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«INTRODUCTION A market economy predictably under-produces certain urgent public or collective goods, such as a clean environment. It also perpetuates ...»

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Robert A. Katz* & Antony Page**


A market economy predictably under-produces certain urgent public or

collective goods, such as a clean environment. It also perpetuates gross

inequalities in resources among people and across regions. Recently, there

has been growing interest in privately-led approaches that use business methods and forms for the express purpose of repairing society1 and which go under the labels of social enterprise and social entrepreneurship. One of these approaches, the social enterprise, can be defined as “an organization or venture that achieves its primary social or environmental mission using business methods,”2 typically by operating a revenue-generating business.3 So defined, a social enterprise may be organized as either a nonprofit or forprofit entity.4 It can also be set up using an organizational form specifically designed for social enterprises—one that seeks to “hybridize” or blend components of both nonprofit and for-profit endeavors. Social enterprises are founded by “social entrepreneurs,” a broader term that denotes an ambitious person who seeks social change on a large scale, characteristically through earned income strategies.5 * Professor of Law, Indiana University School of Law—Indianapolis and Professor of Philanthropic Studies at the Indiana University Center on Philanthropy.

** Professor of Law, Indiana University School of Law—Indianapolis.

1. Ben Cohen, On Becoming an Ecopreneur, in THE GREEN FESTIVAL READER: FRESH IDEAS FROM AGENTS OF CHANGE 50, 51 (Kevin Danaher & Alisa Gravitz eds., 2008).

2. Social Enterprise: Defining the Movement, SOCIAL ENTERPRISE ALLIANCE, http://www.sealliance.org/about_movement.cfm (last visited Sept. 16, 2010). This definition is advanced by the Social Enterprise Alliance, which describes itself as “the only member organization in North America to bring together the diverse field of social enterprise. It serves as advocate for the field, hub of information and education, and builder of a vibrant and growing community of social enterprises.” Id.

3. PAUL C. LIGHT, THE SEARCH FOR SOCIAL ENTREPRENEURSHIP 5 (2008); see also Dennis R. Young, Alternative Perspectives on Social Enterprise, in NONPROFITS & BUSINESS 21, 23 (Joseph J.

Cordes & C. Eugene Steuerle eds., 2009) (“Social enterprise is activity intended to address social goals through the operation of private organizations in the marketplace.”).

4. See SOCIAL ENTERPRISE ALLIANCE, supra note 2 (“The social enterprise movement includes both nonprofits that use business models to pursue their mission and for-profits whose primary purposes are social. Social mission is primary and fundamental; the organizational form depends on what will best advancethe social mission.”).

5. Jo Barraket, Recasting Our Thinking? Social Enterprise and Social Value Creation in a Network Era, CPNS-QUT-Nonprofit Podcast, Program 32, 2 (Mar. 3, 2009), http://www.bus.qut.edu.au/research/cpns/ podcast/documents/podcast32transcript.pdf (“The language of social entrepreneurship... has found resonance with those concerned with dynamic individuals who utilise [sic] entrepreneurial strategies to progress social objectives inside and outside organisational [sic] structures, and across sectoral divisions.”) (citation omitted);

Jerr Boschee & Jim McClurg, Toward a Better Understanding of Social Entrepreneurship: Some Important Distinctions 3 (2003), http://www.se-alliance.org/better_understanding.pdf (“A social entrepreneur is any person, in any sector, who uses earned income strategies to pursue a social objective....”).

60 [Vol. 35:059 Vermont Law Review An increasing number of people and entities are coalescing under these banners. Their expanding influence is reflected in the 2006 Nobel Peace Prize awarded to Muhammad Yunus, a leading promoter of microfinance and the concept of “social business;”6 the growth of centers for social entrepreneurship at leading business schools such as Harvard and Stanford;7 and media attention such as Business Week’s annual list of “America’s 25 Most Promising Social Entrepreneurs.”8 The Obama Administration has also unveiled several initiatives to encourage the growth of social enterprise.9 Even Bill Gates (a proponent of “creative capitalism”)10 and Pope Benedict XVI (who calls for “a profoundly new way of understanding business enterprise”)11 have promoted the notion of business organizations and executives making decisions that are not purely profit-driven.

For many years, social enterprise was associated mainly with nonprofit organizations, which have no owners in the conventional sense and whose controllers can earn no more than “reasonable” compensation. The first wave of contemporary social enterprises was based in nonprofit organizations and gained significant momentum during the 1980s.12 Over time, a growing number of nonprofit organizations began to embrace and pursue earned income strategies, largely as a means to reduce their dependence on donations and grants.13 Earned income also expanded the

6. See Vikas Bajaj, Out to Maximize Social Gains, Not Profit, N.Y. TIMES, Dec. 9, 2006, http://nytimes.com (enter “Out to Maximize Social Gains, Not Profit” in Search; then follow “Out to Maximize Social Gains, Not Profit” hyperlink) (describing Mr. Yunus’s recent Nobel Peace Prize and his partnering with Groupe Danone to start a “social business”).

7. America's Best Colleges for Entrepreneurs, Best for Social Entrepreneurs, CNNMONEY.COM, http://money.cnn.com/galleries/2007/fsb/0708/gallery.bestcolleges_social.fsb/index.html (last visited Oct. 10, 2010).

8. John Tozzi, America’s Most Promising Social Entrepreneurs, NEW ENTREPRENEUR BLOG (June 8, 2010), BUSINESSWEEK.COM, http://www.businessweek.com/smallbiz/running_small_business/archives/2010 /06/americas_most_promising_social_entrepreneurs.html.

