The Benefit Corporation
The rise of the benefit corporation, a type of corporate form that didn’t exist before 2010, is remarkable in its speed. This kind of corporation offers an organization not tied to the narrow goal of short term profit maximization. While the “judgment rule” seems to offer corporations a freer decision making climate to be environmentally friendly and exist with some freedom from being sued for loss of share value, there is some legal uncertainty. The Benefit Corporation removes all doubt. This kind of corporation does not exist for profit maximization.
This offers the opportunity for building purposeful organizations with a stated and legal responsibility to do no harm. This is a far better model than the soulless machines of destruction we often experience as the modern corporation.
This may herald a new era in corporate social responsibility. It only takes a small adjustment in the law to have tremendous effects on the culture over time. This may be one of those historical adjustments.
For my students, the most important concepts here for study are the “judgment rule” and “short term profit maximization.”
Delaware Gov. signs landmark social entrepreneurship law
The benefit corporation, the brainchild of the nonprofit B Lab, is predicated on a simple idea: use the power of business to solve social problems. Companies incorporated under legal frameworks like the one passed in Delaware strive to maximize profits, but can do so while also pursuing a broad range of social and environmental goals, from low carbon emissions to generous employee benefits and transparency in governance. Under traditional corporate law, a firm’s fiduciary responsibility to its shareholders to maximize profits is privileged over other commitments to social or environmental responsibility. The benefit corporation amends this, legally enshrining the interests of stakeholders, including employees, customers, the community and the environment, alongside those of shareholders. Among other things, benefit corporation status shields a company’s social and environmental objectives when it is up for sale. Today, there are at least 200 legally registered benefit corporations (and likely many more, as some states don’t currently track their incorporation), including large companies like Patagonia and many smaller ones like Vermont-based WomenLead and New York-based Clay Marketing. The “shared value” created by these companies is heralded by benefit corporation enthusiasts as a radical refashioning of contemporary capitalism.
From Wikipedia: (I included this section from the Wikipedia article because I want you, kind reader, to get a grasp on the speed of the change in corporate law. Business law tends to be very conservative and usually slow moving, but not in this case. jp)
In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation. As of January 2013 California, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, South Carolina, Vermont, and Virginia had all passed legislation allowing for the creation of benefit corporations. Legislation is also pending in Illinois that establishes a new type of entity called the “benefit LLC,” making available to limited liability companies the same opportunities afforded to Illinois corporations under the state’s Benefit Corporation Law. Passage of the bill would make Illinois the first state to offer a social enterprise the opportunity to be a benefit L3C.
Maryland’s legislation was signed into law on April 13, 2010 and became effective on October 1, 2010.
Virginia’s legislation was signed into law on March 26, 2011 and became effective on July 1, 2011.
Vermont’s legislation was signed into law on May 19, 2010 and became effective on July 1, 2011.
New Jersey’s legislation passed on January 10, 2011 and became effective when it was signed into law on March 1, 2011.
Hawaii’s legislation was signed into law on July 8, 2011 and became effective upon signing.
California’s legislation was signed into law on October 9, 2011 and became effective on January 1, 2012.
New York’s legislation was signed into law on December 12, 2011 and became effective on February 10, 2012.
Louisiana’s legislation became law on May 31, 2012 and went into effect on August 1, 2012.
South Carolina’s legislation became law on June 6, 2012 and became effective the same day.
Massachusetts’ benefit corporation legislation became law on August 7, 2012 and became effective on December 1, 2012.
Illinois’s legislation was signed into law on August 2, 2012 and went into effect on January 1, 2013.
Pennsylvania’s legislation became law on October 24 and will become effective on January 22, 2013.
Washington, D.C. legislation was signed by the Mayor on February 8, 2013 will go into effect after 30 days of congressional review.
Arkansas’s legislation was signed by Governor Mike Beebe on April 19, 2013 and will go into effect 90 days after sine die.
Some Videos on the Benefit Corporation
Benefit corporations — Robert Shiller (A straightforward explanation)
Benefit corporation: John Montgomery at TEDxHultBusinessSchoolSF (A history of the path that leads to the Benefit Corporation.)
From around the web.
From the web site, IIC Investing in Communities.
Guest post by Layton Olson. Layton specializes in representing tax exempt community, trade, and professional organizations at Howe & Hutton LTD.
