Tuesday, November 1, 2016

Will Social Benefit Corporations Be Our Future?

     Morgan A. Cline is a student in my Corporate Governance seminar.  She wrote the following post regarding Benefit Corporations:

Who does a corporation owe responsibilities and duties to? Corporations that embrace social responsibility want to increase profits to satisfy their shareholders, while giving back to communities, and improving society as a whole. In today’s world, being green or environmentally friendly, is not only seen as a lifestyle, but many companies are seeking to change the way in which their business is conducted to be socially responsible. Familiar companies such as Kickstarter, Patagonia, Warby Parker, and even Ben & Jerry’s have entered the do-good realm. In fact, state legislation has been introduced, in which a new legal entity may be incorporated as a benefit corporation.
            Lynn Stout, a Corporate and Business Law professor at Cornell Law School, argues that, “shareholder primacy is a ‘myth.’” Stout’s book, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public, opposes the well accepted idea that corporations are required to, “maximize shareholder value.” Alternatively, individuals such as Leo E. Strine, Jr., of the Delaware Supreme Court, have argued that it is, “not only hollow but also injurious to social welfare to declare that directors can and should do the right thing by promoting interests other than stockholder interests.”
            Numerous articles interchange the labels, “Benefit Corporation,” and “B Corp.” While both have similar goals, they are in fact, separate models that have specific distinctions. B Corp is a certification awarded to companies that have been certified by B Lab. B Lab was founded in 2006 by a group of founders with the goal to, “build a global community of Certified B Corporations who meet the highest standards of verified, overall social and environmental performance, public transparency, and legal accountability.” In order to meet certification, there is a performance Assessment. In addition, there are legal requirements in which it may be necessary to amend the governing documents and/or adopt benefit corporation status to meet legal requirements for some states.
            Although B Lab has made major growth within this certification process, they have also been working towards the larger goal of changing legislation overall. In 2010, the beginning stages of this goal were reached, when Maryland became the first state legislature to pass a Benefit Corporation Act. This new law has allowed corporations to ensure that their, “mission-driven businesses are held accountable and operate transparently.”  This is done by filing annual reports, which specify their social impact. In addition to increasing profits, when corporate leaders are making decisions, their fiduciary duties now require them to consider the social and environmental impact that they may have. Since 2010, 30 other states and the District of Columbia have passed similar legislation in order to recognize Benefit Corporations. While most of these state statutes are similar to Maryland’s statute, others have made deviations. For example, Connecticut allows business owners the choice of, “legacy preservation.” This option provides that despite change in the ownership of a company or the structure in which it may operate, the corporations overall mission to positively impact society, will remain.
            Arguably, society is benefitting from the new social approach of incorporation and certification available to companies. While skeptics argue that benefit corporations are not succeeding in their goal of large-scale societal impact, there can be no argument that the mission of these corporations to have a larger influence is commendable.

For further information about the differences between a Benefit Corporation and a B Corp, please see this helpful chart.

7 comments:

  1. This blog post was very informative for someone who knows very little about these emerging corporations. The key difference between a corporation (as we typically know it) and a "Benefit Corporation" have become much more clear to me. I have to agree that the mission of these corporations is commendable, and should always be welcomed. However, unlike some critics, I can't say that I have any doubts or skepticism regarding the power of public benefit corporations to greatly influence society. Instead, I worry that managers at large multinational corporations, such as Apple or Nike for example, will no longer feel the need to incorporate social corporate responsibility measures into their corporate governance. Perhaps they will no longer feel it is part of their corporate purpose, since it is specifically the purpose of a public benefit corporation, which incorporates under a Public Corporation Act. What if when stakeholders and communities start calling out for social responsibility, the multinational corporation points to these Acts and simply states: "We are not one of those." Perhaps the emerging public benefit corporation takes away some of the strength of corporate social responsibility theory, which commands that ALL corporations should and must consider the societal impact that they may have.