9. Anne Field, Obama Gives Big Boost to Global Rating System for Social Enterprises, TRUE/SLANT (Apr. 27, 2010, 3:42 PM), http://trueslant.com (noting that Obama supports a rating system for social enterprises to encourage investment by socially-concerned investors seeking more robust means for measuring their social and environment achievements). The Obama administration also encourages innovations in the nonprofit sector through its Office of Social Innovation. See, e.g., Press Release, The White House Office of the Press Sec’y, President Obama to Request $50 Million to Identify and Expand Effective, Innovative NonProfits (May 5, 2009), available at http://www.whitehouse.gov/the_press_office/President-Obama-to-RequestMillion-to-Identify-and-Expand-Effective-Innovative-Non-Profits.

10. Bill Gates, Making Capitalism More Creative, TIME, July 31, 2008, www.time.com/time/ business/article/0,8599,1828069,00.html.

11. Encyclical Letter Caritas in Veritate of the Supreme Pontiff Benedict XVI to the Bishops Priests and Deacons Men and Women Religious the Lay Faithful and All People of Good Will on Integral Human Development in Charity and Truth, 40 (Jun. 29, 2009), available at http://www.vatican.va/holy_father/benedi ct_xvi/encyclicals/documents/hf_ben-xvi_enc_20090629_caritas-in-veritate_en.html (emphasis omitted).

12. See, e.g., Barraket, supra note 5, at 2 (“The idea of social enterprise was popularised [sic] in the early 1990s and has gained considerable traction in public policy frameworks and not for personal profit management practices in a number of regions around the world.”) (citation omitted).

13. Id.

2010] 61 The Role of Social Enterprise controllers’ power over their organization’s resources because earned income—unlike donations—is generally unencumbered by donor-imposed restrictions on its use.14 Nonprofit organizations have of course been earning income for many years. In some nonprofits, a revenue-generating activity may be its “very reason for existence”15 and inextricably connected to the accomplishment of its mission. Examples include the tuition-funded nonprofit school that imparts knowledge to each paying student and the self-financing religious publisher that spreads The Word with each book sold.16 In other nonprofits, as with a church bake sale, the business activity is unrelated to the organization’s mission and is conducted solely to raise funds to support mission functions.

Yet, there were several novel and noteworthy aspects about the growing interest among nonprofits for earned income that took off during the 1980s. First, some proponents of these projects saw themselves as vanguards whose members rejected the traditional ethos that denigrated nonprofit business activity as a commercialism of dubious ethicality.17 Also, some new wave nonprofit social entrepreneurs pursued ambitious strategies to raise revenues though business activities that directly advanced their organizations’ missions.18 More recently, the term or concept of “social enterprise” has been applied to some for-profit business ventures with social missions.19 We refer to these entities as “for-profit social enterprises.”20 Other terms for members of this genus include “hybrid social ventures,”21 “for-profit social

14. Burton A. Weisbrod, The Nonprofit Mission and its Financing: Growing Links Between Nonprofits and the Rest of the Economy, in TO PROFIT OR NOT TO PROFIT: THE COMMERCIAL TRANSFORMATION OF THE NONPROFIT SECTOR 1, 14–16 (Burton A. Weisbrod ed., 1998) (analyzing the trend for nonprofit organizations to rely more heavily on commercial sales activity compared to charitable donations).


16. Id.

17. Boschee & McClurg, supra note 5, at 1 (“Twenty years ago the idea of nonprofits acting in an entrepreneurial manner was anathema to most people in the sector: The idea of merging mission and money filled them with distaste.”).

18. See, e.g., Evolution of the Social Enterprise Industry: A Chronology of Key Events, THE INST. FOR SOC. ENTREPRENEURS 3 (Aug. 1, 2008), http://socialent.org/Free_Downloads.htm (follow “Evolution of the Social Enterprise Industry: A Chronology of Key Events” hyperlink) (last visited Sept.

2, 2010) (“Social enterprises directly confront social needs through their products and services rather than indirectly through... [inter alia] the unrelated business activities mounted by nonprofits.”) (emphasis in original).

19. Daniel J. Isenberg, An Indian FOPSE: Innovations Case Discussion: Keggfarms, INNOVATIONS: TECH., GOVERNANCE, GLOBALIZATION, Winter 2008, at 52, 55 n.1 (“[For-profit social enterprises] have explicitly stated goals of earning a profit while solving a major societal problem.”).

Isenberg asserts that he coined the term “for-profit social enterprise” in April 2007. Id. at 54.

20. Id.

21. Thomas Kelley, Law and Choice of Entity on the Social Enterprise Frontier, 84 TUL. L.

REV. 337, 337 (2009).

62 [Vol. 35:059 Vermont Law Review businesses,”22 “social purpose business ventures,”23 blended value organizations, companies with a conscience, Fourth Sector organizations,24 a “for profit with a nonprofit soul,”25 and for-benefit organizations.26 Like a nonprofit social enterprise, a for-profit social enterprise expressly seeks to use business means to address social problems. Yet unlike a nonprofit social enterprise, it is owned (in whole or in part) by equity investors, and one of its core goals (alongside its social purposes) is to generate returns for those investor-owners. These investor-owners include founders who are entitled to a portion of the proceeds from the organization’s sale or an initial public offering (IPO). Thus, an essential difference between nonprofit and for-profit social enterprises is the ability of the enterprise’s founders, controllers and investors to lawfully appropriate its surpluses for their private benefit.

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