Should Business Be About More than Profit?
As Milton Friedman famously stated, “the social responsibility of business is to increase profits.” Along the same lines the Revlon decision required corporate directors to base their decision-making upon serving the financial interests of shareholders by increasing profits rather than consider non-financial interests of other stakeholders. Arguably, with a few exceptions, this type of thinking was absorbed into the corporate culture of the past 10-15 years.
The dot com bubble burst, housing bubble burst and the lingering financial crisis have inevitably led to a rise of social entrepreneurship as a way to make a positive difference in the marketplace and society rather than engaging in business purely for profit. Various states have responded to this trend by adopting Benefit Corporation legislation to provide a solution to this perceived problem in the marketplace.
Benefit Corporation laws create a new class of corporations required to create a material positive impact on society and the environment and to meet higher standards of accountability and transparency. Even though these laws are relatively new, there are approximately 471 Benefit Corporations nationwide earning $2.24 Billion in revenue representing over 60 industries.
Benefit Corporation statutes have been adopted in California, Hawaii, Maryland, New Jersey, Vermont and Virginia. Similar legislation is also pending in Colorado, New York, North Carolina, Pennsylvania, and Michigan. Although there are nuances to each state’s law, they all share the following commonalities:
- The governing documents of the Benefit Corporation must create a “general public benefit;”
- The governing documents of the Benefit Corporation may name specific public benefit purposes (e.g. 50% profits to charity, carbon neutral, 100% local sourcing of raw materials, beneficial product to customers in poverty);
- The creation of public benefit is in the best interests of the Benefit Corporation;
- Directors’ duties are to make decisions in the best interests of the public benefit set forth by the state code or the governing documents of the Benefit Corporation;
- Directors and Officers must consider the effects of decisions on ALL “stakeholders” which includes shareholders, employees, suppliers, customers, community, and the environment, but are not required to give priority to any particular stakeholder.
Benefit Corporations have also attracted a flurry of private investment. Much like mutual funds focusing on companies that meet specific social or ethical guidelines are gaining traction, Benefit Corporations have been the target of investors who desire their investment a greater impact beyond the ordinary financial return.
A nonprofit organization, B Lab, has also developed a certification process for Benefit Corporations. B Lab’s mission is to “use the power of business to solve social and environmental problems” by providing the B-Corp certification and promoting Benefit Corporation legislation. The process varies depending on the state of organization, and the certification process does not affect the legal entity structure from a tax perspective, however, the certification process is more about how a company desires to be perceived in the market (by customers, investors, etc.).
Although many states have adopted this legislation, it is unclear how these laws will develop, or how a court would evaluate these new laws. It is unclear how a court would review standard financial metrics as well as the company’s social impact. Furthermore, Delaware and the other C-Corp friendly states have not yet adopted this legislation. Because of Delaware’s well developed corporate law, it still ranks first in annual C-Corp formations. Thus, until Delaware and other states evaluate Benefit Corporation legislation, companies must navigate the individual state standards and nuances to see what best fits their financial and social objectives.
Navigating this new market requires careful planning. Recent Benefit Corporation legislation presents a new opportunity for businesses. To learn more about becoming a certified B-Corp structure a Benefit Corporation to have greater impact in the marketplace and society, please consult with an attorney from The Keel Group.