Emerging Alternatives to the Shareholder-Centric Model

* Essay: Not Just For Profit: Emerging alternatives to the shareholder-centric model could help companies avoid ethical mishaps and contribute more to the world at large,” Marjorie Kelly.

URL = http://www.strategy-business.com/press/article/09105?gko=106fd-1876-27599815

Kelly explores three new-style corporate designs: 1. stakeholder-owned companies; 2. mission-controlled companies; and 3. public-private hybrids.

Description

"Explores three new-style corporate designs: 1. stakeholder-owned companies; 2. mission-controlled companies; and 3. public-private hybrids.

Ms. Kelly is exploring ways in which corporations can move beyond the dubious effort to develop “socially responsible practices” to a situation where the very structure of a new style corporation addresses social concerns." (http://jasecon.wik.is/Analysis/Not_Just_for_Profit)

Abstract

"We introduce the concept of For-Benefit design, a new organizational archetype that is a hybrid that combines the traditional for-profit archetype, which has profit at its nucleus, and the non-profit archetype, which has social mission at its nucleus. For-Benefit designs have a blended purpose at their core: serving a living mission and making a profit in the process. These emerging designs represent an alternative to the shareholder-centric model that could help companies avoid ethical mishaps and elevate their contribution to meeting societal needs and expectations. The paper discusses various examples of such companies within a three-part typology: Stakeholder-Owned Companies, Mission-Controlled Companies, and Public-Private Hybrids." (http://www.corporation2020.org/corporation2020/documents/Papers/2nd-Summit-Paper-Series.pdf)

Excerpt

"Richard Nelson, an economics professor at Columbia University who cofounded the field of evolutionary economics, observes that social systems evolve because of two kinds of innovation: advances in physical technologies (such as new environmental and energy technologies), and advances in social technologies (such as new forms of organization). As these two types of innovation influence each other, the governance models that emerge, such as microfinance-related structures, take their place alongside older, more established alternative models, such as cooperatives, employee-owned firms, and government-sponsored enterprises. These designs can be thought of as emergent new organizational species, occupying a new sector of society that is a greenhouse of design experimentation in which the future of our economy may be growing.

One helpful way of thinking about these designs is as representing a hybrid between the traditional for-profit archetype, which has profit at its nucleus, and the traditional nonprofit archetype, which has social mission at its nucleus. This type of hybrid has been dubbed the “for-benefit enterprise” by Heerad Sabeti, CEO of the TransForms Corporation — a North Carolina–based manufacturer of wall decorations with about $2 million in revenues, which routinely employs people with disabilities and invests heavily in developing its workforce. Sabeti is one of several people who have begun to explore the parameters of this new archetype. (Another source of exploration is the Corporation 20/20 initiative, organized by Allen White and me at the Tellus Institute in Boston.) All of these initiatives conceive the new type of organization with a blended purpose at its core: serving a living mission and making a profit in the process. The essential framework of such a company — its ownership, governance, capitalization, and compensation structures — are designed to support this dual mission. And it is this design that enables companies to escape the pressure to maximize short-term profits and instead to fulfill a more fundamental purpose of economic activity: to meet human needs and be of benefit to life." (http://www.strategy-business.com/article/09105?pg=all)

Typology

Stakeholder-owned Companies

"The cooperative model of ownership, which dates to the mid-19th century, was conceived as an alternative to the shareholder-based ownership model that developed at roughly the same time. The defining feature of the cooperative model is that these companies are owned and controlled by the members they serve. Members might be customers (as in a credit union), producers (as in a farmers cooperative), homeowners (as in a housing co-op), employees, or the community. (There is some overlap between cooperatives and employee-owned companies, but they are not the same; employees can own corporate shares either through cooperatives or in more conventional business structures through such measures as employee stock-ownership plans.)

Cooperatives are a globe-spanning phenomenon, with membership now at 800 million people — more than double the total from three decades ago. In Colombia, SaludCoop provides health-care services to a quarter of the population. In Spain, the Mondragón Corporación Cooperativa is the nation’s seventh-largest industrial concern. More Americans hold memberships in co-ops than hold stock in the stock market. When they are successful, these stakeholder-owned firms can be extraordinarily long-lived, with remarkable business and social impact: Rabobank Group in the Netherlands and the Springfield ReManufacturing Corporation in the Missouri Ozarks are two examples of companies that have prospered by drawing on the commitment and engagement of their shareholder–customers and shareholder–employees, respectively.

