Benefit Corporations

Businesses seek state's new 'benefit corporation' status

A dozen companies committed to maximizing social good while turning a profit have filed papers with the state to become California's first "benefit corporations." It was the first business day they could register under a recently approved state law that gives companies a way to legally structure their businesses to consider social and environmental efforts as part of their missions.

While that may sound like marketing hype, it's important from a legal standpoint because it helps shield benefit corporations from lawsuits brought by shareholders who say that company do-gooding has diluted the value of their stock.

California becomes the seventh state to adopt this relatively new corporate structure. Until now, California corporate law mandated that shareholders' interests trump those of all other parties. Entrepreneurs who wanted to incorporate green initiatives or social causes into their businesses were often forced to become nonprofits, limiting their ability to raise venture capital.

California's new category allows corporations to officially adopt policies "that create a material positive impact on society and the environment" as an integral part their legal charter. The Huffman legislation also expands the fiduciary duty of executives and board members to include the interests of workers and the community.

The Rise of Benefit Corporations

When America began, the states chartered corporations for public purposes, like building bridges. They could earn profits, but their legitimacy flowed from their delegated mission.

Today, corporations are chartered without any public purposes at all. They are legally bound to pursue a single private purpose: profit maximization. Thus, far from advancing the common good, many for-profit corporations have come to defy the law, corrupt the officials charged with enforcing it and inflict harm on the public with impunity. The consequences are visible in the wreckage left by BP, Massey Energy, Enron, AIG, Lehman Brothers, Blackwater and Exxon Mobil, to name a few recent wrongdoers. Profits rule; anything goes.

We need a new business model inspired by the old one. Corporations should again come to bolster democratic purposes, not thwart them. To be sure, there will be no return to the legislative short leash, especially now that the Supreme Court has invited corporations to spend treasury funds electing pliant and obsequious lawmakers. But socially minded businesses should at least have the right to operate outside the straitjacket legal requirements of Delaware Code profit maximization. [...]

This is an important shift in law. The fear of shareholder litigation has driven many public-spirited businesses, most famously Ben & Jerry's, to take the high bid rather than the high road in a corporate takeover fight. Becoming a Benefit Corporation declares legal independence from the profits-ber-alles model. [...]

It may take a while to displace the rent-seeking leviathans that get rich off lobbying, power plays, pyramid schemes and defense contracts. Then again, a lot of those companies have relocated their operations abroad in search of cheaper labor, while the Benefit Corporations are taking root and blossoming right here in America, restoring the bonds of community while doing honest commerce. This is what economic recovery looks like.

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11 Responses:

  1. LafinJack says:

    Isn't that what not-for-profits were for, or is that something else?

    • Something else.

      A nonprofit can make a profit (e.g. Ikea, Catholic Church), but that profit can only accrue to the nonprofit, be paid out to the employees as salaries, or given away to other nonprofits. If you donate to a nonprofit to get it set up and operating you do not have a claim on any future profits they might realize. They are also not taxed on their profits. So theoretically all their efforts are put towards the 'greater good'

      A benefit corporation is taxed on their profits and can pay out whatever proportion of those profits (after tax) they like as dividends to investors. So if you invest money in a benefit corporation they can choose to pay out some of their excess profits to you in the future. But for a social entrepreneur the advantage of forming a benefit corporation vs a nonprofit is that they can later sell the corporation and retire to an island or use stock options as incentive compensation for recruiting and retaining employees.

      • LafinJack says:

        Sorry, I thought there was already a class separate from non-profit, and it was called not-for-profit, which had goals like to a non-profit, was run more like a traditional business, and had provisions similar to the "investors can't come get me if I don't make a profit". Googling for this seems to show that while there can be a philosophical difference between the two terms, I was mistaken in thinking they are not used interchangeably.