Last month, a dozen companies committed to advancing social good filed to be classified as ‘Benefit Corporations’ in California. Their decisions represent a commitment to business strategies that systematically contribute financial, time, human, and other resources to charitable, educational and community improvement initiatives and institutions. California has joined the six states – Vermont, Maryland, New York, New Jersey, Virginia and Hawaii- that have enacted so-called public benefit or “B Corp” legislation since 2010. Colorado, North Carolina, Pennsylvania and Michigan and some cities have similar laws under consideration.
While traditional C Corporations are chartered to maximize benefit (i.e. profits) for shareholders, the B Corporation is legally chartered to consider and benefit stakeholders – a group that also includes employees, the environment, vendors, and the broader community… This legal status shields corporate directors from “stock-drop lawsuits,” in which shareholders can sue corporate leadership for knowingly acting in ways that decrease profits (i.e. raising social or environmental standards). Benefit Corporations must also publish an annual benefit report, which publicly discloses environmental and social performance using 3rd party reporting standards – therefore increasing transparency and accountability to shareholders and a burgeoning class of social investors.
From the web site, Paradigms for Progress.
What I learned at the workshop was that a benefit corporation is a new corporate legal structure that several states have established (Massachusetts passed BC legislation in August 2012) to provide an alternative to for-profit entities that want to include a public mission equally alongside seeking a profit. This is significant because historically, for-profit corporate legal structures bound CEOs and boards to pursue profit over all other considerations, regardless of the potential social and environmental costs. In addition, while not all corporate lawyers agree, founders and CEOs of traditional for-profit corporations perceived as making decisions that jeopardized the bottom line, can be fired.
Consequently, while there are many contributing factors to the numerous social and environmental challenges humanity’s faces, a very significant factor is the corporation’s pathological pursuit of profit at the expense of public health and environmental sustainability. This pathological pursuit of profit leads many corporate decision-makers to externalize as many costs as possible. As Joel Bakan, highlighted in his book, The Corporation, “It is no exaggeration to say that the corporation’s built-in compulsion to externalize its costs is at the root of many of the world’s social and environmental ills.” (My Emphasis, jp)
From the web site, Pennsylvania Nonprofit Law blog.
This new construct, called a “Benefit Corporation,” stresses sustainability along with financial success. More to the point, this new model is a boon to the non-profit world. It provides the opportunity for increased cooperation with a conscientious corner of the for-profit sector and the potential to leverage more sustainable impacts on business practices beyond existing corporations. Benefit or “B” Corporations redefine the modern notion of commercial success by valuing “stakeholders” above “shareholders.” Unlike traditional corporations, B Corporations must facilitate, and publicly report, positive social and environmental impacts through their work in order to register with the non-profit organization, B Lab (http://www.bcorporation.net). This third-party validation process provides a number of valuable benefits to participating businesses:
Save Money. B Corporations have the potential to deliver immediate financial value, and B Lab has already saved B Corps over $1M through service partnerships.
Set Yourself Apart. B Corporations differentiate themselves in the marketplace, and the certification process allows companies to generate press, meet sustainability requirements set by other companies, enhance reputation and mitigate potential trust erosion from consumers.
Find Common Ground. B Corporations offer a “common ground” for businesses that are committed to both the mission-driven ethos of the non-profit world and the best practices of the for-profit section.
Connect With Your Peers. Through B Lab, B Corporations are encouraged (and incentivized) to collaborate amongst themselves and share best practices in sustainability, marketing, finance, IT, and HR.
Grow Faster and Smarter. The raw numbers (http://www.bcorporation.net/resources/bcorp/documents/2011-AR_B-Index.pdf) demonstrate that registered B Corporations expand at a more consistent rate, work more closely with other area organizations, offer better benefits to their employees, and foster more positive change within their communities than traditional corporations.
From the web site, Class War in America. (I particularly enjoyed this post and recommend you visit the site and read the entire article. jp)
There’s a promising development in the capitalism department these days. It’s called the Benefit Corporation. It’s pretty new, and it’s important. This article in The Nation tells you what’s what.
Benefit corporations are characterized by three things: (1) The purpose of such companies is to support the triple bottom line. That is, they are sworn to protecting the environment and doing good things for the community as well as earning profit; (2) Their social accountability standards are high; (3) They work to build sustainable businesses that are designed to last.
Here are some web sites of Benefit Corporations: