In search of the benefit corporation

My journey in search of the benefit corporation began at SoCap10 with visits to a number of B Corps in the San Francisco Bay area.

The next leg of the journey led me to Takoma Park and Tribeca in my trusty, well-tuned 2002 Toyota Corolla to meet with visionary state senators advancing benefit corporation legislation, including Senator Jamie Raskin and Senator Daniel Squadron. My aim was to learn about model US legislation to further advance understanding on legislative options for local, sustainable ventures in Ontario, building upon the great work MaRS has already done.  Beyond the delights of Dunkin’ Donuts and Denny’s on a 2,482 km road trip, I was determined to bring back important insights for local policy makers and entrepreneurs.

What are the common features of benefit corporation legislation?

There are a number of common features:

1. Purpose: Public Benefit. Benefit Corporations must have the purpose of creating a “General Public Benefit”, defined in Maryland as, “…a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of Specific Public Benefits.”  This public benefit must be reflected in an entrenched social mission within the businesses’ Articles of Incorporation. 
2. Independent Third Party Standard. Beyond social mission and demonstrated impact, a benefit corporation must meet the standards of an assessment regime set by an independent third party to ensure data quality and credibility.
3. Reporting: Annual Benefit Report. Legislation requires benefit corporations to produce an Annual Benefit Report within 120 days following the end of the corporation’s fiscal year, including a narrative description of its General Public Benefit and an assessment of its Specific Public Benefit.
4. Directors’ Responsibilities and Legal Protections. One of the critical components of benefit corporation legislation is the description of Directors’ responsibilities.  The Directors of a Benefit Corporation must consider the effects of their actions not only on the interests of the shareholders, but also on other stakeholders (employees, customers, community and local/global environment).  This provides Directors with legal protections to make decisions that do not solely take into account profitability.  Otherwise, as it stands in traditional US corporate law, a Director could be sued by shareholders for dereliction of financial duty as a Corporate Director if they made a decision that did not necessarily maximize profits.

It is important to distinguish benefit corporations and B Corporations (or B Corps).  Benefit corporations are a legal corporate form for businesses, as enacted by relevant legislation.  B Corps are a company that has brand affiliation with B Lab once a business has successfully completed their assessment and accreditation process.  B Corporation has been identified as one of the third party standards that can be applied in order to register as a benefit corporation.

Why is benefit corporation legislation an important innovation?

Benefit corporation legislation is experiencing rapid adoption in the US: it has been approved or drafted in nine US states, including Maryland, Vermont, New York, New Jersey, Pennsylvania, North Carolina, Washington, Colorado and Oregon.

The legislation provides an easily understood and well-defined legal form for the for-profit social purpose business or sustainable enterprise.  The legal form provides a powerful platform for defining a loosely categorized but burgeoning industry, building sector awareness and providing future functional supports for ventures and investors.  Within a week of going into effect in October 2010, 12 benefit corporations registered in Maryland.  Although benefit corporations do not have preferred tax status, future consideration will be given for reduced rates.  However, the new legal form does provide a ready platform for municipal tax credits and preferred government procurement status.  (In the future, perhaps targeted investment incentives?)

A key theme from my conversations was the belief that this legal form was an important response to the disruptive economic transition.  In New York, it was seen as a means of attracting innovative enterprises and investment capital to build a more sustainable economy in hard hit areas like upstate New York and marginalized neighbourhoods in New York City.  In Maryland, it was seen as a transformative and necessary corporate form that reflects the original, historical intention of corporations that could do well financially and do good for society.

Ultimately, these characteristics have driven bi-partisan, stakeholder and public support for the legislation.

So what?

Benefit corporation legislation is a compelling option for local policy makers with great potential for local social and environmental ventures.  It may also be another means of identifying ventures with demonstrable impact for prospective investors. Over the next month, I will be preparing a short discussion paper with more detailed analysis.

Thank you to the remarkably friendly and inspiring legislators and their staff in Maryland and New York for being so generous with your time.