Guest post by Layton Olson. Layton specializes in representing tax exempt community, trade, and professional organizations at Howe & Hutton LTD.
Last month, a dozen companies committed to advancing social good filed to be classified as ‘Benefit Corporations’ in California. Their decisions represent a commitment to business strategies that systematically contribute financial, time, human, and other resources to charitable, educational and community improvement initiatives and institutions. California has joined the six states – Vermont, Maryland, New York, New Jersey, Virginia and Hawaii- that have enacted so-called public benefit or “B Corp” legislation since 2010. Colorado, North Carolina, Pennsylvania and Michigan and some cities have similar laws under consideration.
While traditional C Corporations are chartered to maximize benefit (i.e. profits) for shareholders, the B Corporation is legally chartered to consider and benefit stakeholders – a group that also includes employees, the environment, vendors, and the broader community… This legal status shields corporate directors from “stock-drop lawsuits,” in which shareholders can sue corporate leadership for knowingly acting in ways that decrease profits (i.e. raising social or environmental standards). Benefit Corporations must also publish an annual benefit report, which publicly discloses environmental and social performance using 3rd party reporting standards – therefore increasing transparency and accountability to shareholders and a burgeoning class of social investors.
Debating the Value of “Benefit” Status
In California, chambers of commerce representing environmental and technology companies advocated for the law, which requires that 2/3 of a company’s shareholders elect Benefit Corporation status. Some corporate law specialists have opposed the law, arguing that it does not clearly delineate duties of company leaders to shareholders. Others critics argue that Benefit Corporation status is superfluous, as the “Judgment Rule” in US law already affords corporate directors great flexibility to act as they deem to be in the best interest of the company. This, they argue, provides adequate cover for socially and environmentally-oriented policies.
While the Judgment Rule does provide flexibility for how corporate directors maximize shareholder value, it does not provide flexibility regarding whether they must do so. And that is the key differentiating factor of Benefit Corporation status – it frees profit-generating companies from the legal imperative of short-term profit maximization. As Eric Friedenwald Fishman points out, it is this very imperative that incents the shortsighted decisions that create profit today at a cost of social or environmental catastrophe tomorrow.
Patagonia Paves the Way
The poster-child for California’s new law is Patagonia, an outdoor clothing company that believes the legislation creates a necessary legal framework for mission-driven companies to stay mission-driven. Patagonia Founder Yvon Chouinard endorsed the law, saying that it enables companies like Patagonia to “stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes and high standards put in place by the founding entrepreneurs.”
This new ability to enshrine “values, culture, processes, and standards” across transitions in corporate leadership and ownership is an essential element of the legislation, because not all Benefit Corporations will fulfill their legal obligation to create “a material benefit to society” through their core good or service. Indeed, far more companies are likely to meet this requirement by implementing socially and environmentally sound practices within operations, supply-chains, human resources policy, or production procedures – variables that are more easily altered than a core business model.
IIC: Integrating Impact Into Operations
Fortunately Benefit Corporation status is within reach for diverse companies, thanks to increasing opportunities for companies to build innovative relationships with sustainable vendors and socially responsible service providers. For example consider a unique real estate program called Investing In Communities (IIC). An IL nonprofit that I’ve had the privilege to advise, IIC (www.iiconline.org)is an online platform that empowers individuals and businesses to fund nonprofit organizations for free through brokered real estate transactions.
IIC’s platform allows real estate professionals anywhere to replace typical business development costs with more affordable, client-directed philanthropy. A company using the IIC platform would thereby direct charitable funding to its preferred nonprofit at no cost – simply by purchasing, selling, or leasing real estate. The cost of the donation is willingly born by the broker because it is less expensive than comparable business development tools. Thus, IIC allows companies to increase “the flow of capital to entities with a public benefit purpose” – a “specific public benefit” as defined in Subtitle 6C(1)(D) of the Benefit Corporation legislation.
IIC – which is now operational across the US, Mexico, and Canada – thereby integrates social impact directly into the standard operations of any company; a perfect example of the hybrid value that Benefit Corporations strive to create. By creating shareholder value and public benefit, Benefit Corporations not only strengthen the economy in a traditional sense (job, wealth, and capital creation), they can simultaneously reduce the cost of government – something that the IRS recognizes as a charitable activity in itself.
Thus, Benefit Corporation status joins L3C (low-profit limited liability) corporation status and employee ownership and profit sharing plans as a framework for business to invest back in our communities – generating sustainable economic growth, reducing costs borne by government and taxpayers, and making society collectively better-off.
Contact Layton Olson at firstname.lastname@example.org if you are interested in learning more about the benefits and drawbacks of such legal structures in relation to traditional charitable, trade association and other tax-exempt activities.