Photo by Martin Fisch
Photo by Martin Fisch

When you think of corporations, you think “maximize profits for shareholders”. This notion is being turned on its head as a growing sustainable business movement asks: “Can we look to factors in addition to profit to measure a company’s success?” More than thirty U.S. states and the District of Columbia have answered “yes” by authorizing a benefit corporation, or “B Corp” – a for-profit corporate entity, but one that seeks to positively impact society, the community, or the environment, in addition to generating profit. The concept is catching on internationally as well, with Italy the first country outside the U.S. to pass benefit corporation legislation.

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Benefit corporations fundamentally alter how a company is allowed to act. While the laws on benefit corporations differ around the country, model legislation is available. B Corps not only seek to create shareholder value, but also must balance social purpose, transparency, and accountability. A B Corp’s purpose is also to create general public benefit — for instance, a material positive impact on society or the environment. B Corps must publish annual benefit reports, made against an independent third-party standard, of their social and environmental performance, and often must file these reports with the Secretary of State. The benefit report includes a description of how the company pursed its benefit, hindrances faced in pursuing such benefit, and the reasons for choosing the specific third-party standard. For example, a company with an environmental purpose may choose to report against the standards set forth by the Global Reporting Initiative. Additionally, shareholders have a private right of action known as a benefit enforcement proceeding, in which they can seek to enforce the company’s mission.

In Florida, a B Corp’s articles of incorporation must state that the corporation is a benefit corporation to incorporate as such. Further, an existing corporation may amend its articles of incorporation to become a benefit corporation. Likewise, a corporation may terminate its benefit status via amendment of its articles of incorporation by a two-thirds vote of shareholders. The law is similar for social purpose corporations (discussed later). B Corp status may provide more options on the sale of the company: (1) buyer competition increased based on the company’s commitment to public benefit, as compared to other potential targets without such a reputational distinction; (2) the seller can consider other factors besides price; and (3) the buyer or seller can keep/remove benefit corporation status immediately before/after sale based on the new owner’s perspective regarding the benefits of B Corp status.

“To ‘B’ or Not To ‘B’?”

There is growing demand for B Corps from: (1) consumers wanting to buy responsibly; (2) employees seeking meaningful jobs; and (3) communities dealing with corporate misconduct. While these goals can be achieved through traditional corporations, the B Corp route can be particularly significant for consumer-facing companies (focused on supply chain integrity or workplace issues) where value for stakeholders in addition to shareholders is pivotal to the business model. Examples include Patagonia Inc.; Altschool (which raised $100 million of venture capital); KickStarter, the popular crowd funding platform; and Laureate Education, a $4.5 billion revenue for-profit education company that was the first B Corp to go public, raising $490 million. B Corp status can also play a differentiator role in industries with numerous bad actors. For instance, Laureate Education is able to position itself as legally committed to its students, providing greater assurance that it will provide a more meaningful educational experience. Finally, increased stakeholder/social commitment may reduce long-term value destruction and systemic risk resulting from pressure for short-term profit growth. Moreover, B Corp designation may allow a company to distinguish itself as more trustworthy due to its commitment to standards higher than “mere” traditional profit maximization.

How is this different than a constituency statute?

 Some states, such as Florida and New York, have so-called “constituency” statutes that permit – but do not require – directors to consider non-financial interests in decision-making. However, decisions whether and when to take such interests into account can be challenging and risky; in the absence of clear case law, directors may be reluctant to stray from the traditional fiduciary duty of profit maximization. In contrast, B Corp shareholders can require directors to consider non-financial interests.

I want to “B” Public:

 Although B Corps are new players in the game, at least one public company has made the switch to B Corp status, in an effort to protect its social mission. After Danone merged with WhiteWave in April 2017, the new company, DanoneWave, became not only the leading dairy business among the top 15 American food and beverage companies, but also the largest public benefit corporation in the country. In changing its status, DanoneWave said it is committed to offering healthier products, using sustainable products, conserving water, reducing waste, and treating animals more ethically. The move may also help the company’s bottom line, as millennial consumers become more attentive to the origins, nutritional facts, and waste product of their consumer goods. Thus, it seems likely that other public corporations will follow suit. B Corps are raising capital from investors, and investors are also adopting B Corp status for their own portfolio companies. In other words, the B Corp model may be a solid option for entrepreneurs looking to raise capital without fear of losing control of the mission of their business.