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  2. As most individuals do not typically associate corporations with the idea of social good or responsibility, the focus on benefit corporations in this blog post was very enlightening. I tend to agree with the skeptics that benefit corporations are not successful in having a large-scale societal impact in today’s society. However, I am still able to appreciate the arguments supporting the emphasis of social responsibility in corporations. The one aspect of this post that really caught my focus was the fact that the fiduciary duties of corporate leaders in these benefit corporations now require them to consider the social and environmental impact associated with their decisions. It seems that shareholder profit is always meant to take a backseat to social and environmental causes in a benefit corporation. When I think about a benefit corporation I immediately think about how difficult it must be in theory to attract investors. Allowing corporations to completely ignore their commitment to profit seeking by allowing a broader benefit-focused purpose, does not seem very enticing for investors. I would think that besides the few socially conscious wealthy entrepreneur investors who actively seek such corporations, most investors would be extremely cautious of investing in a benefit corporation.

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  3. The trend of benefit corporations is an interesting one, and defies the typical stereotype that a corporation is all about making a profit. Even if there is no large-scale societal impact resulting from benefit corporations yet to be seen, it seems like there could be in the future. Connecticut's "legacy preservation" is interesting because a change in ownership will not effect the mission to benefit society. That shows, at least in one state, the commitment that directors have to these benefit corporations. I think it also reflects, to an extent, the commitment that shareholders might have to these benefit corporations in the future. Although benefit corporations aim to give back to society, they must also satisfy their shareholders, and people have been increasingly critical of and aware of the environmental and social repercussions of corporation's actions.

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  5. While the public benefit corporation legislation is relatively new, the ability for directors to consider the interests of constituencies other than the corporation's shareholders has been available for some time. The legislation formally legitimizes that ability and it is interesting to see what kind, if any, of litigation pops up in the next few years with regards to these entities incorporated under these laws. The impact that B Lab will have as an accreditation agency will also be interesting to keep tabs on. Their role is analogous to a gatekeeper for public benefit corporations seeking legitimacy w/r/t following through on their public benefit missions and their potentially high membership dues could have a chilling effect on those seeking to incorporate as a public benefit corporation.

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  6. I find it interesting that a major normative change in corporate structure and governance has once again come from the private sector rather than having been spearheaded by the statutory process. B-Lab, as a private organization, established criteria for certifying corporations and states have now used those criteria as the template for their statutory provisions regarding the founding of a benefit corporation. It's an interesting phenomenon that has affected several different aspects of corporate governance. The private sector (e.g. corporate governance NGOs and consulting agencies) has also led the way on influencing normative change regarding splitting the roles of CEO and Chairperson of the Board. It remains to be seen if the statutory framework will follow in this realm of corporate governance.

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  7. So glad to see more information about one of the newest additions to the corporate entity pantheon, the B corporation. My understanding is that a B Corp is ostensibly a hybrid between the standard C corp and a non-profit. A B corp can make a profit, but is held accountable to its social goals. Where a for-profit company with a social agenda may be able to abandon its social agenda if the financial forecast gets murky, a B corporation must hold true to its mission. As Warby Parker founder is quoted as saying, the B corp “raises the repetitional cost of abandoning your social goals.”

    What I, an admitted newcomer to corporate law, find unnerving about the B corp is that it exposes the company to increased potential for derivative lawsuits. Where the courts have traditionally yielded to the Business Judgment Rule in most instances, it appears that if the B Corp waivers (or is perceived to waiver) from its social mission, it is vulnerable to lawsuits from shareholders. Perhaps this accountability is the point of the whole thing. But if an attorney were to advise a client on what type of business entity to become, would the B Corp be the best choice? Perhaps not for the risk-averse.

    Matt Keen

    My additional info about the B Corp was obtained from:
    http://www.verolawgroup.com/2017/03/whats-hype-b-corporations/

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