PURPOSE AND NONPROFIT ENTERPRISE

PURPOSE AND NONPROFIT ENTERPRISE

Nonprofit enterprise is responsible for a large share of economic activity across the globe. And yet, leading theories fail to explain why nonprofit business survives and even thrives across a vast number of industries, ranging from artificial intelligence to beer brewing, despite an absence of shareholder control. Indeed, as shareholder ownership and intervention rights have become the core component of successful corporate governance, this success is all the more surprising.

This Essay offers a novel “purposeful enterprise” theory to explain the puzzling success of nonprofit enterprises. Drawing on research in behavioral economics and organizational science, it argues that organizational purpose can serve as a substitute for shareholder control and monitoring by mitigating managerial agency costs and aligning employee incentives. Nonprofit enterprise may also promote value creation by improving the stability of the entity. This theory clarifies why nonprofit businesses and other related purposeful enterprises have thrived in certain industries and not others. It also sheds light on fundamental debates in corporate law, including that of the corporation’s purpose in society. In particular, it suggests that shareholder ownership and control are not the only means of addressing agency costs and improving organizational efficiency.

The full text of this Essay can be found by clicking the PDF link to the left.

Introduction

Anthropic—the artificial intelligence (AI) company that created Claude—was founded in 2021 by former OpenAI employees concerned about AI safety. 1 Billy Perrigo, Inside Anthropic, the AI Company Betting that Safety Can Be a Winning Strategy, Time (May 30, 2024), https://time.com/​6980000/anthropic/​ [https://perma.cc/XR8U-MMBV] [hereinafter Perrigo, Inside Anthropic]. With purpose in mind, the founders chose an innovative governance structure: They formed Anthropic as a benefit corporation and gave control of the business to a charitable long-term benefit trust. 2 Id. The founders populated the trust with independent trustees with experience in “AI safety, national security, public policy, and social enterprise,” all of whom were duty-bound to advance the company’s purpose of “responsible development and maintenance of advanced AI for the long-term benefit of humanity.” 3 The Long-Term Benefit Trust, Anthropic (Sep. 19, 2023), https://​www.anthropic.com/news/the-long-term-benefit-trust (on file with the Columbia Law Review).

Anthropic is one of many modern examples of “nonprofit enterprise.” 4 We include within the term “nonprofit enterprise” both enterprise foundations (in which a nonprofit owns and controls a for-profit subsidiary), as well as pure nonprofit business, because both entities use governance to ensure that the nonprofit (and specifically, its self-perpetuating board) controls the business. Of course, there are important differences between these two organizational forms that we discuss in section II.C. Nonprofit enterprise—which this Essay defines as a nonprofit (or related charitable organization such as a trust, foundation, or enterprise foundation) that generates revenue primarily through business operations—looks and feels like a for-profit business. Nonprofit enterprises are typically managed by high-powered and highly compensated managers and are not primarily engaged in charitable causes. And yet, they are organized as, or primarily controlled by, nonprofits.

