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A growing number of socially conscious companies that want to demonstrate their commitment to helping solve social and environmental problems are choosing to incorporate as benefit corporations. It’s a relatively new way to incorporate that’s recognized by a dozen states.
The designation, which requires that corporations demonstrate higher standards of corporate purpose, accountability and transparency, might not be for everybody.
“The directors have the right to consider society and the environment when performing their day-to-day activities,” said Erik Trojan, director of policy for B Lab, a Berwyn, Pa.-based nonprofit that advocates on behalf of the designation and its passage. “On the flip side, investors have the right to enforce the directors’ mandate to consider the society and the environment.”
Trojan added that companies “that don’t want to consider society and the environment in everything they do shouldn’t do this. This is for companies that really want to go the extra mile.”
What They Agree To
Maryland was the first state to allow companies to incorporate as a benefit corporation, in 2010.
Benefit corporations operate much like traditional corporations but give business leaders legal protection to pursue a higher purpose than profit and offer investors and the public greater transparency, Trojan said. Companies agree to:
Adopt a corporate purpose of creating a material positive impact on society and the environment.Require directors to consider nonfinancial interests when making decisions.Publicly report annually on overall social and environmental performance using a comprehensive, credible, independent and transparent third-party standard.
Adopt a corporate purpose of creating a material positive impact on society and the environment.
Require directors to consider nonfinancial interests when making decisions.
Publicly report annually on overall social and environmental performance using a comprehensive, credible, independent and transparent third-party standard.
The benefit corporation designation should not be confused with a certified B Corporation or “B Corp.” That certification is offered by B Lab to companies it determines have met a high standard of social and environmental performance after completing its online “B Impact Assessment.”
The two are often confused, since both are sometimes incorrectly referred to as B Corps. And while they have some things in common, there are key differences: Benefit corporations do not need to be certified by B Lab as a B Corp, although some are. Here’s a closer look at both the legal entity and the certification process.
A Little Background
A number of people were behind the benefit corporation idea, including William H. Clark Jr., a partner at Drinker Biddle & Reath in Philadelphia. He devised a model and drafted benefit corporation legislation.
To date, companies can incorporate as benefit corporations in California, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, South Carolina, Vermont and Virginia. Benefit corporation legislation has also been introduced in Michigan, North Carolina and the District of Columbia, Trojan said.
Although not all states track the number of businesses that have incorporated as benefit corporations, Trojan estimates there are about 175 to 200, with “most of those occurring in the last year.”
Major companies that have incorporated this way include King Arthur Flour, a 222-year-old employee-owned flour and baking company based in Norwich, Vt., and Patagonia outdoor clothing and gear company in Ventura, Calif. Other smaller benefit corporations include Dimagi Inc., a Cambridge-based technology company; Dharma Merchant Services, a San Francisco-based credit card processing company; and South Mountain Company, a West Tisbury, Mass.-based renewable energy business, according to B Lab.
Employees Voted at King Arthur Flour
King Arthur Flour became a benefit corporation in March 2012. The company, founded in 1790, wanted to preserve its mission and values into the next two centuries, said Terri Rosenstock, public relations manager with the company.
“We support what [being a benefit corporation] is all about, which is basically being a company that looks at much more than just profit,” Rosenstock explained. “It’s about the triple bottom line—people, planet and profit.”
Employees at the 100-percent employee-owned company voted to become a benefit corporation.
“We have a vested interest in whether the company succeeds or fails,” Rosenstock said. The company also is a certified B Corp and carries the logo on all of its flour bags sold in stores and in its catalog, thereby helping to boost employee engagement and the brand, she added.
In January 2012, Patagonia became the first California company to get benefit corporation status. In a press release at the time, Patagonia founder Yvon Chouinard said, “Benefit corporation legislation creates the legal framework to enable mission-driven 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 founding entrepreneurs.”
