Including Mission in the Statement of Corporate Purpose

If a business lacks a formal statement of its social and/or environmental mission, or investors want changes in the language of such a statement, requiring the description of the mission, in a formal written agreement or statement, at the term sheet stage may be helpful.

  • If closing a deal before mission is defined:

Sample language: Within [X days or X months] after the Closing, the Company and the Investors shall agree upon a written statement of the Company’s [social and environmental purpose] OR [the impact goals of the Company and the investment].

  • Policies for adoption after closing

Sample language: Within [X days or X months] after the Closing, the Board (which vote shall include the Preferred Director) shall adopt policies relating to each of the following rules:

  • If Mission is defined at the time the deal is closed:

Sample language: The Company and the Investors have agreed upon the Company’s [purpose or goal definition] OR [the shared goals or goal definition] OR [the goal definition contained in Exhibit X], and mutually intend to support this purpose and the achievement of these goals

  • Extending standards of practice to partners

Sample language: The Company shall enter into and maintain business relationships only with suppliers and contractors who comply with the policies described in the preceding paragraph.

Including Mission in Company’s Best Interest Statement

Under US law, corporate directors have a fiduciary duty to make decisions in the “best interests” of the company, which is often interpreted as maximizing shareholder return. Directors are often advised that pursuing mission at the expense of shareholder return risks litigation and perhaps even personal liability. Companies may be able to minimize the risk of director litigation and better protect their mission and values by specifying in the Company’s charter what they want directors to consider in their decision-making. This could mean specifying, for example, that one or more of the following must be considered as part of a “best interests” analysis: the Company’s mission; stakeholders other than owners; and ethical or environmental considerations. The parties may also want to explicitly permit the Company to accept lower acquisition offers if the lower offer would better advance the Company’s mission.

If the parties know that they want the directors to consider more than financial return in their decision making, then they will also want to consider alternative corporate forms such as the Benefit Corporation and the Social Purpose Corporation.

Sample language: The Company’s [identify charter document] shall state that, in determining what is in the best interests of the Company, a [director] AND OR [manager] shall take into account the [purpose] OR [impact goals] described in [Article X] AND OR [the corporate citizenship standards described in Exhibit X], and the best interests of those materially affected by the corporation’s conduct. Even in the context of a liquidation event, as a result of weighing the factors described in the preceding sentence, a [director] AND OR [manager] may decide to accept an offer, between two competing offers, with a lower price per share.

  • Including Mission in the Statement of Corporate Purpose:

By formally stating mission as part of the corporate purpose in the company’s charter, the company sets a clear standard for all stakeholders and communicates its impact commitment to existing and future stakeholders. The agreed upon language may constrain directors’ and management’s decision making authority, influence how directors’ and management’s fiduciary duties are interpreted and also potentially limit the permissible activities and operations of the company. Accordingly, any charter language needs to be drafted with extreme care after consultation with knowledgeable legal counsel.

If the parties know that they want to incorporate mission into the company’s charter, they will also want to consider alternative corporate forms such as the Benefit Corporation and the Social Purpose Corporation.Sample language: The Company’s [identify charter document] shall set forth [the Company’s purpose of [goal definition] OR [the Company’s standards of corporate citizenship as described in Exhibit X].

Corporate Citizenship Policies

Entrepreneurs and investors can agree to minimum standards of business or ethical practices and define them in the investment documents. These may be custom statements based on local law or they can be adapted from third-party standards, such as the International Finance Corporation (IFC). The parties can also agree on general principles at the term sheet stage and require that the board adopt more detailed policies within some period of time after closing. The policies included with these sample terms are examples only and are not intended to be prescriptive.

The IFC Standard

The Company shall comply with applicable local and national laws and as a minimum shall not employ or make use of forced labor of any kind; not employ or make use of harmful child labor; shall pay wages which meet or exceed industry or legal national minima; shall treat employees fairly in terms of recruitment, promotion, terms and conditions of work and representation, irrespective of gender, race, color, disability, political opinion, sexual orientation, age, religion, social or ethnic origin, or HIV status; shall allow consultative workplace structures and associations which provide employees with an opportunity to present their views to management; shall ensure that employees relocated to remote operations for extended periods of time have access to adequate housing and basic services; shall assess the health and safety risks arising from work activities; shall work over time to apply the relevant International Finance Corporation (IFC) policies and guidelines on health and safety, if these are more stringent than local legislation, with appropriate targets and timetable for improvements; shall consider the potential for positive environmental impacts from business activities and take appropriate action to mitigate environmental risks, ameliorate environmental damage, and enhance positive effects; shall work over time to apply the relevant IFC policies and guidelines, if these are more stringent than local legislation, with appropriate targets and timetable for improvements when activities are assessed to present significant environmental risks; shall comply with all applicable laws and promote international best practices, including those laws and international best practice standards intended to prevent extortion, bribery and financial crime; shall uphold high standards of business integrity and honesty; shall properly record, report and review financial and tax information; use effective systems of internal control and risk management covering all significant issues, including environmental, social and ethical issues.