Danish beermaker Carlsberg is another example: It is controlled by a nonprofit foundation. 5 See The Carlsberg Foundation, Carlsberg Grp., https://​www.carlsberggroup.com/​who-we-are/​the-carlsberg-family/the-carlsberg-foundation/ [https://perma.cc/S8R8-SRCM] (last visited Aug. 18, 2025) (“The Carlsberg Foundation still holds the controlling interest in Carlsberg A/S . . . . [T]he Carlsberg Foundation gives back the dividends from the shares in Carlsberg A/S to society by supporting excellent basic research within the fields of natural science, social science, and the humanities.”). British newspaper the Guardian is organized similarly: It has only one shareholder, which is a nonprofit charity. 6 See Guardian Media Group, The Guardian, https://www.theguardian.com/​about/​organisation [https://perma.cc/59QG-YDHW] (last visited Aug. 18, 2025) (“Guardian Media Group has only one shareholder—The Scott Trust. The Trust forms part of a unique ownership structure for the Guardian that ensures editorial interests remain free of commercial pressures.”). Luxury retail conglomerate Rolex is owned by a Swiss charitable trust, 7 See Antonio Fumagalli, Rolex Earns Billions Every Year. Where Does the Money Go?, Neue Zürcher Zeitung (Nov. 21, 2024), https://www.nzz.ch/english/​rolex-earns-billions-every-year-where-does-the-money-go-ld.1754264 [https://perma.cc/6N9M-ZU7N] (discussing the Hans Wilsdorf Foundation and describing it as “the sole owner of . . . Rolex”). and iconic American candymaker Hershey is controlled by the Hershey Trust Company, which also manages the endowment of a private school for low-income children. 8 See Over 120 Years of Strength, Heritage, and Stability., Hershey Tr. Co., https://www.hersheytrust.com/ [https://perma.cc/C7T9-9D29] (last visited Aug. 18, 2025) (“Hershey Trust Company serves as the Trustee of the Milton Hershey School Trust, The M.S. Hershey Foundation and the Hershey Cemetery Perpetual Care Maintenance Trust . . . .”). Taking a look beneath the hood of Swedish furniture giant IKEA reveals that within its labyrinthian corporate organization, it, too, is owned by a set of nonprofits. 9 See Our Funding and Governance, IKEA Found., https://ikeafoundation.org/​our-funding-and-governance/ [https://perma.cc/GHD6-8YZM] (last visited Sep. 12, 2025) (describing the ownership structure of IKEA and noting that “[a]ll three foundations [that exercise control of IKEA] share a charitable purpose, which is to create a better everyday life for the many people”). Civica, the generic drug maker, is organized as a nonprofit, 10 See Civica, https://civicarx.org/ [https://perma.cc/HW8S-GT7H] (last visited Aug. 18, 2025) (describing the Civica Foundation as “[a] 501(c)(3) organization that fosters philanthropic support for Civica’s work to manufacture and distribute affordable medications”). alongside AAA, the national motoring association that funds its activities via its roadside assistance business, 11 See About AAA, AAA Exch., https://exchange.aaa.com/about-aaa/ [https://perma.cc/HN7L-LSPY] (last visited Aug. 18, 2025) (“AAA is a not-for-profit organization of motor clubs serving more than 59 million members in the United States and Canada.”). and ProPublica, the investigative news organization. 12 See About Us, ProPublica, https://www.propublica.org/about/ [https://​perma.cc/​6HTW-H3Q9] (last visited Aug. 18, 2025) [hereinafter About Us, ProPublica] (“ProPublica is an independent, nonprofit newsroom that produces investigative journalism with moral force.”).