The success of firms owned and governed by stakeholders shows that, contrary to some economic assumptions, there’s nothing innately better about independent shareholders or directors. But stakeholder ownership also has its flaws. Cooperatives have failed to match the growth of shareholder-owned companies because they lack access to capital (laws governing cooperatives often put restrictions on capital returns), and they can fail to retain leaders who perceive less chance of accumulating personal wealth. On the other hand, when employee ownership is matched with involvement, businesses can achieve results that would be considered near-impossible in conventional companies.

The Cooperative Regions of Organic Producers Pool (CROPP), better known by its brand name Organic Valley, is a producer-owned marketing cooperative in La Farge, Wis. CROPP is owned by the 1,200 organic family farms that produce the dairy, eggs, and meat it distributes. The company’s mission is to save the family farm, which means paying as much as possible to farmers. “We don’t have any need for profits much over 2 percent,” says CEO George Siemon. “We’d just pay taxes on it. We’d rather give it to the farmers.” Though growth has slowed in recent months, for years the company grew 30 to 40 percent per year. With 2007 revenues of $433 million, Organic Valley stewards one of the nation’s four largest organic brands.

Similarly, the John Lewis Partnership PLC, with £6.8 billion (about US$10 billion) in revenues in 2007, has a stated purpose of serving the happiness of its employee–partners. It is the largest department store chain in the U.K., and also owns 200 Waitrose supermarkets. It is 100 percent owned by its 69,000 staff members, among whom all profits are shared each year. It is overseen by an unusual bicameral governance structure: The company has a traditional board of directors as well as a second employee-based governing body, the partnership council, directly elected by employees. The partnership council in turn elects five of the 12 board members. The council also influences policy and holds management to account, since it has the formal power to dismiss the chairman.

Mission-controlled Companies

A little-appreciated but powerful for-benefit model can be found among companies that manage to be publicly traded while keeping control in mission-oriented hands. Take Interface Inc., for example. This Fortune 1000 flooring company, with 2007 revenues of $1.1 billion, is well on its way to meeting its ambitious 2008 pledge of “Mission Zero by 2020” — a pledge to have zero negative impact on the environment within 12 years. This means eliminating waste and switching entirely to renewable energy, as part of the company’s larger vision of being the first company that, as founder and CEO Ray Anderson puts it, “shows the entire industrial world what sustainability is in all its dimensions.”

Other publicly traded companies have tried to make this kind of long-term commitment, but have had to soften the goal through the ups and downs of the stock market. What supports Interface’s mission is a rarely mentioned but vital element in its social architecture: a dual-class governance structure that puts super-voting shares in the hands of Anderson and a few other top executives, giving them control of 72 percent of votes for the board, although they own far less than a majority of publicly traded shares. Super-voting shares are generally unavailable to the public, which insulates the company from hostile takeovers. In effect, it allows Interface to be a mission-controlled enterprise, one whose governance structure reflects both the need for ongoing sufficient profit and a broader social priority.

Mission control allows capital to trade freely, even as it ensures that the mission is not for sale. It allows leaders to focus the company so that mission becomes the focal point while profits are energetically pursued.

There are other companies with publicly traded stock and revenues greater than $1 billion that are similarly mission controlled. They include the family-controlled New York Times Company, with its mission of serving an informed electorate; foundation-controlled Novo Nordisk A/S, a Danish pharmaceutical company with a mission of defeating diabetes; and trust-controlled Grupo Nueva SA, headquartered in Chile, with a mission of contributing to a sustainable Latin America. Perhaps the most notable recent example of mission-controlled architecture is Google, which adopted a two-tier stock configuration, vesting power with its founders, when it went public in 2004.

In the best of these designs, the mission’s control of voting shares is strengthened by an explicit commitment to mission in the company charter and in the design of governance procedures. Novo Nordisk, for example, has adopted an ambitious charter that spells out the com­pany’s values and commitments, including a commitment to ensuring that all products and services “make a significant difference in improving the way people live and work.” Each year the company board must report to the foundation board on how it is ensuring that operations are “economically viable, environmentally sound, and socially fair.” The foundation board includes an electrician, scientists, a physician, and a lab technician, so that participants represent many relevant points of view. Without design elements like these to keep the mission in focus, super-voting share structures run the risk of creating company monarchs unanswerable to anything but their own whims — which may or may not remain benign over the long run.

