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Podcast: Law in the Fourth Sector

by Katie Wolf

on 28 March, 2019

 

Can you really have it all? Can you have a profitable job and live true to your values by making the world a better place? Attorney and writer Allen Bromberger believes the answer is yes, and he’s built a thriving legal practice on that idea.

Allen Bromberger is a pioneer in a new field combining non-profit and for-profit legal structures. That means his clients are simultaneously pursuing two goals: financial well-being, and social or environmental well-being. Sometimes this is called the 4th sector, and in Allen’s 35 years of legal practice, it’s moved from a fringe idea to a thriving pillar of our society and our economy.

In addition to practicing at the firm Perlman & Perlman, Allen has co-authored the book “The Art of Social Enterprise: Business As If People Mattered.” He’s much sought-after for public speeches and presentations, but he’s taken the time today to tell us about his work, the skills it requires, and how these same ideals can build a successful law practice.

You can learn more about Allen Bromberger’s legal practice at Perlman & Perlman’s website. Allen’s book is available from Amazon and other sellers.

How to Listen

Join us as we sit down with the country’s best attorneys to talk about their processes and practices, as well as their outlook on the always-changing legal landscape. You can browse episodes on our blog, or find us on your favorite podcast directory. New episodes every month!

 


Transcript

Katie: Can you really have it all? Can you have a profitable job and live true to your values by making the world a better place? Attorney and author Allen Bromberger believes the answer is yes, and he’s built a thriving legal practice on that idea.

Welcome to the Filevine Fireside. I’m your host Katie Wolf. Allen Bromberger is a pioneer in a new field, combining nonprofit and for profit legal structures.

What that means is his clients are simultaneously pursuing two kinds of goals — financial well being, and social or environmental well being. Sometimes this is called the fourth sector. And in Allen’s 35 years of legal practice it’s moved from a fringe idea to a thriving pillar of our society and our economy.

Now Allen’s expertise is more sought after than ever. In addition to practicing at the firm Perlman and Perlman, Allen has coauthored the book “The Art of Social Enterprise: Business as if People Mattered.” He’s much sought after for public speeches and presentations, but he’s taking the time today to talk with us about his work, the skills it requires and how these same ideals can build a successful law practice. Thank you so much for talking with us today. Allen.

Allen: My pleasure.

Katie: First of all, could you set the table for us? Could you just let us know a little bit about who you are and how you came to this area of law?

Allen: Yeah. I’m an attorney in New York City. I work for a small firm here and our specialty is working with organizations and businesses that have the dual goal of sort of being financially successful but also creating social benefit; there’s some kind of a social non-financial intention. And I would say probably 70% of the firm’s practice is more or less traditional nonprofit stuff. My own practice is probably about 40% nonprofit stuff and particularly nonprofits that are engaged in substantial commercial activities, they’re running businesses and they’re earning income, as opposed to just taking contributions. And the other half are companies, for-profit businesses that have a social mission or an intention to do good and want the business to be operated in a way that reflects that intention.

Katie: And you’ve made quite a name for yourself in this area of law. I’ve found that when journalists want to understand how it functions, they often turn to you. How did you come to doing this style of practice? Did you just fall into it or did you always know this was where you wanted to be?

Allen: Well, I didn’t always know where it was going to be, because it didn’t exist up until a little while ago. I started my practice actually representing nonprofit groups, I come out of this from the nonprofit side rather than the business side. And I found that a growing number of clients were interested in earned income and revenue generating and unrestricted, and in many cases they were partnering with businesses on various kinds of commercial ventures.

So through that I started meeting entrepreneurs who were doing the same thing but kind of from the other side, and investors who are looking to invest in these kinds of companies. At the time there were very, very few lawyers who had any idea how to do this. The traditional lawyer world is divided into people who are nonprofit lawyers; it’s heavily tax driven, but they don’t really know anything about business and how to do business and how to raise capital and how to operate a business. The other side are business lawyers who know all about that stuff, but they really have nothing about mission or doing good or how to integrate that into the DNA of a company. So it really was an opportunity that I saw and somehow I had a feeling this was going to be big, so I jumped in.

Katie: Can you give us a sense of the current scope that social enterprise plays in our society right now? This isn’t just a small fad, this is everywhere.

