R.I. makes conscience part of plan

A GREATER PURPOSE: Navvid founder, Michael McCarthy and co-founder Jacob A. Brennen see the new benefit corporation structure as a positive for Rhode Island. / PBN PHOTO/BRIAN MCDONALD
A GREATER PURPOSE: Navvid founder, Michael McCarthy and co-founder Jacob A. Brennen see the new benefit corporation structure as a positive for Rhode Island. / PBN PHOTO/BRIAN MCDONALD

When Rhode Island became the latest state to allow a new hybrid form of socially conscious business, it had entrepreneurs like Michael McCarthy of Newport in mind.
An animator and illustrator at AS220 in Providence, McCarthy is in the process of launching an online open-source video-content-management system (described as a WordPress for video).
Active in the Occupy movement, McCarthy wants the business, tentatively named Navvid, to democratize and empower people to use new media.
But because of the history of technology startups with an ideological component being sold or taken on another course, McCarthy is looking to incorporate using the new hybrid structure, called benefit corporations, that Rhode Island just made law.
“Few companies move as fast as tech startups, and once they expand, the angel investors and venture capitalists start thinking about seeing a return on their investment,” McCarthy said. “That is not always a bad thing,” but he hopes the new law will slow the process down a little.
Whether McCarthy’s interest in forming a company halfway between a for-profit and nonprofit will be shared is unknown, but supporters of benefit corporations say it can’t hurt to give them the option.
“We think it could attract a certain type of company to Rhode Island, but we really don’t know how many will really pursue it,” said state Rep. Teresa Tanzi, D-South Kingstown, sponsor of the benefit corporations bill. “But it provides protections for people who want to put their heart and soul into a company and have the legal protections they deserve.”
The benefit-corporation structure was developed out of fears that legal obligations and the very nature of for-profit corporations could be at odds with maintaining a social mission. The watershed event social-venture supporters point to as spurring the need for hybrid corporate forms was the sale of Ben & Jerry’s ice cream to consumer-goods conglomerate Unilever in 2000.
In the 1980s and 1990s, Ben & Jerry’s became a social-enterprise star by pursuing a “double-bottom line” that included both profit and public-benefit goals.
After the sale, Ben & Jerry’s owners expressed regret over the transaction and said they had been concerned about potential legal challenges if they had rejected the best financial offer for the company.
Although legal observers have questioned the notion that Ben & Jerry’s would have been vulnerable to lawsuit if they had turned Unilever down, the narrative of an idealistic business rendered powerless by corporate law has endured.
Benefit corporations are one of two kinds of hybrid corporate entity developed especially for social ventures, with the other being the L3C, or low-profit limited-liability corporation.
Both are taxed like for-profit corporations, so the benefit-corporation law is not expected to come with any cost to the state budget.
The L3C designation allows a company to function like an LLC, but with the ability to accept Program Related Investments from charitable foundations just as nonprofits do under the tax code.
Under the Rhode Island bill, the purpose of benefit corporations is “general public benefit” and company directors must weigh decisions based on their impact on other shareholders, employees, customers, community and societal factors, the environment and the future of the company itself.
The benefit corporation is required to have a written mission and produce an annual report under third-party reporting standards describing their progress toward that mission and overall social impact. It must also have a “benefit director” focused on the mission. To switch from a for-profit structure into a benefit corporation requires two-thirds approval by a company’s shareholders.
Tobias Ledergerg, a business attorney and former chairman of Social Enterprise Greenhouse, said benefit corporations are primarily used to maintain a defined corporate culture.
“A benefit corporation tries to embed a social conscience in the company,” Lederberg said. “If you are starting a company and think it is going to scale up and don’t want it to be driven in a different direction, this puts in protections.”
High-profile benefit corporations include King Arthur Flour Co. Inc. and clothing company Patagonia Inc.
“I think it is important Rhode Island adopted it because states are adopting it around the country, and pretty soon the majority will have passed it,” Lederberg said.
With passage of Tanzi’s bill, Rhode Island became the 17th state (as well as the District of Columbia) to allow benefit corporations.
Vermont, home of Ben & Jerry’s, has benefit corporations, and Massachusetts passed a similar law last year. Connecticut considered a similar bill to Rhode Island’s this year but it did not make it through the state legislature.
Although Rhode Island passed the benefit corporation law, McCarthy said it might be too late for his startup to use, as he needs to incorporate over the summer and the Attorney General may not finish reviewing the law by then.
Still, he is glad the option will be available for others.
“From an investor level, some might be scared in having less power and more responsibility, but hopefully it will make some tech companies more sustainable,” McCarthy said. •

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