Environmental and Social Responsibility

The Company shall endeavor to conduct all aspects of its business in an environmentally and socially responsible manner, including the promotion of peaceful conflict resolution, fair and humane working conditions, equitable treatment of its employees, implementation of sustainable business processes, waste minimization and recycling, and philanthropy as described below. The officers and directors will use their discretion and business judgment to determine how best to implement this policy consistent with their fiduciary duties.

Corporate Giving

The Company shall endeavor at all times to have in place a program encouraging robust corporate philanthropy at a level established by the officers and directors using their discretion and business judgment to determine how best to implement this policy consistent with their fiduciary duties.

Fair Wages

The Company shall pay its eligible employees based in the United States of America and its non-US based employees in a fair and just manner as determined by the officers and directors in their business judgment consistent with their fiduciary duties.

Equal Benefits for Employees

Domestic Partners (whether same sex or opposite sex) of the Company’s eligible employees shall be eligible to receive benefits under the Company’s employee benefit policies and programs to the same extent spouses of the Company’s eligible employees are eligible to receive benefits under such policies and programs, subject to the eligibility requirements and benefits policies adopted by the Company.

Domestic Partners (whether same sex or opposite sex) of the Company’s eligible employees shall be eligible to receive benefits under the Company’s employee benefit policies and programs to the same extent spouses of the Company’s eligible employees are eligible to receive benefits under such policies and programs, subject to the eligibility requirements and benefits policies adopted by the Company.

Compensation

The Company shall not provide cash compensation to any officer of the Company (excluding signing bonuses, performance bonuses, stock and option grants and other benefits), in excess of a ratio to the compensation paid to the lowest paid full-time employee of the Company based in the United States of America, such ratio to be set at a level determined by the board in their business judgment consistent with their fiduciary duties.

No Third Party Beneficiary Status

The adoption of these Rules of Corporate Responsibility does not confer third party beneficiary status on any party or give any party rights hereunder.

Balancing Purpose and Profit

Is there some correlation between an entrepreneur’s purpose in starting a business, whether it is one created to have positive social and financial returns or simply to maximize profit, and access to mainstream investors? The answer to this question used to matter more than it does today particularly in the following G8 countries (Canada, France, Italy, UK and US) and will hopefully matter even less as legal forms of “profit with purpose businesses” gain traction and enable purpose minded entrepreneurs to access investment capital from mainstream investors.  The authors of the 2014 report titled Balancing Purpose and Profit highlighted the positive trends taking place in mainstreaming legal forms for profit-with-purpose business.  In their 2016 update to the 2014 report, they write the following:

“The development of legal and other structures that make profit-with-purpose businesses (“PPBs”) more attractive is a powerful confirmation of the reality in our civil society that not every investor or shareholder subscriber is motivated solely by profit. Millions of business owners around the world seek to do more than simply maximize financial return … primary purposes include improving the environment, eradicating poverty and developing communities. In the classic model, these social purposes had to be pursued as a charity or nonprofit corporation. This is no longer the case, and the G8 countries are continuing to develop legal regimes that allow businesses to have a primary mission of having a positive social and environmental impact while gaining access to investment capital that can deliver that impact in unprecedented scale and scope.”

Mainstream investors will mostly invest in businesses with well-developed and widely used legal structures/forms.  They want investments to be in legally registered entities with known governance parameters. Over the last few years there has been a flurry of legal activity around company formation targeted at locking-in mission for profit-with-purpose businesses.  This note highlights progress in the G8 countries from a report published first published in 2014 and then updated in 2016 by Orrick Herrington and Sutcliffe LLP, UnLtd, and Thomson Reuters Foundation

It is exciting to be a profit and purpose minded entrepreneur in any of Canada, France, Italy, UK and US, where PPB legal forms have been enacted and adopted relatively well.

