Social Innovation, Evolving to Law

At the stroke of the midnight hour on Sunday night, Governor Brown submitted his final list of approved and vetoed bills. In the approval pile were two bills that create new legal structures for social innovation in California. The bills—AB 361 (benefit corporations) and SB 201 (flexible purpose corporations)—establish new for-profit entities committed to creating positive impact.

I launched Innov8Social a few months ago to explore social innovation, with special interest in its intersection with law and policy. The timing coincided with the progress of AB 361 through various stages at the California State Senate and State Assembly. After connecting with the B Lab Policy team, attending a few of the hearings in Sacramento, and writing about the legislation, I began to see things from a unique perspective. The legislation, rather than being stand-alone happenings in the field, seemed to be part of a broader evolution of social innovation. The following walks through one view of that evolution.

A Social Entrepreneur by Any Other Name…
Bill Drayton’s furthered the concept of a “social entrepreneur” in the 1970’s. In 1980, he started Ashoka, which has helped define the term, the field, and the relevance of social entrepreneurship.

Against the backdrop of an ending war, a stock market crash and an uncertain economy, periods of high unemployment and inflation, the resignation of a President, the rise of the Peace Corps, and the beginnings of the Internet as we know it—it makes sense that there was an emerging need to connect the dots in new ways. And it makes sense that it would take a luminary such as Drayton to recognize a unique way to engage the social sector with entrepreneurship.

Technology, Out of the Box
Drayton’s concept of transforming society through engaging and expanding the citizen sector began to take shape. And it was happening at a time of profound technological revolution responsible for personal computers, mobile phones, smart phones, tablets, and the rapid expansion and development of the Internet.

In the past few decades, technology has astounded, mesmerized, challenged, sometimes-disappointed, and often amazed us. More than anything, it has served to connect all of us in a way unparalleled to any other period of history. As tech entrepreneurs developed new technologies that shot to fame, social entrepreneurs began to find new ways to harness those technologies to connect business with cause.

Not Business as Usual
Social innovation took another leap forward when Muhammed Yunus introduced the concept of microfinance, slowly shifting the paradigm from philanthropic donation to impact investment. Investing in change connects the investor and beneficiary in a sustained relationship. It builds communities and it enables new kinds of businesses to emerge. Yunus’ 2006 Nobel Peace prize for his innovative approach for creating change inspired broad-scale efforts in microfinance through organizations such as Kiva.org.

The need to see beyond a singular bottom line began to take shape. And new reporting standards began developing ways to account for a triple bottom line—a way to recognize a broader view of stakeholders including as stock-holding shareholders, but also including other sectors impacted by business such as the community and the environment. Those efforts have culminated in development of systems such as the Global Impact Ratings System (GIIRS).

Academia, Governance, and Fellowship
Social innovation continued to evolve and blend into traditional fields. New fellowship programs emerged to try to capture and rising interest in social entrepreneurship. Ashoka, Acumen, Skoll, Echoing Green fellows joined many others participating in and furthering social innovation. Universities followed closely behind with the establishment of courses on social entrepreneurship and centers on social innovation. The rise in interest even reached the White House, with the establishment of the White House Office of Social Innovation and Civic Participation.

Evolving to Policy and Law
Perhaps, then, the logical next chapter of the social innovation story is law and policy. Existing laws tend to draw lines between for-profit and non-profit businesses. Early cases such as Dodge v. Ford made clear that the businesses exist to benefit shareholders. The starkness of that notion and its sometimes unintended consequences gave way to the development of the Business Judgment Rule and state constituency statutes.

And now, in a handful of states, there is a new option for how companies can incorporate, lending a distinct legal structure to recognize social ventures. This type of incorporation can effectively blend social and environmental missions with entrepreneurial motivation. Benefit corporations have become an option in 6 states and have been in existence for over a year in Maryland.

California is the first state to introduce two options for social ventures. Corporations can opt to incorporate as benefit corporations or flexible purpose corporations—a form of social venture unique to California.

Forging a Path
When forging a path, the road ahead is always unknown. Similarly, though we’ll have to wait and see how companies engage with the new legislation—the fact that there is legislation is not the feat of a single effort, but the culmination of an evolving story of social innovation.

Read more stories by Neetal Parekh.