Corporate Law Gets Progressive – All About Benefit Corporations

The Present State of Corporate Law

Profit! Profit! Profit! That’s the rallying cry of corporations worldwide – we must make more money! Indeed, imbedded into the psyche of business is the overarching goal of producing profit with little to no concern for whether or not those profits do more harm than good for humanity. In the bastion of corporate law that is Delaware, the case law reverberates with analysis after analysis of what is in the “best interests of the corporation,” which, unfortunately, is generally translated as “maximize value to the shareholders.” Don’t get me wrong, profit is a wonderful thing. Money is the language our world speaks and the free market system, predicated on the pursuit of profits, has been the historical catalyst for more pure freedoms, such as freedom of speech and press and religion.

But like any good thing, the profit motive can be taken too far. Profits are a wonderful tool to drive progress and change, but when profits become the end and not the means, problems ensue. And those problems are exacerbated when profits are the only goal in sight. Do any of us really believe it’s a good thing when shareholders of company XYZ profit at the expense of XYZ employees, the environment, or the community in which it operates?

B Corporations Offer a New Approach

Enter Stage Left, Benefit Corporations. These are a relatively new type of entity (the first Benefit corporation established anywhere in the World was in 2010), which offer a beacon of hope to the often misguided corporate world. Whereas traditional corporations exist only to serve the interests of their shareholders, B corporations are emboldened with a much larger mandate.

Here’s how it works: a traditional corporation is run by a Board of Directors, which owes its fiduciary duties only to the corporations’ shareholders. This is an essential underpinning of corporate law in the United States. Therefore, the Board of Directors generally looks at every question through the narrow lens of, “how do we maximize value to our shareholders?” Inevitably, the answer to that simple question is profit. Shareholders only care about profit. They do not care about the community, environment, employees, or social impact. Delaware and other state case law reinforce this monomaniacal viewpoint by deciding case outcomes using that one level of analysis. However, B corporations are allowed to build into their governing documents (e.g., Certificate of Formation) the freedom for Boards of Directors to apply their fiduciary duties to constituents other than shareholders – employees, the community, and the environment for example. This is immensely liberating to directors who otherwise are held by the law to only looking after the concerns of shareholders.

Current Legislative Adoption

As of the date of this post, the following states have passed legislation allowing the formation of Benefit corporations:

o Arizona
o Arkansas
o California
o Colorado
o Connecticut
o Delaware
o Florida
o Hawaii
o Illinois
o Louisiana
o Maryland
o Massachusetts
o Minnesota
o Nebraska
o New Hampshire
o New Jersey
o Nevada
o Oregon
o Pennsylvania
o Rhode Island
o South Carolina
o Utah
o Vermont
o Virginia
o West Virginia

Forming a Benefit corporation in a state that allows for it is as easy as forming a traditional corporation – you must simply file a piece of paper with the Secretary of State. In Delaware, B corporations are called Public Benefit Corporations. They are required to state a specific public benefit in their charters, which means they need to state their mission to have a positive effect on a category of persons/interests, which may include any of the following:

o artistic
o charitable
o cultural
o economic
o educational
o environmental
o literary
o medical
o religious
o scientific
o technological

A Delaware Benefit corporation must include the words, “public benefit corporation,” or the designation “PBC” after its name in order to inform the public that it operates differently than a traditional corporation. Delaware requires that its benefit corporations prepare a public annual report to discuss the progress of their social goals. When it comes to managing the affairs of a Delaware PBC, § 365 of Subchapter XV of Chapter 1 of Title 8 of the Delaware Code instructs as follows:

The board of directors shall manage or direct the business and affairs of the public benefit corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.”

Certification: Taking it to the Next Level

Benefit corporations may elect, but are not required, to be certified. B Lab is a 501(c)(3) nonprofit that certifies Benefit corporations that meet their defined standards. B Lab says, [Our] B corp certification is to sustainable business what LEED certification is to green building or Fair Trade certification is to coffee.” (http://www.bcorporation.net/what-are-b-corps/about-b-lab) Becoming a certified Benefit corporation is not easy. There is a rigorous certification process that each corporation must complete to be considered. Among the things that B Lab assesses are:

o Does the corporation pay a living wage to employees?
o Does the corporation review a compensation study for its industry to determine the wages it pays?
o Does it offer employees the same benefits as are given to executives and management?
o Does it offer outplacement services and/or a severance package for terminated full-time workers?
o Does it have a health and wellness program?
o Does it distribute an employee handbook?
o Does it conduct regular, anonymous worker satisfaction and engagement surveys?

Companies certified by B Lab are called B Corps. It is possible to be a B Corp without being legally formed as a Benefit corporation (i.e., to be certified as a B Corp while legally being a traditional C or S corporation, for example). In other words, there is a distinction between the legal entity form of a Benefit corporation and a company that is certified as a B corp.

Moving Forward

Benefit corporations report overwhelmingly positive feedback. It is clear that this model is working for both the companies and the shareholders. When asked what their biggest surprise about becoming a Benefit corporation was, Jed Davis, Director of Sustainability at Cabot Creamery said, “Easy question to answer: the powerful fellowship among Certified B Corps. There is something special about companies that are Benefit corporations. Perhaps the element of the B the Change movement adds to this, but the B Corps as a lot are just so authentic, so eager, and so focused on aspirations to be ‘better.’ This reality has greatly surpassed our initial expectations in a wonderful way.”

Although Benefit Corps should be accessible to everyone, they are really only appealing to those who already have similar ideals. Companies who already care about things like purpose, accountability, and transparency are a perfect fit. Most of the actors we see at play here are people who are already on board. From the employee who acts as the leader in getting their company certified to the folks at Benefit corporation who conduct the certification process. If the Benefit corporation movement is really going to be effective, it needs to target corporations and shareholders who do not already care about purpose, accountability, and transparency. In other words, the movement needs to become a revolution.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]

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Author: Brett Cenkus

Brett Cenkus is a business attorney with 18+ years experience based in Austin, Texas. He has worked with a variety of businesses and has clients throughout Texas as well as many technology clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial heart. As a founder of 6 companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood’s Ethics in Business & Community Award. He offers businesses solutions that are in sync with their culture, goals and values. You can learn more about Brett by visiting the About page on this website.

2017-07-18T19:44:58-06:00