A Canadian entrepreneur can register a PPB in British Columbia and have operations across the country under the Community Contribution Company (“C3”) Act of 2012.  In 2015, British Columbia strengthened market opportunities and the role of C3s in the economy by introducing Social Impact Purchasing Guidelines providing for the inclusion of social values in solicitation (request for proposal) documents for goods and services.

In France the government has shown support for social entrepreneurs and investors. PPBs are regulated under the Social and Solidarity Economy (“SSE”) Law.  A “Solidarity enterprise of social utility” designation allows PPBs access to government funding as well as procurement set asides. Investors in these businesses enjoy tax incentives 18% tax credit on income and 50% tax break on losses. The B-corp label was officially launched in 2015, allowing businesses to add purpose to their mission, committing to a set of impact best practices.

Italy is making progress. In 2015, the government enacted regulations governing “innovative start-up with a social purpose” which are granted tax incentives including an individual tax credit of 25% of the amount invested and a corporate tax credit of 27% of the amount invested. In 2016, the Italian government introduced the Benefit Corporation framework. In addition to benefits under the tax code failure to pursue impact goals as committed to can result in sanctions again the B-Corp entity.

In the UK the authorities have, via the Social Investment Tax Relief Act, provided for a 30% tax relief for investments in qualifying social enterprises and additional tax exemptions on capital gains from qualifying social investments.

If you are a mission-driven entrepreneur incorporating your business in the US, you can take advantage of registering as a Benefit Corporation or Low Profit Limited Liability Company. These models have become prevalent with the Benefit Corp structure as the most popular. State legislatures have enacted regulations favorable to entrepreneurs wanting to convert for profit businesses to PPBs. The market has also shown progress through IPOs demonstrating that PPBs can offer investors favorable returns.

The important question is how can the adoption of these legal forms be fast-tracked in countries that need the growth of social entrepreneurship to deliver benefits that cannot be fulfilled by government investment in areas that include protecting the environment, eradicating poverty and generally developing stronger communities?

Governance

Corporate governance is the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationships with all stakeholders (financiers, customers, management, employees, government, and the community.

Corporate governance framework consists of (i) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards; (ii) procedures for reconciling conflicting interest of stakeholders in accordance with their duties, privileges, and roles; and (iii) procedures for proper supervision, control, and information-flows to serve as a system of checks and balances (business dictionary).


Why Sound Corporate Governance Matters

It is important for an entity to have robust corporate governance because it is a risk management tool. It gives all stakeholders some comfort that, at some future date, if or when stakeholder interests diverge, stakeholders will continue to be accountable to each other to the extent spelled out in the governance framework.

Corporate governance frameworks are more important for impact or social ventures as it is usually in the governance framework that impact objectives and expectations are spelled out.  Impact entrepreneurs spell out their values or define their mission and investors who are aligned with those values can show their support through financial investment.

Entrepreneur View

Sound corporate governance can assist founders and management in attracting the “right type” of capital for their ventures. For social entrepreneurs who care about bringing in capital from investors who share similar values or care about impact outcomes, outlining expectations is critical to preserving those values over time.

Investor View

Investors generally like well-structured corporate governance frameworks because they are one component of risk mitigation tools. In traditional investments, investor risks are mostly financial and reputational.  In impact investing, investor risks include, financial, reputational, and values alignment. A framework that defines the enterprise mission as well as how such mission will be protected over time can influence an investors investment decision.


Governance Elements

Mission related governance provisions can be included in a company’s formation or charter documents. Before registering a company, a social entrepreneur should develop a solid business plan that includes the following: (i) clear definition of the product or service as well as the company’s social objectives, (ii) the strategy for meeting financial and social goals, and (iii) the process for measuring both business and social success. This is critical because in some countries where profit with purpose business (“PPB”) forms are available, a decision can be made to register as a PPB . In countries without PPB business forms, a social entrepreneur can include provisions in the company’s charter as well as be smart about the types of investors to target. Additionally, entrepreneurs and investors can agree on the minimum Standards of Business or Ethical Practices and elect to include Corporate Citizenship Policies in the investment documents.

In countries where the potential of the company Board of Directors being sued is a real, it is possible to include mission as part of the company’s “Best Interest Statement” or the company’s “Statement of Corporate Purpose” .

