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B Corp: Better laws for business

   /   Mar 9th, 2011Business, News

Signing the Maryland Benefit Corporation legislation into law, April 2010.

In the current corporate structure money takes precedence over mission — as a matter of law – but for many social entrepreneurs, maximizing company profits can often be at odds with their desire to act responsibly. The well-known story of what happened to environmentally and socially-conscious Ben and Jerry’s when it was bought out by Dutch conglomerate Unilever in 2000, is one of the most significant examples of this clash. In the case of Ben and Jerry’s, the founders didn’t want to sell for fear the takeover could compromise their efforts as a socially responsible company. However, when the founders couldn’t come up with a counter offer from private investors that topped the price of shares offered by Unilever, its shareholders sued, and Ben and Jerry’s was forced to relent to the sale.

But now, new legislation is being enacted to solve this problem and to help social enterprises avoid the dilemma that arose for Ben and Jerry’s founders.

A new type of corporate structure called the Benefit Corporation, is taking hold in state legislatures across the country and changing the way social enterprises do business. Current corporate law dictates that companies must act in the interest of increasing shareholder value, and opens them up to lawsuits by shareholders if they make decisions that don’t directly create more profit.

Benefit Corporation legislation is a crucial step in changing this reality by providing social entrepreneurs with the choice to legally prioritize their public benefit over profits. Last year, the legislation was signed into law in Maryland (where it took effect in October) and Vermont (to take effect this July), and as of last month, when Governor Chris Christie signed the bill, New Jersey became the third state to enact the legislation. Virginia isn’t far behind either – the bill also recently passed the state legislature there and will soon become law with Governor Robert McDonnell’s signature.

“For too long, corporations that wanted to make money and make the world a better place didn’t have a place in the legal infrastructure of our corporate system,” says Andrew Greenblatt, policy associate for B Lab, the organization behind the movement to promote and establish B Corporations. Greenblatt and B Lab have been instrumental in getting Benefit Corporation legislation introduced in several other states including New York, Colorado, North Carolina, and Hawaii.

Public policy of this nature can be notoriously hard to get off the ground, often due to bi-partisan conflicts, but Greenblatt says that hasn’t been the case with the Benefit Corporation legislation, and in every state where it has been introduced it has received strong support from the major parties. “States are realizing that they want to be on the front end of this,” says Greenblatt. With the swift progress being made so far this year, he predicts that the Benefit Corporation will ultimately become the dominant structure for social ventures “because it does what the existing law for corporations was never designed to do.”

So what does this new law that allows for the creation of Benefit Corporation status actually do? For starters, it makes it possible for companies to legally consider the interests of other stakeholders when making decisions, and protects the company’s owners from shareholder lawsuits. “When you elect to incorporate as a Benefit Corporation, the fundamental change that occurs is that there is now a responsibility as a corporation to promote the general public benefit,” says Bill Clark, a partner at Drinker Biddle and Reath, who has been the primary legal force behind writing the new legislation and revising it in accordance with different state laws.

Clark drafted the legislation to include a provision that deals with the fiduciary duties of corporate officers, giving them the discretion to act on behalf of other stakeholder interests, namely employees, the environment, and community. The law also holds companies accountable to their social and environmental responsibilities. Without the Benefit Corporation status, any company can act responsibly and advertise that they do so. They can even get certified as a B Corp by a third party assessment firm – a main mission of the B Lab organization — to demonstrate to the public that they are committed to running their business in a sustainable way. But, prior to legislation passing, they were not required by law to do it.

The legislation is now a crucial bench-marker in holding companies accountable for their actions. Companies that incorporate as a Benefit Corporation are required by the law to publish an annual report that details how they have fulfilled their public benefit. The report must be filed using third-party assessment standards, like the impact rating tool that B Lab provides on its Website, and distributed to company shareholders as well as published on its own website.

John Shepley, co-owner of Maryland-based Emory Knoll Farms, and one of the first business owners to incorporate his company as a Benefit Corporation in Maryland last October, says this level of accountability is exactly what led him to elect the status.

“We did it to show leadership to the rest of the world,” says Shepley, “and to act as an example for others of what it means to be a Benefit Corporation.” As the ranks of Benefit Corporations grow (there are currently 15 incorporated in Maryland since the law took effect), business owners like Shepley are pioneering a new way of doing business by showing that transparency simply makes good business sense.

When Shepley and his partner Ed Snodgrass formed Emory Knoll Farms, a company specializing in selling green roof plants in 2004, they made a commitment to be a sustainable business in all aspects of their operations, including the way that they manage and compensate employees. The product itself – green roof plants – was also a part of the company’s overall efforts to be environmentally responsible. Because Emory Knoll Farms built these principles into their operations from the beginning, Shepley says electing the Benefit Corporation status was not a major change for them. It did, however, change the way they portrayed themselves to the rest of the business community.

“When we started, we were a small company and we didn’t see a need to document our sustainability efforts because we were the ones running everything and we held each other accountable,” says Shepley. “One thing that the new status has changed is that it gave me a reason to create written pieces of documentation, for example putting into words our policy on sustainability or how much energy we consumed on a yearly basis.” Shepley was already conducting self-audits to keep track of their social and environmental impact, but he never officially had to create a public report. Now that we’re a Benefit Corporation, “the report I put together allows us to summarize all of our environmental and social impact in a more complete and comprehensive way,” says Shepley.

He recently published Emory Knoll Farms’ first public report as a Benefit Corporation on its website, based on the results he received from the B Lab online assessment tool. Shepley says being a Benefit Corporation has also prompted him to want to pursue reporting of more challenging metrics at Emory Knoll Farms. For example, their green roof plants positively impact the environment by significantly decreasing storm water run-off. Shepley is now in the process of trying to measure how many millions of gallons of storm water the plants hold, which he believes will be a meaningful metric to report to the public.

“One of the main benefits is to be transparent,” says Shepley. “You’re actually showing the world the specific things that you are doing that are positive contributions to the environment and the community.”

The hope among B Lab supporters is that 2011 will be a big policy year for social enterprise, with at least four other states poised to pass legislation this year. If the recent success of the Maryland legislation is any indication, then they are well on their way to making that goal a reality.

Photo is courtesy of B Lab.

8 Responses

  1. [...] Currently, Adam and Donald are part of a working group that is promoting the passage of Assembly Bill 361 (Huffman) pending in California legislature.  AB 361 would create a new corporate structure (think C Corporations or S Corporations) available to companies that want to build social and environmental values into their core mission.  The Benefit Corporation form of entity would protect the corporate officers (and hold them accountable) for socially- and environmentally-driven decisionmaking. It requires transparency and verification (trust, but verify) from those companies choosing to take its form.  Donald and Adam discuss specific examples of what this might mean in real world application for companies, including their duties to shareholders. Remember when Ben & Jerry’s ice cream was sold? [...]

  2. Janelle says:

    Hats off to whoever wrote this up and potesd it.

  3. [...] survivors of sex trafficking in Thailand. Here he gives Dowser some thoughts on the emergence of Benefit Corporation legislation and the power of social enterprise. Check out more of Westaway’s advice on the [...]

  4. [...] survivors of sex trafficking in Thailand. Here he gives Dowser some thoughts on the emergence of Benefit Corporation legislation and the power of social enterprise. Check out more of Westaway’s advice on [...]

  5. [...] bill allowing Benefit Corporations was signed into effect this week in California by Governor Jerry Brown. Now companies that wish to [...]

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