Lawyer Weighs Pros and Cons
Penny J. Minna, a partner in law firm DLA Piper’s corporate practice in Baltimore, said there are potential benefits and pitfalls to incorporating as a benefit corporation.
“It really depends on what the company’s goals are,” Minna said. Such a designation can potentially help a company secure work because it's perceived as being socially conscious, and can prove a boon to marketing, recruiting and investor fundraising.
Some wrongly believe that being a benefit corporation, much like a nonprofit, confers special federal or state tax benefits. That’s not the case, although some local municipalities, including the city of Philadelphia, do offer certain tax benefits to benefit corporations, she added.
Minna said companies “really have to think through the fiduciary duty of directors” and who their stockholders are, as there is uncertainty in what it means for directors to consider nonfinancial interests when making decisions rather than always maximizing profit for shareholders. That could give rise to legal claims.
“A board has to think, ‘How are we going to do this?’ It gets a little more complicated, and part of why it’s so complicated is that this is all relatively new,” Minna said. She added that it could open a board up to lawsuits.
Another potential drawback is that companies also must publicly report annually on overall social and environmental performance using a third-party standard, thereby creating additional work and potential costs on top of those already incurred for other accounting reporting, she added.
B Corp Designation
B Lab receives major funding from The Rockefeller Foundation, Deloitte, Halloran Philanthropies, The Prudential Foundation and The United States Agency for International Development.
B Lab first offered the B Corp designation in 2007. Today, there are 650 certified B Corps from 20 countries and more than 60 industries that have taken a free online assessment to evaluate their social and environmental activities and impact and received B Corp certification.
All must meet rigorous standards of social and environmental performance, accountability and transparency, according to B Lab.
Certification also has a legal requirement where a company may need to amend its governing documents, depending on its corporate form and state of incorporation. Trojan said this gives legal protection to directors and officers to consider the interests of all stakeholders, not just shareholders, when making decisions; creates additional rights for shareholders to hold directors and officers accountable to consider these interests; and limits those expanded rights to shareholders exclusively
The assessment is confidential and free.
“That’s a big issue for us. We want to have tools out there for the marketplace to use to measure what matters,” Trojan said.
The assessment is customized depending on the company's size, industry and location and typically takes 60 to 90 minutes to complete. Questions include: Are all employees paid a living wage? What percentage of expenditures is from local suppliers? What percentage of full-time workers was reimbursed for continuing education in the last fiscal year? Does the company monitor and record energy use and have reduction targets? What percentage of workers (including full-time and part-time workers and independent contractors) reside in low-income communities?
Companies with B Corp certification include Ben & Jerry’s, Method, Seventh Generation, Dansko and Etsy.
Companies must earn at least 80 points to receive the certification, which costs from $500 to $25,000 annually depending on the size of the company, Trojan said. Companies also agree to post results of their report on the Internet. The certification is good for two years.
Etsy Says Being a B Corp Helps with Hiring, More
Etsy, a Brooklyn-based online marketplace where people buy and sell handmade or vintage arts and crafts, became a certified B Corp in May 2012, said Jen McKaig, an Etsy values and impact specialist. She said the idea was sparked from energy and ideas that came out of Hello Etsy Berlin, the company’s first conference on small businesses and sustainability, held in September 2011.
“Shortly after that, we were having a lot of conversations about Etsy’s mission, vision and values as a company,” McKaig said in an e-mail. “When we learned about B Corps, we realized they were in total alignment with our values and that B Labs would offer a third-party framework to rigorously assess how we do business when it comes to community, employees and the environment.”
McKaig said the online assessment provided the biggest benefit because Etsy learned “so much about the impact of our business, where we are succeeding and what we can improve upon.”
She added that it also helps with employee engagement and recruitment.
“Our B Corp certification reinforces our commitment to our company values,” McKaig said. “When hiring, we always look for candidates whose values align with Etsy’s. Publicly committing to our values makes it easier to find good matches.”
Pamela Babcock is a freelance writer based in the New York City area.
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