Minnesota should enact public benefit corporations

In his November Apostolic Exhortation, Pope Francis challenged business leaders to use the power of capitalism to deliberately address social issues, not just to accumulate personal wealth. Other prominent figures like Bill Gates have been making similar appeals for several years.

As last Sunday's article on the subject reported ("New business on the agenda," Feb 2), later this month a bipartisan group of Minnesota legislators will introduce the Minnesota Public Benefit Corporation Act (MPBCA). If passed, this bill would enable entrepreneurs who are inspired by this challenge to create a new type of for-profit entity that also requires a social purpose (commonly called a "social business").

Today, it is legally difficult and expensive to create social businesses in Minnesota. The nonprofit entity form does not work, because it prohibits private ownership and personal profit. While social businesses technically may be created using the business corporation or LLC for-profit form, these forms must be contractually modified to allow for the simultaneous pursuit of social purpose and profits, which adds expense and uncertainty.

More important, a contractually modified social business is not legally or publicly differentiated as a social business for customers, vendors and investors in the broader economy.

The MPBCA would address these issues by creating user-friendly legal forms for social businesses that also would provide marketplace differentiation. In exchange, the MPBCA would require social businesses to annually and publicly report their efforts, successes and failures in pursuit of stated social aims, which would add a level of accountability that does not exist today.

Ultimately, the MPBCA would help Minnesota social businesses more efficiently harness the power of the private market and its profit motive to advance social goals.

While the public benefit corporation form is a modern legal innovation, the idea of using market mechanisms to tackle social issues has deep roots in U.S. history. Founding father Benjamin Franklin pioneered this approach in his own American style.

In Franklin's colonial America, wooden buildings, fireplace heating and high urban density combined to turn private house fires into devastating public problems.

Franklin wrote prolifically about the problem of fires, and he spent considerable amounts of energy and money creating solutions. To prevent fires, Franklin preached fire safety in his own newspaper, writing memorably that "an ounce of prevention is worth a pound of cure." He also invented and commercialized the lightning rod and the Franklin stove, although he unexpectedly refused to patent either in order to increase their impact on fire prevention. To help society respond to fires, Franklin organized volunteer firefighting units, donated personally to cover better equipment and established the first successful American fire-insurance company.

What is remarkable about Franklin is not that he spent time as an inventor, businessman, statesman and philanthropist, but rather that he was able to think about social problems like fires from all of these perspectives at once. Ahead of his time, Franklin worked across sectors and pioneered the practice of designing sustainable, scalable and profitable business models to address important social problems.

Just as in Franklin's time, social businesses have a role to play in helping to solve today's social challenges. Because social businesses have owners and generate profit, they can move beyond philanthropic and government financial support and tap the vast resources of the private sector to sustain and scale social impact.

To give a sense of scale, total U.S. charitable giving from all sources is about $315 billion per year. While substantial and growing, that amounts to less than 1 percent of the $33.3 trillion in total U.S. investable assets.

The social-business movement and its related legislation are not happening just in Minnesota. Twenty-one other states, from Delaware to Arkansas, already have passed similar legislation to facilitate a legal and financial ecosystem for these mixed entities.

Our elected leaders need to pass this bill to keep our entrepreneurs' social-business activities — and the financial and social return these activities generate — here in Minnesota.

Kim Lowe is a shareholder at Fredrikson & Byron; chairwoman of the Minnesota State Bar Association's public benefit corporation drafting committee, and co-chairwoman of the American Bar Association's Business Law Section Task Force on Social Benefit Ventures. Jeff Ochs is the founder of Cornerstone Stories, a Minnesota social business, and a board member of Social Enterprise Alliance-Twin Cities.