LAW AND SOCIAL ENTREPRENEURSHIP

NJ SIGNS BENEFIT CORPORATION LEGISLATION INTO LAW

With a stroke of the pen Gov. Chris Christie made NJ the third state to enact Benefit Corporation legislation. S-2170, the benefit corporation legislation, passed the both houses of the New Jersey state legislature unanimously. Not a single vote was cast against this legislation.

This version of the Benefit Corporation is unique from Maryland’s version in 3 distinct ways:

1. Appointing of a Benefit Director. The Benefit Director is an independent member of the board of directors that is responsible for monitoring and reporting on the success and/or failure of that Benefit Corporation in meeting it’s General Public Benefit and Specific Public Benefits. He is responsible for issuing an annual Benefit Report .

2. The Benefit Report. This annual report must be available to the public, sent to the shareholders and filed with the NJ Secretary of State for a filing fee of $70. The filing with the Secretary of State adds additional cost and administrative burden, but more importantly, this is the first time we have seen states, interested in the publication of the Benefit Report.

3. Benefit Enforcement Proceeding. If the directors of a Benefit Corporation are not acting to further the General Public Benefit or the Specific Public Benefit, a claim can be brought against them in a Benefit Enforcement Proceeding only by:

(1)   Directly by the benefit corporation; or

(2)   Derivatively by:

(a)   a shareholder;

(b)   a director;

(c)   a person or group of persons that owns beneficially or of record 10% or more of the equity interests in an entity of which the benefit corporation is a subsidiary; or

(d)   such other persons as may be specified in the certificate of incorporation or by-laws of the benefit corporation.

Photo by: Marty.FM

CALIFORNIA’S BOLD MOVE TO LEGITIMIZE SUSTAINABLE BUSINESS

A great post by Joel Makower on The Flexible Purpose Corporation legislation introduced in CA.

A bill introduced in California’s state Senate last week holds enormous potential to give sustainable business a push by making it — well, legal.

Under current law in California and most other states, companies can be sued by their shareholders or investors for taking environmental or social measures that negatively affect shareholders’ financial returns. The proposed bill would enable a new form of for-profit corporation, encouraging and expressly permitting companies to pursue other things besides simply making money.

This is no small matter. The legal issue of fiduciary responsibility has long been seen as a barrier to companies taking more proactive social and environmental measures. In many cases, it has given companies a fig leaf to avoid taking substantive measures to, say, clean up pollution or avoid sourcing from sweatshops. Indeed, the requirement for companies to put profits above all else has been blamed for much of society’s ills — at least the kind allegedly propagated by business. And the alternatives have been a cold cup of tea: to become a nonprofit organization, a hybrid model championed by social entrepreneurs, or some other legal entity frowned upon by capital markets. That pretty much guarantees that these “good” companies are destined to remain small.

For years, groups of socially responsible investors, social and environmental activists, and others have tried to change this state of affairs, with little success. Maryland and Vermont recently enacted measures to allow “for-benefit” companies, such as those advocated by the nonprofit group B Lab, and a few other states are considering them. However well-intentioned, these laws are limited in scope in that they focus principally on smaller, privately held firms.

Getting large publicly held companies to change has been all but impossible, which is why SB 201, the Corporate Flexibility Act of 2011(download – pdf), introduced in California’s State Senate on February 8, is of such significance. It would authorize and regulate the formation and operation of a new form of corporate entity known as a “flexible purpose corporation.”

Under SB 201, “Any company establishing in California will be permitted to negotiate to include a social and environmental mission that is given equal weight, perhaps even greater weight, than profits,” Susan H. Mac Cormac, who co-led a working group that helped draft the bill, told me recently. “We have given additional protection to boards and management if they do that. We also have a metric for shareholders to enforce the social and environmental mission, just the same as shareholder value.” It’s a model, she says, that can be used by both public and private companies.

SB 201 differs from the “for-benefit” statutes in at least one significant way: It doesn’t proscribe what a company must do. The Maryland and Vermont laws, in contrast, spell out the requirements of a “benefit corporation” — a checklist that hews largely to B Labs’ model for sustainable business.

