Interview with R. Todd Johnson, Co-Author of California’s Flexible Purpose Corporation Legislation

Meet Attorney Todd Johnson

One of the thought leaders in social enterprise law in California, and co-author of the FPC (flexible purpose corporation) law is R. Todd Johnson. Todd is a Partner at Jones Day and is the Practice Leader of the Energy group of the firm where he focuses on Renewable Energy and Sustainability.

Todd has had a lengthy career serving social entrepreneurs, having represented companies such as SunPower, Embrace Technologies, GoodGuide, LaborFair.com, as well as Grameen Trust, and advising companies like Good Capital, Global Giving, and B Labs during his 25 year career at Jones Day. He also blogs at Business for Good.

Innov8Social had a chance to speak with Todd Johnson about his vision for the intersection of law, policy, and social enterprise; as well as the story behind California’s flexible purpose corporation.

Q1 | Innov8Social:  How do you define social entrepreneurship?

A1 | R. Todd Johnson, Partner at Jones Day:

Q2 | Innov8Social:  Can you share the history of the flexible purpose corporation?

A2 | Todd Johnson :

In the late 1990’s as I started working with social entrepreneurs I noticed some dysfunction in the way the legal community thought about legal structures for social enterprises. The thinking was bifurcated…there was a 1 or 0 mentality on the subject, and there wasn’t much middle ground. Entrepreneurs were forced to choose between being a “for-profit” or a “not-for-profit,” terms loaded with baggage of what entities should and should not do.

Then, a shift started happening. Companies such as Salesforce championed a 1-1-1 model and other corporations, often spurred by institutional investors, adopted strong environmental, social and corporate governance (ESG) measures. These innovations moved the for-profit model more toward a company doing good rather than merely minimizing harm.

Even these initial steps were cautiously taken. Companies like Google already had standing mottos of doing the least harm (i.e. “don’t be evil”) and certain sin stock filters on portfolios excluded vice-products such as tobacco, alcohol, etc.

I began working with the social enterprise PureVida Coffee in the late 1990’s, whose founders had new questions. For example, they wanted to know if you want to do something that is fully blended, what legal structure should you adopt?

As I started thinking about these issues, I met Jay Cohen Gilbert and others social enterprise thinkers at the Aspen Institute. He and B Corporation co-founders were beginning to develop the B Lab and B Corporation concepts.

In working closely on issues of social enterprise law, I saw a huge flaw in many corporate statutes. In California, for example, a social enterprise couldn’t even file Articles of Incorporation with a mission/impact driven statement of purpose. The fact that founders could not write in a purpose for their corporations was a major issue.

In 2005-2006 I did a study on constituency statutes for B Lab. Constituency statutes can be effective tools in legal tool kit; however, they don’t necessarily create transparency around stakeholder empowerment. And in all 31 states with constituency statutes, it is elective (i.e. Boards can abide, but are not required to).

In 2008, B Lab proposed a California constituency statute applying a “shall” requirement—to apply to all corporations. While I supported the idea that the market should allow for social enterprise, I was wary of forcing it on every corporation. A few entities, including the State Bar Association opposed the proposed law. 2008 was also the first year of major budget battles in CA (i.e. there were 99 bills that Gov. Schwarzenegger allowed to lapse, and vetoed by default). The governor didn’t comment on any of the vetoes, except for this one—he told the bill’s sponsor that he wanted a better bill, and wanted CA to be a leader.

I convened a meeting at our SF offices in Fall 2008. The robust discussions resulted in a working group of 10 lawyers including attorneys from large firms, smaller firms law firm, academics, nonprofit attorneys, and foundation attorneys who kicked off a multi-year effort to create a new statute for social enterprise.

In 2009, we published a draft of a new law and distributed it to 300 social entrepreneurs, organizations, thought leaders, and incubators, and received comments from many. In response, we made changes to the proposed legislation and prepared an FAQ to explain the changes made and those that were not made in response to comments. That FAQ remains available to this date, providing transparency in the trade-offs made in drafting the legislation. In 2010, California state senator DeSaulnier sponsored the bill. Unfortunately it was another budget battle bill year, and the bill didn’t proceed very far. In 2010, B Lab also ended up introducing their own legislation in MD and VT, and in 2011, introduced a version in California.

In 2011, both the benefit corporation and flexible purpose corporation legislation passed into law in CA. Since that time, fifteen states have adopted either a benefit corporation or social enterprise legislation that resembles FPC. And just two weeks ago, Delaware (the grand-daddy of all corporate laws), introduced legislation that is a hybrid between the benefit corporation and the flexible purpose corporation.

Q3 | Innov8Social:  What have you seen from the front lines of being part of social enterprise legislation?

A3 | Todd Johnson:

The structuring of social enterprise is in its infancy. We are in the rapid prototyping phase, and we should realize there will be failures. I think it is key to apply design theory in determining legal structure for social enterprise.

