Designing Business Forms to Pursue Social Goals

49 Pages Posted: 10 May 2019 Last revised: 9 Jul 2019

See all articles by Ofer Eldar

Ofer Eldar

Duke University School of Law; Duke University - Fuqua School of Business; Duke Innovation & Entrepreneurship Initiative

Date Written: July 5, 2019

Abstract

The long-standing debate about the purpose and role of business firms has recently regained momentum. Business firms face growing pressure to pursue social goals and benefit corporation statutes proliferate across many U.S. states. This trend is largely based on the idea that firms increase long-term shareholder value when they contribute (or appear to contribute) to society. Contrary to this trend, this article argues that the pressing issue is whether policies to create social impact actually generate value for third-party beneficiaries — rather than for shareholders. Because it is impossible to measure social impact with precision, the design of legal forms for firms that pursue social missions should incorporate organizational structures that generate both the incentives and competence to pursue such missions effectively. Specifically, firms that have a commitment to transacting with different types of disadvantaged groups demonstrate these attributes and should thus serve as the basis for designing legal forms.

While firms with such a commitment may be created using a variety of control and contractual mechanisms, the related transaction costs tend to be very high. This article develops a social enterprise legal form that draws on the legal regime for Community Development Financial Institutions (“CDFIs”) and European legal forms for work-integration social enterprises (“WISEs”). This form would certify to investors, consumers and governments that designated firms have a commitment as social enterprises. By obviating the need for costly social impact measurement, this form would facilitate the provision of subsidy-donations to social enterprises from multiple groups, particularly investors (through below-market investment) and consumers (via premiums over market-prices). Thus, this social enterprise form would be to altruistic investors and consumers what the nonprofit form is to donors.

Moreover, the proposal could facilitate the flow of investments by foundations in social enterprises (known as program-related investments, “PRIs”) because it would help foundations verify the social impact of their investees, which could help them avoid potential tax penalties. In addition, by giving subsidy-providers greater assurance that social enterprises pursue social missions effectively, the proposed legal form could facilitate public markets for social enterprises.

Keywords: social enterprise, corporate social responsibility, theory of the firm, non-profits, development, subsidies, program-related investments, business organizations, corporate governance

JEL Classification: L3, K1, H2

Suggested Citation

Eldar, Ofer, Designing Business Forms to Pursue Social Goals (July 5, 2019). Virginia Law Review, Forthcoming; Duke Law School Public Law & Legal Theory Series No. 2019-33. Available at SSRN: https://ssrn.com/abstract=3369354

Ofer Eldar (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
131
Abstract Views
659
rank
216,766
PlumX Metrics