There are good arguments for both approaches. On the one hand, a set of criteria sets a standard for what a company must do to be “beneficial.” On the other, it lets legislators and regulators set those criteria, a process that often ends up muddled or worse. Unfortunately, traditional California corporations are not able to amend their articles to “embed” environmental and social criteria without considerable risk, thereby creating an issue for California corporations seeking “B Corporation” status.

Cormac, who co-chairs the 550-lawyer Business Department as well as the Cleantech Group at the law firm Morrison & Foerster, has been working on these issues for the better part of a decade. As co-chair of the California Working Group for New Corporate Forms, she and a small team spent nearly 18 months deliberating and drafting this proposed new division of the California Corporations Code. Along the way, the group solicited comments from an advisory committee comprised of members of the California legal and communities.

“We have the conservative folks behind us from the chamber of commerce,” she says. “We have a lot of support and have spent a lot of time working with folks to get it right.”

Cormac admits that big corporations aren’t likely to quickly adopt this new legal form should it become law. “The companies that could easily do this are the ones where there’s a really strong link between their profitability and their sustainability — the Methods or Revolution Foods of the world,” she says.

Even if SB 201 passes, it will be just one step in a longer journey to transform mainstream business to pursue environmental and social goals as aggressively as they do financial ones. To gain traction, these companies will need the support — or the demands — of institutional investors, such as large pension funds, embracing flexible purpose corporations. It will take leadership companies, government agencies, universities and other large buyers of goods and services to adopt policies giving procurement preference to these companies. And it may well take preferential tax treatment for flexible purpose corporations, or other policy mechanisms, such as fast-track permitting or reduced oversight.

All of which is only one part of the puzzle, says Cormac. “I’ve looked at every part of the system, and it’s not just corporate structure that ties it to profitability. It’s executive compensation with stock options. It’s the analysts on Wall Street and the quarterly reports, and a whole confluence of factors that lead to this unholy emphasis on shareholder value.”

I asked Cormac how she and her law firm would benefit if SB 201 became law. After all, she heads the corporate division of one of America’s larger law firms.

“This is pro bono,” she says. “We have no skin in this game.” To back it up, she explains that she is working working with law schools at Stanford, Berkeley, and UCLA to establish free legal help for companies that want to set up flexible purpose corporations. “This is a passion, not a business opportunity.”

For now, it’s all about getting this bill passed — it needs to pass the gauntlet of two committees, then the full Senate, then the State Assembly and getting Governor Jerry Brown to sign it. It’s looking good, says Cormac, but we’ve all seen “sure things” blow up at the last minute.

This will take everyone’s best efforts — letters of support and all of the other usual tools of the trade. (You can send letters to Senator Mark DeSaulnier, State Capitol, Room 2054, Sacramento, CA 95814.) And it will take mainstream companies and investors standing up to be counted.

Without such a law, we’ll be stuck with business as usual — companies hamstrung by their legal obligation to put shareholders’ financial returns above all. But if bellwether California can get this passed, it will make it legally possible, once and for all, for companies to truly integrate the triple bottom line.


Joel is co-founder and executive editor of Greener World Media, Inc., which produces GreenBiz.com and its sister sites, ClimateBiz.comGreenerBuildings.comGreenerDesign.com, and GreenerComputing.com. Joel is also the principal author of the annual State of Green Business report and the Greener by Design conference, both produced by Greener World Media.

Joel also serves as a senior strategist at GreenOrder, a sustainability consultancy, as well as co-founder and principal of Clean Edge Inc., a research and publishing firm focusing on building markets for clean energy technologies. From 1991 to 2005, Joel was editor and publisher of The Green Business Letter, an award-winning monthly newsletter he founded on corporate environmental strategy. In 2005, he was appointed a Batten Fellow at the Darden Graduate School of Business at the University of Virginia.

Photo: Flying House Studios

FLEXIBLE PURPOSE BILL INTRODUCED IN CA

Add California to the list of states that is contemplating a new corporate structure that for social entrepreneurs that are seeking to create mission driven for profit companies. On Tuesday, February 8th, The Corporate Flexibility Act of 2011 was introduced into the California Legislature.

The proposed legislation is the first of its kind and is distinct from the Benefit Corporation laws currently on the books in Vermont and Maryland and pending in seven other state legislatures. Stay tuned for a post focusing on the differences in the the two approaches. It should be interesting to see which approach ends up being adopted by the most states in the end.

photo: PatrickSmithPhotography