Why does nonprofit enterprise exist? Fifty years ago, Henry Hansmann proposed the leading economic theory: contract failure. 13 Henry B. Hansmann, The Role of Nonprofit Enterprise, 89 Yale L.J. 835 (1980) [hereinafter Hansmann, Nonprofit Enterprise]. It is one of the most cited law review articles in history. Fred R. Shapiro & Michelle Pearse, The Most-Cited Law Review Articles of All Time, 110 Mich. L. Rev. 1483, 1489, 1492 tbl.1 (2012). Note that a deep theoretical literature considers the question of why nonprofits exist. For example, some scholars posit that the nonprofit sector responds to deficiencies in the private market and government when providing collective goods (the “market failure” theory); others contend that the government responds to the limits of the nonprofit sector by subsidizing it with grants and other funding (the “voluntary failure” theory). See generally Burton A. Weisbrod, Toward a Theory of the Voluntary Nonprofit Sector in a Three-Sector Economy, in The Voluntary Nonprofit Sector: An Economic Analysis 51 (1977) (advancing the voluntary failure theory of nonprofit activity); Lester M. Salamon, Of Market Failure, Voluntary Failure, and Third-Party Government: Toward a Theory of Government–Nonprofit Relations in the Modern Welfare State, 16 Nonprofit & Voluntary Sector Q. 29 (1987) (comparing the market failure and voluntary theories). Our question is different: This Essay considers why some businesses organize as nonprofits and whether that business would be better run if it had shareholders. Indeed, given the central role that shareholders play in theories about corporate governance, this question is all the more interesting. Simply put, this Essay does not focus on differences between business nonprofits and donative nonprofits and instead considers the choice between nonprofit enterprise and for-profit enterprise. As such, Hansmann’s contract failure theory is our starting point—it explains how nonprofit business can offer a competitive advantage relative to for-profit business. But others have also offered compelling accounts. See generally Albert H. Choi, Nonprofit Status and Relational Sanctions: Commitment to Quality Through Repeat Interactions and Organizational Choice, 58 J.L. & Econ. 969 (2015) (theorizing that the nondistribution constraint subjects nonprofit enterprises to shorter relational sanctions, making the organizational form appealing to profit-driven entrepreneurs). In certain industries—such as hospitals, nursing homes, and education—consumers cannot easily evaluate or bargain with service producers. For example, consumers often find themselves seeking hospital services during an emergency, making it hard for them to shop around for the best deal. This contract failure is ameliorated when the producer organizes as a nonprofit: The nonprofit form assures the consumer that they are purchasing services from a business that cares about healthcare, for example, rather than one that is primarily motivated by generating profits for shareholders. 14 Hansmann, Nonprofit Enterprise, supra note 13, at 845, 866–67. Note that enterprise foundations, in particular, make up a sizeable amount of economic activity in Nordic countries. For example, in Denmark, roughly 1,400 enterprise foundations account for 5–10% of the economic activity, more than 70% of stock market capitalization, and roughly 50% of Danish research and development. Likewise, in Germany, over 50% of stock market value comes from companies in which foundations are the majority shareholders. Rasmus Kristian Feldthusen, Denmark: Enterprise Foundations (Mar. 6, 2023), https://www.intersentiaonline.com/publication/enterprise-foundation-law-in-a-comparative-perspective/8 [https://perma.cc/V2KN-ZPVZ].