Governance and Director Liability

B Corp shareholders retain traditional corporate protections; they maintain all their corporate governance rights. For instance, shareholders elect directors, vote on major transactions/amendments/mergers, can sue the corporation, can demand election review proceedings, and can claim breaches of fiduciary duty against directors. Moreover, the high vote requirement to switch in and out of B Corp form provides shareholders with assurance that the corporation will attend to its mission. For the most part, director’s duties are similar to those under the traditional corporate model, aside from those related to corporate purpose, accountability, and transparency. Like traditional corporations, a director has duties of care and loyalty. However, in the B Corp arena, directors must consider the impact of decisions on not only the corporation’s shareholders but its other stakeholders, as well (e.g., employees, customers, communities, the environment). While taking into account these and other stakeholder interests when making a decision could lead to liability under traditional corporate law, such consideration would not lead to liability for directors of B Corps.

The B Corp statutes are drafted to limit director liability for failure to properly balance or consider the various constituents/stakeholders. The statutes specify that only stockholders possessing a certain minimum amount of stock are able to challenge directors’ balancing of interests. Moreover, the statutes provide that there is no monetary liability if the director otherwise meets his/her duties of care and loyalty. Therefore, stockholders must bring lawsuits in the form of a request for injunctive relief, asking the board to reconsider the benefit/mission in question. Delaware, however, allows the company to choose whether or not to exclude directors and officers from monetary liability.

Do I have to “B” a “B”? 

A similar type of corporation, known as a social purpose corporation, also considers social and environmental issues in decision making. In 2014, Florida, for instance, created both social purpose corporations and benefit corporations. Essentially, the two types of corporations differ in that a B Corp pursues a general public benefit, applying to all the company’s activities, while a social purpose corporation pursues a public benefit in a specific area. Social purpose corporations may consider the social purpose in decision-making, while B Corps must consider the social purpose in decision-making. B Corps are typically required to have a positive impact on society and the environment. Social purpose corporations have more flexibility — deciding who or what (employees, suppliers, creditors, the community, society, or the environment) obtains the positive impact. To illustrate, say a for-profit corporation plans to produce and sell a portable water filtration device and, pursuant to the business plan, will provide the device at little or no cost to certain developing countries. If distribution in those developing countries is the corporation’s sole benefit purpose, the corporation could structure as a social purpose corporation. However, if the corporation structures as a B Corp, directors and officers would also be required to balance employee programs, environmental issues, community impact, and other societal concerns. Moreover, as a B Corp, the company must not focus on its chief social purpose — helping those developing countries — to the detriment of the other interests and concerns.

The standard of director conduct is different for directors of social purpose corporations and directors of B Corps. For example, the pertinent Florida statute mandates that directors of a social purpose corporation, in discharging their duties and in considering the best interests of the corporation, consider the effects of any action or inaction on the shareholders of the social purpose corporation and the ability of the corporation to accomplish its purpose. For B Corps, the applicable statute enumerates the director’s standard of conduct and balances the effects of any action or inaction upon the shareholders of the corporation; the employees and workforce of the corporation, its subsidiaries, and its suppliers; the interests of customers and suppliers as beneficiaries of the general public benefit and any specific public benefit purposes of the corporation; community and societal factors, including those of each community in which offices or facilities of the corporation, its subsidiaries, or its suppliers are located; the local and global environment; the short-term and long-term interests of the corporation; and the ability of the corporation to accomplish its general public benefit purpose and each of its specific public benefit purposes.

There is also a B Corporation Certification issued to for-profit companies that meet social sustainability and environmental standards. B Lab, a global non-profit organization issues the certificates, which have no legal status but provide the certified companies with access to discounts. Certified B Corporations and B Corps are similar in that both must meet high standards of accountability and transparency. B Corporation Certification is more attainable than benefit corporation status as the certification is available to every business, regardless of corporate structure, state, or country of incorporation. In 2015, Etsy became the largest Certified B Corporation to go public, and it did not convert to B Corp status prior to the IPO. For some states, like Delaware, the only way to meet the requirements for B Corporation Certification is through B Corp structuring. B Lab has also established the Multinationals and Public Markets Advisory Council (MPMAC), addressing systemic, institutional, and practical barriers faced by companies attempting to adopt B Corp status or certification. MPMAC includes representatives from Deloitte, Ernst & Young, Harvard, Unilever, and many more.

That’ll “B” all  

For companies livin’ in a corporate world,  looking to hold on to that social feeling, B Corp status may provide a way to kill two birds with one stone: (1) maintain focus on the social/environmental purpose and (2) raise capital from investors interested in a socially conscious company. Of course, some will win, some will lose, but all won’t stop believin’.