Kyle Westaway, Author at socentlaw - Page 4 of 6

PATAGONIA ASKS ITS CUSTOMERS TO BUY LESS

This is the type of business we should be creating!

Patagonia’s Common Threads from Dokument Films on Vimeo.

 

SOCENTLAW LIVE! – NYC

This fall you have not one, but two, opportunities to attend a live lecture about the legal structures for social enterprise in New York City. Click on the date below for more details.

 

October 11th / 7:00 PM / Skillshare HQ

November 8th / 7:00 PM / General Assembly 

 

Class Description:

Have a great idea for social innovation, but trying to figure out whether it should be a nonprofit or a for-profit? Have you heard something about these new hybrid legal structures but can’t figure out what the heck they do? If so this course is for you! We’ll be digging into:

  • 501(c)(3)
  • L3C
  • Benefit Corporation
  • B Corp Certification
  • LLC
  • Corporation
This course is taught by Kyle Westaway. Kyle believes in the power of the market to create a positive social and environmental change. He has helped build Biographe – a sustainable style brand that employs and empowers survivors of the commercial sex trade. Kyle is the founding partner at Westaway Law – an innovative New York City law firm that counsels social entrepreneurs.Kyle is a Cordes Fellow. He lectures at Harvard Law School and Stanford Law School. He launched Socentlaw – a blog about the legal side of social enterprise. Kyle has been featured by We Are NY Tech and Dowser; and writes for Huffington Post, GOOD, and Social Earth. He is Chairman of the Board for both the Excel Charter School in Brooklyn and The Adventure Project – a nonprofit that seeks to add venture capital to social entrepreneurs in the developing world.

 

photo: elsonpro

INTRODUCING GIIRS – RATINGS AND ANALYTICS PLATFORM FOR IMPACT INVESTING

 

Today at the Clinton Global Initative, B Lab announces the launch of GIIRS Ratings & Analytics, and the commitment of 15 GIIRS Pioneer Investors who declare as part of their impact investing strategy an investment preference for GIIRS-rated funds and companies. Andrew Kassoy will be on a panel at 3:45 EDT Tuesday entitled Financing Inclusive Jobs: Impact Investing and the Triple Bottom Line, moderated by Adam Davidson (NPR’s Planet Money), with Cheryl Dorsey (Echoing Green) and Christina Leijonhufvud (J.P. Morgan). Please tune-in to watch this panel live as Andrew discusses the GIIRS Launch and Pioneer Investor commitment – live-streaming will be available here.GIIRS Impact Ratings provide investors for the first time with a comprehensive, comparable, and third party verified assessment of companies’ and funds’ social and environmental impact. The GIIRS Analytics platform gives investors uniquely powerful tools to analyze aggregated, verified and comparable data on the social and environmental impact of companies and funds across geography, sector, organizational maturity, and size. The launch of GIIRS Ratings & Analytics follows a successful global beta test with more than 200 companies across 30 countries from 25 leading impact investing funds (the GIIRS Pioneer Companies and Funds, respectively).The GIIRS Pioneer Investors are a diverse group of global private equity investors and credit providers, including mainstream global financial institutions, foundations, family offices, leaders in social finance, and a multilateral development bank. They include: Annie E Casey Foundation, Armonia LLC, Calvert Foundation, Farm Capital Services LLC, Gatsby Charitable Foundation, Impact Investing Foundation, Inter-American Development Bank, J.P. Morgan, KL Felicitas Foundation, Prudential Financial, Inc., The Rockefeller Foundation, RSF Social Finance, Skoll Foundation,The Tony Elumelu Foundation and W.K. Kellogg Foundation. GIIRS expects to announce additional GIIRS Pioneer Investors in the coming months.

“These Pioneer Investors recognize that we can’t build an industry for impact investments without credible, comparable metrics on impact,” said Andrew Kassoy, co-founder of B Lab, the non-profit organization powering GIIRS. “GIIRS has the potential to catalyze hundreds of billions of dollars of sidelined investment capital to flow to the world’s most inspiring and talented entrepreneurs. These businesses demonstrably create high quality jobs that increase economic opportunity here and abroad.”

GIIRS also announces today that three GIIRS Pioneer Funders – Deloitte, Prudential Financial, Inc., and The Rockefeller Foundation – have committed a combined $9 million in funding to accelerate industry adoption of the robust GIIRS Ratings & Analytics platform.

With the support of GIIRS Pioneer Investors and Funders, in five years GIIRS aims to provide Impact Ratings for more than 2,500 companies and over 350 funds, and to provide over 150 institutional and high net worth investors with the ability to benchmark social and environmental impact for the first time the same way financial performance is benchmarked today. By providing credible, comparable and verified impact ratings and creating a powerful analytics platform, GIIRS provides the needed capital markets infrastructure to drive $1 trillion toward impact investments in 10 years.

“The Inter-American Development Bank is committed to supporting entrepreneurs across Latin America and the Caribbean who show great potential to effect change in their societies,” said IDB Executive Vice President Julie T. Katzman. “GIIRS Ratings & Analytics provides tools to clearly measure the impact of our investments in venture capital funds – both at the level of the fund and the individual company.”

“Prudential is proud to be one of the GIIRS Pioneer Investors. We are also one of the first companies to have a devoted impact investment portfolio, reflecting our ongoing support of initiatives that provide positive, sustainable impact,” said Ommeed Sathe, Director, Social Investments at Prudential. “Earlier this year we were lead investor in an innovative new technology platform to create an automated infrastructure to monitor impact investments. This and our groundbreaking work with GIIRS and B-Lab underscores our commitment to creating an investment infrastructure that will nurture the growth of the entire impact investing field.”

