As companies increasingly seek to accommodate social- and public benefit-minded policies, more pressure is being put on the conventional for-profit corporate model. In addition, investors and talent have shown interest in being part of mission-driven and sustainability-focused companies that align with their values and purpose, with the result that many businesses are looking for ways to distinguish their corporate persona from the competition.
Use of the “benefit corporation” (as they are called in California) legal structure and of third-party social/public benefit enterprise certifications are two ways in which companies have been demonstrating their commitment to balancing social purpose and profits while also managing associated legal risks.
This Legal Update summarizes some high-level considerations relating to the benefit corporation structure and third-party certifications such as those offered by the nonprofit organization B Lab.
What Is a Benefit Corporation?
- A benefit corporation is a for-profit entity established by state statute that is intended to produce one or more public benefits and to operate in a responsible and sustainable manner.1 California, Delaware and a number of other states have adopted laws recognizing benefit corporations (see below, “Certain Considerations When Converting to or Forming a Benefit Corporation”).
- The public benefit purpose is built into the company’s formation documents by (i) modifying the charter of an existing entity to adopt the statutory requirements for a benefit corporation or (ii) incorporating a new business as a benefit corporation in a state where the status is available.2
- Unlike conventional corporations, which are required to maximize profits for shareholders, the directors and officers of a benefit corporation have the flexibility to manage the business in a manner that considers the interests of a broader range of applicable “stakeholders,” including, potentially, its employees, suppliers and the communities affected by the company’s activities. The impact of the business on the local and global environment should generally be considered, as well.
- The directors’ fiduciary duties are modified to include the interests of the additional stakeholders within the scope of the public benefit that the corporation is serving.
Well-Known Benefit Corporations and Their Publicly Stated Missions
- Patagonia – build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis
- Danone North America – bring health through food to as many people as possible
- Laureate Education – produce a positive effect (or a reduction of negative effects) for society and persons by offering diverse education programs delivered online and on premises operated in the communities that it serves3
Why Form a Benefit Corporation?
Benefit corporation status can be a good way for a business to pursue profit while having a material positive impact on society or the environment, something that is becoming increasingly relevant with the growing focus on Environmental, Social and Governance (ESG) investing. Other advantages of benefit corporation status include:
- Branding, standing out from competitors by highlighting a commitment to providing a public benefit.
- Giving the company the legally protected flexibility (i.e., through expansion of director fiduciary duties) to consider the impact of its decisions on stakeholders other than shareholders (i.e., employees, customers, communities and the environment) without liability for claims that directors breached a fiduciary duty to maximize shareholder value.
- Positioning the company (or its subsidiary) to attract investors that are interested in investing in socially responsible companies.
Certain Considerations When Converting to or Forming a Benefit Corporation
- Whether the state of incorporation recognizes the benefit corporation legal form –35 states (including California and Delaware) have recognized some form of benefit corporation legal entity. As noted, this provides the legal basis for management to consider additional ESG “stakeholders.”
- Ongoing compliance and reporting requirements
- States generally have some form of public reporting and governance requirements for benefit corporations aimed generally at telling shareholders how the company is doing in meeting its public benefit objectives, including, for example:
- California – disclosing, in a publicly available benefit report, the company’s environmental and social performance, as measured by a third party’s standard; identifying 5 percent or more owners of the benefit corporation; and imposing “supermajority” voting requirements for certain major corporate actions by the company, including mergers or the sale of all or substantially all assets.
- Delaware – providing goal progress statements to stockholders at least once every two years. Unlike many other states that recognize the benefit corporation legal form, Delaware does not require public benefit corporations to measure performance against a third-party standard, and benefit reports are not required to be made publicly available.
- As a benefit corporation will need to balance the financial interests of its shareholders with its public benefit mission, a publicly traded benefit corporation will have additional disclosure obligations in its US Securities and Exchange Commission or other public filings.
B Lab – Obtaining Certified B Corporation Status
Many companies (both benefit corporations and traditional corporations4) seek “certification” from B Lab, a nonprofit that tracks companies’ progress toward social sustainability and environmental performance standards through its certification process.5 While B Lab certification can signify a corporate position on ESG matters, it is not the same as the benefit corporation legal structure that formally modifies management’s fiduciary duties and the company’s legal purpose.
- Why seek independent certification?
- To demonstrate publicly, through the legitimate label of an independent accreditor, a company’s commitment to both shareholder and stakeholder success beyond typical corporate social responsibility initiatives. In addition, B Lab certification may be a good option for companies for which benefit corporation status is not feasible (or not available).
- To assess best practices across different industries and constantly improve a company’s own social and environmental programs through access to the “B Corp” community of companies.
- To potentially make a company more attractive to impact investors.
- Certification process
- As part of obtaining B Lab certification, a company must undergo an assessment of its impact on workers, the community, customers and the environment, with the goal of achieving a passing score of at least 80 out of 200 on the “B Impact Assessment” and obtaining “certified B Corporation” status.
- The assessment includes an evaluation of the company’s commitment to the relevant social benefit purpose, including by formalizing and documenting its worker-, environmental- or customer-friendly policies.
- Generally, a company seeking B Lab certification must have been in operation for at least 12 months; however, early stage companies without 12 months of operation can seek “Pending B Corporation” status. B Lab-certified companies are generally expected to convert to the benefit corporation legal form, to the extent available in their state, when they renew their B Corporation status two years after initial certification.
- Certification for multinational and publicly traded companies
- In the case of multinationals and other large or public companies, many have opted to certify specific subsidiaries or business divisions rather than the entire corporate group at once, something that the B Lab process can accommodate.
- Some of the notable publicly traded companies or their subsidiaries that have obtained B Corporation certification include Laureate Education (a Nasdaq-listed provider of higher education services); Natura (a Brazilian cosmetics company that is the parent of The Body Shop); New Chapter (a health company that is a subsidiary of Proctor & Gamble); and Ben & Jerry’s and Seventh Generation (subsidiaries of Unilever).
In general, benefit corporations are taxed for US tax purposes in the same manner as traditional C-corporations. Both regular C-corporations and benefit corporations are entitled to deduct contributions to charitable organizations (subject to limitations). In addition, applicable Internal Revenue Service regulations recognize that expenses paid for institutional or goodwill-related advertising are generally deductible for income tax purposes even where such expenses are paid to a nonprofit organization provided that such expenses are related to patronage the company might expect in the future. It can be observed that incurring institutional or goodwill-related expenses is fully consistent with the purposes of a benefit corporation.
There are many strategic benefits to the benefit corporation legal form. As demand for socially conscious companies continues to grow, and as investors and customers gain familiarity with the benefit corporation model and the related certification processes, they are likely to become increasingly attractive options for businesses.
1 In some states (e.g., Delaware, which recognizes “public benefit corporations”), these entities must be corporations. In other states (e.g., Oregon, where they are called “benefit companies”), these entities may be organized as corporations or limited liability companies.
2 A helpful guide to states that have passed legislation recognizing benefit corporations (or that are in the process of doing so) can be found at: https://benefitcorp.net/policymakers/state-by-state-status.
4 Benefit corporations do not have to become certified B Corporations, and certified B Corporations are not always benefit corporations at the time of certification (and may not need to become benefit corporations if their state of formation does not provide the legal framework to do so).