There is often a difference between what’s true and what some folks just want to be true – and that contract was on vivid display during NPR’s Morning Edition on March 9.Reporter April Dembosky and her editors accepted at face value some highly questionable assertions by proponents of so-called Low-Profit Limited Liability Corporations (L3Cs). Authorized under Vermont law as well as the law of several other states, LC3s are supposed to be a hybridization of non-profit corporations and for-profit limited liability companies (LLCs). It’s basically heads-I-win-tails-you-lose public policy for so-called ‘social entrepreneurs’ who want the law to treat them like nonprofits unless and until they start making a lot of money, in which case they can shed their low-profit status and act like every other profit-maximizing firm.
According to NPR, “right now, businesses can be either for-profit companies or nonprofit organizations. The law doesn't recognize a corporate form that falls in between.” As authority for these propositions, Morning Edition cited California attorney Todd Johnson.
Though NPR doesn’t mention it, Johnson is a partner with a huge global law firm known as Jones Day. (Here’s a few highlights from the Jones Day client list: Abbott Labs, Bank of America, Chevron, PepsiCo, Pfizer, JP Morgan, and Verizon. According to the Firm’s web site, Johnson's big client is SunPower, builder of the world’s biggest solar power project (and a publicly traded, traditional business corporation with $2.6 billion in assets and $450 million in annual sales as of September 2009)).
It appears that Attorney Johnson is so busy representing, according to the bio on his firm’s web site, “founders, investors, and companies pursuing renewable energy solutions, impacts on sustainable growth, energy efficiency, energy optimization, corporate governance transparency, and those pursuing "for-benefit" models,” that he simply doesn’t realize that there is, in fact, a legally recognized corporate form that “falls in between” for-profit and nonprofit. It’s called the cooperative.
This lack of awareness on Johnson’s part – and that of NPR – would be understandable if cooperatives were some obscure phenomenon limited to owners of Grateful Dead t-shirts and their loved ones. But, in fact, cooperatives are responsible for wiring up 71 percent of the continental U.S. for electric service. Cooperatively organized banks (i.e., credit unions) are the only banking sector that didn’t suffer a meltdown in 2008 and nearly take the entire U.S. economy down with it. Cooperatives are a bulwark of the U.S. agricultural sector – ever heard of Ocean Spray, Land o’ Lakes, Cabot, Organic Valley, and Sunkist? These are cooperatives. Associated Press is a cooperative. Housing cooperatives provide 1.5 million homes in the U.S. Food co-ops invented the natural foods industry. Altogether, according to the web site www.go.coop, 47,000 co-ops in the United States serve 130 million people.
Attention Todd Johnson and NPR — that’s 43 percent of the U.S. population, all enjoying the benefits of true social entrepreneurship as provided by entities duly organized under applicable state law as neither nonprofit nor for-profit.
The typical plot line for those who tout L3Cs, “social entrepreneurship” and other euphemisms for profit maximization quickly moves to Ben & Jerry’s. So, too, with NPR – which bought the enduring myth that Ben & Jerry’s was a groovy little Vermont company that (1) was compelled to offer its shares publicly in order to remain viable and reach its potential as an avatar of corporate responsibility, and (2) was forced by evil yet enduring principles of corporate law and fiduciary responsibility to accept a buyout offer from Unilever, a monolithic food conglomerate based in Europe.
Wrong again! As Professor Antony Page of the University of Indiana School of Law explained last month at a conference on L3Cs at Vermont Law School, the truth about Ben & Jerry’s is much more complicated and tends to cast Ben and Jerry themselves (especially co-founder Ben Cohen) in a much less favorable light.
According to Page, Cohen himself had spearheaded a prior, unsuccessful effort to buy Ben & Jerry’s back from the people who had acquired shares of Ben & Jerry’s in the open market. And this failed tender offer triggered so-called Revlon duties, leading inexorably to the Unilever sale. Revlon, a 1986 decision of the Delaware Supreme Court (considered the gold standard for principles of American corporate law), basically established the principle that once a board of directors has put its company “in play,” they are obliged to accept whatever offer is best (i.e., most lucrative) from the perspective of the shareholders.
