Many different types of businesses have become benefit corporations since the first law was passed in Maryland in 2010. The benefit corporations currently incorporated in the United States come from many different industries, including retail, manufacturing, tech, service, professional services, FIRE, private education, and food and beverage production. Benefit corporations also come in all sizes, from small one-person service companies to large-scale international brands with many employees.
A few examples of well-known benefit corporations include Method, Plum Organics, King Arthur Flour, Patagonia, Solberg Manufacturing, and Rasmussen Colleges. You can see B Lab’s best attempt at a complete list of benefit corporations here.
Benefit corporation legislation is effective in over half the country and numerous states are working on it. For state by state information, click here.
Business leaders need to be able to satisfy the increasing demands of investors, employees and customers who require them to serve both shareholders and society. These considerations require them to make decisions on multiple stakeholders rather than maintaining a singular focus on short term financial returns.
In addition, benefit corporations create a new and useful corporate structure that meets the needs of business leaders and investors whose core mission it to create a material positive impact on society and the environment.
Without increasing regulation or impacting state budgets, benefit corporations:
- Remove legal impediments preventing businesses and investors from making decisions to use sustainability and social innovation as a competitive advantage, particularly in liquidity/sale scenarios;
- Deregulate the purpose of a corporation, by freeing up the marketplace to allow corporations to consider other factors in addition to profit. The purpose of a corporation is overly regulated because they can only consider the maximization of profit and are prevented from considering moral and missions in addition to profit. Benefit corporation laws allow for these considerations alongside profit.
- By uniquely identifying benefit corporations outside of traditional corporations investors can find these companies more easily, review their annual benefit reports, which are assessed against third party standards, and greatly reduce their due diligence prior to making an investment decision. Time is money for investors and the reduction in due diligence means a greater likelihood that investments will be made.
- Rebuild public trust in business by demonstrating that businesses are willing to be held accountable to create value for both shareholders and society.
No. Benefit corporations are neither nonprofits nor hybrid nonprofits. They are for-profit companies that want to consider additional stakeholders, morals or missions in addition to making a profit for their shareholders. Nonprofits cannot be benefit corporations, but they could create one. Because of the public benefit purpose provisions, expanded fiduciary duties of directors, and additional shareholder rights created within the model benefit corporation legislation, this structure could be useful to operate and scale the earned-income activities of a nonprofit.
No. Benefit corporations do not have to be audited or certified. Not by B Lab; not by anyone. Benefit corporations and Certified B Corps are different. You can learn more about that here.
If a company is looking for mission-aligned capital, it will help. Social investors want to invest in companies which 1) achieve high social and environmental impact; 2) are structured to maintain their mission after the next financing, sale or IPO; and 3) can command higher valuations.
If a company is looking for mainstream capital, it won’t hurt. If a prospective investor doesn’t want a company to remain a benefit corporation, the shareholders can vote to relinquish the benefit corp status via in most cases a two-thirds vote, prior to an investment or sale.
Benefit corporations are attractive to a large and growing market for socially responsible and impact investments. According to the U.S. Social Investment Forum, $3.7 Trillion (or approx. 11% of U.S. assets under management) is currently invested in some form of Socially Responsible Investing. According to JPMorgan, there is a $1 Trillion investment opportunity in impact investing over the next decade.
Some investors have looked at the benefit corporation form as a way to protect their mission oriented investment. If a mission oriented investor has stock in a traditional corporation that claims to have a mission but deviates from that mission the investor typically does not have any private right of action to prevent the corporation from solely focusing on profit.
Shareholders are among the stakeholders whose interests the directors of a benefit corporation are required to balance.
Shareholders are the only stakeholder entitled to bring a legal action against the corporation or its directors.
Benefit corporations are required to provide shareholders with a report on overall social and environmental performance and on its success achieving any specific public benefit purpose.
Shareholders of a company seeking to elect or terminate benefit corporation status enjoy dissenters rights, entitling them to a fair market appraisal of their shares.
Shareholders of benefit corporations can vote to terminate benefit corporation status (usually by a 2/3 supermajority vote or a majority vote in Delaware).
Enhanced reputation as a leader both internally and externally: Benefit corporation status helps companies compete for talent and customers.
- Millennials, which represent 50% of the global workforce, want work with meaning.
- A recent Intelligence Group study found that almost two-thirds (64%) of Millennials said they would rather make $40,000 a year at a job they love than $100,000 a year at a job they think is boring.
