It’s Just Business… or is it?
“You say to-may-to, I say to-mah-to” ….. a refrain from the song, “Let’s Call the Whole Thing Off” written by the Gershwin brothers for the movie Shall We Dance is the perfect analogy of how words can be used in different ways and cause confusion and anxst. The song features Fred Astaire and Ginger Rogers, a couple grousing about their different regional dialects who threaten to “call the whole thing off.” It’s not long before they realize that “we need each other so we better call the calling off off.” If we change the words to “You say B corps and I say Benefit corporations”, I bet we have the same confusion!
Lately, I have had a number of clients with a deep-rooted desire to make a difference in the world coming to me with questions about the proper corporate entity for their venture. My stock response is to make sure that their business is well thought out with a business plan to support it before they create the structure to house it. It’s akin to buying a car. You need to figure out your budget, how many seats you want, how fast you need it to go, whether hybrid or electric is important or if you want a luxury or sports model … before you buy the vehicle that is perfect for your transportation needs.
Up until recently, selections were somewhat limited to the more commonly known sole proprietorships, partnerships, limited liability companies and S or C corporations. Now, the word is getting out that there is a new kid on the block, a Public Benefit Corporation, and people who care about conscious business want to know if this is a good fit. Texas is proud to be the 32nd state that has adopted a version of this new entity which will become effective on September 1, 2017. Those that are interested in showing the world that they want to contribute to resolutions even as they make a profit are trying to make sense of what this means exactly and whether they should wade into these untested waters. They have heard of B corps for years, companies certified by B Lab as meeting certain sustainability standards, but what are these new entities called Benefit corps? Is it just semantics? Let’s look at the differences.
The B Corp Movement
All entrepreneurs can participate in the B corp movement which started as a certification process by B Lab in 2007. B Lab is a non-profit whose mission is to maximize opportunities for values-lead businesses. The founders of B Lab believed that we would move at an accelerated pace from “shareholder capitalism”, where the purpose of corporations has historically been to maximize shareholder value even if there are damages to the environment or human rights exploitation, to “stakeholder capitalism” which allows us to create social and shareholder value simultaneously. Their hope was to build the infrastructure for pioneer companies leading the charge by providing a platform to bring them together and amplifying their voices through the power of unified goals. Their mission was, and continues to be, the initiation of a real driving movement for change across the entire economy by leading the charge for companies who understand that the best way to create change is to 1) weave social responsibility into the DNA of the company through corporate documentation and 2) live up to benchmarks and standards created through third party validation. B Lab has taken on the task of offering this type of certification. Companies go through a demanding online assessment and are awarded points for everything from energy-efficient offices to worker benefits and local sourcing.
B Lab’s reporting requirements attempt to be in line with the realities of the time and resources of smaller companies, allowing them to go through the assessment without outside assistance. The companies are randomly audited for consistency in quality and best practices and must file annual reports with B Lab which are published on the B Lab website. Secondly, B companies must make a change to their corporate formation documentation (i.e. articles of incorporation and bylaws) that reflects their commitment to higher standards of social and environmental performance, accountability and transparency. The founders believe that this is a critical step in building impact companies that last. It gives the companies and their boards and management teams a rule book for corporate governance keeping their efforts fair and transparent to all the stakeholders.
B companies mean business and are in it for the long haul attempting to differentiate themselves from pretenders. Becoming a B corporation is a reflection of a company’s values even as it operates for profit and shows the world it is all about being the best in class. If it achieves a passing score (the bar is raised every two years) and meets the certification’s legal requirement, it earns the right to display the B Corporation logo, a seal of approval, and become part of a dynamic and progressive business community. B corporations have become a constituency for change, united to create a shift in the market place, in investor expectations and ultimately for legal modifications to old corporate regulations and laws that no longer serve the public. As of August 2017, there were 2,221 B corporations across 130 industries in 50 nations.
Ultimately though, this community realized that the only way to fast-track to a tipping point was to give entrepreneurs more flexible business structures that accommodate the demands of consumer advocates, impact investors and the needs of society. This can only happen with a change in state corporate governance statutes and resulting case law. Until recently, the case law was clear, the business of business was amassing personal wealth for its investors and shareholders. Pretty straightforward, pretty clear cut. Any deviation was considered to be a breach of fiduciary duty on the part of corporate management and the board of directors. But, there is a new kid on the block and it is here to stay – the Public Benefit Corporation.
Although the idea of sustainable practices and socially conscious capitalism isn't new, what is new is the legislative effort sweeping through the United States to adjust existing corporate statutes to allow for a new enterprise known as a “Benefit Corporation.” These statutory entities may offer a comfort level to the general public by showing that a particular business has a governmental seal of approval in the sea of private certification entities springing up on the Internet, often confusing to the average citizen. Benefit corporations are structured exactly the same as traditional corporations except that their corporate purpose is to create a material positive impact, or reduce a negative impact, on society and the environment with higher standards of purpose, accountability, and transparency. This differs from a standard corporate purpose of maximizing return on investment for shareholders.
In 2010, Maryland became the first state to enact a benefit corporation law authorizing the formation of Benefits Corporations. Thirty-one additional states and DC have followed in its footsteps including Delaware, the bellwether for corporate change and the state home to more than 1,000,000 businesses including 50% of all publicly traded companies and 64% of the Fortune 500.
State laws are often built on a standard model (Model Benefit Corporation Act drafted on behalf of B Lab) and, aside from small regional variances, are substantially similar. In addition to its obligation to create a general public benefit, a Benefit corporation may also identify in its certificate of incorporation one or more specific public benefits such as preserving the environment or improving public health as part of its purpose. A Benefit Corporation can be a C-corporation or elect S-corporation tax status but either way, it will be treated the same as a traditional corporation under current tax law. There is no direct way for an LLC to become a Benefit corporation at this time but it can amend its membership agreement to incorporate any of the benefit corporate provisions. Although reporting requirements differ, Benefit corporations are required to consider the impact of their decisions on all stakeholders and provide regular reports that assess their overall social and environmental performance in pursuit of realizing both their general and specific public benefits.
Companies assessing this route will need to decide if it is worth the additional administrative and financial responsibilities. And, understand that they will need a plan to devote a certain amount of their capital to the fulfillment of their responsibilities in the actual creation of public benefits. Their commitment is not discretionary or dependent on whether they need to place their funds in other parts of the business if there is a recession or a period of rapid expansion. As a result, they will be faced with evaluating the competing demands for resources. And, they may be faced with the flipside of shareholder actions if a benefit enforcement proceeding is filed against the company, its officers and/or its directors for failing to pursue or create requisite benefits.
Do you want your business to be viewed as a “Renaissance Company”, one on the leading edge of change? If the answer is yes, you may want to consider becoming a B Corp, Benefit Corporation or both, driving change for your company and all its stakeholders and setting an example in this new world of business. As our global market continues to flatten and expand, these new structures may be an avenue for attracting a new Millennial workforce, impact investors and socially minded consumers allowing your circle of influence to do good even as it does well.