We all know that entrepreneurs and investors in startups hope to make money. Conveniently, the traditional corporate form allows that. In fact, directors of traditional corporations are required to base decisions on just one thing: maximizing financial return to shareholders.
In the words of Al Franken, “it is literally malfeasance for a corporation not to do everything it legally can to maximize profits.”
Here in Washington, birthplace of the technologist-turned-philanthropist mentality, it’s not surprising that there is a growing cadre of visionary yet savvy entrepreneurs who not only want to make money, but want to do some good for the world in the process. Corporate lawyers have argued for centuries about whether that is legal in the current corporate system.
Certainly there are plenty of for-profit corporations that spend money on things that are good for the community or good for their employees but that, arguably, result in fewer dollars going into the pockets of shareholders. The question is, how much civic-minded or mission-based spending does the law allow?
Luckily, local entrepreneurs and investors who want to do something good for society will no longer need to worry about how much good is too much. On March 30th a new law was enacted in Washington State that creates a new type of for-profit corporation, called a social purpose corporation. This new structure is purely voluntary and must be elected by a super majority of shareholders of an existing or newly-formed corporation.
In addition to maximizing profits, the social purpose corporation must operate its business “in a manner intended to promote positive short-term or long-term effects of, or minimize adverse short-term or long-term effects of, the corporation’s activities upon any or all of (1) the corporation’s employees, suppliers or customers; (2) the local, state, national or world community; or (3) the environment.”
The corporation can also identify one or more specific social purposes that are unique to the company. And each year, the company is required to post on its website a report that describes the company’s efforts to promote the social purpose or purposes.
Variants of this entity have been adopted in seven other states, but Washington’s approach is unique. The social purpose corporation gives management and investors the flexibility to identify the nonfinancial factors that are key to the company’s mission, and provides directors the protection necessary to consider those factors in decision making.
The drafters of the new law, a committee of lawyers within the Washington State Bar Association, worked diligently for nearly two years to create a structure that would serve the needs of various enterprises including, the owner-managed microenterprise, the venture-funded startup, the late stage privately-held company, the wholly owned subsidiary of a public company, and even the publicly-traded enterprise.
Washington State has proven its leadership in the development of innovative technologies and world-changing philanthropy. With the social purpose corporation structure, Washington companies can now lead the way in bringing those efforts together and harnessing the power of business to do good.
Drew Markham is an attorney in the Seattle office of Wilson Sonsini Goodrich & Rosati. [Editor’s note: WSGR represents GeekWire].