That’s a good deal more nuanced than what Cohen was heard to say the other day on NPR: “The laws required the board of directors of Ben & Jerry's to take an offer, to sell the company despite the fact that they did not want to sell the company. But the laws required them to sell the company to an entity that was offering an amount of money, far in excess of what the stock was currently trading at.”
The point here is not to trash Ben, Jerry, or Ben & Jerry’s (although, as Page also noted, they didn’t come out with their “caring capitalism” schtick until the late 1980s, running the company pretty much like any other business prior to that and even, at one point, entering into and backing out of an agreement to sell the company). The point is that most of the hype around LC3s as a needed reform to allow so-called social entrepreneurs to flourish in what would otherwise be a greed-based economy is nothing more than mythology.
Meanwhile, cooperatives are a reality and have been so since a bunch of textile workers in Rochdale, England, trying to fight back against the depredations of the Industrial Revolution, formed the Rochdale Equitable Pioneers Society in 1844. Since that first cooperative, this unique and legally recognized form of doing business has flourished around the world. Cooperatives are democratically controlled (with boards elected on a one-member-one-vote basis), are free to be as entrepreneurial as Ben Cohen (or any of Todd Johnson’s clients) would like to be, pay their share of taxes (unlike tax-exempt nonprofits), and exist to serve their members rather than faraway shareholders seeking profit.
7 comments:
Dear DMK - I recall we were both at the Vemont event where I was a speaker. Firstly no one would deny the importance of the the Co-Op movement. Why cannot we have a number of structures? Surely bringing new capital into the market is good ? You mention that you have reservations (as your students told me) - its a shame we could not have discussed them in a public forum as is a true liberal (in its English untainted) tradtion
Dear Arthur Wood:
I would have welcomed the discussion you reference . . . Though (as you may recall) I asked a question or two that mentioned co-ops, I didn't really attempt to generate a big discussion of my reservations about L3Cs because I feared my Vermont Law School colleagues (including the students who organized the conference) would perceive this as an unhelpful effort to hijack the proceedings, at least in part. (They had not, after all, invited me to speak on behalf of that position, and I am only starting to become publicly associated with it.)
In reality, we are probably not very far apart. As you suggest, I cannot (and therefore do not) object to experimental entities that are designed to attract new capital, especially if it is of the patient variety. My reservations about L3Cs notwithstanding, I don't oppose Vermont's having authorized them, nor do I object to Vermont's aspiration to become the Delaware of L3Cs.
Something vaguely related that I DO find objectionable is a new kind of entity created by the Uniform Limited Cooperative Association Act. Much as L3Cs bridge the gap between LLCs and nonprofits, a Limited Cooperative Association is supposed to serve as a cross between an LLC and a cooperative. There's nothing inherently immortal about it, but the result has lost the essential attributes of a co-op and should therefore not be allowed to use the word.
In any event, thanks for coming to Vermont -- I hope your visit was a rewarding one.
Let me see if I can get this right, Don. You are a jounalist, turned lawyer, turned architectual critic, who now claims to be an expert on corporate governance. Hmmm . . . ?
First, your explanation of what happened in the Ben & Jerry's situation and how Revlon duties did or did not apply is simplistic and naive. Second, your commentary on the NPR piece, while appropriate in certain respects (yes, it is a simplistic soundbite piece that attempted to cover a far too complex issue in less than two minutes), by leaning on co-ops as if they were a solution that was missed, shows a thorough lack of understanding of what the piece used as the center of its report -- the legislative efforts underway to address signfiicant corporate governance friction points for those attempting to raise traditional capital to accomplish strong social good through a for-profit model. (And by the way, the piece was NOT about L3C's. Take another listen.)
Frankly, Don, you distingush yourself as exactly the type of kook who has kept the fiction of an either/or economy alive within the liberal progressive world. Somehow, the liberal idea that money always corrupts, must be overcome. Greed corrupts, but not all for-profit efforts beget greed. Just take a look at your own example of a co-op.
