From Duty and Disclosure to Power and Participation in Social Enterprise

62 Pages Posted: 8 Aug 2018

See all articles by Brett McDonnell

Brett McDonnell

University of Minnesota Law School

Date Written: July 19, 2018

Abstract

A growing number of businesses are social enterprises, with a dual mission of generating profits for investors while also pursuing various social goods. Statutes have created new legal forms of business association to be used by social enterprises, most prominently benefit corporations, but also L3Cs and social purpose corporations. These new forms use purpose, duty, and disclosure as corporate governance mechanisms to enable social enterprises. This paper argues that these forms have some advantages, but ultimately those governance mechanisms are too weak to help social enterprises credibly commit to pursuing their dual missions. Stronger governance mechanisms focus on voting power and participation, allowing stakeholders other than shareholders to vote either directly on some matters or else to elect representatives who in turn are involved in decisionmaking. Individual companies can and should adopt voting governance mechanisms in ways tailored to their individual needs and circumstances, and the paper analyzes ways they can do so, and what considerations may guide the choice of mechanisms for any given company. Moreover, the positive externalities generated by companies that effectively pursue various stakeholder interests suggest legal interventions beyond simply enabling private contracting. Social enterprises benefit society, and the law should do more to encourage effective enterprises that involve multiple stakeholders. The paper suggests tax and regulatory compliance innovations that could promote more stakeholder representation.

Keywords: social enterprise, fiduciary duty, disclosure corporate governance, shareholders, stakeholders

JEL Classification: D21, G30, K22, L21, L53, M14, P13

Suggested Citation

McDonnell, Brett H., From Duty and Disclosure to Power and Participation in Social Enterprise (July 19, 2018). Alabama Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3217159

Brett H. McDonnell (Contact Author)

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-1373 (Phone)

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