Hansmann’s elegant theory anchors an important literature on nonprofit enterprise. 15 See generally Avner Ben-Ner, Who Benefits From the Nonprofit Sector? Reforming Law and Public Policy Towards Nonprofit Organizations, 104 Yale L.J. 731 (1994) (highlighting the misconception that nonprofits mainly service the poor and needy); Ira Mark Ellman, Another Theory of Nonprofit Corporations, 80 Mich. L. Rev. 999 (1982) (arguing that the contract failure theory fails to account for the distinction between donors and customers); Brian Galle & David I. Walker, Nonprofit Executive Pay as an Agency Problem: Evidence From U.S. Colleges and Universities, 94 B.U. L. Rev. 1881 (2014) (exploring the implications for nonprofit governance if managerial power affects nonprofit pay setting); Henry Hansmann & Steen Thomsen, The Governance of Foundation-Owned Firms, 13 J. Legal Analysis 172 (2021) (exploring how the governance structures of industrial foundations—nonprofits controlling for-profit firms—drive strong corporate performance despite lacking traditional incentives, using data from Danish firms and highlighting the implications of recent U.S. legal reforms); M. Todd Henderson & Anup Malani, Corporate Philanthropy and the Market for Altruism, 109 Colum. L. Rev. 571 (2009) (describing the state of the “market for altruism” as requiring corporations to engage in philanthropy only when they have a competitive advantage over nonprofits and the government); James R. Hines Jr., Jill R. Horwitz & Austin Nichols, The Attack on Nonprofit Status: A Charitable Assessment, 108 Mich. L. Rev. 1179 (2010) (arguing that extending nonprofit-style tax benefits to socially motivated for-profit entities offers limited advantages over the nonprofit market and risks eroding nonprofit sector vitality and tax integrity); Robert A. Katz, Can Principal-Agent Models Help Explain Charitable Gifts and Organizations?, 2000 Wis. L. Rev. 1 (holding that principal–agent models are incomplete without viewing charities and their managers as agents of the charities’ intended beneficiaries rather than only of donors); Jonathan Klick & Robert H. Sitkoff, Agency Costs, Charitable Trusts, and Corporate Control: Evidence From Hershey’s Kiss-Off, 108 Colum. L. Rev. 749 (2008) (arguing that state intervention blocking the sale of Hershey Company stock by the Milton Hershey School Trust preserved agency costs and impeded diversification, ultimately reducing social welfare and shareholder value); Anup Malani & Eric A. Posner, The Case for For-Profit Charities, 93 Va. L. Rev. 2017 (2007) (arguing that tax benefits and corporate form should be unlinked so that for-profit firms could enjoy them for their charitable activities); Anup Malani & Guy David, Does Nonprofit Status Signal Quality?, 37 J. Legal Stud. 551 (2008) (arguing against the hypothesis that nonprofit status is a signal of quality through an empirical analysis of nonprofits that indicate their nonprofit status in their advertising); Peter Molk & D. Daniel Sokol, The Challenges of Nonprofit Governance, 62 B.C. L. Rev. 1497 (2021) (discussing the challenges of nonprofit governance); Steen Thomsen & Henry Hansmann, The Performance of Foundation-Owned Companies (Oct. 11, 2013) (unpublished manuscript), https://papers.ssrn.com/​abstract=2406055 [https://perma.cc/3NVA-84SA] (observing that foundation-owned companies perform as well as investor-owned companies). See Edward L. Glaeser & Andrei Shleifer, Not-for-Profit Entrepreneurs, 81 J. Pub. Econ. 99, 103–08 (2001) (modeling the conditions under which entrepreneurs would choose the nonprofit form as a bonding mechanism). And yet, in the years that followed Hansmann’s article, it has become clear that contract failure is not the whole story. Today, nonprofit enterprise proliferates across a broad spectrum of industries, beyond those with severe consumer information asymmetries. Nonprofits successfully run clothing manufacturers, 16 See, e.g., Yvon Chouinard. Earth Is Now Our Only Shareholder, Patagonia (Sep. 14, 2022), https://www.patagonia.com/ownership/ [https://perma.cc/X6AK-J25A]. insurance compa­nies, 17 See, e.g., Press Release, Det Norske Veritas, The Foundation Det Norske Veritas Assumes Full Ownership of DNV GL and Remains Committed to Maritime Headquarters in Hamburg (Dec. 14, 2017), https://www.dnv.com/news/the-foundation-det-norske-veritas-assumes-full-ownership-of-dnv-gl-and-remains-committed-to-maritime-headquarters-in-hamburg-105746/ [https://perma.cc/VPM2-EEMY]. beer breweries, 18 See, e.g., Who Owns Carlsberg?, Carlsberg, https://www.carlsberg.com/en-be/better-answers/who-owns-carlsberg/ [https://perma.cc/BBF8-FYJU] (last visited Aug. 18, 2025). candy manufacturers, 19 See, e.g., Hershey Tr., History of Hershey Trust Company, https://​www.hersheytrust.com/​press-releases/​History%20of%20Hershey%20Trust%​20Company.​pdf [https://perma.cc/XFT7-UVCQ] (last visited Aug. 18, 2025). furniture makers, 20 See, e.g., About Us, IKEA, https://www.ikea.com/us/en/this-is-ikea/about-us/ [https://perma.cc/M5TB-AHRK] (last visited Aug. 18, 2025). and more 21 See Erik Friesenhahn, Nonprofits: A Look at National Trends in Establishment Size and Employment tbl. A-3, U.S. Bureau of Lab. Stats.: Monthly Lab. Rev. (Jan. 2024), https://www.bls.gov/opub/mlr/2024/article/nonprofits-a-look-at-national-trends-in-establishment-size-and-employment.htm#top [https://perma.cc/MJU8-WHGB] (showing that nonprofits exist in the following industries: laundry services, repair and maintenance, waste management, retail trade, finance and insurance, construction, and wholesale trade). —that is, industries in which consumers can easily evaluate goods and services. Changes in the information environment also undermine the existence of contract failure in Hansmann’s paradigmatic examples. Hansmann theorized, for example, that parents sending their children to college might not be able to evaluate such a “complex and subtle service,” preferring to rely on nonprofit status as an indication of quality. 22 Hansmann, Nonprofit Enterprise, supra note 13, at 866. Of course, modern college rankings and college advisory services offer detailed descriptions of colleges; 23 See, e.g., 2025 Best Law Schools, U.S. News & World Rep., https://www.usnews.com/​best-graduate-schools/​top-law-schools/law-rankings (on file with the Columbia Law Review) (last visited Aug. 18, 2025). therefore, it is difficult to attribute the success of nonprofit colleges to contract failure alone.

