Benefit Corporations: A New Formula for Social Change

research By: Shelly Alcorn, CAE

The traditional division between for-profit corporations and nonprofit organizations is being blurred by an emerging form of business: the benefit corporation, which commits itself to providing social or environmental benefits while still showing a healthy bottom line. While they raise concerns for the nonprofit community, benefit corporations create new opportunities for associations to pursue their missions.

In January, outdoor clothier Patagonia became the first company to register as a benefit corporation under a new statute in California. Known for his company's commitment to the environment, Patagonia founder Yvon Chouinard was quoted in the press regarding the decision to adopt benefit-corporation status: "Patagonia is trying to build a company that could last 100 years. Benefit-corporation legislation creates the legal framework to enable mission-driven companies like Patagonia to stay mission driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs."

Patagonia is just one of a host of for-profit companies—including brand names such as Method (creating soaps and cleaners with environmentally sound practices) and Better World Books (selling, recycling, and donating books while funding literacy projects around the world)—devoted to what is known in the business community as the triple bottom line: people, planet, and profit.

Although the idea of sustainable practices and socially conscious capitalism isn't new, what is new is the legislative effort sweeping through the states to create the legal framework to support these enterprises by adjusting existing corporation statutes. As of June 2012, nine states (California, Hawaii, Maryland, Lousiana, New Jersey, New York, South Carolina, Vermont, and Virignia) had authorized a new class of corporate enterprise known as the benefit corporation, and the state of Washington has passed a similar statute authorizing "social purpose corporations." Benefit-corporation legislation was also moving forward in Illinois, North Carolina, Pennsylvania, Michigan, Minnesota, Oregon, Wisconsin, and Washington, DC.*

The effort to create this new class of for-profit business is the manifestation of evolving views of corporations. Traditionally, for-profit entities have been required by corporate law to do one main thing: maximize shareholder value and profits. Under that model, pursuit of additional social or environmental goals exposes corporate directors to the risk of lawsuits from shareholders interested in profits alone. This incentivizes short-term profit, regardless of long-term costs to society and the environment, sometimes requiring extensive legislative and regulatory action to fight abuses. Some business scholars argue the time has come for business and industry to adopt a different mindset (see Umair Haque'sThe New Capitalist Manifesto for a prime example), and benefit corporations are one way to address these concerns.

While the movement is enjoying a surge of momentum and bipartisan support, it has thus far not been embraced by the association community. A handful of nonprofits, including associations, have even opposed benefit-corporation legislation.

As the movement grows, associations need to understand the thinking behind benefit corporations, the concerns about them from nonprofit organizations, and their potential effects, both positive and negative, on the association community.

What Is a Benefit Corporation?

A benefit corporation is a for-profit entity that has voluntarily and formally committed to creating social and environmental benefit, in addition to its traditional for-profit motive. Benefit corporations have no tax exemptions, and most will have neither members nor dues. Presumably, some businesses will seek status as a benefit corporation to differentiate themselves from for-profit competitors, who are ostensibly in business strictly to maximize profits without concern for society or the environment.

The state laws are built on a standard model and, aside from small regional variances, are substantially similar. Benefit corporations are subject to all legal requirements of any other for-profit enterprise, with three key differences:

  • Benefit corporations create a "safe harbor" for boards of directors who take interests other than profit into account when making decisions on the corporation's behalf.
  • Benefit corporations are required to declare and demonstrate their commitment to an independent, third-party standard.
  • Benefit corporations can be held accountable for abandoning their commitment to their stated public-benefit purposes.

To qualify as a benefit corporation, the for-profit must include a statement in its certificate of incorporation that it was formed for the purpose of creating a "general public benefit," defined as "a material positive impact on society and the environment, taken as a whole, assessed against an independent third-party standard, from the business and operations of a benefit corporation." Existing for-profit corporations can amend their current certificates of incorporation to become a benefit corporation with a super-majority vote of their shareholders.

