Is Social Enterprise a Con?

That’s the argument is made by David Groshoff, a Harvard educated law professor and business executive. In his treatise “Contrepeneurship? Examining social enterprise legislation’s feel-good governance giveaways” Groshoff asserts that, based on his academic research, Social Enterprise is a “con” led by promoters, dubbed “contrepeneurs”. These players navigate the murky, greenwashed world which resides at the nexus of private equity, legislatures, academia, and guilt-ridden wealthy investors.

He maintains that these con artists possess and advance interests which are opposed to those of actual equity holders, and that they have nothing but disdain for longstanding business governance practices. They use a deceptive maze of ethically questionable marketing tactics to promote their fake objectives. And, they have created a self-serving and self-reinforcing cottage industry whose aims run counter to that of the very communities they claim to benefit.

Harsh words? We’ll see.

In my own CPA practice I can attest to the hypocrisy of Social Enterprise proponents’ claims of “triple bottom line” and community and environmental benefits. I have observed the opposite: private equity which uses B Lab certification to promote its portfolio of business acquisitions to the conscientious wealthy investor class, all the while destroying those very businesses with ill-conceived scaling,  greenwashing, and the burden of massive and hidden management fees which characterize the world of private equity. This process can lead to the destruction of the business investee, which was once a healthy enterprise. That is not “beneficial” to anyone but the promoters who get their fees no matter how their portfolio of acquisitions actually performs. Without transparency, wealthy investors rely on their personal relationships with these promoters and on Social Enterprise’ claims of ethereal benefits to the world at large. Their guilt is assuaged.  Meanwhile, businesses, jobs, and communities are harmed.

While my experience is only anecdotal, Groshoff has done the research to support his claims. He has found that, despite the marketing and brand managing of Social Enterprise to investors and legislators, these new enterprises have costs which substantially outweigh any benefits.

First of all, what the heck is Social Enterprise? Unfortunately there exists no basic definition. “An organization which advances a social mission through entrepreneurial, earned income strategies” is one definition, among many. But, the lack of clarity in defining what it actually is only serves to benefit its promoters. It’s hard to be held accountable to goals when those goals are not clearly defined. And, while Social Enterprise may possess legitimate, if ill-defined goals, related legislative efforts are a result of vigorous brand management and marketing that appeals to “unsophisticated equity investors” – Groshoff’s unflattering term for what I call the conscientious wealthy investor class.

Leaving the definition issue aside, Groshoff reviews the legislative history of the lobbying efforts led by Social Enterprise Legislation (“SEL”) promoters. In various states, one can find Benefit Corporations, L3C’s (low-profit LLCs), and FPCs (Flexible Purpose Corporations).

Using California as an example, Groshoff discusses how these entities were created under new state legislation, much to the chagrin of the California State Bar, which was genuinely concerned that such legislation would marginalize shareholders and rely on an un-vetted 3rd party standard setter (B Lab), an entity who derives benefit from doing so in a circular self-serving industry of its own creation and of which it is the only player. Further, the California Bar expressed dismay that legislation was being considered which was directly harmful to shareholders by removing the fiduciary duty of a business’ directors and thus allowing them to act in a morally hazardous manner that would otherwise lead to liability claims under traditional corporate law. But, the legislation passed anyway, and the B Corporation bandwagon was underway. All aboard!

The resulting rush of legislative activities across the U.S., and indeed throughout the world, has been fueled by B Lab and its many minions. Though B Lab currently enjoys tax exempt status, and so is conducting its lobbying efforts at taxpayers’ (our) expense, those days may be numbered. Groshoff asserts that B Lab is not deserving of its tax exempt status for a variety of reasons, one of which is that its extensive lobbying activities were not properly disclosed, and if they were disclosed would reveal that much of B Lab’s resources are spent on lobbying.

But, is Social Enterprise a con?  I think it is more of an agenda whose aims are not fully known or understood.  One of those aims may be the elimination of government as a regulator, replaced by “benevolent” private interests.  And, Social Enterprise is certainly a magnet for con artists of all types, as the legislative parameters governing them have no regulatory teeth.

Meanwhile, I have seen a kind of grassroots form of social enterprise emerging among the businesses and non-profit organizations that I work with. These new entities are often democratically governed, and some are organized as multi stakeholder cooperatives. They don’t need or want private equity, and they scale up as resources and market forces allow. Funding comes from small, local investors, bank lending, and from the ability to reach global markets via technology. These enterprises are closer to “true capitalism” than the corporate capitalism we see in today’s economy. They work to treat one another, their vendors, their community, and their environment with respect. Existing corporate law allows them to consider the interests of those other than investor/owners, and, they don’t need anyone to “certify” that they are doing well by doing good.

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