- There are nearly 70 Million conscious consumers in the U.S. Consumers who buy goods or services at a premium price because of the company’s social and environmental practices.
- 90% of Americans say that companies must not only say a product or service is beneficial, but they need to prove it. - Cone Communications
- 73% of consumers care about the company, not just the product when making a purchasing decision. – BBMG
- 86% of consumers are more likely to trust a company that shows the impact of its cause efforts. – Cone Communications
Provides clarity to directors and officers that their fiduciary duty includes creating a material positive impact on society and the environment, even in liquidity/sale scenarios;
Helps maintain mission over time by 1) expanding shareholder rights to enforce this expanded definition of fiduciary duty and standard of consideration; and 2) requiring usually a 2/3 super-majority vote of shareholders to remove these higher standards; and 3) providing the opportunity to name and enforce pursuit of one or more specific public benefit purposes;
Creates a marketing opportunity to differentiate the business as a new class of corporation required by law to benefit society as well as shareholders.
If you are starting a new company, you can simply incorporate as a benefit corporation in any state where legislation has been passed. The procedure for incorporation is nearly identical to that followed for any other corporate structure with the addition of a statement that the company is be a benefit corporation. For state by state instructions click here.
If you have an existing company, you can elect to become a benefit corporation by amending your governing documents. Amendment requires a 2/3 super-majority vote of all shareholders in most states and currently 90% in Delaware. The procedure for filing amendments with the state is identical to that followed for any other corporate structure with the addition of a statement that the the company is a benefit corporation. For state by state instructions click here.
Consult state requirements: The specific requirements for benefit reports differ slightly from state to state. More information on requirements for your state is available here.
Follow best practices: B Lab believes that there is a best practice for benefit reporting, which are reflected in the model legislation. More information on best practices is available here.
Choose a third-party standard: Benefit corporations are required to use a third party standard to assess their creation of general public benefit over the course of the previous year, but do not need to be certified or audited by this third party standard. B Lab believes that the B Impact Assessment is the best available standard for benefit corporations. The B Impact Assessment is available for free for those that do not wish to have a verified or certified report. More information on choosing a third-party standard can be found here.
Check out examples of benefit reports.
Yes. To see a listing of these attorneys, click here.
No. B Lab is has not been told by the more than 1200 existing benefit corporations across the country that they have had difficulty obtaining D&O insurance or been asked to pay a higher premium.
This experience is corroborated by meetings with brokers at Marsh McLennan and underwriters from several major D&O (director and officer) insurance carriers, including ACE, Chubb and Zurich.
Some say that over time benefit corporation might enjoy reduced rates as a result of their enhanced governance regime and stakeholder engagement.
A director of a benefit corporation has a duty to ensure that the benefit corporation meets its statutory corporate purpose to create general public benefit, which is defined as "a material positive impact on society and the environment, taken as a whole, from the business and operations of the benefit corporation."
A director of a benefit corporation has a duty to "consider the effects of any action or inaction upon" the stakeholders of the benefit corporation.
A director of a benefit corporation has a duty to ensure that the benefit corporation meets its statutory obligations to make publicly available an annual benefit report that assesses the overall social and environmental performance of the benefit corporation against a third party standard that meets the criteria listed in the Model Legislation (i.e the third party standard is comprehensive, credible, independent, and transparent).
Directors must manage the corporation in a responsible and sustainable manner.
Directors must manage or direct the business and affairs of the benefit corporation in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.
Directors must also provide a biennial, annual in Colorado, report to the shareholders on the corporation’s promotion of the public benefit identified in its certificate of incorporation and of the best interests of the stakeholders.
For private companies, the benefit director is required in some states and an option in others. However, public companies are required to have a benefit director. The benefit director must be an individual who is independent from the benefit corporation. The benefit director may serve as the benefit officer at the same time as serving as the benefit director. The articles of incorporation or bylaws of a benefit corporation may prescribe additional qualifications of the benefit director not inconsistent with this subsection. For more information on choosing an independent benefit director and the requirements in your state please click here. The benefit director’s role includes preparing the annual compliance statement portion of the annual benefit report. This includes the director’s perspective on whether the corporation has been successful in pursuing its general and any named specific public benefit purpose, which will be an important source of information for the shareholders as to whether the directors have adequately discharged their stewardship of the benefit corporation and its resources. The annual compliance statement must include a statement from the benefit director about whether the following:
- The benefit corporation acted in accordance with its general public benefit purpose and any specific public benefit purpose in all material respects during the period covered by the report.