In addition to "general public benefit," any of the following specific public benefits may be part of a benefit corporation's stated, incorporated purposes:

  • providing low-income or underserved individuals or communities with beneficial products or services
  • promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business
  • preserving the environment
  • improving human health
  • promoting the arts, sciences, or advancement of knowledge
  • increasing the flow of capital to entities with a public-benefit purpose
  • accomplishing any other particular benefit for society or the environment

To maintain its status as a benefit corporation, the for-profit must have its activities assessed using an independent, third-party standard. The legislation does not specify a particular standard, but legislative guidelines generally provide that standards should be comprehensive, credible, transparent, and developed by an independent entity that has no material or financial interest in the use of the standard.

Some familiar examples of third-party standard makers that could fulfill this requirement include Global Reporting Initiative, GreenSeal, Underwriters Laboratories, the U.S. Green Building Council, the International Organization for Standardization, and many others, including some that cater just to benefit corporations. (Full disclosure: The authors have founded the Benefit Corporation Standards Institute, Inc. (BCSI), a 501(c)(3) whose purpose is to connect associations with business leaders and stakeholders to develop these standards.)

Additional reporting requirements are minimal. A benefit corporation must provide an annual report detailing how it met its chosen standards to both its shareholders and the secretary of state in its jurisdiction and must post the report on its website.

One source of confusion surrounding benefit corporations arises from an entity known as B-Lab, which spawned the movement. B-Lab, a nonprofit public-benefit organization, has established a brand-name certification called "Certified B Corporation." However, a benefit corporation need not be a Certified B Corporation, and it may or may not choose to be certified by a third party at all. B-Lab is just one of several third parties offering certification. And third-party certification of a business as a benefit corporation should not be confused with the third-party standards used to measure a benefit corporation's progress toward its social mission.

Nonprofit Industry Objections

While the extent to which benefit corporations will affect associations is unknown, some nonprofit industry groups have opposed benefit-corporation legislation. It is difficult to assess whether their arguments are valid this early in the evolution of these organizations, and we have to admit our bias in favor of benefit corporations since learning about them. Nonetheless, it may be helpful to explain some of these concerns and how they might be addressed, alleviated, or simply let go:

Lack of director accountability to shareholders. It seems to us that benefit-corporation directors will be as accountable to shareholders as they would be in any corporation. Although directors cannot be sued for decisions they make in pursuing stated social and environmental objectives, shareholders presumably accept this limitation when they purchase shares or when the corporation converts into a benefit corporation. Shareholders are still empowered to remove directors, refuse to invest, and sue directors for breach of their fiduciary duties. And it stands to reason that investors in benefit corporations will be more attentive to corporate responsibility than investors in ordinary for-profit corporations.

Vagueness and unenforceability leading to abuse. The new corporate form, like other forms, will be subject to abuse from time to time, and some benefit corporations' commitment to social and environmental benefit will be a sham. Abuse, however, is nothing new. What is new is that benefit-corporation statutes rely on investors and consumers to make their own determination of whether the social and environmental benefit is satisfactory. Benefit corporations that lack a genuine commitment to social and environmental benefit will not draw investors or differentiate themselves in the market—which is the point of becoming a benefit corporation to begin with—and they will subject themselves to criticism due to increased access to required annual reports.

Blurring the lines between for-profits and nonprofits, potentially misleading consumers. Benefit corporations may indeed blur the line between nonprofit and for-profit entities. Some consumers might be misled, but in an age of ever greater access to information, consumers are becoming increasingly well informed about the companies they like and dislike. Further, there is no reason to believe that this confusion, if it happens, will cause significant harm.

Competition against nonprofits. Call us altruistic, but don't nonprofits want for-profit enterprises to do more good for society and the environment? And, as an association leader, if a benefit entity is helping address the same problem as my association, shouldn't I be happy about that? For example, if I lead the American Polio Association and a benefit corporation finds a way to eradicate polio, leaving APA with no reason to exist, should I complain? If you are focused primarily on protecting your turf, you need to do some serious reflecting on your mission.

We cannot dismiss the worry that funding for nonprofit work might be diverted to benefit corporations. However, such funding options already exist, so this is nothing new. Meanwhile, no new tax benefits are granted in the benefit-corporation statutes for funding them. Grants and sponsorships of associations will continue to be attractive for the same reasons they always have been: positive public relations, tax benefits, furthering causes donors care about, and so on.

The existence of benefit corporations does not prevent nonprofits from doing any of the things they have always done—although, because of potentially superior resources, a benefit corporation might be able to do certain things better than a nonprofit. This is speculative, however, and even if the benefit corporation can outperform the association, should we argue that society should be deprived of those benefits because associations didn't provide them?

