The “Benefit Corporation” Movement

A new corporate structure requires companies to look beyond the interests of shareholders and to consider the effect of decisions on employees, the environment and the surrounding community.

Image courtesy of Eugene Chan of Hub Bay Area, via B Corporation Facebook.

There’s a young movement underway that takes a new twist on efforts toward corporate social responsibility and sustainability: it’s a push to get companies to incorporate as something called “benefit corporations.”

Ben Schreckinger, an Atlantic Media fellow reporting for National Journal, writes in “Virtue Inc.” in the Boston Globe that “the idea of a benefit corporation is to weave some social responsibility into the DNA of the company itself through its charter.” A benefit corporation, he writes, is ” required by law to create ‘a material, positive impact on society and the environment,’ and — while still making a profit — to consider the effects of its actions on its customers, its employees, society, and the environment.”

The idea emerged from nonprofit called B Lab. B Lab certifies companies according to its own standards of social and environmental performance, accountability and transparency and calls those companies “B Corporations.” It says that “B Corp certification is to sustainable business what Fair Trade certification is to coffee or USDA Organic certification is to milk.”

B Lab’s website says there are 650 B Corporations in 19 countries and 60 industries. While some of the founding companies are smaller business, including Seventh Generation, Comet Skateboards and King Arthur Flour Company, they have been joined by larger profile companies that include Patagonia and Ben & Jerry’s. The program has received funding from donors that include the Rockefeller Foundation, Deloitte LLP and the United States Agency for International Development.

On December 1, Massachusetts will become the eleventh state to allow companies to incorporate as benefit corporations. See the state’s notice about the new legislation (pdf).

Boston law firm Foley Hoag clarifies in a press release that there is a difference beyond semantics between benefit corporations and B Corps: “Benefit corporations should not be confused with ‘B Corps’ . . . [whose] status is conferred by B Lab on business entities that meet certain criteria. The B Corp designation is a branding tool and has no legal significance.”

Foley Hoag provides this example of how registering as benefit corporation might play out: “For example, the directors of a traditional corporation faced with financial hard times may opt to build up cash reserves by laying off employees, in order to fulfill their fiduciary duty to prioritize the financial returns to investors. A benefit corporation’s directors faced with similar economic circumstances could prioritize retaining the corporation’s workforce through the hard times, and opt to dip into cash reserves to do so, in order to continue to fully pursue the corporation’s public benefit goals.” Boards and officers are required to consider not just the shareholders but the employees; community factors; the local, regional and global environment; and both the short-term and long-term interests of the corporation.

Not everyone is keen on the new corporation structure. Phil Peters, cochair of the Corporation Committee of the California Bar, told the Globe that the charter of benefit corporations gives managers unnecessarily broad discretion at the expense of shareholders. His preference are flexible-purpose corporations, which California recognizes. They are similar but have stronger provisions for shareholder control.

And Kent Greenfield, a professor at Boston College Law School, told the Globe that a better way to get U.S. corporations to be driven by social obligation as well as profit is to elect a government willing to make the duties owed by all corporations “clear and enforceable.”

For more on benefit corporations, see “Why Boards Need to Change,” by Edward E. Lawler III, of the University of Southern California, Marshall School of Business, and Christopher G. Worley, of the Center for Effective Organizations and professor of organization theory at Pepperdine University’s Graziadio School of Business and Management, in the Fall 2012 issue of MIT Sloan Management Review.