Today was an important day for Benefit Corporations: Governor Markell signed a Delaware Benefit Corporation Statute into law. I had the pleasure of presenting an investor perspective at the signing. Here is roughly what I said:
Our problem as society is no longer how to make more stuff. Cars, clothes, computers are all becoming better and cheaper. A trend that will only accelerate with new technologies and increased globalization. Purely shareholder value driven companies have done a good job with this technological innovation.
Our biggest remaining problems, however, require social innovation: how to distribute the benefits of progress more widely, how to live in better harmony with the environment and how to provide affordable access to education and healthcare for all. A new wave of mission driven companies can and will play an important role in addressing these problems. At Union Square Ventures we are seeing more and more entrepreneurs and startup employees who are motivated as much by making the world a better place as they are by making money.
Until now though as investors we faced a challenge: founders who want to protect their company’s social mission through supervoting shares and/or by controlling the board of directors. These and similar approaches extend the power of founders far beyond pursuing the stated mission and result in poor corporate governance. Historically that has been bad for investors and ultimately also for the mission itself. The Benefit Corporation solves this problem much more elegantly by allowing companies to put social objectives right upfront and empowering investors to hold founders and management accountable for pursuing these.
The Benefit Corporation statute passed by Delaware legislators and about to be signed into law by Governor Markell will thus provide the legal foundation for aligning investors and entrepreneurs around social missions. This is crucial both for the venture funding process and when these companies eventually go public. Add to that the Internet which provides a mechanism for efficiently disclosing and monitoring not just financial performance but also mission metrics on a timely basis. Together with the statute this increased transparency will help create a new financing market in which social innovation can be funded as effectively as technological innovation has been in the existing one. As investors we are excited about participating in that new market.
As longtime readers of Continuations know, I have been a strong proponent of the Benefit Corporation. I am therefore thrilled that Delaware, which is the home to almost all venture backed corporations, has introduced Benefit Corporation legislation. This will allow companies to charter or recharter in Delaware and add one or more public benefits as goals that are on equal footing with maximizing shareholder value. This is critical for allowing mission driven companies to raise money from private investors and go public without using supervoting stock or other artificial controls to protect their mission.
Previously there were only two choices: be a for profit and put everything in the service of shareholder value or be a not-for profit and be subject to all sorts of restrictions on fundraising, compensation, value creation, etc. Benefit Corporations offer an attractive third way that provides commitment to a mission but still allows the market to operate. It is useful to examine why that is more important today than ever and also why this form is possible today (and would have been much harder if not impossible pre Internet).
Let’s start with why we need mission driven companies now more than ever. The reason is simple: capitalism as currently practiced is failing to address major existing and emerging problems, including damage to the environment and wealth and income inequality arising from the dramatic changes in the labor market. Our governments at the federal, state and local level are largely broke and cannot adequately address these problems either. Yet at the same time there is a glut of private capital that could be put to work. We simply need to create ways for that capital to flow more efficiently to companies that will make a change for the better.
That raises another important question. Why don’t the existing capital markets, especially public markets, accomplish this? Even if you were still a believer in the efficient market hypothesis anything that’s a social externality is not captured by the company providing it and will be underpriced and hence underinvested with the current setup. That’s because in the absence of a credible commitment to the mission there is always an opportunity for short term rent extraction. The Benefit Corporation fixes that problem.
The Internet’s ability to provide a rich information channel is critical in enabling this new form. Historically we had to provide massively condensed information about companies, such as EBITDA, as it was virtually impossible to widely distribute and analyze more detailed information in a timely manner. Much regulation was focused on enforcing the proper way of calculating these summary measures. Of course, as the world got more complex we encountered vast abuses of the ability to manipulate summary measures (cf. Enron). Today, mission oriented companies can provide realtime detailed information about the degree to which they are succeeding both financially and with their mission. With a higher level of transparency multiple independent third parties can help validate this information.
In summary then what Benefit Corporation legislation does is facilitate a market that is badly needed: the market for mission driven companies. For me as an investor that is exciting news.
Since I first wrote about the Benefit Corporation several great things have happened, including New York State passing legislation and Etsy becoming a certified B Corp. Since most venture backed companies are incorporated in Delaware, it would be terrific to see Benefit Corporation legislation passed there as well.
Sometimes I have people ask me what problem the Benefit Corporation solves that cannot be addressed simply in the context of an existing C Corp. What it really comes down to is better aligning the incentives between investors and mission oriented founders. If you take a company such as Kickstarter (where we are investors), then the objectives of the founders are quite different from just creating share holder value and have a strong social component (funding for the arts and creative projects). And that makes founders wary of investors because they are afraid of future conflicts.
The current solution in many instances are structures such as dual class shares where founders control a majority of voting rights. Google and Facebook are examples of this in the public markets. That turns out to be a solution that is very unfriendly to investors and extends the powers of founders far beyond pursuing well defined and measured social benefits. The Benefit Corporation solves this problem more elegantly by allowing founders and companies to put social objectives right upfront and giving investors the tools to actually hold management to pursuing these.
This is important not just during the venture funding process but also when these companies eventually go public. A Benefit Corporation statute effectively creates a market place for investors and companies who have aligned incentives around a broader set of goals
I attended an interesting lunch yesterday on something called the B Corporation. It is an effort to formally write the idea of triple bottom line businesses into corporate law and provide the standards to go along with that. Today’s common form of organization is the C Corporation which has as its objectives to maximize shareholder value. The key measurement standard that goes along with that is GAAP accounting. B Corporations by contrast have a broader set of objectives that includes positive external impact and employee well-being.
What I love about this initiative is that it is an example of the kind of values based re-design that I believe we need. It is not an add-on or single product standard (eg fair trade coffee) but rather a comprehensive approach down to the legal foundations. You can already formally become a B Corporation in six states, including California as of a week ago. In New York the bill has been passed in both houses and awaits the signature of Governor Cuomo (if you happen to know him, please ask him to sign this!).
For venture backed companies it would be ideal to have Delaware also write the B Corporation into the law. That will likely take some time as Delaware is not an innovator when it comest to corporate law (they were the 22nd state to provide LCC laws). But in the meantime, you can already act like a B Corporation if that’s of interest to you and even be certified by B Labs (the non-profit behind the B Corporation). I encourage everyone to check it out. If nothing else, it will provide some interesting ideas for areas to pay attention to as a company. That is especially helpful for startups as it is much easier to bake sustainability, transparency, employee well-being into a company’s culture early on than add it later.
I was impressed by the people behind this effort who had successful careers in finance and became convinced that there had to be more than pure markets. The B Corporation could be the basis for a progressive form of capitalism and just the kind of thing we need. This might make a good subject for a teach in at Occupy Wall Street.