B-Lab has caused confusion and conflicts of interest. The distinction between B-Lab, Certified B-Corporations, and benefit corporations is unclear. We have concerns that an entity that sets standards appears to be certifying conformance to those standards. That B-Lab is devoting resources to the pursuit of benefit-corporation legislation might be seen as self-serving, but that could be said of most lobbying efforts. In its defense, B-Lab has advocated for open third-party standards and actively promotes other standards and certifiers, and no one is required to select B-Lab's standards or its specific certification.

Fewer tax exemptions for nonprofits. Some fear the IRS will begin to limit the number of tax exemptions it issues to favor the creation of benefit corporations that pursue charitable interests and generate taxable income at the same time. However, the IRS already grants as few tax exemptions as possible; while only those entities that qualify receive an exemption, the IRS cannot refuse to grant an exemption to applicants that are indeed qualified. In short, this concern seems speculative.

Positive Opportunities for Associations

We foresee several potential positive opportunities for associations that are likely to result from this movement:

Collaborating with benefit corporations to help achieve association or nonprofit goals. Benefit corporations have the ability to declare that a certain percentage of profits will be routinely distributed to support certain causes, issues, or nonprofits. Collaborating with benefit corporations could prove to be a sustainable, stable, long-term source of funding for nonprofits and associations.

Participating directly in—but not controlling—benefit-corporation standard-setting in your industry or profession. Associations have thus far been limited to a supporting role in setting third-party standards for benefit corporations. This wasn't done to block associations from participating, but rather, we believe, to increase transparency and credibility in standards development. As the benefit-corporation movement grows, associations will have more opportunities to participate in the next generation of standard-setting for their industries and professions (our organization, BCSI, being just one option).

Helping your members be more competitive and successful by becoming benefit corporations. There is a strong case to be made for becoming a benefit corporation to gain a competitive advantage and attract investors, many of whom are specifically designing portfolios devoted to triple-bottom-line companies. If converting to benefit-corporation status is a logical move for some organizations in your industry, your association could help guide them along the way.

Establishing programs that provide services to benefit corporations in your industry or profession. Associations are in a prime position to provide services to their benefit-corporation members. These services would most often produce unrelated business income for providing assistance in becoming a benefit corporation, preparing annual reports, performing optional audits, providing certifications, and similar functions. Associations could offer these services directly or through third-party providers.

Changing current association for-profit subsidiaries into benefit corporations. Your association or nonprofit may have for-profit subsidiaries that could benefit from re-incorporating as benefit corporations. You have an opportunity to send a message to members and stakeholders that all of your endeavors are devoted to making a better world.

With the advent of the benefit-corporation form, pursuit of socially and environmentally conscious capitalism may become more mainstream. The movement will undoubtedly have both positive and negative ramifications, some of which will affect associations. Since benefit-corporation legislation is spreading rapidly, it will likely become a permanent part of the landscape.

Refusing to recognize this movement would be a strategic mistake for most associations, which would risk being viewed as being protectionist, self-serving, and lacking commitment to improving society. More important, they will have missed important opportunities to help shape the future of their respective industries or professions.

Associations are in a unique position to participate in the growth of the benefit-corporation movement. They can leverage it to further their nonprofit objectives, improve their industries or professions, provide their members with new competitive advantages, create new revenue streams, and help make the world a better place.

Shelly Alcorn, CAE, and Mark Alcorn, JD, MBA, are principals of Alcorn Associates Management Consulting in Sacramento, California. Shelly is chair of the Benefit Corporation Standards Institute, Inc. Email: [email protected], [email protected]

*Editor's note: This article originally stated that Washington had enacted benefit-corporation legislation. However, Washington's statute classifies the new coporate structure as a "social purpose corporation." (For more info, see "The Social Purpose Corporation, or the SPC," by John Reed and Ame Wellman Lewis at Davis Wright Tremaine LLP.) This article has been updated to reflect this distinction. In addition, the list of states with enacted benefit corporation statutes has also been updated to include Louisiana and South Carolina, which passed benefit corporation statutes shortly after this article's original publication.

Shelly Alcorn, CAE