Moving Beyond Profit: Pursuing Social Good at Scale in Business Law
The topic of social purpose in business is seemingly everywhere these days. Should for-profit businesses pursue social goals alongside profit? What business law and management frameworks are necessary to enable them to do so? What corporate finance structures are most appropriate for these firms? And, perhaps most saliently, is it even possible to operate a business at large scale while meaningfully and authentically pursuing social purposes?
This last question led me to a research project on what happens when for-profit firms with social goals grow, and why they so often seem to lose their social objectives once they scale. Take, for example, Etsy. Etsy was a crown jewel of socially responsible business. It prioritized female entrepreneurship, its employees, environmental stewardship. It was widely admired as a company pursuing social goals alongside financial goals. It was even a certified B Corp, considered the highest currently available standard for the pursuit of social goals in business. Etsy’s IPO was one of the first ever for a certified B Corp.
But after Etsy scaled through an IPO, it fell apart both financially and socially—despite its best attempts to preserve its social objectives through private ordering. Activist investors acquired a stake in the company, laid off eighty employees, and fired the beloved socially oriented CEO in dramatic fashion. The board appointed a profit-oriented successor, who cut social projects at the company and laid off another 140 employees. And then, in a culminating move, Etsy announced it would not recertify as a B Corp. The drastic turn of events felt like a betrayal for online sellers, employees, and customers who had relied on the company’s public promises to pursue social objectives alongside financial success. Etsy has since bounced back and experienced much financial success, though it never recertified as a B Corp or otherwise outwardly re-committed to pro-social objectives.
Etsy’s story is not unique. Lots of companies that flourish along both social and financial dimensions on a small scale seem lose their way once they scale up. What happens to these companies?
Standard accounts point to many factors. They blame greedy, profit-minded investors. They blame short-termism. They say it simply isn’t possible to pursue social purpose on a large scale. They blame the entire capitalist structure.
Elements of these accounts may be true. But as I show in my most recent paper, there is also a fundamental problem in US business law. Specifically, business law in the US is not designed to facilitate scaling up for companies that pursue social goals in addition to their commercial goals. It lacks a durable commitment mechanism for these companies to bind themselves to long-term pursuit of their multiple objectives. Founders can privately order their companies in many ways to try to preserve their multiple objectives over the long term. They can add provisions to their charters, incorporate as benefit corporations, and seek certifications like B corp. They can also try to scale in a few different ways, through securing outside equity in an IPO or acquisition or bootstrapping to remain privately held.
Yet no matter how they choose to legally incorporate or privately order themselves, and no matter which avenue to scaling they pursue, these companies cannot systematically tie themselves to the mast of their multiple objectives. This problem is particularly acute due to the dual-pronged losses of strategic and managerial control that occur at scale. The choice to scale with outside equity (and pursue an IPO or acquisition) results in losses of strategic control over the board and day-to-day managerial activity, usually jettisoning the social purpose objectives. Although scaling privately may seem like a solution, this avenue still entails a loss of managerial control and also frequently a loss of strategic control, as is common for example in debt financing. As I explain in the paper, business law fails to provide a durable commitment mechanism to help counter these losses of overall strategic and day-to-day managerial control.
The inability to reliably scale limits these companies’ potential for larger social and economic impact, requiring them to choose between staying small or abandoning their social goals to scale up. It also reduces founders’ abilities to privately order themselves as they wish—in this case, to use a for-profit legal entity to pursue objectives beyond profit.
To help address this problem, I advocate for providing a voluntary commitment mechanism in business law to companies that want to help protect their social goals over the long term. My proposed commitment mechanism would attach to the benefit corporation—a completely voluntary incorporation status—and it would apply to benefit corporations that go public, get acquired, or exceed a certain size.
What would the commitment mechanism require of these companies? It could take many forms, and we need additional research in law and management to understand how companies with social goals can succeed at scale to better inform future legislation. But I preliminarily suggest two potential rules. First, it would mandate companies that opt in for the commitment mechanism to have stakeholder representation on their boards of directors, rather than just shareholder representation. And second, it would impose socially conscious executive compensation that links C-Suite pay in part to the achievement of social goals, and not just financial ones.
This kind of requirement in business law would help enable companies to commit meaningfully to their social purpose goals at scale. It would help make benefit corporation law more accountable and impactful. It would help filter out the ‘greenwashers’ who claim social purpose goals to gain public recognition, but don’t actually follow through on their claims in practice. And it could help to facilitate large-scale social impact in for-profit businesses, instead of just large-scale profit.
Emilie Aguirre is an Associate Professor of Law at Duke Law School.
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