Tuesday, March 6, 2012

Public Purpose & the Corporate Form: CICs vs BCorps

By Cyrus Bhedwar

Over the past decade, two legal innovations have emerged that attempt to integrate social and environmental purpose with the well-known profit-making prowess of the corporation. Can these alternative corporate forms successfully scale and attract the interests of business people and investors or will they remain footnotes in corporate registries?

The Community Interest Company (CIC) was created in 2006 in the United Kingdom. This alternative form of incorporation restores a broader sense of purpose to business enterprises. The CIC is an overlay on existing corporate forms, such as a private company limited by guarantee. What sets CICs apart from these conventional forms are two characteristics that ensure the primary beneficiary of the CIC remains the community it was established to serve.

An organization registering as a CIC must provide a community interest statement which serves as the mechanism against which the CIC’s stakeholders or the government regulator may judge its suitability. If either find that the organization is acting in conflict with its statement, remedial action may be taken.

Secondly, the asset lock is a requirement by which the resources associated with the CIC remain restricted to uses benefiting the community in perpetuity. Related to this limitation are restrictions on the percentage of profits that can be distributed to investors. CICs allow for modest returns, but they are not intended to generate significant wealth for their shareholders.

Rather than reintroducing broader purpose to conventional, profit-minded corporations, the CIC model is designed for the third sector; specifically for entrepreneurs who already have social purpose in mind but need additional opportunities to channel resources to those ends. While CICs address issues that limited social enterprises and they help to reintroduce the relationship between purpose and profit, their relatively strict limitations make it unlikely that they will attract sufficient interest to reorient the trend of profit-maximizing corporations.

The US version of an alternative corporate form is called the benefit or “B” corporation. While providing the legal protection to consider socially, environmentally and economically optimal solutions, it does not impose limits such as the asset lock or limits on the distribution of profits. Rather it emphasizes and protects broader purpose in organizations’ founding principles. It relies on instruments such as annual reporting and voluntary third-party evaluation to maintain the integrity of this brand.

Of these options, the B-corp seems to have greater appeal to conventionally minded business people; it has been adopted by once traditional corporations such as Patagonia. However without more stringent accountability mechanisms, will B-corporations reintroduce a broader sense of purpose to businesses in meaningful ways or will they simply be window-dressing?

Do either of these approaches make headway in the apparent loss of purpose in the business world? Can they influence the context in which businesses operate in ways that reduce the pressure and temptations to exploit opportunity rather than add value? Can additional innovation produce the right blend of profit and purpose to reduce the likelihood of corporate excess in the future?