For me, the real test for these new legal forms will be whether they attract capital. Today, the jury is still out on that point. Most of the B Corporations that have institutional investor funding are traditional Delaware corporations or they are companies like Patagonia – owned and controlled by a founder with a passion around anchoring the mission. The key will be when capital flows freely into companies that are organized affirmatively to achieve blended value or the triple-bottom line and are structured to make that institutional, rather than subject to the will of the founder (which is always at risk of death, divorce or a change of heart).

Q4 | Innov8Social:  How do you help social enterprises determine the right structure for their business?

A4 | Todd Johnson:

When I discuss legal structure options with social entrepreneurs, I walk them through a “design tree” of options. It helps to evaluate the traits of each form against the needs of a particular business.

I personally don’t find tandem structures (using both a for-profit and a non-profit corporation) to be a good option, except in the situation of a “corner case”. Look, a startup is hard to launch on its own—without a social mission. Nine out of ten startups fail in the first two years. And social entrepreneurs aren’t just doing a start-up, but they are also trying to tackle some of the world’s hardest problems.Tandem structures lead to social enterprises doing all of that while living with the worst of both worlds—i.e. having to adhere to strict accountability of corporate law as well as IRS regulations.

However, some social enterprises have chosen a tandem model because tax deductible contributions are key to the business model. For example, Global Giving adopted a tandem structure; although I’m sure that Mari and Dennis could give founders an earful about the challenges of establishing and operating such a structure. In contrast, there seems to be a movement for social entrepreneurs to consider starting in a non-profit as a way to cover the soft costs of start-up, and then morphing into a for-profit once a product or business idea is fully baked. This is challenging and not for the faint of heart, even if it is possible. Embrace Technologies did something like this, but not without receiving hundreds of pro bono hours from a law firm to navigate the challenges. Also, it can be difficult and costly to move assets between entities–a business and nonprofit (i.e. you need 2 law firms, and huge transaction cost are major). At the end of the day, I think the administrative and operational costs of pursuing this route make it extremely unwise, except in the rarest of circumstances.

Q5 | Innov8Social:  Should CA still pursue a constituency statute?

A5 | Todd Johnson:

No, that’s crazy!

In mid-1980’s states introduced constituency statutes to be able to look at other interests besides maximizing shareholder value. So 31 states have passed them, but they were essentially anti-takeover tools. The idea of using them for social enterprises as a way to anchor the mission is no longer necessary in most cases, now that B Lab has been successful in getting alternative legislation adopted in so many states.

And we need to remember, no courts have ever looked at using constituency statutes as a way to anchor the social mission of a social enterprise. There is a risk that a constituency statute might not be effective to protect a corporation’s mission.

Q6 | Innov8Social:  What are your thoughts on how social enterprises should measure impact?

A6 | Todd Johnson:

First, let’s be clear. Social enterprise is not a sector! A social enterprise is a business deploying capital to solve problems/do good. Organizations that are making money and doing good are social enterprises. At its essence, social entrepreneurship is a “way” of doing business, rather than a type of business.

But that means that measuring impact depends on the type of business of a social enterprise. We can’t think of impact in a uniform way. For example, Change.org can measure impact by successful petitions. Embrace can measure the number of babies lives saved by the number of inexpensive infant incubators distributed. The folks at d.light can estimate the amount of kerosene not used in favor of their solar-powered LED lights and the health and environmental benefits.

It’s incumbent on the social enterprises to develop an impact strategy and a means for measuring and reporting that impact. Of course, as my examples note, this will be different for a base of the economic pyramid company than for a Western-focused technology company. And it will be hard for companies with a mission around personal transformation. But social enterprises need to own this issue as part of their business plan, and it must include looking and thinking about the unintended negative consequences.Bottom line: If social entrepreneurs want to attract impact investing money, then they need to have a well-developed impact story, developed using the same type of empathic design thinking they used to develop their service or product.

Q7 | Innov8Social:  What inspires your commitment to the social enterprise movement?

A7 | Todd Johnson:

My parents have always been very active in their communities and always modeled giving back. From the very beginning of my legal career I have sought out ways to give back.

At Jones Day, I run the renewable energy and sustainability practice—and that fits well with my passions.

But ultimately, I feel like that part of my responsibility–and others of us who are more established in the field (or just older)— to help build an ecosystem for the young lawyers passionate about this emerging arena.

Q8 | Innov8Social: What advice do you have for attorneys interested in practicing social enterprise law?

A8 | Todd Johnson:

First, there really isn’t such a thing as “social enterprise law.” The most important goal for any young lawyer passionate about this area must be to become a very good lawyer in a specific expertise – capital markets, mergers and acquisitions, venture capital and private equity, intellectual property, etc. Then apply that expertise to social enterprises. Initially, focus on becoming an expert.

Lawyers need to understand at the beginning of their careers that the trajectory of an attorney’s career is like an hour-glass—broad at the beginning, specialized as it develops, and broad in the later years — and prepare accordingly.note: photo of Todd was adapted from his LinkedIn photo.