This Essay therefore offers a new “purposeful enterprise” theory to explain the existence and persistence of nonprofit enterprise. It posits that corporate purpose can play an important role in both the selection of the nonprofit form at the outset and the success of the entity over time. 24 A note on what this Essay means by success. Of course, profit is an important component, but a successful nonprofit enterprise might offer higher quality products, a better working environment, or survive for longer. Quantifying success in this way is difficult, but anecdotal evidence suggests that nonprofit enterprise may better succeed in these dimensions relative to for-profit enterprises in certain industries. See, e.g., Katharina Lewellen, Gordon M. Phillips & Giorgo Sertsios, Control Without Ownership:
Governance of Nonprofit Hospitals 22 (Nat’l Bureau of Econ. Rsch., Working Paper No. 34132, 2025), https://www.nber.org/system/files/working_papers/w34132/w34132.pdf [https://​perma.cc/​​9KN8-SYC3] (“Hospital closures are substantially more likely for for-profits, particularly after poor financial performance. On average, 0.9% of for-profit hospitals close each year . . . and this frequency is 0.7 percentage points lower for nonprofits . . . .”); Maya Brownstein, Private Equity’s Appetite for Hospitals May Put Patients at Risk, Harv. Sch. Pub. Health (Dec. 16, 2024), https://hsph.harvard.edu/news/private-equitys-appetite-for-hospitals-may-put-patients-at-risk/
[https://perma.cc/8ZSU-6847] (dis­cussing examples of private equity funds converting nonprofit hospitals to for-profit and documenting how patient care suffered as a result).
 In particular, our theory explains how nonprofit enterprise can flourish despite departing substantially from “good governance” practices thought to be responsive to the central problem in corporate law and governance—that of managerial agency costs.

Agency costs are inherent in many business entities—when the owners of an entity are not the managers of the business, managers have an incentive to behave self-interestedly and to the detriment of the business. 25 Adolf A. Berle, Jr. & Gardiner C. Means, The Modern Corporation and Private Property 3–112 (1932) (“Where ownership is sufficiently sub-divided, the management can thus become a self-perpetuating body even though its share in the ownership is negligible.”). A complex corporate governance machine has risen to combat agency costs in for-profit business, with shareholder monitoring and control at its core. 26 Dorothy S. Lund & Elizabeth Pollman, The Corporate Governance Machine, 121 Colum. L. Rev. 2563, 2565 (2021) (providing “an original descriptive account of the ‘corporate governance machine’—a complex governance system in the United States composed of law, institutions, and culture that orients corporate decisionmaking toward shareholders”); see also Lucian Arye Bebchuk, The Case for Increasing Shareholder Power, 118 Harv. L. Rev. 833, 899–901 (2005) (discussing the benefits and drawbacks of a regime that would further increase shareholder control). Through the power to elect directors, make shareholder proposals, and review books and records (among other rights), shareholder monitoring and control is thought to ameliorate managerial agency costs. 27 See, e.g., John Armour, Luca Enriques, Henry Hansmann & Reinier Kraakman, The Basic Governance Structure: The Interests of Shareholders as a Class, in The Anatomy of Corporate Law: A Comparative and Functional Approach 49, 51–62 (3d ed. 2017) (explaining that shareholder appointment and decision rights reduce information and coordination costs, improving managerial oversight and reducing managerial agency costs).

