Public authorities and the fourth sector
Broadly speaking, you can classify corporate organizations into three types: business, government, and nonprofit—or private, public, and social, stated slightly differently. But, as reported this week in the New York Times, there’s a growing trend among the states to recognize new types of corporations that put social goals ahead of maximizing profits. While they go by different names, these benefit corporations have generally been labeled as part of the fourth sector, which has emerged as an alternative framework to the traditional private, nonprofit, and government sectors.
Public authorities differ from these new hybrid corporations in a few ways. Aside from skewing more toward the government sector than the private or nonprofit sectors, they’ve been around a lot longer, and they weren’t designed with socially responsible ideals or complex twenty-first century problems in mind. Rather, they were created (and pioneered, famously, by New York’s master builder Robert Moses) as a way to get around nineteenth century restrictions on state debt in order to finance big public works projects like bridges and tunnels, and later, economic development projects. And while early public authorities may have created their own sort of fourth sector, they’ve struggled over the years to define their fiduciaries (e.g., the state, the public, that portion of the public being served by the authority, the board of directors, or some other combination of interests). They’ve also seen major shortcomings in areas like transparency and accountability, leading to various reforms based on concepts like government ethics and corporate fiduciary duties.
Nevertheless, public authorities share a lot of similarities with the new types of hybrid companies that make up the fourth sector. Like these entities, public authorities don’t fit neatly into any of the traditional organizational sectors. They also offer alternative corporate structures that place public functions before profit. Reports on the fourth sector, however, usually leave out public authorities, instead focusing on socially responsible businesses and low-profit corporations. This is unfortunate, because the fourth sector could learn quite a bit from public authorities.
The philosophy behind the fourth sector is set out in a recent report from the Fourth Sector Network, aptly titled The Emerging Fourth Sector, which emphasizes how the distinctions between the public, private, and nonprofit sectors have blurred over the past few decades.
The report also identifies nine core attributes of the ideal fourth sector “For-Benefit” corporation:
- Social Purpose. The For-Benefit organization has a core commitment to social purpose embedded in its organizational structure.
- Business Method. The For-Benefit organization can conduct any lawful business activity that is consistent with its social purpose and stakeholder responsibilities.
- Inclusive Ownership. The For-Benefit organization equitably distributes ownership rights among its stakeholders in accordance with their contributions.
- Stakeholder Governance. The For-Benefit organization shares information and control among stakeholder constituencies as they develop.
- Fair Compensation. The For-Benefit organization fairly compensates employees and other stakeholders in proportion to their contributions.
- Reasonable Returns. The For-Benefit organization rewards investors subject to reasonable limitations that protect the ability of the organization to achieve its mission.
- Social and Environmental Responsibility. The For-Benefit organization is committed to continuously improving its social and environmental performance throughout its stakeholder network.
- Transparency. The For-Benefit organization is committed to full and accurate assessment and reporting of its social, environmental, and financial performance and impact.
- Protected Assets. The For-Benefit organization can merge with and acquire any organization as long as the resulting entity is also a social purpose entity. In the event of dissolution, the assets remain dedicated to social purposes and may not be used for the private gain of any individual beyond reasonable limits on compensation.
Public authorities already embody some of the fourth sector principles listed above, but others don’t quite fit, or offer only fuzzy solutions—the goals of “inclusive ownership” and “stakeholder governance,” for instance, don’t really explain how stakeholders (i.e., fiduciaries) should be identified or how their contributions should be weighed. And transparency could be a lot harder to obtain among private fourth sector entities than it is among public authorities, which are at least subject to some government oversight.
Proponents of the fourth sector recognize these problems. As the report notes, it’s an “ambitious scenario” and “changes like these do not happen overnight. The transition of Fourth Sector activity toward the archetype will be an evolutionary process.” It will also require a new sort of organizational ecosystem, with complex “cross-sectoral collaboration.”
But while the fourth sector framework presents a new way to understand the need for organizational evolution in light of our current environmental, social, and economic problems, it’s not really clear how it should work or whether it’s viable. It’s also unclear whether we need new forms of hybrid corporations at all. As the New York Times article explains, critics of these new corporate formats have questioned their necessity, suggesting that existing corporate and nonprofit laws are flexible enough to accommodate fourth sector goals. The same might be said for public authorities, which provide state and local governments with a broad range of options for structuring public-private entities.