--mission or profits, and how are you inspiring the troops? And if you're sitting on the board, on what basis are you ultimately making critical decisions--mission or profits? Eradicating poverty in Africa, or making profits from the sale of financial services? It should be one or the other. And if you're an equity holder evaluating the performance of your directors and managers, how do you balance the competing purposes--mission or profits? And will all equity holders strike the same balance? In a for-profit, the measures of success are clear; with competing purposes, how will the board know what success looks like?

First, to provide some background, there are at least two ways to become a B company:

1. Keep your existing entity (corporation, LLC, partnership, etc.). Amend your governing documents to include dedication to public interests (e.g., social, environmental) as part of your company's goals and a valid interest for the company and its officers/directors/partners to consider. This is an attempt to insulate the organization and officers, etc. from law suits from shareholders or owners for not maximizing shareholder value. B Lab at Bcorporation.net will certify an organization as engaging in good B company practices.
2. Pass legislation to provide for a new type of business entity called a B corporation that has imbedded in the legislation the requirement to consider the public as well as shareholder value. This sets out the right to sue for nonperformance of public service. According to Bcorporation.net, Maryland is the first and only state to have done so. Some have suggested legislation in Pennsylvania as well. L3Cs also need statutory authorization.

B corps, at best, seem gimmicky. At worst, I think B corporations could undermine the clarity between for-profits and nonprofits, and also open the floodgates to law suits against B corps by equity investors who feel misled. Furthermore, I believe that graying the lines between for-profits and nonprofits could jeopardize nonprofits in clarifying their public service roles to state and local governments that have recently been considering levying taxes and fees on nonprofits.

Right now, we have two clear and distinct universes--for-profits and nonprofits, and they generally work well:

• For-profit companies, that are either privately held or public: Privately held companies generally give the owners latitudes in terms of providing philanthropy and service in addition to generating profits. The purpose of public companies, however, is to increase shareholder value. As part of their responsibilities, the public company's leadership can make corporate social responsibility (CSR) integral to the company's strategy to increase shareholder value.
• Nonprofit organizations, whose missions are to serve the public and provide social benefit.

There are benefits of maintaining bright lines between for-profit and nonprofit corporations: management and investors know what they are driving for, and there is little confusion about priorities and expectations. But mixing mission and profits can inject ambiguity and mismatches of intentions among shareholders, the board, and lenders. With a B corp, especially as shares are transferred to new owners, there can be competing visions of profit and mission, allocation of resources between profit and mission activities, and even as to the nature of the mission itself.

B corps and L3Cs can be useful as a vehicle to attract program-related investments (PRIs) from foundations and related commercial financing under narrow circumstances--for the building of a facility where the purpose is clear (a symphony hall, for example), and there is one (or a very few) equity holders (such as a foundation) that is fully aligned with the mission.

Follow @FastCoLeaders for all of our leadership news, expert bloggers, and book excerpts.

The bottom line: Know what your business is and do it well.