Can better corporate organization humanize the marketplace? Kickstarter is finding out.
The brown-brick exterior of the former pencil factory on Kent Street in Brooklyn’s Greenpoint neighborhood seems little changed from the late 19th century. But where one might expect to see dusty, empty pallets spread across a vacant shop floor, there is instead a courtyard of ferns, swamp azalea and other indigenous plants. On the rooftop is a garden with blueberry bushes, various vegetable plants and flowers.
Around that courtyard and below the garden is a sea of LED lights. Casually but smartly dressed young urbanites rush to and fro, some of them accompanied by a dog, in an open workspace. Colleagues sip coffee over spreadsheets in a restaurant-style booth to the side of a kitchen area. There is an auditorium and, past a row of conference rooms filled with natural light, a library with leather armchairs. This is the headquarters of Kickstarter, both a cradle for creative projects and a new way of doing business.
Since its launch in 2009, the global funding platform has matched a growing number of would-be creators—more than 150,000—with people willing to fund them. While it has raised money for everything from video games to picnic coolers to the Pebble smartwatch, Kickstarter focuses on artistic endeavors like music, graphic design and publishing. Independent films also make up a significant number of its projects. Within three years of its inception, Kickstarter was distributing more funds in support of arts-related projects than the National Endowment for the Arts, according to Forbes. (The New York Times writer Rob Walker even dubbed it “the people’s N.E.A.”), The company says its mission is to “help bring creative projects to life” through its internet platform and ancillary services.
Kickstarter could have been an upstart darling turned I.P.O., or a high-value acquisition for a larger tech company. It could have taken the path of its Brooklyn neighbor Etsy and aimed to show that e-commerce sites for small-scale ventures can acquire symbols on Nasdaq tickers.
Kickstarter is one of a small but growing number of entities, known as “benefit corporations” or “public benefit corporations,” that are ushering in a new approach to business.
Neither is Kickstarter a public foundation or a private charity. Rather, it generates profit by helping others achieve success for otherwise cash-starved creative ventures.
Here is how Kickstarter works. Let us say someone has an idea for a new board game but needs money to fund the project. The person posts the details of the plan on Kickstarter’s website, offering non-equity-based rewards in exchange for various levels of financial support. These rewards could be anything from the inclusion of a supporter’s name on the product’s packaging to dinner with the product’s creator. If enough money is raised, the plan goes forward. If not, the project is canceled and the funds are returned. Kickstarter collects 5 percent of the amount raised by successful projects. The company has been profitable since 2010.
Kickstarter is one of a small but growing number of entities known as “benefit corporations” or “public benefit corporations,” which are ushering in a new approach to business. In 2015 it renamed itself Kickstarter P.B.C., announcing that it was “obligated to consider the impact of [its] decisions on society, not only shareholders.” For Kickstarter’s chief executive and co-founder, Perry Chen, the decision to join the benefit corporation movement began with a sojourn to the heart of Renaissance culture and finance in 2014.
A New (Micro) Medici
The setting could hardly have been more appropriate. In the shadow of Brunelleschi’s Dome, in a city populated by the statues of Donatello and Michelangelo, near the frescoes of Fra Angelico and the panels of Botticelli, Mr. Chen sat in an Airbnb in Florence, Italy, contemplating Kickstarter’s future.
Several of the monuments of Renaissance art that surrounded him were made possible by the patronage of Europe’s first family of finance, the Medici. Mr. Chen’s own interest in culture and the arts, combined with an innovative financial idea, is what led him to share his vision for the company with two other co-founders, Yancey Strickler and Charles Adler. Along with Mr. Chen, they recognized that many worthwhile creative projects never have a chance to develop because of a lack of funding. Yet the three co-founders also suspected the money to support them was out there. The missing link was the vehicle that would bring together would-be creators with large numbers of smaller patrons. Kickstarter supplied that bridge.
Kickstarter’s model, as Mr. Chen describes it, is “micro-Medici.” With the company’s platform, a larger number of individuals can become patrons of new cultural initiatives by committing lesser amounts. These smaller sums, when aggregated, allow inventive artistic endeavors to be undertaken. Kickstarter found an alternative to the well-heeled patron.
For Mr. Chen and his co-founders, the goal with Kickstarter was always to do more than perpetuate its existence, grow and fend off competition.
