By Isis Bous, Managing Director, Lex Mundi Pro Bono Foundation
The time for small intermittent steps toward inclusivity, equality, and sustainability has passed. Watershed global crises in health, the economy, and climate have brought the need for a seismic shift sharply into focus. With governments and the public paying closer attention than ever, the business community has been forced to reflect deeply, and somewhat urgently, on its own contribution.
J.P. Morgan recently polled investors from 50 global institutions, representing a total of $12.9 trillion in assets, on how they expected COVID-19 to impact the future of environmental, social and corporate governance (‘ESG’) investing. Notably, 71% of respondents believe that COVID-19 increased awareness and actions related to climate change and biodiversity losses globally.
Governmental and non-governmental organisations alone do not have sufficient time and resources to address the compounding global challenges of climate change, environmental degradation, and inequality in global health outcomes, education, and social welfare. And while many corporations have admirably begun to address some of these problems, it is clear we cannot rely solely on the goodwill of business interests to reform economic systems and promote sustainable growth. Social enterprises, organizations that place mission at the forefront of their operations, have an absolutely critical role to play in bridging this gap.
Social enterprises are a distinct and growing phenomenon, capable of addressing multiple social challenges simultaneously. While they have existed for decades and can be found all over the world, most jurisdictions suffer from a lack of laws and policies that support them. Worse, in some jurisdictions, governments have specific regulations that actually present obstacles to their expansion.
The Lex Mundi Pro Bono Foundation, led by their California member Morrison & Foerster LLP, collaborated with more than 60 Lex Mundi member firms around the world to investigate how legal reform can act as a catalyst for social enterprise.
The Report was commissioned by Catalyst 2030, a global movement bringing together social entrepreneurs and social innovators from all sectors to attain the Sustainable Development Goals by 2030. The clients approached the Foundation with a very broad request – a survey of all laws and policies globally that affect social enterprise and suggestions on how to improve them. After working to refine the ask into a manageable project, the Foundation set out to find a firm to lead the endeavor. Morrison & Foerster agreed to the impressive undertaking.
A comprehensive questionnaire requesting information on laws and policies regarding enterprise form, funding, tax, government infrastructure, and miscellaneous questions directly related to social enterprise was created and distributed to member firms around the world. A total of 66 Lex Mundi member firms put hundreds of attorneys and countless hours into responding to the surveys for 83 countries, while Morrison & Foerster dedicated dozens of lawyers to reviewing responses and writing the final report. The entire project took more than a year to complete.
Nothing with this kind of depth and breadth existed in the ecosystem prior. A global guide reviewing such a large number of jurisdictions was only made possible by the unmatched expertise available in the Lex Mundi network, the Foundation’s unique position and relationship with so many top-tier firms, their collective trust in each other, and an immense commitment to changing the world for the better.
Legal reform as a catalyst for social enterprise: an international social enterprise law & policy report launched alongside the 2022 virtual Davos Agenda, an event held by the World Economic Forum, as part of the broader discussion around restoring trust in global markets and taking precautionary measures in the face of future adversity.
The report offers a comparative analysis of how different countries support and enable the development of social ventures, including observations from each inhabited continent and every major legal structure. It also offers recommendations to assist policymakers in catalysing the formation and growth of social enterprises in their respective jurisdictions.
Specifically, the report identifies six legal policy recommendations which could assist countries in helping social enterprises flourish, thereby contributing to a more sustainable end equitable future. Policymakers should seek to clearly define these businesses as distinct corporate entities; enable fiduciaries to consider stakeholders more broadly; provide tax benefits to social enterprises and their investors; reduce barriers to investing in these companies; guard against corruption and “greenwashing”; and lastly, allow a degree of flexibility for scaled application. Of course, there is no one-size-fits-all solution for all jurisdictions. Therefore, each jurisdiction should tailor its approach to reflect its local laws, regulations, needs, and goals. Nevertheless, this framework and its supporting global review provides policymakers with a useful roadmap for success.
The first step in shaping an equitable and sustainable community through social enterprise is to lay out a clear definition of these entities based on desired policy outcomes. It is imperative to begin with a coherent definition in order to achieve specified goals. Further, clarifying when and how fiduciaries may consider social and environmental factors is necessary to facilitate best practices and investments. Once these foundational principals are understood, other policies can be implemented to bolster support.
Policymakers could then consider tax benefits for social impact entities and their investors, as well as measures to make investing in social ventures easier. Most jurisdictions tax for-profit enterprises one way and non-profit organizations another, with few exceptions and not much middle ground. A third approach that rewards for-profit social enterprises and their investors with tax benefits for pursuing public good would be enormously valuable. Further, regulators could remove or minimize legal obstacles to fundraising for social enterprises to ease the inherent burden in their hunt for capital.
Of course, if policymakers choose to provide benefits and incentives to social ventures, they must also take steps to prevent corruption. Regulators should develop a form of reporting or certification to, first, ensure legitimate social ventures continue complying with relevant standards, and second, prevent illegitimate businesses from defining themselves as social enterprises solely for the purpose of receiving benefits. Meaningful and quantifiable reporting requirements, potentially coupled with independent third-party auditing, will help guard against fabrication and aggrandizement.
Lastly, recognizing that not all social enterprises are created equally, policies should be flexible and allow for scaled implementation as appropriate. Some entities are small for-profit start-ups, others are structured as nonprofits, while some are very large organizations, flush with assets. Most social enterprises are not public companies, but some are. Although larger companies may not need as much support, they could be eligible for some benefits, nonetheless. More importantly, large corporations have incredible influence and are capable of setting standards that impact the ecosystem as a whole. Elastic regulations that can account for size, structure, mission, and impact will result in benefits being spread equitably across ventures that truly require it.
There are many ways for policymakers to support and accelerate social enterprises and contribute to a more equitable and sustainable world. They can define new corporate forms, adopt flexible tax policies, promote more investing, facilitate fundraising, provide supportive services, reward good behavior, and require impact related disclosures. Any one of these changes, or a combination of many, has the capacity to propel and accelerate these vital organizations. We hope that this report will inspire policymakers around the world to examine current regulations, consider changes, and provide a more fertile ground for social enterprises to further their meaningful work.
Read the report and explore the supporting research at lexmundiprobono.org/social-enterprise-report/
About the Author
Ms. Bous joined the Foundation in 2017 bringing more than a decade of experience working in law firms and in-house with both for profit and nonprofit organizations; she advised and mentored social entrepreneurs both domestically and abroad; and was an entrepreneur herself.