Benefit Corporations Expand but not Without Criticism (Part 1)

Benefit corporations, for-profit companies that also have social or environmental missions are being legally recognized in an increasing number of jurisdictions.  With Pennsylvania coming on board in January 2012, twelve states currently have enacted legislation allowing for the creation of such corporations and many more are in the process of considering enactment of benefit corporation statutes. To some extent, this spread is not surprising.  Companies are aware that consumers increasingly emphasize elements of corporate social responsibility when making purchasing decisions and are eager to self-identify themselves as good corporate citizens. (See, Urša Golob, Marko Lah & Zlatko Jančič,  Value orientations and consumer expectations of Corporate Social Responsibility.) From the political perspective, what state legislator would block a statute that “officially recognize[s] companies with a conscience.”  As New York Senator Daniel Squadron stated when New York adopted benefit corporation legislation “[t]here's no reason that you can't care about the world and also care about your own business.” 

In light of the growing interest in benefit corporations, it is worth understanding a bit about their legal structure, the perceived advantages they offer over a traditional corporation or non-profit entity and the criticisms being leveled against them. 

First, as to the legal structure of benefit corporations, it must be noted that the precise requirements of each jurisdictions’ legislation varies, but great commonality exists as many jurisdictions simply adopted in large part model legislation proposed by B Lab, one of the chief drivers of benefit corporation legislation.  B Lab is a non-governmental party that offers to serve as the outside annual reviewer of benefit corporations—for a fee.

Generally, benefit corporations operate just as ordinary corporations do which frees them from the constraints placed on non-profits. Benefit corporations can engage in ordinary market activities and can issue stock which provides them with access to traditional funding sources.

Benefit corporation statutes require that benefit corporations have a stated purpose of creating “general public benefit” and permit them to identify one or more “specific public benefit” purposes.  Examples of specific public benefits include

(1) Providing low-income or underserved individuals or communities with beneficial products or services;

(2) Promoting economic opportunity for individuals or communities beyond

the creation of jobs in the ordinary course of business;

(3) Preserving the environment;

(4) Improving human health;

(5) Promoting the arts, sciences, or advancement of knowledge;

(6) Increasing the flow of capital to entities with a public benefit purpose; or

(7) The accomplishment of any other particular benefit for society or the environment.

Directors of benefit corporations are required to consider a much broader range of stakeholder interests when making business decision.  Specifically, they must consider, among others, the interests of (i) shareholders, (ii) employees and workforce, (iii) customers, (iv) community and societal factors, (v) the local and global environment, and (vi) benefit corporation itself including any benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation.

To become a benefit, two-thirds of a corporation’s shareholders’ must vote to elect the status.  Benefit corporation status must be noted in the articles of incorporation.  If benefit corporation status is elected, the corporation must deliver an annual benefit report to the shareholders, post it on its website and file it with the appropriate department of the jurisdiction.  The annual report must include, among other disclosures, “an assessment of the overall social and environmental performance of the benefit corporation against a third-party standard applied consistently with any application of that standard in prior benefit.

Benefit corporation legislation formally recognizes a growing trend in business as more and more companies seek to be viewed as socially and environmentally responsible. In theory, it allows a corporation’s directors to consider non-financial interests when making decisions without fear of breaching any fiduciary duty to shareholders—a perceived advantage to the traditional corporate form.  It also provides a signaling mechanism to the market that a benefit corporation takes its corporate social responsibility seriously.

In addition to these “advantages” some, although not many, jurisdictions are considering granting benefit corporations special tax benefits and other privileges. For example, Philadelphia voted to run a pilot program under which certified B Corporations would receive a $4,000 tax incentive as a means to reward companies engaging in sustainable business practices.  B corporations may or may not be benefit corporations but instead are corporations that have been certified by B Lab as meeting the criteria that apply to benefit corporations. In other words, a B Corporation has no legal status whereas a benefit corporation is created pursuant to state statute.

All of the above suggests that benefit corporation legislation should be non-controversial and that we should expect it to be adopted nationwide.  This may or may not occur, but there has been some resistance to the model legislation proposed by B Lab and some push back against the very notion of benefit corporations.

Comments

[Herrick Lidstone]

Prof Taylor:

Let me address your question, quoted from New York: "From the political perspective, what state legislator would block a statute that “officially recognize[s] companies with a conscience.”" That state legislator would be one that recognizes how poorly drafted the bill proposed by BLAB (Berwyn, PA) which has been the model for much of the benefit corporation legislation.

Let's take your point that, in making their decisions, the directors must (the BLAB statute uses the term "shall") consider listed factors "and other factors" in making their decisions. Notably, those are not even benefit-related decisions, but refer to all decisions. How does the board document that they have considered the factors in a way that can withstand scrutiny? Why is the statute trying to supplant the business judgment rule? Don't the shareholders trust the directors? If not, elect new directors.

The focus of benefit corporation legislation should be to give the directors leeway from the profit maximization motive of the for-profit corporation act so that when directors look to the corporation's benefit purpose shareholders will not accuse them of corporate waste as might be the case in a for-profit corporation where the expenditures for the benefit purpose exceed reasonable marketing expenditures and (therefore) may not even be tax deductible.

The benefit corporation is a great idea and provides flexibility to corporate managers. The benefit corporation statute adopted in a number of states takes that flexibility away and puts on poorly constructed handcuffs designed by a private organization for its own marketing purposes.