By the time Mr. Chen visited Florence in 2014, the company was already successful. The year before, Kickstarter raised an average of $1.3 million a day for a total of $480 million, about a 50 percent increase over 2012. In 2013 Mr. Chen himself earned a spot on Time magazine’s list of 100 most influential people. Before the trip to Florence the following year, Mr. Chen took a break from daily management of the firm as its co-founder, Mr. Stickler, assumed the role of chief executive officer until Mr. Chen returned to the position in July 2017.
Taking a step back from day-to-day operations gave Mr. Chen the chance to re-examine the company’s future. In the same city where Cosimo de’ Medici envisioned art and contemplated the design of financial transactions, the man who first hatched the idea for Kickstarter typed out his thoughts on preserving the company’s mission.
Mr. Chen would eventually share his reflections in an email to Mr. Strickler. The subject line read “existential kickstarter,” and the message started a conversation about the company’s future.
For Mr. Chen and his co-founders, the goal with Kickstarter was always to do more than perpetuate its existence, grow and fend off competition. They had sought to transcend a commercial environment in which the pursuit of profit could cause the company to depart from its original purpose of helping to bring creative projects to life. A fitting form of organization was needed to preserve the company’s identity. Kickstarter found that structure in the form of the benefit corporation.
Putting Profit at the Service of Mission
Corporate mission statements have been in vogue for decades. Standard iterations allude to how the company’s products or services improve lives, like Facebook’s pledge to “give people the power to build community and bring the world closer together.”
But the absence of any mention of profit in corporate mission statements, according to Mr. Chen, obscures a basic fact. “In truth,” he explains, “the mission statement is the mix of a strategic and brand statement. The real mission is to make the most amount of money possible…. When there is a fork in the road, the framework dictates the choice toward profit.”
The “framework” is the product of both financial expectations and corporate law. Investors place funds in the hands of managers, who direct the operations of the firm with the hope of financial returns. Corporate law protects the investors’ financial interests by imposing duties on the managers. In practice, the demands of the market and the laws designed to protect investors have created an obligation for corporate managers to maximize wealth to the extent legally possible.
This narrow purpose of commercial enterprise was famously endorsed by the University of Chicago economist Milton Friedman in an article in The New York Times Magazine in 1970 titled “The Social Responsibility of Business Is to Increase Its Profits.” Mr. Friedman wrote, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” In other words, according to Mr. Friedman, businesses contribute to the common good only through the relentless pursuit of gain. All other interests, including those of the employees, customers, suppliers and the community in which the enterprises operate, are subordinate to the duty to maximize private wealth.
The principle of profit primacy does not mean that business organizations must always act toward immediate gain. Charitable contributions by commercial entities are defended as efforts to build good will and provide reputational enhancement, which will, in turn, contribute to business success. In other words, a company can provide charitable contributions and the like, provided its efforts to do so are driven by the profit motive.
The result is a binary corporate world of profit and nonprofit entities with distinct purposes. What is lacking in the binary construct is a business model that promotes the pursuit of profit not as an end, but as a means toward some wider, nonfinancial goal.
The benefit corporation model was designed to address this deficiency. Beginning with Maryland in 2010, 33 states and the District of Columbia have adopted legislation allowing for the creation of private, for-profit entities that subordinate the pursuit of gain to the promotion of public or social welfare.
Kickstarter, for example, embeds the support of five social benefits in its corporate charter—art, charity, culture, education environment—and specifies its commitment to each area as part of the way it pursues its mission.
Kickstarter, for example, embeds the support of five social benefits in its corporate charter—art, charity, culture, education and environment—and specifies its commitment to each area as part of the way it pursues its mission. The particular practices listed in the charter include the requirement that the company support “green” commuting methods for its employees, factor in environmental impacts in selecting vendors, and provide resources and recommendations to those raising funds on Kickstarter to make environmentally conscious decisions in areas like shipping and packing.
Among its socially conscious business practices, Kickstarter refuses to sell user data to third parties. It also declines to use “loopholes or other esoteric but legal tax management strategies” to reduce its tax burden. In an effort to promote diversity and pay equity, the charter requires the company to report on leadership demographics and comparisons of compensation between executive and nonexecutive employees. The company also pledges to provide paid time off for employees to use toward volunteering.
