Breaking Through the False Choice Between Mission and Liquidity

Many a social enterprise leader has asked themselves: If I take on equity investors, will I have to fight to preserve my company’s mission? If I have to sell my company to a larger enterprise to provide an exit for investors, will I be selling out that mission? Do I have to stay small to stay loyal to my founding purpose? If I grow the company on my own, how can I ensure a mission-preserving succession?

For many growing, purpose-driven ventures, these questions are hardly theoretical: The choice between liquidity for the business or for owners on the one hand, and loyalty to a social or environmental mission on the other, is as real as it is problematic. And the stakes in addressing this conundrum go much deeper than the concerns of individual companies.

The current corporate code, particularly in the United States, dictates that directors act in the best interests of the company and all of its shareholders. This notion of maximizing shareholder value as the ultimate goal of a corporation has laid the groundwork for the immense growth of wealth over the past 150 years, but it comes at a steep cost. Today we find ourselves in an extractive global economy—one that is leading to ever-increasing inequality, rapid depletion of natural resources, potentially irreversible climate change, and enormous social challenges.

The bulk of the solutions needed to create social and economic justice, reverse climate change, and generally increase human consciousness must come from social enterprises and mission-based companies. As illustrated by Michael Porter’s Shared Value Initiative, NGOs and governments do important work to drive positive change, but businesses have incredible leverage through the marketplace to scale the best ideas—if they have a mission that is greater than profits or shareholder value. We must get this right, and that imperative has created a global movement that is developing and testing alternatives that preserve mission, support growth, and ideally address the severe power imbalances created by dominant business structures.

Perpetual purpose trust: A new level of mission protection

An extremely promising model that has been implemented by a few companies in Europe and is just emerging in the US is the perpetual purpose trust. Chartered to protect the company’s purpose (or mission), it owns a majority of common (voting) shares and appoints a board of directors.

With this structure, the company basically owns itself. A company can sell itself to a perpetual purpose trust by issuing preferred, non-governance stock and taking on debt to self-leverage a buyout. Outside investors can purchase that stock and receive a dividend—but because they will never see an exit, they are not investing with a speculative motive. The company is protected from hostile takeovers, and can focus all of its resources and attention on running the business and furthering the mission.

As an added benefit, the trust structure decouples ownership and control (which sits with the trust) from the financial outcomes of the equity investment (which sit with the operating company). As the sole owner, the trust prioritizes profitability in service to the operational well-being of the company and its mission, investors, employees, customers, and suppliers collectively. Time will tell how well this novel structure serves the mission and all stakeholders, but early indicators are positive and promising.

In July, Portland, Oregon-based produce distributor Organically Grown Company (OGC) became the first US business to adopt the structure. Previously employee- and grower-owned, OGC made the bold move to buy back all the shares from its stockholders and transfer them to the Sustainable Food and Agriculture Perpetual Purpose Trust, which will eventually hold 100 percent of the ownership rights. Our organization, RSF Social Finance, provided a $10 million loan to help buy out OGC’s previous shareholders and recapitalize the business, plus $1 million in working capital. In the spirit of integrated capital, a group of values-aligned equity investors has lined up to acquire non-governance stock and provide the company with additional capital. The trust will ensure that the company delivers positive economic, social, and environmental impact, and maintains its independence in perpetuity, never to be sold.

OGC had been providing liquidity to its retiring farmer- and employee-owners for decades. For the previous 10 years, its employee stock ownership plan (ESOP) allowed the company to fund share repurchases and redistribute the ownership to current employees. But with many founder-owners approaching retirement and mergers and acquisitions activity heating up in its sector, OGC grew concerned about its ability to fund the generational transition without compromising its ability to invest in the business or sacrificing its mission priorities.

“The perpetual purpose trust is an innovative model in the US, but OGC is part of an emerging global movement toward new corporate structures,” says Natalie Reitman-White, vice president of Organizational Vitality and Trade Advocacy at OGC. “This movement is challenging the status quo in capitalism, in which ownership, as a company scales and matures, becomes distanced and disconnected from the founding purpose and the stakeholders the company serves. In OGC’s new structure, the company “compass” stays aligned with the purpose, which creates more innovative, resilient, and valuable companies over the long term, as all stakeholders share the focus on purpose.”

Worker cooperatives: Fitting an old model to a new purpose

This is an old form that has always provided a clear alternative to typical, undemocratic, corporate power structures. Worker co-ops give all employees a voice and an ownership stake in the business, and can include customers and suppliers. Profits accrue to the owner stakeholders, so incentives are aligned for all parties. There is no guarantee of mission preservation, but co-op founders tend to assume that employee-owners are more likely to be committed to the mission, and hostile takeovers are less likely when there is no majority shareholder.

What’s new here is that a few pioneers have a found a way to raise growth capital within the co-op structure, which presents barriers to traditional equity investments. The fair-trade food purveyor Equal Exchange is a shining example. The company (also an RSF borrower) sells preferred shares to investors in periodic private offerings, but investors don’t receive voting rights or profits from share sales; instead, they get an annual dividend of 0 to 8 percent (5 percent is the target). The company has raised more than $16 million this way.

Equal Exchange has solved for mission risk too, with what co-executive director Rob Everts calls a “poison pill”: There’s no incentive to sell the company, because in the event of a sale, any proceeds remaining after paying off loans and returning investors’ money at face value would have to be donated to another fair-trade organization.

Benefit corporations: Bringing stakeholders to the shareholder table

For companies that want or need access to a broader range of investors, registration as a benefit corporation can provide mission protection within the framework of a conventional corporate structure. Benefit corporation status (not to be confused with B Corporation certification) is designed to preserve mission through capital raises and leadership changes, and add flexibility when evaluating potential sale and liquidity options. (For background on how social enterprises are using this form, see “Benefit Corporation and L3C Adoption: A Survey.”)

Benefit corporation status does not fully address the challenge of shareholder power, however. Most statutes require a supermajority shareholder vote of two-thirds or more to revoke benefit corporation status—a high bar, but one that could be cleared by, say, an acquirer buying out the founders. And collectively, shareholders still control significant aspects of a company’s future. While benefit corporation statutes require that the board consider or balance the interests of a spectrum of stakeholders, they do not mandate any particular outcome. As with perpetual trusts, we need more time and testing to see how benefit corporations perform vis-à-vis their mission orientation over the long term.

Financial success is the means, not the end

A truly mission-first business that sees financial results as a necessity, rather than an objective, needs a financial and ownership structure that enables it to focus on its mission, rather than on chasing short-term profitability or shareholder favor. The model of maximizing shareholder value, whether or not the shareholders are employees, can’t serve the purpose of a mission-based enterprise.

Mission-protective ownership structures like the ones mentioned above help build the scaffolding to support a community-based financial system that can unlock our human potential to fix the problems we’ve created under previous paradigms. This is going to take some experimentation, and we hope other funders will join us in testing and proving the viability of business structures fitted to purpose.

Read more stories by Jasper van Brakel.