The Rise of Benefit Corporations: Show me the Money…and the Good

A large cardboard box with a hole in the top is labeled to accept donations for a book drive sponsored by the organization Better World Books.The “Benefit Corporation” is a new corporation class and it may be coming to a state near you (if it hasn’t already).  A benefit corporation (colloquially referred to as B-corp) is an entity type that seeks to blend profit and purpose.

In 2010, Maryland was the first state to adopt a benefit corporation law.  Since then, about 30 other states have followed suit. As of October 2017, the Wisconsin legislature had a bill under consideration to create a benefit corporation statute.

What Exactly Is a Benefit Corporation?

Benefit corporations seek to create a material positive impact on society and the environment. These companies focus beyond the entrenched corporate purpose of profit maximization.  Most states with benefit corporation statutes base these laws on the Model Benefits Corporation Legislation.  Benefit corporations are required to (a) espouse a general/specific public benefit, (b) be accountable, and (c) be transparent.

This pursuit of public benefit could take various forms, such as: providing low-income communities with beneficial services; preserving the environment; improving human health; promoting the arts; or any other nonpecuniary purpose that could be of benefit to society or the environment.

For example, Better World Books, a benefit corporation, is an online book retailer that sells used and new books.  For every book sold, it gives a percentage of its funds and unsold books to literacy foundations across the globe.  Some other famous companies who have decided to go the benefit corporation route include Kickstarter, Etsy, and Ben and Jerry’s.

Benefit corporations are usually required to have some measure of accountability. This often entails measuring the provision of the corporation’s stated public benefit goal against an independent third-party standard.

Most benefit corporation statutes also require specific disclosures. Corporations are required to provide an annual benefit report to their shareholders regarding the corporation’s success or failures in delivering the espoused public benefit. 

How Does It Differ from a Typical Corporation?

Under traditional corporate law precepts, for-profit corporations have one legitimate purpose—maximizing shareholder value.  Consequently, directors weigh corporate decision through the prism of profitability. It starts and ends with the financial bottom line.  And anything to the contrary amounts to corporate heresy, punishable by shareholder derivative lawsuits and personal liability.  This could make it difficult for social entrepreneurs and companies who wanted to create business models that explicitly prioritized non-financial gain.

But directors of benefit corporations can go further.  They can vehemently pursue nonfinancial goals and consider the impact of corporate decisions on society and environment with some added legal protection.

Now, one may ask—how are b corporations different from corporate social responsibility programs?  Well, benefit corporations are intentional about creating a material positive impact on society and environment.  A positive result isn’t merely incidental or accidental for these organizations. It provides a bedrock on which companies can embrace a “triple-bottom-line” approach of people, planet, and profit.  The framework of benefit corporations allows for-profit businesses to do more than just pay lip service to espoused social and environmental values.

 So Now What?

The rise of social entrepreneurs is a trend worth paying attention to.  No doubt, uncertainties abound.  How would traditional concepts of corporate law be applied to benefit corporations?  How does the business judgment rule apply to board decisions that don’t drive short-term financial gains?  What form would shareholder derivative suites take?  How are some of these lofty ideals going to be accurately measured and communicated in compliance with requisite statutes? Etc.

The bevy of questions won’t stop social entrepreneurs, investors, and some traditional corporations from forging ahead. Lawyers must be equipped to not only assist clients with these niche complexities, but they must also be aware of the impact such decisions may have on the client’s bottom line. This is where the client’s business model becomes very important.

Now benefit corporations don’t always have to forgo profit in pursuit of their public purpose.  Some business models allow for a for a positive correlation between profit and purpose—the more good done, the more monies made.  This is known as the profit-purpose alignment model of social enterprise.

On the other hand, some social enterprises may have a negative correlation between profit and purpose. In order words—the more good done, the fewer profits made. This is known as the Profit-Purpose Tension business model of social enterprise.  For companies pursuing this type of model, being a benefit corporation becomes even more crucial to the protection of the company’s public benefit purpose.

Business lawyers advising or intending to counsel social enterprises must remain nimble and dynamic.  From understanding the nuances of benefits corporation statutes to the interplay between social enterprise business models, clients seeking to blend purpose and profit are bound to demand more guidance from their legal counsel.

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