The charters of some benefit corporations link their profit and revenue generation to their mission. Kickstarter’s corporate charter, for example, commits the company to donate a portion of its after-tax profits to arts and music education. Another benefit corporation, the popular clothing manufacturer Patagonia, pledges to contribute 1 percent of its annual net revenue to nonprofits that promote environmental conservation and sustainability.
Mr. Chen contrasts this approach with philanthropy. He says his company’s practice is to seek partners in the nonprofit world that share the same mission, rather than merely selecting high-profile charities and advertising support of them. Finding partners with a common purpose has a more-lasting impact than giving to already successful charities.
While other corporations may engage in some of these socially minded activities on an ad hoc basis or even regularly, a benefit corporation law solidifies the role of social purpose and cements its place in the management of the organization. This kind of statute expands the legally defined fiduciary duties of a benefit corporation’s managers and directors to require, rather than simply allow, the consideration of interests other than profit maximization.
There are currently more than 5,000 benefit corporations in the United States. In addition to Kickstarter and Patagonia, other popular benefit corporations include the baby food producer Plum Organics and the soap and cleaning products maker Method. Shares of another benefit corporation, Laureate Education, began trading on Nasdaq in 2017. Socially minded entrepreneurs and business owners now have a substitute for the profit/nonprofit dichotomy. “It gives us an alternative,” says Mr. Chen.
A More Human Form of Business
In his 2009 encyclical “Caritas in Veritate,” Benedict XVI called for a practical alternative to the profit/nonprofit division. Mr. Chen finds himself in agreement with Benedict when the latter writes that “the traditionally valid distinction between profit-based companies and non-profit organizations can no longer do full justice to reality, or offer practical direction to the future” (No. 46).
Mr. Chen acknowledges that a narrow focus on profit-maximizing has an advantage in its simplicity. Decisions can be reached more easily when interested parties agree on a quantifiable goal. “Everyone can organize around the idea of making the most money,” he says. “It is more complicated for a benefit corporation.”
By making the pursuit of profit an instrument for other objectives, the benefit corporation model attempts to “humanize” the commercial environment by establishing a framework that more closely resembles a fulfilling human life
But Mr. Chen views the management of a benefit corporation as more closely resembling human life and the choices people must make. Individuals need to find ways to access material resources, but they also have wants and needs that they value more than money. Setting priorities and making selections based on those goals is “what we all do every day,” Mr. Chen explains. By making the pursuit of profit an instrument for other objectives, the benefit corporation model attempts to “humanize” the commercial environment by establishing a framework that more closely resembles a fulfilling human life.
In The Corporation, a book that became a documentary of the same name, the Canadian law professor Joel Bakan claims that individuals who adopt the value system of a for-profit corporation would generally be regard as psychopaths by society. Borrowing from Mr. Bakan’s remark, Mr. Chen says, “the classic corporation is a sociopath and the benefit corporation is a human.”
The Beginning of a Corporate Renaissance?
Earlier this year Larry Fink, the chairman and chief executive officer of the multinational investment firm BlackRock, acknowledged in a letter to business leaders that “society is demanding that companies serve a social purpose.” Mr. Fink elaborated by adding: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.”
Mr. Fink’s letter attracted a great deal of attention. With more than $6 trillion in assets under management, BlackRock is the world’s largest money management firm. Mr. Chen says he was encouraged but not made enthusiastic by Mr. Fink’s comments, which sounded to him like “wishful thinking.” He points out that the emphasis of the message remained on companies prospering over time. Throughout the letter, financial performance is the point of reference and ultimate goal.
What is necessary, Mr. Chen explains, is an inversion of values. Instead of focusing on what companies need to do to succeed financially, chief executives and others should consider that businesses may need to shift their focus for the sake of human and social development. Without recasting the way business leaders like Mr. Fink frame success, Mr. Chen argues, any movement toward greater corporate social responsibility will ultimately be hollow. “We have to change what ‘success’ means,” he says.
That code dictates certain results, and values that conflict too directly with profit maximization are subordinated or ignored.
Mr. Chen draws an analogy between the business climate and current concerns about artificial intelligence. He highlights a fear among some that A.I. technology will quickly enable future machines to determine the most efficient ways of accomplishing various goals without considering all the factors humans value. The results could produce unanticipated catastrophes.
