There are new bills in the works in California, Vermont and other states to protect social entrepreneurs, or make it easier for them to sell in a private market. Business Week reporter John Tozzi points us to a trend where sometimes once-public companies, frustrated by the way Wall Street treats their products and their business with its focus on financials, seek to become benefit corporations.
What’s weird about this is that it’s unclear from the article itself whether the legislation would make these private companies a form of public-benefit corporation, which is normally a private corporation chartered by the state to do a public good. Tozzi doesn’t clarify this in his writing, so I’m taking a guess. What does seem apparent from his writing is that some companies already in existence turn to this procedure to raise money away from the public markets, which apparently are disinterested in small scale and weaker bond ratings.
Let’s drill down and find out what the meat of the story really is, by quoting a focused business owner, Small Dog Electronics CEO Don Mayer:
Many more privately held companies are likely to seek benefit corporation status. Small Dog Electronics is a 40-employee Apple (AAPL) reseller with two stores in Vermont and annual sales of $20 million. CEO Don Mayer wants to recharter as a benefit corporation if the Vermont law is passed, in part because he is considering selling a stake in the company to raise funds for a third store. Small Dog, which is 15 years old, operates e-waste drives that recycle hundreds of tons of discarded electronics. It also matches customer donations to charities and pays 90% of its workers’ health premiums. It even covers some veterinary care. “This will give us another tool in our quiver to attract the kind of investors that we want,” says Mayer, 61, who hopes to ensure that future owners will preserve the company’s mission after he retires.
Last I checked — in January 2010 — the private placement markets were doing better than they had in 18 months or more, but there was still a problem with companies that had lower bond ratings — due to economic volatility and decline — and companies that didn’t seem attractive to a private capital raising industry were having a hard time attracting investors willing to pony up for a B or Triple B company. That wasn’t a problem in 2006-7.
Will shareholders want to invest in companies that don’t have a laser-like focus on profit? “Most shareholders invest for the return to them, not for the return to somebody else,” says James J. Hanks Jr., a corporate lawyer at Venable in Baltimore. Others think managers could cite these alternative aims as justification for bad decision-making. “If your goal as a corporation is to better the environment, then you should be working philanthropically,” says Charles Elson, director of a corporate governance program at the University of Delaware.
Okay, this is a fair point, but let’s add a little something to the cake batter. If a government gets behind an organization by chartering it as a benefit corporation, is it then easier for endowments and funds to put in their money behind the government? That would seem true for education start-ups that work in an environment where it’s hard to find scale. There are too many decision makers, too many districts, and not enough agreement on what is considered good for schools, students and states, for that matter. Just look at arguments about data standards, and those are facts we are taking about.
It would be really interesting for Tozzi to take a look at the way education entrepreneurs would approach this topic.