Mission-controlled architecture can offer a solution to the challenge that socially responsible companies face as they struggle to keep their social mission alive after founders depart or sell their shares. It is rarely sustainable for the mission of a company to be embodied in the personality of a single individual. Research shows that once founders depart, the company mission often shifts — and in the absence of thoughtful for-benefit design, the pressure of mainstream cultural norms and financial practices makes it easiest to revert to short-term results as the primary goal.

One of the companies that is most explicit in using design to achieve a mission is the Upstream 21 Corporation, a socially responsible holding company launched by the social investing firm Portfolio 21 Investments in Portland, Ore. This holding company was set up explicitly to buy local companies in order to build natural, social, and economic capital within the region. Oregon stakeholder law says directors may consider the interests of many stakeholders, not just stockholders, in making decisions, and Upstream’s articles of incorporation adopt language saying directors shall do so. The Upstream design also reconfigures voting rights, giving greater power to hands-on owners (including employees) and less power to absentee owners.

The “directors’ duty” aspect of this design has since been replicated by more than 130 companies signing on to become B corporations, or beneficial corporations. This model is being promoted by Jay Coen Gilbert and his colleagues at the nonprofit B Lab in Philadelphia, who aim to create a unified marketing presence and certification process for B corporations. Unfortunately, they did not replicate Upstream’s redesign of voting rights in their model. Because virtually all B corporations today are founder controlled, these firms may be vulnerable to losing their mission when the founders depart. But as the B corporation model becomes more widely adopted, a community of practice could emerge — similar to the communities of employee-owned companies and cooperatives, with their networks of attorneys and consultants — that could help in the evolution of this promising new model.

Public–private Hybrids

A third school of for-benefit design involves company architectures that deliberately blur the lines between for-profit and nonprofit modes of operation — like Grameen Danone. One powerful model here is being termed “for-profit philanthropy,” and it is famously embodied by Google.org, a boundary-spanning entity created by Google. Google.org currently manages an annual philanthropic budget of $2 billion; the amount is based on Google’s initial public offering, which announced the company’s intention to contribute 1 percent of equity and 1 percent of profits to charity.

As Brooklyn Law School Professor Dana Brakman Reiser observed in a recent paper, Google.org is not a traditional foundation but a division of Google, standing alongside the engineering, sales, and finance functions, yet tasked with addressing climate change, disease pandemics, and poverty. By eschewing tax-exempt status, it gains the running room to combine investments with grants as it pursues its ambitious goals — drawing fully on Google’s staff, technology, and products in the process. As Reiser put it, “Google.org’s use of an integrated for-profit division inaugurates a new model: ‘for-profit philanthropy.’” The director of Google.org is Larry Brilliant, known both for his business acumen (he cofounded the Whole Earth ’Lectronic Link [WELL] computer network) and for his medical philanthropy (he was a primary figure in the World Health Organization’s eradication of smallpox and a cofounder of Seva, a foundation that has brought eyesight to more than 2 million blind people).

Another cross-sector governance structure involves nonprofit companies that create for-profit subsidiaries. The Great Neighborhoods Development Corporation (GNDC) in Minneapolis — where I serve on the board — has ushered in a renaissance in the once-blighted Phillips neighborhood by driving out disreputable bars, drug dealers, and prostitutes and bringing in a business incubator, health clinic, grocery store, and retail shops. Although GNDC is a nonprofit organization, its real estate projects are designed to operate in the black. “We’re in the business of changing the lives of the poor, and we’re using real estate business development to do it,” says Chief Executive Officer Theresa Carr."

Yet another model in this category would be “nonprofit venture capital” funds such as the Acumen Fund, which raises charitable donations to serve the poor but takes an investing rather than grant-making approach, offering equity and loans to both for-profit and nonprofit organizations that deliver affordable housing, energy, and clean water in South Asia and Africa." (http://www.strategy-business.com/article/09105?pg=all)

More Information

Critique by Bernard Marszalek at http://jasecon.wik.is/Analysis/Not_Just_for_Profit