An enduring puzzle of the nonprofit form is that nonprofits are, by definition, entities without shareholders. 28 Seong J. Kim, Hiding Behind the Corporate Veil: A Guide for Non-Profit Corporations With For-Profit Subsidiaries, 5 Hastings Bus. L.J. 189, 205 (2009). As such, they should suffer from pronounced agency costs. 29 Hansmann & Thomsen, supra note 15, at 173; Geoffrey A. Manne, Agency Costs and the Oversight of Charitable Organizations, 1999 Wis. L. Rev. 227, 227. Without shareholder monitoring, who will monitor management and ensure that they pursue the organization’s mission and not extract undue private benefits?

And yet, nonprofit enterprises not only exist, but thrive. Certain industries—such as hospitals and higher education—are dominated by nonprofit businesses, which outcompete their for-profit rivals. 30 Danielle Ofri, Opinion, Why Are Nonprofit Hospitals So Highly Profitable?, N.Y. Times (Feb. 20, 2020), https://www.nytimes.com/2020/02/20/opinion/nonprofit-hospitals.html (on file with the Columbia Law Review); see also Friesenhahn, supra note 21, at tbl. A-3 (showing that nonprofit hospitals and educational institutions are larger and employ more people than their for-profit counterparts). Other industries, including technology, 31 Notably, two of the largest AI companies in the world have chosen to use an enterprise foundation structure. They join other household names like Mozilla and Wikipedia, which operate as pure nonprofits. See generally Joanna Glasner, Nonprofit Tech Startups Are Neither Strange nor Destined to Flame Out, Crunchbase News (Nov. 22, 2023), https://news.crunchbase.com/startups/openai-nonprofit-tech-accelerators-yc-fast-forward/ [https://perma.cc/4BGL-26EC] (explaining that tech nonprofits can be successful—as exemplified by Mozilla, Wikipedia, and, more recently, OpenAI—while placing mission over profit). retail trade, 32 See Friesenhahn, supra note 21, at tbl. A-4 (listing an 80% increase in industry sector employment for retail trade nonprofits from 2007 to 2017). and pharmaceuticals, 33 See Oluwarantimi Adetunji, Jon F. Oliver, Sonal Parasrampuria, Grace Singson & Trinidad Beleche, HHS, The Potential Role of the Nonprofit Pharmaceutical Industry in Addressing Shortages and Increasing Access to Essential Medicines and Low-Cost
Medicines 2 (2024), https://aspe.hhs.gov/sites/default/files/documents/485fcc11d2440
ddede2e455079ad9922/nonprofit-pharma-report.pdf [https://perma.cc/​KXY7-PN3B] (“Researchers have proposed alternative business models [to for-profit companies] to promote growth in the nonprofit pharmaceutical sector and address some of the existing market gaps. These alternative business models include nonprofit collaborations with for-profit companies . . . .” (footnotes omitted)).
are seeing more and more productive activity conducted by nonprofits. What explains this expansion and success?

Purposeful enterprise theory provides an answer. It argues that nonprofit enterprises can harness corporate purpose as a substitute for shareholder monitoring and intervention rights, mitigating agency costs in the process. In particular, our theory draws on insights from behavioral economics and organizational science to describe how an authentically communicated purpose can provide direction for management, serve as a powerful source of motivation across the organization, and empower stakeholders as enforcers. Indeed, because authenticity of purpose depends on the sacrifice of profits, nonprofits have a head start relative to for-profit enterprise, as nonprofits are defined in part by their nondistribution constraint. 34 See infra section III.B. This Essay further explains how purposeful enterprise can generate organizational efficiencies by eliminating an expensive stakeholder with powerful control rights that may undermine the organization’s mission, thus increasing the resilience and stability of the organization over time.