Allen: This is huge. The estimates are that the amount of business that social enterprises represent is 2, 3 trillion dollars in the global economy. It’s very, very big. And it makes sense if you think about markets like education and healthcare and tourism and media, there are huge players in all of those spaces, all of whom had this kind of duality to them. They’re making money, they’re financially successful, but they are also oriented towards doing some public good. So it’s been going on for a long time.

And it’s just huge. I mean, I would say up until a few years ago it tended to be smaller companies that were doing it in niche markets. But now we are seeing very large companies start to assume this.

Katie: So consumer society has made a lot of us pretty cynical, but does this challenge your cynicism when you see something like this actually working?

Allen: So I tend to be a kind of a cynical person, I think people tend to act in their own self interest, generally speaking, and certainly in business I see that as kind of the norm. I think what’s happening is that people’s sense of what’s in their own self interest has begun to change and instead of just worrying about this week and next week, people are starting to think about the longer term impacts of what they’re doing, because we now know a lot more about these impacts. The other thing that’s happening is that because there’s more and more regulation, companies are realizing that they are eventually going to be responsible for cleaning up their messes. They can’t just externalize all these destructive costs indefinitely. It’s happening with the coal mines in West Virginia right now.

So they realize there’s a business necessity, they need to do two things, which is they need to be more honest with themselves about what they’re doing, and what the impacts are. And to the extent that the impacts are negative impacts, they need to mitigate those and develop partnerships that are going to minimize the impact.

Katie: So this isn’t an issue of pie in the sky idealism, this is actually just hard nose business sense often?

Allen: Sometimes it is. Yeah, I honestly think it is. It takes a while. It’s kind of like changing the course of the Titanic, it doesn’t happen in three weeks. Everybody goes, oh, I guess we need to do this completely differently. So it’s taking hold.

But two things are happening. One is the environment for business is changing and it’s changing pretty quickly, because as you mentioned, these problems are becoming acute and they’re becoming more immediate and they’re requiring more urgent attention. The other thing that’s happening is that the attitude of consumers is changing and particularly younger generation of consumers and entrepreneurs and suppliers who care about these things personally. So if you’re a business and you want to be around in 20 years or 50 years, you have to adapt.

Katie: Well, thank you Millennials. What role do you see legal professionals as playing in this nudging of the Titanic in a different direction?

Allen: As I mentioned sort of traditional legal practice is kind of divided into the nonprofits, which is about doing good, and money is very secondary. Businesses on the other hand are about making money, that’s what it’s all about, but traditionally they haven’t really had social responsibilities, they haven’t really been forced by any of the constraints to adopt this. What I call the sort of hybrid space, we can call a fourth sector, we can call it social business, we can call it common good, there are there as many names for it as there are people making up names, is that you’re trying to do both of these things simultaneously.

So if it’s on the business side you have to take traditional business techniques and adapt them to the fact that it’s not just about making as much money any way you can, and if that means dumping chemicals into the river, so be it. It’s about building into these agreements and building into the DNA of these companies’ commitments to some kind of positive social outcomes.

So for example, when we do investments, we have people who invest in these companies, or you may be a company who’s out looking for an investment. We disclose this very early on in the term sheets to make sure that it becomes part of the conversation. And then you have to think what are the implications of that? So even just things like reporting. So investors are saying, alright, we want you to report to us, not just your financial, but we also want you to report to us on what you’re doing to create a positive impact and how’s that affecting the business?

Katie: So you and your colleagues have really been pioneering new ways of thinking, new legal options. What kind of roadblocks have you come up against? What have been your big obstacles as you try to make this possible?

Allen: Well, I think there are two kinds of obstacles. One set of them are sort of legal obstacles where you have tax issues and you have securities issues and you have business issues where you’re operating in a framework that was never really designed for any of this. So there’s not a lot of legal guidance for example. It took years before the IRS would bless these nonprofit / for-profit kind of hybrid arrangements and joint ventures and things like that, because traditionally nonprofits weren’t allowed to do that. So that’s changing.