True liberals are embracing a much more holistic approach that would seek integrated (a whole or complete) organizations. I agree this cannot be done with the traditional for-profit corporate model. I am also not a fan of L3C's. But the idea that the answer rests in using a co-op and elevating one type of stakeholder (a customer or a producer) over every other (e.g., investor, vendor, creditor) is absurd, unless the level of impact sought is small. When you talk about "impact" on 43% of the population, you misleadingly talk of numbers, without addressing the actual contact or impact. (If I buy a piece of fruit grown by a co-op, your definition would include me in the impacted group. That type of consumption is hardly an impact, when it comes to the would of create postive benefits for the world. Some of the large corporations that you use to defame Mr. Johnson by association could accomplish that goal.)
Finally, it is clear you have no idea of what you are speaking when you take pot shots at Todd Johnson. (Heck, you even mis-name him several times.) Do you have any idea who this guy is? You clearly read his bio, right? Then why didn't you note the rest of it for your readers:
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Anyone who has spent time earnestly working in this space knows Todd to be one of the "good guys," who has spent thousands of hours helping entrepreneurs build new structures, helping build legislative alternatives (when he co-chaired the committee that brought SB 1463 to the floor in California last month), and working pro bono with a dozens other organizations and entrepreneurs. In fact, you deliberately (and misleadingly) leaving out the part of his bio that explains his work in this area.
Why?
Well, you clearly have an agenda here. How's the publicity feeling, Don?
Go back to criticizing architecture.
For my part I can only agree with the observations on Todd Johnson made by Anonymous. To my mind he is one of the thought leaders in this field whose work is to be highly commended and supported
Dear Anonymous:
I like the publicity just fine, thank you. And I don't mind anonymous criticism, though I do find myself wondering what purpose is served by anonymous criticism of an ad hominem nature, verily littered with the slain corpses of straw people.
"Money always corrups<' the sentiment anonymous attributes to "liberal kooks," is precisely the opposite of what the liberal kook who blogs here happens to think. I buy Milton Friedman's observation that businesses should make money, period. Folks who want to be entrepreneurial, to some other end than profit, should form cooperatives. That's the point I was making.
I regret that Todd Johnson's friends seem to be so thin-skinned on his behalf. My point about him was not that he is lacking in virtue -- I don't know about that, one way or another -- but, rather, that for a self-proclaimed expert on virtuous uses of capital he is curiously to make a key statement to NPR that is flat out wrong. I admit that I drew the inference that someone who works for a global law firm, representing clients that operate on a similar scale, might by virtue of that focus be oblivious to the cooperative sector of the global economy.
As for complaints about my lack of expertise, and about how once sentence mentioning Revlon duties failed to convey the breadth of this aspect of corporate law: All I can say is that I haven't claimed here to be an expert about anything. I'm just a habitual NPR listener complaining about a story that was wrong.
I wrote a comment, but it was too long for Blogger to accept, so I posted it here.
Here's the reply I posted to Michael J.'s comments on his Notio blog. They're best read there, but I am posting them here because, perhaps, they have some stand-alone value:
This is really thoughtful, perceptive analysis. In the end, I have no principled basis for opposing the creation of either L3Cs or LCAs (limited cooperative associations) -- as you suggest, innovation is a good thing when it comes to entity formation. I worry about allowing LCAs to call themselves co-ops not because they are bad but because their form of organization is so untethered from key cooperative principles. In a sense, I think they pose a risk that the cooperative "brand" will become too diluted.
Apart from that, here are the two things that are really bothering me about all of this.
First, I deem it unconscionable that virtue-capitalists are out there drafting legislation and promoting their ideas without so much as acknowledging a whole sector of the economy -- co-ops -- that embody much of what they espouse and which currently serve 130 million Americans, more than the number of folks who directly or indirectly own shares of publicly traded corporations. If co-ops and their exponents were part of the conversation, then the kinds of insights you have provided would be at or near the center rather than, at best, on the periphery.
Second, I believe that these discussions, whether focused on LC3s, LCAs, so-called constituency statutes (designed to let corporate boards take other constituencies than shareholders into account) or other such initiatives, are too likely grounded in a form of self-delusion. In my view, if we want to put our wealth and our ingenuity to work for the greater good, we are going to have to live with less individual enrichment. Lots of people proclaim themselves socially responsible investors, but most if not all are still pursuing maximum return on investment. We need to look each other in the eye and ask if we're willing to change that, instead of creating new entities that allow us to pretend we really can do as well as we'd like by doing good.
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