Just in time for the Super Bowl the New Yorker writes about the non-profit Packers — the only NFL team organized in this form. The argument for the NFL rule barring anymore non-profits is that it takes a lot of money to run an NFL franchise. But the article says
Green Bay stands as a living, breathing, and, for the owners, frightening example, that pro sports can aid our cities in tough economic times, not drain them of scarce public resources. Fans in San Diego and Minnesota, in particular, where local N.F.L. owners are threatening to uproot the home teams and move them to Los Angeles, might look toward Green Bay and wonder whether they could do a better job than the men in the owner’s box. And if N.F.L. owners go ahead and lock the players out next season, more than a few long suffering fans might look at their long suffering franchises and ask, “Maybe we don’t need owners at all.” It has worked in Green Bay—all the way to the Super Bowl.
This called to mind Usha Rodrigues’s recent Entity and Identity, which discusses non-profits’ benefits of creating (per the abstract) “a special ‘warm-glow’ identity that cannot be replicated by the for-profit form.” Usha discusses, among other examples, the Packers and the Cubs.
The Cubs were the subject of Shlenksy v. Wrigley, 95 Ill. App. 2d 173, 237 N.E.2d 776 (1968), in which an owner challenged the majority shareholder’s refusal to put lights in Wrigley field. As Usha says (footnotes omitted):
The case illustrates the power of the business judgment rule: directors’ actions cannot be questioned absent fraud, illegality, or conflict of interest. For our purposes, what is interesting is that it appears that Wrigley, who owned 80% of the firm’s shares, may have been interested in running the corporation in a way that “protect[ed] values such as tradition and concern for neighbors, even at the expense of short term profit.” While the business judgment rule provides a shield, nevertheless majority owners in a for-profit organization such goals and motives are vulnerable to attack by minority shareholders. In contrast, the nonprofit structure of the Packers ensures that a Shlenksy-style suit could never even be brought against the management.
George Will has written (in Pursuit of Happiness and Other Sobering Thoughts 311 (1978)) that when, back in the pre-Tribune days, he sought to buy stock in the Cubs a substantial Cub shareholder told him to ignore “price-earnings ratios, return on capital, and a bunch of other hogwash which has no place in a transaction between two true sportsmen.” Usha is suggesting that it that’s so, the team should make it official and use the non-profit form.
But do you really need a non-profit corporation to ensure the preservations of lofty ideas? In my Accountability and Responsibility in Corporate Governance I stress the capaciousness of the business judgment rule in accommodating this objective. After all, Wrigley’s emphasis on traditionalism and no lights helped build a powerful franchise and cement Chicagoans to the team despite the use of the for-profit form.
Usha may have a point that the non-profit form does it better by better signaling the firm’s objectives. But, as with everything, there are tradeoffs. Agency costs might be higher in non-profits, which have no owners in the sense of residual claimants to discipline managers.
It might be better to have a hybrid form, which locks “warm glow” into the for-profit form. You might do that in a conventional for-profit corporation, and Wrigley did succeed in fighting off the challenge in Shlensky. But you never know when the rigid precepts of the corporation, including fiduciary duties, will rear up in court and defeat the parties’ idiosyncratic objectives.
That’s where LLCs come in. As I argue at length in my Rise of the Uncorporation, the flexibility of the LLC form allows the owners to tailor it to their needs without worrying they will be bit by centuries of corporate law. Even here, uncertainty may arise when the for-profit nature of the firm clashes with “warm glow” objectives. For example, unless the LLC operating agreement locks the issue down tight, and unless the firm is organized under the clear pro-contract principles of Delaware law, the managers of a “Packers, LLC” turn down a very lucrative bid to leave Green Bay?
A variation on the LLC, the “low profit LLC,” or “L3C,” addresses this problem by providing for a firm that has owners but that commits not to make profits a significant objective of the firm. I’m skeptical, however, that these firms solve more problems than they create. See the above book at p. 161 and an earlier blog post.
The bottom line is a “warm glow” is one of the many things that uncorporations do better than corporations. Even so, I’m not suggesting that we need to tinker with the Packers.