And then I think in some ways the harder problem is was what I would call the sort of cultural issue, which is to say, if I’m dealing with an investor who’s thinking about coming into a company and we’re negotiating with them, they have their own lawyer, they have their own accountant, they have advisors. None of those people have ever seen anything like this before; they don’t really know how to evaluate it. And that creates uncertainty for them, it’s perceived uncertainty at least, and uncertainty increases risk. And therefore they are sometimes reluctant to do these deals. Not because there’s anything wrong with the deal, honestly, but because they don’t really understand how it works and they’re wary of getting into something that they don’t really understand. Which is completely understandable.

But I always say that my problem is not that there’s too many lawyers in this space, because the number of lawyers that do this has grown tremendously in the last 10 years, but especially in the last five years. When I first started doing this, you could take all the lawyers in the country who had done more than three deals and actually knew what they were talking about and they would have sat in my conference room, which holds 20 something people. Now you’d need a hotel ballroom, there’s hundreds. But it’s not really in the mainstream yet. So the problem is not that there’s too many lawyers doing this, the problem is that there’s not enough lawyers doing this.

Katie: Yeah. So would you encourage other attorneys to move into doing this kind of practice?

Allen: Oh, absolutely, I do all the time. The biggest difficulty that somebody would have as a young lawyer is where are they going to go and learn how to do this? Where are they going to get experience? Because when I started out, there was no law firms that talked about this, they didn’t have a practice in this area, maybe they had one person who sort of had an idea how to do it, but they weren’t really there. And now, they have sections of their website devoted to this kind of business to doing it, because the demand is great.

Katie: I remember all of those books written in the ’90s and early 2000s about the race to the bottom, all of these industries becoming increasingly egregious in their human rights violations are shuffling off of those violations and environmental issues onto sub sub, sub, sub contractors or whatever. Is this a real race to the top do you think?

Allen: Yeah, I don’t know if it’s a race yet, but it’s very enlightened. So the idea is how do we run a successful enterprise? Could be nonprofit or for profit. So if it’s a nonprofit, you don’t call it a business, but they’re businesses. I mean, we’ve looked at the deal that Nat Geo did with Fox. So Nat Geo is a big media company. They have dozens of subsidiaries that produce all kinds of content, and they’ve always distributed themselves. And they’re OK, I think they had a pretty good audience. Then they sat down with Fox, and Fox says, well listen, we know how to run a media company, you guys have all the content, let’s join forces and you’ll triple your audience; you’ll reach many more people with the messaging and the programming that you have — which is really what Nat Geo is trying to do. And PS, you’ll make more money too, because we really know how to monetize this. That was for $700 million at the time it was announced, which was maybe three years ago. I’m sure it’s a lot more than that now. It’s very successful. So it’s happening everywhere.

Katie: And I remember when that deal happened, Nat Geo readers and fans were terrified that now the magazine wouldn’t cover climate change news anymore because it’s been purchased by Fox.

Allen: Right, right.

Katie: But it’s interesting to see that there actually can be a win win situation sometimes.

Allen: It absolutely can. And in that particular case they did some unusual things. Because of the fact that Nat Geo is a nonprofit 513c organization, they can’t be formed for the purpose of enriching Fox and their shareholders. So the way they structured that deal is, the decision making, particularly decision making about content, is exclusively with Nat Geo. In fact Fox can’t tell them what programming to do or not do, certainly not officially, they can’t.

But on the financial side Fox basically put up all the money to launch the thing and start it and they absorb all of the costs that are involved in the sort of media side of it, and they get the majority of the profit because they’re putting up the money. I mean even so Nat Geo’s making more money. But that was the bargain that they struck. Fox is much more interested in the money than they are about creative control, in this particular instance, because they have a partner that’s proven over decades they could really produce high quality stuff that’s very popular.

So that’s an example of structuring a deal in a way that it wouldn’t be structured in a traditional deal because the protection of the mission is essential for one of the partners, essentially could not do the deal otherwise.