- The directors and officers created general public benefit.
- If, in the opinion of the benefit director, the benefit corporation or its directors or officers failed to act or comply in the manner described above, a description of the ways in which the benefit corporation or its directors or officers failed to act or comply.
There are legal impediments in traditional corporate law that prevent companies from permanently changing the fiduciary duty of the board to require them to consider additional stakeholders and create general public benefit. One hundred years of case law, starting with the seminal case of Dodge v. Ford Motor Company in 1919 and continuing in Ebay v. Newmarket and the Revlon Ruling, have added to the precedent that current corporate law constrains directors to the sole fiduciary duty of maximizing profit for shareholders. Any consideration beyond the maximization of profit could subject the company to a shareholder suit.
This is a particularly worrisome problem for mission driven companies at the time of sale or during any capital raises:
- In any of the 19 states without a constituency statute, when a company is ‘in play,’ directors’ discretion under the business judgment rule is narrowed as a result of the Revlon ruling in Delaware, requiring them to ‘take the highest offer’ regardless of the impact of that decision on non-financial interests.
- In any of the 31 states with a constituency statute, the lack of case law regarding those statutes leaves lawyers and the directors and officers they counsel with a lack of clarity about how a court would rule if directors made a decision based on broader considerations than just the highest offer.
Impediments also exist in operating scenarios.
- The best interests of the corporation are commonly equated with the financial interests of shareholders. Any decision by directors must be tied back to serving the financial interests of shareholders. This prevents directors from making decisions that consider both financial and non-financial interests.
- Despite the existence of the business judgment rule governing operating decisions, most directors and officers and many attorneys believe that their options are constrained to acting only in the financial interests of shareholders. The belief that ‘the social responsibility of business is to increase profits’ has been absorbed into U.S. corporate culture and impacts how decisions are made. This impediment can be removed by creating a new corporate form explicitly required to take multiple interests into consideration when making decisions.
An LLC could currently amend its membership agreement to incorporate any of the benefit corporation provisions. However, because LLC law is based on contract law institutional investors prefer the corporate structure, which is constructed in statute and case law, over LLC’s, any company with plans to raise outside capital or go public is better off with a corporate rather than an LLC structure. The benefit corporation thus provides the most effective corporate structure for scaling social enterprise and innovation.
Incorporating benefit corporation provisions into an LLC operating agreement would not achieve the market differentiation or leadership objectives cited above.
No. Benefit corporations are for-profit entities and do not offer philanthropists the same tax advantages as donating to a nonprofit organization. Benefit corporations seek equity or debt investments that presume a return on investment for the investors, while nonprofits seek charitable donations that presume no return. Benefit corporations simply expand the range of opportunities for individuals or institutions to use their investment capital – not just their philanthropic dollars - to create a positive impact on society and the environment.
Chronicle of Philanthropy, 'Businesses with a Social Conscience' by Phillip Henderson, President, Surdna Foundation
Based on our analysis of mission-driven businesses, and because they are legally obligated to create a material positive impact on society and the environment and to consider the impact of their decisions on all stakeholders, there are three primary ways benefit corporations help nonprofits: more charity; more volunteerism; and fewer problems. Due to the imperative to create general public benefit, benefit corporations will be more likely to donate a higher percentage of their profits than ordinary corporations to support nonprofits. Benefit corporations are also more likely create opportunities for their employees to volunteer for nonprofit organizations and are less likely than ordinary corporations to create or exacerbate social or environmental problems as a result of their business practices.
Certified B Corporations (see explanation of the difference between Certified B Corporations and benefit corporations above), are very similar to benefit corporations and empirical data shows they give significantly more than the market average to charities and volunteer more of their employees’ time to charitable causes than their traditional corporate counterparts.
Before embarking on an effort to pass benefit corporation legislation, please contact B Lab. We have been the spearhead of advocacy and education in the passage of legislation in all 27 states and also working on passing legislation in 16 more states. We can provide a wealth of experience, information and materials that can aid in your the legislative and advocacy process. B Lab also works with attorneys from Drinker Biddle & Reath who can draft legislation specifically for your state. You can find more detailed information on B Lab’s recommended best practices for the benefit corporation legislation legislative process here.