Moreover, purposeful enterprise theory extends beyond nonprofits and sheds light on blended entities that pursue both purpose and profit—including insulated benefit corporations, which cut off shareholder inter­vention rights using dual-class structuring and antitakeover provisions. 35 Cf. Paul B. Miller & Andrew S. Gold, Fiduciary Governance, 57 Wm. & Mary L. Rev. 513, 579 (2015) (discussing how benefit corporations “occupy a middle ground between a non-profit entity and the classic for-profit corporation”). Our analysis shows that these blended entities resemble nonprofit businesses when they use corporate governance to elevate purpose and cut off shareholder control. 36 Of course, there are important differences as well. In particular, benefit corporations have shareholders, while nonprofits do not. This Essay discusses these differences and their effects throughout Part II and again in section III.A.3. Therefore, insulated benefit corporations offer similar advantages to enterprise foundations, which can use nonprofit ownership of a for-profit subsidiary to cut off shareholder intervention and elevate purpose. 37 Nonprofits may use for-profit subsidiaries for nonpurpose reasons as well, such as insulating themselves from liability or protecting their tax exemption. See Jeffrey S. Tenenbaum, Forming and Operating Subsidiaries and Related Entities, Am. Soc’y Ass’n Execs. (Dec. 21, 2015), https://www.asaecenter.org/resources/articles/​an_plus/​2015/​december/forming-and-operating-subsidiaries-and-related-entities [https://​perma.cc/​5CSJ​-​DWUL] (discussing nonprofits’ uses of for-profit subsidiaries). Moreover, our theory sheds light on the success of each of these three entity types and helps us understand the trade-offs presented by each form of social enterprise.

Although our theory explains why certain nonprofit enterprises may succeed over time and even outcompete for-profit competitors, 38 See, e.g., Hansmann & Thomsen, supra note 15, at 173 (describing the success of nonprofit entities that possess a controlling interest in for-profit companies). it is largely descriptive. It does not suggest that all companies should become nonprofits or use purpose as a substitute for shareholder control—indeed, it suggests that calls for a mandatory corporate purpose 39 See, e.g., Colin Mayer, Prosperity: Better Business Makes the Greater Good 22, 24 (2018) [hereinafter Mayer, Prosperity]. are misguided because they undermine the authenticity of purpose that is necessary to secure the benefits that we observe. 40 See infra section III.B. Instead, our analysis helps us understand why purposeful enterprise has emerged and thrived in certain areas. In particular, it explains why companies ranging from AI developers 41 Company, Anthropic, https://www.anthropic.com/company [https://perma.cc/​K8M4-NRGC] (last visited Aug. 18, 2025); OpenAI LP, OpenAI (Mar. 11, 2019), https://openai.com/index/openai-lp/ (on file with the Columbia Law Review). to pasture-raised egg farmers 42 About Us, Vital Farms, https://vitalfarms.com/about-us/ [https://perma.cc/​A4CX-4A99] (last visited Aug. 18, 2025) [hereinafter About Us, Vital Farms]. choose—and succeed under—a purposeful enterprise form. 43 See infra section II.C.

All in all, purposeful enterprise theory represents an important development in how scholars and practitioners currently think about nonprofit and other purposeful enterprises. Specifically, it offers a serious critique of the economic disaggregation of purpose and profit. Common economic and legal understanding asserts that embracing a corporate purpose other than shareholder wealth maximization is inefficient and undermines profit incentives. 44 Jonathan R. Macey, Corporate Governance: Promises Kept, Promises Broken 2 (2008) (“Corporations are almost universally conceived as economic entities that strive to maximize value for shareholders.”); Milton Friedman, A Friedman Doctrine—The Social Responsibility of Business Is to Increase Its Profits, N.Y. Times, Sep. 13, 1970, at 32, https://timesmachine.nytimes.com/timesmachine/1970/09/13/issue.html (on file with the Columbia Law Review) (questioning the additional costs of “imposing [social responsibilities] on [a corporation’s] stockholders, customers and employe[e]s”). Our analysis of nonprofit enterprise demonstrates that this assertion is incorrect: Corporate purpose may actually enhance the profitability of certain organizations.

