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Sustainability Meets Profitability: The Convenient Truth of How the Business Judgment Rule Protects a Board's Decision to Engage in Social Entrepreneurship

Janet E. Kerr

Pepperdine University - School of Law

November 1, 2007

The world of publicly held companies sits on the brink of change. Corporate focus that has traditionally been fully consumed with shareholder profit maximization is rapidly diverging into a new sector that takes a more social view. Whether by choice or force, this change is inevitable. On one hand traditionalists with shareholder tunnel vision resist; on the other, community activists and socially concerned corporate leaders are embracing the change. Leaders of publicly traded corporations such as eBay's Jeff Skoll and Pierre Omidyar and Google's Larry Page and Sergey Brin "have done so in ways that seem likely to shape their generation's philanthropic legacy-first poking at the firewall between the nonprofit and business worlds, then punching through and building a network of investments that cross back and forth."

Thus, social entrepreneurship is born. Put simply, social entrepreneurship takes proven business tools and applies them to generate a social good. To clear any misconception, social entrepreneurship is an investment, not a gift, and not charity. Investments in social entrepreneurship are two-fold: pecuniary and social; thus, a double bottom line is developed. Decisions to engage in social entrepreneurship look beyond the corporate wall and to outside stakeholders where "the social mission and the business mission [are] inseparable."

Naturally, a question arises: Are these corporate decisions that look beyond shareholder profit maximization allowed and supported by the law of corporate governance and business objectives? The short answer is: Yes. While some research and scholarly articles may suggest that corporate law must be revisited and completely or partially revised to support social entrepreneurship decisions, this Article proves that our existing legal system already allows for corporate decisions to look outside immediate shareholder interests. Thus, this Article shows that social entrepreneurship is supported by existing corporate law, within the duty of care as protected by the business judgment rule. First, a growing number of stakeholder constituency statutes, in addition to judicial corporate holdings, have opened the door to allowing consideration of non-shareholders when making investment decisions. Second, investments in social entrepreneurship are just that-"investments." Third, there is a growing body of knowledge that allows measurement of the social impact and financial success of social entrepreneurship. In sum, this Article asserts that corporate decisions which consider outside stakeholders can increase shareholder value both socially and financially and therefore these decisions directly correlate with shareholder profit maximization and are within the scope of corporate governance. Furthermore, the availability of knowledge that such social investments exist and can be profitable for the company and its shareholders, both socially and financially, invokes the board of director's duty to be informed when making investment decisions.

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Date posted: November 8, 2008 ; Last revised: November 16, 2008

Suggested Citation

Kerr, Janet E., Sustainability Meets Profitability: The Convenient Truth of How the Business Judgment Rule Protects a Board's Decision to Engage in Social Entrepreneurship (November 1, 2007). Available at SSRN: http://ssrn.com/abstract=1296270 or http://dx.doi.org/10.2139/ssrn.1296270

Contact Information

Janet Kerr (Contact Author)
Pepperdine University - School of Law ( email )
24255 Pacific Coast Highway
Malibu, CA 90263
United States
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