The same thing with Ben and Jerry’s. So when Ben and Jerry’s was sold to Unilever, they were very concerned about how are we going to protect and preserve the mission. And Unilever wasn’t really willing to agree to a lot of specific stuff because they’ve got to run a business. But what they did agree to, there’s something called the Ben and Jerry Foundation, which had been in existence for quite a while. And they put a provision in their agreement that says with respect to certain types of decisions, if we want to change the ingredients, if we’re not going to use fair trade anymore, we want to have a new line, we don’t want to buy our milk only from local farmers anymore because we were making way more ice cream than they can supply whatever it may be, we have to consult with the Ben and Jerry’s foundation beforehand. It’s not consent, but if Ben and Jerry are going to have a real problem with it, they’re going to find out before they do it rather than afterwards. And as Paul Polman at Unilever said, it’s like, why would we do something that Ben and Jerry are against, it’s called Ben and Jerry’s. There’s no faster way to kill the brand than to get in a public fight with Ben and Jerry’s about something that we want to do. I assure you this is not a typical part of a business acquisition; you never see that.

Katie: Because they’ve already been so successful.

I just love these stories. I feel like they’re just a great little pick-me-up when things look hard. What’s the moment in your practice when you felt like the work you were doing was most meaningful and worth it and valuable?

Allen: I think for me, I think there are a probably two areas where you’re sort of serving the underserved and you find an economic model to do that. And the other is climate change and environmental impact. I have two daughters, I have two teenage daughters. I worry about the world that they’re going to grow up in, and when I feel like I’ve been part of something that’s going to make it a little better or less worse, because sometimes that’s what it’s really all about, that makes me feel… I get a lot of satisfaction out of that.

And I get a lot of satisfaction out of working with entrepreneurs who see an opportunity and they’ve got a solution and they’ve got something and they may not be sophisticated business people or they reach a certain point and they can’t really go any further without whatever the next step is, and to be able to work with them and get them to that point and support them in doing the various transactions and whatever is involved, because it can be all kinds of things, it’s intellectual property that’s been licensed, sometimes it’s what are your vendor agreements and your supplier agreements saying, all kinds of ways that this gets laid out — when we see that idea, or we see that fledgling business that now moves because of something that we did, that’s also… Because in a way it’s a version of having done something good for the world.

I mean, the nice thing about it is I’m in social enterprise myself because I’m trying to do good, but this is how I make my living.

Katie: Right, exactly.

Allen: So I’m charging people for these services and that’s another win win.

There’s a company I have… I’m going to tell you one more story and then I’ll stop. There’s a company called Gradian Health Systems and this was a company that was originally started within a private foundation that was interested in rural health in undeveloped or underdeveloped areas where you didn’t have up to date medical facilities, or you didn’t have reliable electricity, you didn’t have a lot of things. And say well, how can you do surgery in these places? How can you do certain things? They developed an anesthesia machine, which essentially doesn’t require external power, and if you put some fairly basic chemicals into it, it manufacturers all the anesthesia and all the other things that it needs in order to do its job. It’s a mobile and it’s rugged, it’s designed to be in a rural clinic in Africa.

Originally the business plan was — we’ll get some foundations. So if you’re a foundation and you’re supporting some health clinics could be anywhere in the world, could be Costa Rica, could be Malawi, could be China, and you want this equipment there, the foundations would buy the equipment and then they would ship it over to their grantees.

After looking at this for a while, they realized that that was not actually the best strategy. The best strategy was to spin it off to become a business and then they could manufacture and sell the machines on a business like basis and really, really dramatically improve health outcomes and be completely successful.

So the business was spun out of the foundation into its own free standing entity and now it sells these machines, and because it no longer has to live within the constraints of what the foundation’s allowed to do, it’s growing. It can enter into all kinds of business relationships that the foundation couldn’t. It can raise money from other sources that the foundation couldn’t, it can do all sorts of things.

So they sell the machines. But part of their social mission is they provide a lot of training because they’ve got to train up a whole generation of technicians who know how to use the machine and know how to support doctors. And that they do, sometimes the governments hire them to do that, sometimes they just do it. Because there’s no point putting the machines out there if nobody can use them.

Katie: So you had a hand in literally taking away pain from who knows how many people now.

I’m so grateful for your generosity in taking the time to talk with us today Allen, and also really grateful for the work that you, yourself are doing. Thank you, thank you so much for taking this time.

Allen: It’s my pleasure. Enlightened self interest is a wonderful thing. If you can make the world better and make a living doing it, I can’t imagine anything better.