Newsletter for April 2016

 

For the Public Good:  Benefit Corporations

By Kellie M. Delaney, Attorney

Social entrepreneurs often want to add a social mission and values to their corporate mandate while still operating as a for profit corporation. To achieve this and formalize the mission as part of the corporate entity, many states (including California) now offer alternative corporate forms like the benefit or flexible purpose corporation.  These hybrid entities remain for profit corporations but elevate their social missions in several ways.

What Makes a Benefit Corporation Different?

In a for-profit corporation, the board of directors has a fiduciary duty to act in the corporation’s best interest has been viewed as largely equivalent with one thing:  maximize shareholder value.  If that singular focus creates negative consequences for employees or the public, the board can, but need not, weigh those consequences as part of its decision-making process.  Most corporations adopt mission statements and a set of stated values but it’s the economic results that almost always carry more weight.

In contrast, the board of directors of a benefit corporation is not only permitted to consider social or environmental goals, but is required to do so.  Corporate directors and officers are protected by statutory provisions against shareholder lawsuits for considering these factors.

Thus, the benefit or “B” corporation is different from a C corporation in the following ways:

1. It has a social purpose that creates a public benefit.
2. Its board of directors and officers are required to weight how their decisions will impact not only shareholders but also employees, customers, the community, and the company’s goals with respect to its social mission and the local and global environment.
3. It must report on its social and environmental performance as measured by an independent, third-party standard.

Rationale to Become a Benefit Corporation

A benefit corporation isn’t for everyone.  Although there is a legal form under the California Corporations Code, a benefit corporation is a mindset, a corporate culture and point of view that may not be sustainable for every entrepreneur.

No one will be surprised to learn that Patagonia—the outdoor clothing and equipment company—was the first one at the California Secretary of State’s office when the doors opened for business on January 3, 2012, to file for status as a benefit corporation.  Patagonia had already embedded environmental consciousness into the corporation long before it adopted the new corporate form.  For a company whose website sells environmentalism as prominently as it sells parkas and backpacks, it’s a no-brainer to become a benefit corporation.  But for other companies who haven’t fully explored the burdens to maintain their third-party certification, a benefit corporation may add another layer of governance that is unwieldy to manage before the company has established its foundation.

Opting to become a benefit corporation comes down to a strategic decision.  Most benefit corporations elect this form for one or more of these reasons:

• To emphasize the social mission of the business and inculcate this mission as part of its culture, starting with the board of directors and executive officers.
• To retain some influence over the type of buyer that is appropriate during the sale or acquisition of the company.
• To retain the social values regardless of changes in leadership.
• To leverage its corporate status as a way to distinguish the company in the market.  Millions of consumers make purchases every day in which they evaluate not only the product itself but the ethical, social, or environmental practices of the company behind it.
• To attract investors who want to provide capital to companies pursuing a social benefit.

If you want to learn more about benefit corporations, see: http://benefitcorp.net.  If you would like to discuss any type of new entity formation, including a nonprofit, benefit, or traditional business entity, contact kdelaney@clearskylaw.com or emorton@clearskylaw.com.