New Tool for Social Entrepreneurs: The Benefit Corporation
The benefit corporation must operate in a socially and environmentally conscious manner, and requires an unprecedented level of transparency.
In this Business Better Than Usual series, social enterprise attorney Kyle Westaway explains the fundamentals of different legal structures available to social entrepreneurs.
The benefit corporation is a new class of corporation for entrepreneurs that are seeking to create a positive social and environmental impact while running a profitable company. (As a side note, the benefit corporation is distinct from the B Corp Certification, which is not a legal structure, but a voluntary, consumer-facing certification that a company operating in any legal structure may apply for.)
Under existing corporate law, the board of directors of any corporation has a duty to maximize shareholder value, which means its sole duty is to make as much money for its shareholders as possible. (There is significant debate on whether this legal duty actually exists, and if so, under what circumstances. Whether this duty is an actual legal obligation or not, it has become a powerful legal norm, and guides decisions of the boards of directors.) If the board of directors makes decisions that fail to maximize shareholder value, then they open themselves up to a lawsuit from the shareholders. If the shareholders are successful in their suit, the corporation will have to pay damages to their shareholders. Thus, a company that wants to create a positive social and environmental impact at the cost of maximizing shareholder value may open itself up to litigation.
So what’s a socially and environmentally conscious company to do? The benefit corporation was designed to solve this problem, by creating a new legal structure for entrepreneurs that are seeking to maximize their impact socially, environmentally and financially.
The benefit corporation has two distinctive features: first it creates a mandate to operate in a socially and environmentally conscious manner, and secondly, a benefit corporation requires an unprecedented level of transparency.
First of all, the benefit corporation must operate for the general public benefit—in other words it is mandated to create a material positive social and environmental impact on society as measured against a third party standard. Every benefit corporation is required to measure their social and environmental impact against an independent, third-party assessment tool. This mandate to operate for the general public benefit requires the directors to make decisions with not only the shareholders, but also the community, environment, employees and suppliers in mind. This group is collectively known as stakeholders. The shift from maximizing shareholder value to maximizing stakeholder value is a shift at the very core of the traditional conception of a corporation.
In addition to the general public benefit, the benefit corporation may, but is not required to, pursue a specific public benefit. This specific public benefit is a goal above and beyond simply operating in a generally socially and/or environmentally conscious manner. It is a specific purpose that the company is trying to achieve. For example, a benefit corporation may choose to only employ formerly incarcerated persons or make a commitment to give a certain amount of profits to charity.
Secondly, the benefit corporation mandates a high degree of transparency and accountability through measuring and reporting its social and environmental performance. Benefit corporations are required to have their social and environmental performance measured by a third-party assessor. The third-party assessor reviews the entire business/operations of the benefit corporation when conducting their assessment. It considers sourcing of materials, production practices, labor policies of suppliers, carbon footprint, employee benefits, engagement with local communities, and many other factors. The purpose of the third party assessment is to gauge the holistic impact of the benefit corporation.
After the benefit corporation has been assessed, the results of the assessment must be published in an annual public benefit report. Additionally, if the benefit corporation has a specific public benefit, it must report on the activities related to that benefit.
By shifting from shareholder-focused to stakeholder-focused management and holding itself accountable to an external standard of environmental and social performance, the benefit corporation strives toward an objective, measureable goal of holistic performance.