THE GUARDIAN / AUGUST 14, 2013
The benefit corporation is a new class of corporation in the US, which mandates that entrepreneurs take into consideration their social and environmental impact, potentially at the cost of returns to shareholders. An essential question for entrepreneurs who are creating a sustainable business but also need investment is: what do investors think about the benefit corporation?
Shift from technological to social innovation
As a partner at Union Square Ventures (USV), Albert Wenger has invested in some of the most successful tech companies, including Twitter and Tumblr. He considers himself a pure tech venture capitalist, not an impact investor, yet he is strongly in favour of the benefit corporation.
Wenger believes that the current version of capitalism has been incredibly efficient at creating and distributing a high volume of stuff at an increasingly cheaper price. Technical innovation has ensured that everything from computers to clothing is getting cheaper and much more widely available.
“The problem of technological innovation is not the primary problem that we still need to solve. The primary problems are the very large-scale problems: giving people access to good education, quality healthcare, poverty alleviation and not destroying our planet.” Wenger believes we have to usher in a new version of capitalism that will shift the focus from technological innovation to social innovation and the benefit corporation is a great vehicle to do that because it moves beyond a narrow view of shareholder maximisation-centered version of capitalism
Protection from short-termism
There is a fundamental disconnect between the incentives for short-term profit maximisation and long-term value creation. “A company could exist for decades or longer, but individual managers may work at a company for only five years or 10 years; investors may be looking to exit even more quickly. So you have very different time horizons,” notes Wenger.
The benefit corporation empowers management, directors and shareholders to set a long-term vision for the health of their company without the interference of short-term focused shareholders forcing them to extract value too soon. A good example of this, according to Wenger, is the Myspace acquisition: “News Corp bought it and paid what they thought was a reasonably high price for it and then proceeded to want to recover that price very quickly. So they tried to monetise the network very, very heavily, ultimately contributing to its collapse.”
After a long career in investment, including serving as co-chairman for the $21bn asset management firm Genworth, Ron Cordes has shifted his focus from simply investing in great companies, to investing in great companies that have a positive social and environmental impact.
Most investment rounds include multiple investors and, more often than not, they have never met each other – the other investors are simply names on a capitalisation table. There is no way to understand the other investors’ motives for making the investment. Typically, the investor would have to rely on the CEO of the company to bring together a group of investors who are aligned around a common mission.
This works well so long as the company is meeting or exceeding their financial projections, but, Cordes notes, “growing a business is never a linear path. So it’s always two steps forward, one step back. Markets and economies are at play. Crashes like 2008 happen, and generally issues occur that were unexpected in a negative way.
“Investors sometimes react in unusual ways. They may say, ‘Wait a minute: that was great when we were performing well, but now we’re down here and you’re asking me to put extra money up, and you’re saying we still have this employee and stakeholder engagement policy.'” For individual investors to continue to support the social and environmental mission of a company even when the company is struggling financially is challenging.
Cordes says: “If the values are not codified, you’re going to be relying on the collective good intentions of the group, which is hard. So if I’m a shareholder and I truly don’t know the other shareholders, then the benefit corporation at least says, OK, I’m not going to have that issue come out of the left field here because everybody is signing up to the baseline goals baked into the articles, which gives you a recourse that you don’t have otherwise.”
It sounds lovely to pursue profit and purpose. But David S Rose, angel investor and entrepreneur who has founded or funded more than 75 companies, says that, when the rubber meets the road, you need to choose profit or purpose, but you can’t build a successful company trying to pursue both simultaneously.
Rose says: “It’s wonderful to think that one can have one’s cake and eat it, too; that one can benefit society, make a lot of money, make everybody happy, end wars, cure cancer. In the real world, however, things tend to optimise in one area. It is nearly impossible to try to truly optimise for a double bottom line. But, in the case of making money and creating social good, the underlying challenge is that starting a new venture is insanely tough. It’s really, really difficult. Given the fact that the majority of new businesses fail when entrepreneurs are busting their rear ends to try to make it succeed economically, to then overlay on top of that a secondary goal is really, really challenging.”
So, when it comes to the benefit corporation, which is designed for companies pursuing both profit and purpose simultaneously, he concludes: “I don’t think benefit corporations are evil. I just think that they are ultimately naïve because, in the real world, you have to choose. You can’t have your cake and eat it.”
In the end, it’s difficult to make a general statement for the entire investment community because every investor is different and driven by unique blend of motivations. But there seems to be openness from some leading investors to the new corporate structure. Wenger and his team at USV are looking forward to working with benefit corporations. “We are actively encouraging some portfolio companies to pursue the benefit corporation structure. It certainly would never stop us from investing.”
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