This Essay also sheds light on fundamental debates in corporate law and governance, including that of a corporation’s purpose in society. Conventional wisdom posits that corporations should be managed for the benefit of their shareholders, although advocates of alternative stakeholder governance theories have been gaining ground. 45 See, e.g., Lucian A. Bebchuk & Roberto Tallarita, The Illusory Promise of Stakeholder Governance, 106 Corn. L. Rev. 91, 176 (2020) (“Stakeholderism . . . offers an inadequate and counterproductive approach to the goal of stakeholder protection; its illusory promise should not be allowed to distract from the critical needs for external laws, regulations, and policies designed to provide such protection.”); Cathy Hwang & Yaron Nili, Shareholder-Driven Stakeholderism, U. Chi. L. Rev. Online (Apr. 15, 2020), https://lawreviewblog.uchicago.edu/2020/04/15/shareholder-driven-stakeholderism-hwang-nili/ [https://perma.cc/3P29-EJ3F]. Share­holder primacy proponents have greeted this interest in “stakeholderism” with dismay, arguing that directing management to pursue a purpose other than profit will undermine discipline and lead to runaway agency costs, to the detriment of all. 46 See Bebchuk & Tallarita, supra note 45, at 101 (“Increased insulation and reduced accountability would increase managerial slack and agency costs, thus undermining economic performance and thereby damaging both shareholders and stakeholders.”). Our analysis of nonprofit enterprise shows a different picture in many places—one not of rampant organizational inefficiency, but of prolonged economic success. 47 See Susan Rose-Ackerman, Altruism, Nonprofits, and Economic Theory, 34 J. Econ. Literature, 701, 715–25 (1996) [hereinafter Rose-Ackerman, Altruism, Nonprofits, and Economic Theory] (summarizing a number of empirical studies on cost and quality differentials); see also Hansmann & Thomsen, supra note 15, at 173 (showing the sustained profitability of enterprise foundations); Ofri, supra note 30 (discussing the profitability of nonprofit hospitals). As such, our analysis provides an important counterweight to scholars who contend that accountability to shareholders is the only or best way to respond to agency costs and promote efficient business. 48 See Zohar Goshen & Richard Squire, Principal Costs: A New Theory for Corporate Law and Governance, 117 Colum. L. Rev. 767, 769 (2017) (“Many scholars . . . treat the reduction of agency costs as the essential function of corporate law . . . . To reduce agency costs, the essentialists would mandate corporate-governance arrangements, such as proxy access, that allocate more control rights to shareholders. And they would ban arrangements that disempower shareholders, such as staggered boards . . . .” (footnote omitted)).

Our analysis further provides practical guidance for entrepreneurs who wish to engage in purposeful enterprise. It describes how founders can elevate purpose and use it to provide discipline for motivation across the organization. Although not all companies will be able to secure the benefits of purposeful enterprise, certain firms—and dual-class firms in particular—could potentially benefit from using purpose to respond to agency cost problems created by the governance structure, improving efficiency and profitability.

The remainder of this Essay proceeds as follows. Part I begins with an overview of the existing literature on the nonprofit business form. It focuses on Hansmann’s pathbreaking contract failure theory—the leading economic explanation for the existence of nonprofit enterprise. Although this lens helps explain an important advantage of nonprofit enterprise, we show that it is imperfectly explanatory. Part II introduces and elucidates purposeful enterprise theory. This Part centers on two major claims. First, by elevating corporate purpose, the business can mitigate agency problems by motivating management and lower-level employees, providing direction and promoting stakeholder enforcement. Second, the nonprofit form can create business value by eliminating an expensive stakeholder that can redirect the entity’s mission over time. Importantly, this Part also explains that our theory is not universally applicable. Some businesses would benefit from a purposeful form of business, while others would not. Instead of offering a normative account, this Part concludes by explaining which types of business might be a good fit for purposeful enterprise. It further shows how our theory has descriptive purchase over the types of businesses that have become nonprofits and related purposeful businesses. Part III then turns to implications for theory and practice, including implications for the ongoing debate about corporate purpose.