ANNAPOLIS, Md., Apr. 14 /CSRwire/ – Maryland Governor Martin O’Malley signed into law the nation’s first legislation creating Benefit Corporations, a new class of corporations required to create benefit for society as well as shareholders.
Unlike traditional corporations, Benefit Corporations must by law create a material positive impact on society; consider how decisions affect employees, community and the environment; and publicly report their social and environmental performance using established third-party standards.
The legislation, sponsored by Senators Jamie Raskin and Brian Frosh and Delegate Brian Feldman, passed the Maryland Senate with a vote of 44 – 0 and the Assembly 135 – 5.
“Milton Friedman would have loved this,” said Andrew Kassoy, co-founder of B Lab, the non-profit that drafted the model legislation with William H. Clark, Jr., partner in the Corporate & Securities Practice Group of Drinker Biddle and Reath. “For the first time, we have a market-based solution supporting investors and entrepreneurs who want to make money and make a difference,” Kassoy added.
The new law addresses a long time concern among entrepreneurs who need to raise growth capital but fear losing control of the social or environmental mission of their business. These entrepreneurs and other shareholders of Benefit Corporations now have additional rights to hold directors accountable for failure to create a material positive impact on society or to consider the impact of decisions on employees, community, and the environment.
From a company’s point of view, the new law empowers directors of Benefit Corporations to consider employees, community and the environment in addition to shareholder value when they make operating and liquidity decisions. And, it offers them legal protection for those considerations.
“Today marks an inflection point in the evolution of capitalism,” said B Lab co-founder Jay Coen Gilbert. “With public trust in business at an all-time low, this represents the first systemic response to the underlying problems that created the financial crisis — protecting companies from the pressures of short-termism while creating benefit for shareholders and society over the long-haul.”
“This is a great moment in the evolution of commercial life in Maryland and America,” said Senator Raskin. “We are giving companies a way to do good and do well at the same time. The benefit corporations will tie public and private purposes together.”
Maryland is the first state to pass Benefit Corporation legislation, but others are quickly following Maryland’s lead. Vermont Bill S.263, co-sponsored by Senators Hinda Miller and Peter Shumlin, has already passed the Senate and will be considered by the Vermont Assembly over the next 30 days. Other states considering the legislation include Colorado, New York, North Carolina, Oregon, Pennsylvania, and Washington.
Benefit Corporation — Major Provisions
- shall create general public benefit
- shall have right to name specific public benefit purposes (e.g. 50% profits to charity, carbon neutral, 100% local sourcing, beneficial product to customers in poverty)
- the creation of public benefit is in the best interests of the Benefit Corporation
- directors’ duties are to make decisions in the best interests of the corporation
- directors and officers shall consider effect of decisions on shareholders and employees, suppliers, customers, community, environment (together the “Stakeholders”)
- not required to give priority to any particular stakeholder
- have discretion to give priority to particular stakeholders consistent with general and any specific public benefit purposes
- standard of accountability is identical for operating and liquidity/change of control decisions
- shall publish annual Benefit Report in accordance with recognized third party standards for defining, reporting, and assessing social and environmental performance, including assessment of successes and failures in achieving general and specific public benefit purpose and in considering effects of decisions on stakeholders
- Benefit Report delivered to: 1) all shareholders; and 2) public website with exclusion of proprietary data
Right of Action
- only shareholders and directors have right of action
- no third party right of action
- Right of Action can be for 1) violation of or failure to pursue general or specific public benefit; 2) violation of duty or standard of conduct
Change of Control/Purpose/Structure
- shall require 2/3 majority vote