B Lab recommends using the model legislation for the basis of any new legislation. B Lab and the pro-bono attorneys at Drinker Biddle & Reath are available to draft a version of the legislation tailored to your state’s specific corporate law. Using the model legislation has several important advantages:
- Expertise. The Model Legislation was drafted by Bill Clark from Drinker, Biddle, & Reath LLP and has evolved based on input from state legislatures, state bar associations, Secretaries of State offices, Attorneys General offices, associations, nonprofit groups and businesses in the states in which the legislation has been passed or introduced. It reflects the expressed needs of business leaders and investors interested in using the power of business to solve social and environmental problems, and has been conformed to local corporate codes by local corporate attorneys.
- Consistency. Using the model legislation ensures that your state remains consistent with the other states that have passed the legislation. This is particularly important for investors who rely upon this consistency to reduce their due diligence requirements when evaluating a company. The ability to recognize that a benefit corporation is the same in Illinois as it is in Florida allows the free market to function effectively.
- Conformity. The Model Legislation has been drafted so that the existing corporation code applies to benefit corporations in every respect except those explicitly stipulated in the Model Legislation. This drafting approach avoids the potential legal and administrative issues that will arise in keeping a new corporate form in conformity to the corporation code as changes to the corporation code occur over time.
- Economic Development. Only the Model Legislation has a built in economic development engine that opens up new markets for states by giving investors and social enterprise the tools they need to function effectively. By identifying benefit corporations separately from traditional businesses investors can easily identify them, which they could not do before. By requiring the production of a publicly available annual benefit report, which is assessed against a third party standard, not only are shareholders given the materials they need to enforce their rights, investors can quickly research benefit corporations and determine if the company matches the mission of their fund. This marketplace does not exist in our economy without the passage of benefit corporation laws. The best part, is that it does not require government oversight or government money to allow it to function. It is a true free market approach.
Every benefit corporation is required to publicly publish an annual benefit report that includes "an assessment of [its] overall social and environmental performance against a third party standard." This simply requires the use of a third party standard as a rubric for producing their report, similar to how we use the third party created Generally Accepted Accounting Principles (GAAP) for financial reporting.
This transparency requirement is intended to help the benefit corporation, its directors, its shareholders, investors and the general public determine whether the benefit corporation has met its statutory corporate purpose to "create a material positive impact on society and the environment, taken as a whole, assessed against a third party standard."
A third party standard is defined as "a standard for defining, reporting, and assessing overall corporate social and environmental performance" that meets the criteria listed in the model legislation.
- Government has no role in determining whether a selected third party standard is acceptable or whether the benefit corporation has met its benefit corporation purpose to create a material positive impact;
- Benefit corporation legislation does not require benefit corporations to adopt any particular third party standard in preparing its annual benefit report; and
- Benefit corporation legislation does not require the annual benefit report to be audited or certified by any third party standards organization.
It is up to the benefit corporation, its directors, and ultimately its shareholders, to judge whether any particular third party standard fits the statutory definition. B Lab does not take any position on whether a given standard would be deemed acceptable.
Most importantly, the primary objective of this legislation is to create a new corporate form that can not otherwise be achieved under our current laws and case law. This objective requires the legislation to consider society and the environment, in whatever way the company wishes, and not simply to consider one-off safe harbors that can arguably be done already under law.
The ‘general public benefit’ purpose helps prevent abuse of this legislation by corporations interested in green-washing. Without the ‘general public benefit’ purpose, a corporation could name a single, narrow ‘specific public benefit’ purpose (e.g. keeping the river in back of the factory clean from toxic effluents) and then ‘consider’ and dismiss all other non-financial interests when making decisions, which would not meet the primary objective of this legislation to create a new corporate form whose corporate purpose requires it to create benefit for society generally. Additionally, without the continual consideration of society and the environment a company could choose a short-term safe harbor and still be considered a benefit corporation after the consideration is completed. The legislation prevents this and allows the company flexibility to change with the dynamic forces of the market.
To meet the transparency provisions of benefit corporation legislation, all benefit corporations are required to create a benefit report. These transparency provisions serve not only to inform, shareholders so they are better able to exercise their rights, but also to inform directors so they are better able to meet their duties and the public about the overall social and environmental performance of the benefit corporation.
In a benefit enforcement proceeding, judges may also look to a benefit report, or series of annual benefit reports, to determine if the benefit corporation has met its statutory requirement to meet its general, and any named specific, public benefit purpose.