Words: John Montgomery (May 2017)
Image Credits: Jelle Lamsma
Reading Time: 5 minutes

New Law: Benefit Corporation / B-Corp Law

Timing: The first benefit corporation law was adopted in Maryland in 2010

Positive Impact:  A benefit corporation must create general public benefit, which means “a material positive impact on society and the environment, taken as a whole. ……from [its] business and operations.”

The benefit corporation may be the most significant innovation in corporate law since New York invented limited liability and free incorporation in 1811 because it begins to endow the corporation with a social and environmental conscience in addition to the usual pecuniary one. In its 20th Anniversary Special Issue of December 2015-January 2016, ‘Fast Company’ declared the advent of the benefit corporation as one of the top 100 moments that matter of the last 20 years. The FAQs about benefit corporations from B Lab’s website and the white paper, The Need and Rationale for the Benefit Corporation, which includes an annotated copy of the model benefit corporation legislation, provides background material and the context for the benefit corporation.

In the US, a benefit corporation is otherwise identical to the prevailing corporate form except that it has a purpose of creating public benefit by providing a material positive impact on society and the environment, as measured against a third-party standard and reported periodically to stockholders and the public.

The benefit corporation gives businesses that are inclined to benefit society and the environment the option to incorporate in an entity that is prone to altruistic behavior because it has a social and environmental conscience. The benefit corporation is also a good choice for a conventional business because the economic data shows that businesses that adopt principles of sustainability and a multiple stakeholder model, such as those embedded in the benefit corporation, outperform their conventional peers and provide a greater rate of return for stockholders. The economic data indicates that corporations built with cultures of sustainability out perform their conventional peers: The Impact of Corporate Sustainability on Organizational Process and Performance, Robert Eccles, Ioannis Ioannou and George Serafeim, Harvard Business School Working Paper, November 2011 and From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance, University of Oxford and Arabesque Partners, updated version March 2015. The economic data also suggests that corporations that adopt a multiple stakeholder approach to business also out perform their conventional peers: Firms of Endearment: How World-Class Companies Profit from Passion and Purpose (2nd Edition, Pearson FT Press 2014), Rajendra Sisodia and Jagdish Sheth. Leading benefit corporations include, Laureate Education, Kickstarter, Ben & Jerry’s and Patagonia.

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The Basics: Model Benefit Corporation Legislation

Since Maryland adopted the first benefit corporation law in 2010, more than 4,000 corporations in the US have become benefit corporations. Thirty-three US states, including Delaware, have adopted benefit corporation legislation.  Italy adopted benefit corporation legislation in 2015 and similar legislation is currently pending in Argentina and Columbia.  Legislation is being drafted or has been proposed in Australia, Brazil and the United Kingdom. [From BCorp UK FAQs, the “Companies Act (2006) is sufficiently flexible to allow for this change in the purpose of the business without having to create a new legal form. The B Corp legal requirement in the UK uses the Articles of Association of the company to embed the commitment to treat all stakeholders’ interests equally. The effect is identical to that of the US legal requirement (i.e. Benefit Corporation legislation). B Lab UK have a Policy Council which has established this UK Legal Requirement.”]

Most US state benefit corporation statutes are based on the Model Benefit Corporation Legislation, which has three principal tenets: general public benefit, accountability and transparency. A benefit corporation must create general public benefit, which means “a material positive impact on society and the environment, taken as a whole. ……from [its] business and operations.” Accountability comes from the requirement to measure the creation of such general public benefit against an independent third party standard such as B Labs’ Certified B Corporation assessment which measures a business’ social and environmental impact. Transparency comes from the requirement to provide an annual benefit report to the corporation’s stockholders and the public about how well the corporation creates the requisite general public benefit.

The Basics: Directors’ Duties

At the heart of being a benefit corporation is the requirement that directors consider the effects of any corporate action or inaction on all of the corporation’s stakeholders, including employees, customers, suppliers, the communities in which the corporation is located, society, the environment and stockholders. This requirement recognizes that a corporation’s long term fiscal health depends on maintaining good relations with all of its stakeholders.

This fundamental change in directors’ duties offers an alternative to the prevailing corporate paradigm in which, by law or custom, the corporation exists solely to maximize stockholder welfare and in which directors’ fiduciary duties flow exclusively to stockholders. Corporations in the prevailing paradigm are prone to anti-social behavior because it is morally acceptable for them to externalize as many as possible of the negative consequences of their behavior on society and the environment. By requiring its directors to consider the effect of corporate behavior on all of its stakeholders, the benefit corporation has a more comprehensive social and environmental conscience that transcends and includes the limited, pecuniary conscience of the conventional corporation.

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The Basics: Creating Specific Public Benefit

Most U.S. states follow the model legislation which allows corporations to choose one or more specific public benefits and put them in their charters. The model legislation offers a broad selection of categories of possible specific public benefits, including providing beneficial products or services to low-income or underserved individuals or communities, providing economic opportunities for individuals and communities beyond the creation of jobs, protecting or restoring the environment, improving human health, promoting the arts, sciences or advancement of knowledge, increasing the flow of capital to entities with a purpose to benefit society and the environment.

The Basics: Liability

Although directors’ fiduciary duties extend to all of the benefit corporation’s stakeholders, only stockholders have standing to sue the corporation for failure to create general public benefit. The model legislation allows stockholders and directors a right of action to bring a benefit enforcement proceeding to compel a benefit corporation to create general public benefit but the benefit corporation cannot be liable for monetary damages for failing to provide such benefit.

The model legislation also contains an express waiver for directors for liability for monetary damages for failing to create general public benefit and affirms that directors are protected by the business judgment rule in fulfilling their expanded fiduciary duties.

The intention behind expressly limiting the liability of the corporation and directors was to encourage widespread adoption of the form. The model legislation relies on public opinion to enforce benefit corporations’ commitment to provide a material positive impact on society and the environment. The belief is that the transparency requirement to provide an annual benefit report to the public will inspire benefit corporations to create the desired general public benefit.

The Basics: The Difference Between a Benefit Corporation and a Certified B Corp

One of the most popular third party assessment tools is B Lab’s Certified B Corporation assessment. Businesses that pass such assessment are known as Certified B Corporations. Benefit corporations and Certified B Corporations are often affectionately referred to as “B Corps”. Because many people conflate these terms and use them interchangeably, it is important to understand the difference.

The Basics: Law Firms as Benefit Corporations

Most U.S. states authorize law firms to be organized as limited liability partnerships or professional corporations. In many states that have adopted benefit corporation legislation it is possible to incorporate a law firm as a professional corporation and a benefit corporation.

Conclusion

If every corporation were a benefit corporation, the global economic system would likely take better care of our collective human family and its common planetary home. The benefit corporation is not a panacea but it represents a good start towards endowing the corporation with a conscience and turning it into a better global citizen. Just as free incorporation and limited liability are standard features of corporations in almost every country, my hope is that the benefit corporation will become the global standard and help capitalism evolve into a more humane and sustainable economic system.

JOHN MONTGOMERY is a corporate attorney, governance consultant and leadership coach. He is the founder of Lex Ultima, PC, a California professional corporation and benefit corporation, and Lex Ultima Consulting LLC, an Oregon limited liability company organized as a benefit company. He was co-chairman of the legal working group that drafted California’s benefit corporation legislation and is the author of Great from the Start: How Conscious Corporations Attract Success.  He previously founded Montgomery & Hansen, LLP, a corporate law firm in the heart of California’s Silicon Valley.

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