For example, under US law, corporate directors have a fiduciary duty to make decisions in the “best interests” of the company, which is often interpreted as maximizing shareholder return. Directors are often advised that pursuing mission at the expense of shareholder return risks litigation and perhaps even personal liability. Companies may be able to minimize the risk of director litigation and better protect their mission and values by specifying in the Company’s charter what they want directors to consider in their decision-making. This could mean specifying, for example, that one or more of the following must be considered as part of a “best interests” analysis: the company’s mission; stakeholders other than owners; and ethical or environmental considerations. The parties may also want to explicitly permit the Company to accept lower acquisition offers if the lower offer would better advance the Company’s mission.

In any event, mission-aligned investors generally need assurances regarding mission-related expectations. Such assurances can be in the form of a company’s registration form or provisions in charter documents – for example incorporating as an alternative entity. Clearly defining social or environmental goals in charter documents will align the interests of investors and entrepreneurs, as well as avoid potential misunderstandings over time. Articulating the mission brings a shared understanding of what the mission is and can surface differences in values and priorities between the company and investors early on. If the mission is not spelled out, both parties may mistakenly think they have a shared understanding.

If mission is not captured in formation and charter documents or in Standards of Business frameworks, mission goals can be included in investment term sheet provisions. These provisions can take many forms including:

  • formal written language in the investment document – If a business lacks a formal statement of its social and/or environmental mission, or investors want changes in the language of such a statement, requiring the description of the mission, in a formal written agreement side agreement or statement at the term sheet stage may be helpful. [link to legal language]. Drag-Along Rights have been used in the impact context to mandate conversion to an alternative entity after deal closing.  This can be in a situation where there is no time for going through the alternative incorporation process or when an entity’s management wants to defer the decision until after they have closed the deal (link to language).
  • use of investment proceeds provision – when the company and investors agree that the investment serves a defined social or environmental purpose and earmark investment capital, in whole or in part, for that purpose, including a formal written statement at the term sheet stage may be helpful [link to use of proceeds language],
  • mission related metrics approvals can be part of Investor voting rights Investors in preferred stock generally require that the company secure the approval of the preferred stockholders to take certain actions. The parties could agree to expand the traditional list of approval items for investor preferred stock to include impact-related actions (e.g. changing the company’s purpose).

Although less common, company founders can demand similar voting rights as part of a special class of founders’ shares. Founders, for example, may hold preferred shares with voting rights that allow them to veto any change of control they view as not aligned with the company’s mission.

If founders hold the voting rights, investors may try to negotiate for a provision that requires founders to buy (or find a buyer for) the investor shares that would have been sold in a vetoed transaction, at the price offered in that transaction. Conceptually, these rights could also apply to a capital raise, with founders reserving some period to find more mission-aligned capital, even after the board has approved a funding round.

Founders and investors will need to agree on the areas that the voting rights will cover [link to language below], as well whether a simple majority or super-majority of rights holders will be required to block changes.

  • Board mandate of oversight over the mission objectives and outcomes – a company’s founders and investors who share the same vision can protect against “mission drift” over time – including through a change of management or ownership. Agreements concerning corporate decision-making as well as restrictions on stock transfers can help to keep a company’s mission on track. An impact investor or a representative of the social entrepreneur can have a seat on the Board to safeguard the mission objectives. Within limits, the company’s board of directors can empower a committee or director to oversee mission-related decisions [link to language below]
  • Stock transfer restrictions as a way to protect against mission drift – Mission drift describes a situation when an entity moves away from its mission.  Mission drift happens over time and could be set into motion by one or many decisions that an organization needs to make on a daily basis. A company’s founders and investors can protect against mission drift – even through a change of management or ownership. Agreements concerning corporate decision-making, measuring mission objectives, as well as restrictions on stock transfers can help to keep a company’s mission on track.  Founders and investors may choose to adopt policies related to general corporate citizenship and ethical conduct [link to stock transfer restrictions language];

Additional Resources

The intersection of traditional venture capital and impact is gaining momentum as traditional venture investors understand that there are highly profitable companies that also have a social mission. Founders of impact companies want to access more traditional pools of capital because there is more money in traditional investing than there is in impact investing. Unfortunately, it can be a time-consuming process to educate traditional investors, who have not previously invested in impact companies, about the different impact registration forms or specific impact related provisions and how these do not automatically translate to lower financial returns. Founders of registered BPP companies have to decide whether approaching traditional venture is worth it

https://itpv3.wpengine.com/corporate-citizenship-policies/
http://itpv3.wpengine.com/balancing-purpose-and-profit/
https://itpv3.wpengine.com/including-mission-in-companys-best-interest-statement/
https://itpv3.wpengine.com/including-mission-in-the-statement-of-corporate-purpose/

Contributors

  • Patience Ball, Toniic.