        • Nick Lamb says:

          There are lots of other classes of business. Exactly which ones legally exist depends on your jurisdiction. But even when something doesn't legally exist as a separate "class" you can often build it with skilled lawyers and some ingenuity. Co-operatives for example. The co-operative may very well seek to make a profit. But everyone involved with the business also owns it, that often includes employees, customers, maybe suppliers, people who live where the business is, that sort of thing. So that makes the corporation unlikely to destroy the local environment to make a few pennies, or cut its employee healthcare in order to buy yachts for senior management. But at the same time these owners must all face the consequences of their decisions. Supermarket customers who insist their co-operative supermarket buys only local produce may find that as a result sometimes things they buy are more expensive than they used to be. Do they buy them anyway? If not, their hypocrisy will be reflected in the co-operative's profits (ie their profits), and perhaps in its failure as a business.

  2. This is pretty cool.

  3. Finally, someone figured out the shareholders are the problem and did something about it.

  4. I think the problem is that shareholders can sue their own company due to decisions made by the Board of Directors they
    have chosen. It's absurd that the state must create a new corporate category just so that companies can do whatever the shareholder-elected directors want. Don't choose those directors if you don't agree with them, idiots!

    I guess most of these companies have been upfront with their social and/or environmental work even before most shareholders bought their shares. In that case the shareholders shouldn't have bought the shares in the first place.

    I'm not an american so I may miss something here. In Sweden the shareholders are the owners of the company. The shareholders (owners) vote for the board of directors, the board of directors appoint a CEO and that CEO is responsible for all decisions made in the company. The correct way to handle disagreement with the company is then to either change board of directors, CEO, tell those people that you disagree with their decisions or just sell your shares. There's no way in Sweden to sue your own company for its failure in trying to maximize profit.

    • 205guy says:

      What you are missing is greed. Anyone can buy shares, and anybody can sue. What the directors want is not judiciable, but what the corporation's charter says is--so it prevails.

      I think the problem will be new lawsuits alledging that the new benefit corporation did not benefit the right thing or not enough. I think it is a problem with the idea of incorporation in general.

    • I think the problem is that shareholders can sue their own company due to decisions made by the Board of Directors they have chosen. It's absurd that the state must create a new corporate category just so that companies can do whatever the shareholder-elected directors want. Don't choose those directors if you don't agree with them, idiots!

      If only government worked this way.

  5. Thomas Lord says:

    This thing strikes me as kind of a sham. If I'm misunderstanding it, maybe someone can explain.

    sham part 1) This new structure does not only create "benefit corporations" it creates a new class of non-profit regulators. The role of the regulators is to "certify" that the corp is conducting its private purpose. I don't see where the great new legitimacy of these certifying agencies is to be found but I do see that they'll make money and wield market-influencing power, complete with a nice marketing pitch.

    See (for example) particularly about the "third-party standard".

    sham part 2) I don't see the legal necessity for this category. Certainly any company can declare in its charter and financial statements its policies (and their purpose) towards things like workers rights and social good -- the shareholder suit threat is partly overblown in that way. The take-over threat (the Ben and Jerry's example) is routinely resisted by issuing shares without giving up majority control. If you are willing to trust a b-corp's third party certifier not to become corrupt, then why wouldn't you trust a few majority shareholders.

    All in all this seems like the erection of a new form of liability shield -- one that comes with "positive spin" marketing opportunities -- without making any substantial promise of actual public benefit.

    Historically, I think the idea arises out of the investment class toying around with "social investment". Prior to the take-off of B-corps they spent a few years exploring the ins and outs hybrid models like non-profits holding majority stakes in for-profit subsidiaries. There are perils, there, for those who would hold stakes but be sloppy about things like self-dealing from the non-profit side. Such perils are nothing to worry about unless you intend to commit those wrongs the regulations were meant to prevent. B-corps seem to just brush some of those regulations out of the way. "Just trust us."

  6. So here I am, sitting in my Business Law class at b-school, thinking about the topic of my presentation due next week: "30 minute presentation on a topic that's relevant to both business and law."

    Looking for distraction, I open up Google Reader, and see this post -- the perfect subject for my presentation. Serendipity!

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