Benefit corporation laws hold social ventures accountable

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Businesses with an environmental and social conscience have dramatically grown in number and influence.

Entrepreneurs are starting mission-driven, for-profit businesses with purposes traditionally associated with nonprofits, such as providing solutions for obtaining basic needs like food, water and capital in third-world countries. Other businesses are engaged in more traditional for-profit activities, but finding ways to do so with a substantially reduced environmental footprint. Many of these businesses consider the group of stakeholders to whom they are responsible to go well beyond company shareholders, and to include employees, customers, suppliers, the environment, and the communities in which the business operates. This growth has forced traditional corporate laws to adapt to evolving business methods and ideas. Social entrepreneurs now have a variety of choices to make when organizing their businesses, such as forming a "benefit corporation" under some state laws, or being certified as a "B corporation" by an independent organization.

The historical legal framework for business corporations requires the directors and officers of a corporation to act in the best interests of the corporation. Profits and short-term financial gains for investors have traditionally been the exclusive tools for measuring whether something is in the best interests of a corporation.

This focus on profits is too narrow and inflexible for many socially minded businesses that consider their stakeholders to extend beyond investors. So, the marketplace and corporate laws are adapting to these needs. Many states are amending their corporate laws to allow corporations different ways of expressing their purposes and interests. There are also independent certification services that can evaluate and certify a business' commitment to sustainable practices. Entrepreneurs who wish to express a corporate commitment to social or environmental goals have several options available to them.

A business can apply to become a certified B corporation. This is a certification program offered by B Lab, an independent agency. The term "B corporation" is a trademark of B Lab. Being a certified B corporation is one way for a business to demonstrate that its commitment to social or environmental goals is more than mere marketing or greenwashing. The certification process assesses a broad spectrum of a corporation's practices, beyond the main product or service that the corporation sells, including employee policies (such as wage equality and the payment of living wages), the use of resources, and other community impacts. Organizations that achieve a minimum score on the assessment and pay a licensing fee to B Lab can become a certified B corporation. B Lab audits companies' compliance with the B corporation standards, and also advocates for the passage of evolving state laws concerning benefit corporations.

One of the B corporation standards is a formal commitment to pursue social and environmental goals, written into the corporation's articles of incorporation, in the states where this is possible. Different states offer different ways to express this commitment.

Oregon law allows a corporation to include a provision in its articles of incorporation "authorizing or directing the corporation to conduct the business of the corporation in a manner that is environmentally and socially responsible." If a corporation does include this language in its articles of incorporation, it can demonstrate its commitment to social and environmental responsibility, and its directors and officers can take environmental and social considerations into account when making decisions on behalf of the corporation.

The corporate laws of many states go a bit further than Oregon's, and allow (but don't require) the directors to consider a specific list of "other constituencies" such as employees, customers, suppliers, local communities, or other environmental or social interests, when determining the best interests of the corporation in its day-to-day business. Oregon's default rules allow directors to consider other constituencies, but only when evaluating a buyout offer. There have been proposals to expand the Oregon constituency statue to apply to day-to-day business, not just buyout proposals. These constituency statutes give directors the ability to consider these factors in decision-making, without adding special language to the articles of incorporation.

Going still further, in 2010, Maryland and Vermont adopted statutes creating a new class of business entity, called a "benefit corporation." While their laws vary in some areas, the benefit corporation statutes generally provide that a corporation opting to become a benefit corporation must pursue a "general public benefit," that is, "a material, positive impact on society and the environment, as measured by a third-party standard." The B corporation standard is not mentioned specifically in the statute, but few, if any, other third party standards currently exist. Therefore a benefit corporation may also need to become a certified B corporation.

A benefit corporation may also choose to pursue one or more additional specific public benefits. Benefit corporations have additional duties of accountability, and must give reports to stakeholders on their delivery of public benefits. In Vermont, these additional corporate responsibilities can even be enforced in court by different qualified stakeholder groups. Other states are considering similar laws, but this particular area is rapidly evolving and different states are evaluating different approaches. Because benefit corporation laws are so new, it remains to be seen how well they work in practice and whether traditional sources of capital will invest in them. Nevertheless, it's fairly clear that a business that organizes as a benefit corporation assumes substantial additional corporate responsibility, but also demonstrates its willingness to be accountable for the goals it sets.

Countless companies have operated sustainable businesses and have achieved social goals without forming benefit corporations under state law or being certified B corporations. Numerous other tools exist, but these evolving corporate laws and independent certifications are valuable additions that help social ventures make meaningful and enforceable commitments to their stakeholders.

Douglas D. Morris is the chair of the business department at Ater Wynne LLP. He focuses on mergers and acquisitions, corporate finance, securities and general corporate representation. L. David Connell, chair of the Ater Wynne tax group, served as co-author of this article. Connell focuses on tax, business and nonprofit law.