March 26, 2012

STATE PONDERS DESIGNATION OF ‘SOCIAL ENTERPRISE BUSINESS’

By Greg Bordonaro, Hartford Business Journal

State lawmakers are considering a bill that would allow for the creation of a new corporate entity called a social enterprise business that would shield a firm’s executive management from shareholder lawsuits if they put pursuing a social cause ahead of maximizing profits.

Such corporate structures are growing in popularity across the country as states begin to compete for more socially conscious businesses.

In the past two years, seven states have adopted similar legislation, which essentially creates a hybrid business model. It allows organizations to combine non-profit motives, like pursing social or environmental goals, as part of their mission, with the ability to turn a profit.

Advocates say it will give organizations that fit a more typical nonprofit profile access to credit markets so they can grow their business without having to rely on donations or government funding, which tend to dry up during economic downturns.

According to some estimates, social responsibility investing is a $50 billion industry that is projected to grow to $500 billion over the next 10 years. Lawmakers and advocates say tapping into that market could lead to job growth in Connecticut and help increasingly cash strapped nonprofits.

“This provides a company whose mission may include improving the environment or public health to make business decisions with those goals in mind — not simply on only how investors are affected,” said State Rep. Gregory Haddad, a Democrat from Mansfield who introduced the bill in the Commerce Committee.

“Companies can still make money and deliver a return to investors, but this provides executives with more flexibility in pursuing the true founding goals of a business.”

Haddad said Connecticut’s proposal to create a social enterprise business entity actually goes further than any other law that exists across the country because it calls for restrictions on excessive executive compensation and requires a living wage to be paid to a company’s employees.

More significantly, it requires a business to state a public benefit mission in its incorporation articles, and gives equal priority to the interests of a company’s shareholders, employees, customers, as well as community and social considerations and the environment.

That’s different from a typical corporation which is legally bound to put shareholder interests ahead of all other parties.

The bill recently received a public hearing in the Commerce Committee and drew wide support from more than two dozen groups and individuals. The Judiciary Committee is also considering a similar measure, Haddad said.

Haddad said he is optimistic that some form of the measure will pass, but he was uncertain if the pay restrictions and living wage requirements will gain widespread support.

Mary Jo Keating, a spokesperson for reSET or the Social Enterprise Trust in Farmington, said social benefit enterprises can have a significant appeal to young people, a demographic the state is desperately trying to keep in Connecticut.

At the same time it can add new businesses to the state’s tax rolls.

The Social Enterprise Trust is one of the leading proponents of the bill, and its founder, Kate Emery, has been transitioning her Farmington technology company, The Walker Group, into a social enterprise.

Another supporter is Dayan Moore, who is the owner of an eco-friendly handbag and accessories company in Milford. Moore’s company, GG2G, makes its products using recycled materials from billboards and restaurant seating. GG2G has been forced to cease production in recent years because it hasn’t found an environmentally conscious sewing center in the area to help put together the products.

Now Moore is looking to open her own sewing center that would fit the social benefit model because the company would look to hire low-income individuals or people just released from prison and offer them life skills and other education opportunities to assist them inside and outside the workplace.

Moore said she has a location picked out in Bridgeport for the business, and a staff in mind to help run it.

Moore says she can’t find the $250,000 in private financing to get the sewing center off the ground and she doesn’t want to make the company a nonprofit because that would force her to depend on fundraising.

Being designated as a social enterprise business, Moore says, would make her company more attractive to private investors interested in the social responsibility space.

“I really believe its time for a business designation that allows you to function as a for-profit business doing nonprofit work and providing social benefits to the community and environment,” Moore said.

Nationwide, several states have passed legislation allowing for the creation of a social enterprise business, or something similar to it, including Vermont, Maryland, New York, New Jersey, Virginia and Hawaii.

There are questions of course about whether or not there is a large social enterprise investment base in Connecticut. Moore said she would like Connecticut’s proposed bill to offer tax benefits to companies or individuals that invest in such businesses but its not clear if that will make its way into the proposal.

Haddad also pointed to the popular growth of socially responsible mutual funds, like Winslow Green Growth and Portfolio 21, which provided double digit returns over the past five years exceeding the S&P 500 Index.

There have also been some critics of the measure in other states, particularly from the legal community, which has raised concerns that the corporate structure would lower standards of fiduciary oversight.

Others have said the model can be used by companies as a marketing ploy, because they register as a social benefit enterprise and tout it as a selling point, but then eventually convert back to a regular for-profit entity.

Haddad said the bill in the Commerce Committee puts restrictions on such activity, something also not done in other states.

“Dissolution provisions are important,” Haddad said. “In other states, corporations have been able to float in and out of this corporate structure with a two-thirds vote from shareholders. We have a desire to set it up so there is a no-turn-back clause.”