Benefit Corporations: Why Colorado Should Have Them

Seth Henry : Wednesday May 2, 5:39PM

Last week a Benefit Corporation Bill was introduced that would allow Colorado businesses to organize as benefit corporations – a new form of business entity designed for triple bottom line businesses. The bill would provide a valuable option for Colorado companies that seek to build into their legal structure a commitment to society and the environment.

The benefit corporation form is only available in states that have amended their corporation statutes to add that option. In the past two years, seven states have done so: Virginia, Vermont, New York, New Jersey, Maryland, Hawaii and California.

Sustainable business leaders are organizing to spread the form to more states, and the initiative is generating a lot of buzz around the country. The press coverage is upbeat about what the movement is trying to accomplish, but a bit fuzzy about the nuances. (See examples here, here and here.)

Who Needs Benefit Corporations?

These days, nearly all businesses want to say they are socially responsible, and many are taking steps in that direction. But some businesses walk that talk in a deeper way.

Some companies are rethinking what private enterprise is all about, organizing their core strategy around their commitment to sustainability or their mission to address a major social problem. The impetus for these business model innovations comes from:

  • values-driven entrepreneurs, who are in business to benefit people and the planet as much as to make money; and
  • impact investors, who want to finance social and environmental benefit, and also earn a monetary return.

Some of these same business leaders are powering the movement to spread the benefit corporation form. They want the ability to build a social mission into the structure of a company, so that as the company grows, its triple bottom line nature endures. The conventional form of corporation does not meet this need.

The problem with the existing corporate form is this – somewhere along the line, being socially and ecologically responsible tends to conflict with maximizing profit. If company directors want to prioritize a social mission over financial returns, their shareholders are likely to be unhappy. Directors are answerable to the shareholders, and they can get sued.

The problem is compounded when the company wants to access the financial markets – to scale up, to provide an exit for founders and early backers, or for any other reason. Entering the financial markets risks exposure to buyout offers, backed by the threat of shareholder litigation. Many companies that were pacesetters in social responsibility have been reluctantly sold to buyers that didn’t share the same level of commitment.

Critics of corporation law often overstate the extent to which it requires profit maximization to the exclusion of all other values. But still, they have a point. Corporation law does support a culture in which financial return is the standard by which all other outcomes are judged.

The benefit corporation form is designed for companies that want to preserve their commitment to a social mission while raising capital for growth. It’s no magic bullet, but it’s aimed at a real need.

What Are Benefit Corporations?

Benefit corporations are a subset of for-profit corporations. They have all the same characteristics as other for-profit corporations, plus:

  • The company has a corporate purpose to create a positive impact on society and the environment.
  • In making decisions for the company, directors and officers have a duty to take into account the interests of non-financial stakeholders (workers, community and the environment), and are not required to prioritize the interests of shareholders over those of other stakeholders.
  • The company must publish an “annual benefit report” describing its social and environmental performance, as assessed against a third-party standard. The standard used must meet defined criteria to ensure that it is comprehensive, credible, independent and transparent.

Shareholders and directors can sue the company for failure to meet its obligations under the statute. Other stakeholders don’t have enforcement rights. Monetary damages are not available, so the recovery in these lawsuits would be limited to an injunction ordering the company to do better.

Several organizations offer social and environmental performance standards that could meet the criteria for the annual benefit report. One such standard is the B Impact Assessment published by B Lab, the nonprofit organization that originated the benefit corporation concept.

Most of the press coverage about benefit corporations has confused them with certified B corporations. The two groups are overlapping but distinct.

“Certified B corporation” is a private certification from B Lab. Any form of for-profit company can be certified if they:

  • earn at least 80 of a possible 200 points on the B Impact Assessment, and
  • legally commit to consider the impact of their decisions on their employees, suppliers, community and the environment. Corporations in states with a benefit corporation law must become a benefit corporation within two years to keep their certification.

But Will It Work?

The benefit corporation builds accountability to the triple bottom line into the entity’s charter. This gives founders a way to protect the company’s social mission while allowing it to access the financial markets. The form may be better adapted for that purpose than any alternative yet available. Only time will tell.

The test of whether the form fulfills its potential is likely to be this – will investment capital be available to benefit corporations across the full range of levels, to and including IPO?

Some investors will avoid benefit corporations, since they modify the rights of shareholders and may not be available in the investor’s preferred state of incorporation. This includes traditional venture capital investors, who generally prefer corporations incorporated in Delaware.

On the other hand, some impact investors are likely to favor benefit corporations. Impact capital is a much smaller pool of money than traditional venture capital, but it’s growing fast. Access to that pool may motivate some founders to organize as a benefit corporation.

Benefit Corporations Are Not for Everyone

Just because the benefit corporation form is designed for sustainable business doesn’t make it the best choice for every triple bottom line company. Any choice of entity involves tradeoffs. For example, like other for-profit corporations, benefit corporations lack the flexibility and tax advantages of LLCs.

And the benefit corporation form has costs. Producing an annual benefit report and considering the interests of nonfinancial stakeholders will cost money and management time.

Any company, director or officer that is sued in a benefit enforcement proceeding will face litigation expenses (though there is no monetary liability). And complying with any injunction that comes out of such a proceeding will have costs to the company. A benefit corporation’s commitment to social and environmental benefit is a novel legal standard, so it is not known what a court enforcing that standard might order a company to do.

A number of companies appear willing to take the risks. No one knows how many benefit corporations have been organized or converted, but so far over 40 have listed themselves in a national directory.

Why Colorado Should Do This

Much of the conversation in the legislature will be about economic development. Anything that can help bring jobs to the state is welcome right now. According to Richard Eidlin of the American Sustainable Business Council, those states where the benefit corporation form is already available have attracted new investment from companies that want to use the form.

But the more long-term reason to authorize benefit corporations is to encourage innovation. Entrepreneurs and investors are eager to invest their capital and creative energy in companies with a durable commitment to social and environmental goals. The benefit corporation meets that demand.

As Eidlin puts it, “The impetus for this comes from companies that are deciding on their own to balance financial profitability with social benefit. These companies want to build social benefit into their DNA. The market wants transparency and accountability.”

The Colorado businesses that support the legislation are leaders in this space. In my next post, I’ll take a look at what some of them have to say.

My bottom line: the legislature should pass this bill. Some feel otherwise, and I’d welcome the chance to engage with their views. Your opinion?

This blog post is courtesy of Seth Henry’s blog. The Alliance has introduced a bill to allow Benefit Corporations in Colorado and is currently tracking it as it goes through the House and Senate. Find out more about this effort here.

Author Bio:

Seth Henry is a business lawyer with Campbell Law Group in Boulder, focusing on social impact and triple bottom line ventures.

Comments are closed.