The structure of our business environment, Mr. Chen believes, is similar. He calls the mandate to make profit growth the consummate driving principle the “source code” of the business world. That code dictates certain results, and values that conflict too directly with profit maximization are subordinated or ignored. Outcomes that can be harmful to society, like job losses and environmental pollution, are practically necessitated by the framework in which decisions are made.
Mr. Chen argues that this framework has been in place so long that it has become all too easy for people to avoid examining their own culpability. “We poorly negotiate our complicity,” he says, “and our collective values are lowered as we make more and more compromises.”
Individual responsibility extends beyond operational management of a business firm. By Mr. Chen’s reckoning, entrepreneurs who sell their businesses do not shed their moral accountability. The seller of a business, especially sellers concerned about social impact, should consider the plans of potential buyers. Too many times, he says, the profit received upon the sale includes “a forward payment for exploitation.”
What society and those working in the for-profit world need most, according to Mr. Chen, is a more robust set of guiding principles, not just broad aspirational reflections from business leaders.
“My realistic hope is that there are alternative structures for the people who want those,” he says, and the benefit corporation is just one option. “The important thing is that it breaks out of that one sociopathic mandate,” Mr. Chen says, and it helps to prompt a conversation about the purpose of commerce.
For now, Mr. Chen is happy that Kickstarter is furthering that discussion. The co-founder is back in the C.E.O. position, leading new company initiatives like The Creative Independent, a site offering practical guidance for creative people, and Drip, a platform that channels support to creators on an ongoing basis.
The former factory where he once again directs daily operations is perhaps a symbol of Mr. Chen’s hope for Kickstarter’s mark on the business world. The decision to move from Manhattan’s Lower East Side to Greenpoint has contributed to an ongoing renaissance in the neighborhood, as shops and other businesses take up occupancy nearby. Rather than rent its space, the company strengthened its commitment to the neighborhood by purchasing the building. Kickstarter wants more than a place for an office. The company sent a signal that it wants its community to flourish along with it.
Mr. Chen has those same hopes for the business world and society in general. By both purchasing a building and adopting the benefit corporation model, Kickstarter aims to spark a renaissance in corners of the commercial world.
Brother Garrett -- did you know that Kickstarter projects fund Planned Parenthood?
A most interesting article, which shows and encourages the Catholic principle of subsidiarity. I have often wondered why there are not more Catholic or Christian Community Banks, which use an almost parallel system - using deposited funds to help grow Christian families and business, within a community.
An interesting article, and how wonderful that we can now tell the difference between a psychopathic business and a human business by simply checking the initials at the end of the corporate name: Inc and Corp, to the asylum; S.B.C., to heaven.
I started my corporate career one year before Prof. Friedman (a noted academic economist, but never a CEO) penned his article. In the subsequent decades of working for two Fortune 500 corporations, and doing business with many others, I heard executives say things like, “We carry our wounded with us,” regarding benevolent care of an alcoholic as he wrestled with the demon, sometimes unsuccessfully. I saw managers approve purchase of expensive equipment that allowed a newly-blind employee to continue working, long before the Americans With Disabilities Act. And I saw executives give their valuable time and corporate money to charities from the Boy Scouts, the Archdiocese of New York, the United Way, and a host of others organizations—all of this decades before Larry Fink’s thoughtful letter.
The legal recognition of socially benevolent corporations is worthy of exploration, as in this article. Many existing for-profit corporations could qualify, listing two of their social benefits as providing products for the world and providing employment—purposes that Pope Francis endorsed in the same document that observed that business can be a noble vocation. The applying corporations might also mention their share of the $21 billion in corporate donations to charities during 2017, the largest chunk of which (25%) went to health and human services, then community development getting 15%, and pre-K thru 12 education received another 15%, the balance to diverse other good ends, though Mr. Chen looks askance at all that.
Of the five thousand companies now designated as social benefit corporations, according to this article, at least a few are already drawing cynical reaction from some observers. In his book, “Winners Take All: The Elite Charade of Changing the World,” Anand Giridharadas criticizes SBC’s and recites a short litany of specific accusations. So the stereotype of the SBC as some uniquely virtuous corporation is already under attack. Isn't every human association some mix of vice and virtue, reflecting the involvement of its human participants? Is the difference between SBC and traditional for-profit corporations a difference of label without a deep distinction?