GIIRS Pioneer Investors recognize that government and non-profits are necessary but insufficient to solve our most challenging social and environmental problems. As entrepreneurs around the world develop market-based solutions, they need investment capital to help them scale. Increasing interest in impact investing requires improved capital markets infrastructure, including generally accepted standards for defining, measuring, and comparing positive social and environmental impact. Without credible third party standards, there are significant barriers- to-scale including: a fragmented market where each investor defines impact differently, high due diligence and transaction costs, limited understanding by investors of how to manage for impact, and a weak policy environment due to a dearth of information. GIIRS helps remove these barriers to growth and attracts mainstream capital to the impact investment space.

 

Photo: Buck Forester

THREE OBJECTIONS TO L3C’S ANSWERED

Though many sections of the American Bar Association are in favor of L3C legislation, the Nonprofit Organizations Committee and the Limited Liability Companies, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association are planning to oppose the L3C legislation based on three primary objections. Below are the objections and the responses by leading nonprofit attorneys excerpted from their letter.

1. L3C’s are no better at receiving PRI’s than an LLC

Your letter indicates that “The L3C is no better than any other business form for receiving program related investment[s] ….”  In our view, an L3C is a better vehicle for accepting program-related investments than a standard LLC. The state-law L3C restrictions will make it easier for private foundation investors to conduct the due diligence necessary in order to complete a
program-related investment and comply with expenditure responsibility. A charitable purpose would necessarily be articulated in the L3C’s operating agreement, helping to ensure that the L3C’s purposes and operations are
aligned with PRI requirements. Persons who form L3Cs are likely to be better informed about the  requirements applicable to private foundations for PRIs and for expenditure responsibility and so draft their operating agreements accordingly.  The L3C designation automatically sets the entity apart from ordinary LLCs that may or may not be structured in  a way compatible with PRI requirements.
We agree, and understand that, L3C is not necessary for an LLC to serve as the vehicle for a program-related investment, and we have represented many foundations that have made PRIs into LLCs, but we believe that in many cases L3C will make it easier for foundation investors to make the findings that they need to make for a proper PRI and for compliance with expenditure responsibility.

Your letter indicates that “The L3C is no better than any other business form for receiving program related investment[s] ….”  In our view, an L3C is a better vehicle for accepting program-related investments than a standard LLC. The state-law L3C restrictions will make it easier for private foundation investors to conduct the due diligence necessary in order to complete a program-related investment and comply with expenditure responsibility. Acharitable purpose would necessarily be articulated in the L3C’s operating agreement, helping to ensure that the L3C’s purposes and operations are aligned with PRI requirements. Persons who form L3Cs are likely to be better informed about the  requirements applicable to private foundations for PRIs and for expenditure responsibility and so draft their operating agreements accordingly.  The L3C designation automatically sets the entity apart from ordinary LLCs that may or may not be structured in  a way compatible with PRI requirements.We agree, and understand that, L3C is not necessary for an LLC to serve as the vehicle for a program-related investment, and we have represented many foundations that have made PRIs into LLCs, but we believe that in many cases L3C will make it easier for foundation investors to make the findings that they need to make for a proper PRI and for compliance with expenditure responsibility.

2. Traunched investment results in private benefit for profit-seeking investors.

Your letter indicates that “tranched investing purposefully uses foundation funds to subsidize (and thereby attract) private, profit-seeking investors” so that such a PRI “almost inevitably results in private benefit.” Tranched financing does not lead to per-se private benefit, as you suggest.  Private benefit depends on all of the  facts and circumstances in a given situation.

In fact, a PRI (other than one made to a charity) always involves some level of private benefit, but rather than a disqualifying private benefit, it is deemed incidental to the accomplishment of charitable purposes. One example in the Treasury regulations involves a foundation making a below-market-rate loan to a “business enterprise which is financially secure and the stock of which is listed and traded on a national exchange,” in order to encourage the enterprise to establish a factory in a depressed urban area. In this example, there is clearly private benefit, since the corporation receives a below-market-rate loan from charity – but the private benefit is incidental. In any PRI investment in a for-profit entity there is private benefit, but the private-benefit doctrine involves a weighing of public good against private benefit.

In any case, there is  nothing in the L3C statutes that requires or even addresses tranched financing anymore than there is in the LLC statutes. L3C is now a creature of the states and American Indian nations that have adopted it, not of some promoters. Just because some promoters of L3C have talked about tranches does not mean that tranched financing is an inherent part of L3C. It is simply not in the L3C legislation

3.  Supposedly “Low Profit” companies could make significant profits.

Your letter also points to a purported “technical error” in the L3C legislation, suggesting that there is some contradiction between the requirement that “no significant purpose of  the company  is the production of income or the appreciation of property” on the one hand and the label “low-profit” and the involvement of for-profit investors on the other. But there is no such contradiction.

L3C requires that the primary purpose of the organization must be charitable, but permits the production of income to be a secondary purpose. As with a tax-exempt charity that must have a charitable purpose by law, yet also must, from an economic standpoint, have sufficient revenue to conduct operations, institutional decisions must be made with the L3C’s overarching charitable purpose in mind, but profit may certainly be the result. The fact that an investment produces significant income or appreciation is not, in the absence of other factors, conclusive evidence of a significant purpose involving the production of income or the appreciation of property.

In fact, an example in the Treasury regulations, in analyzing an investment by foundation “Y,” states that the investment “is a program-related investment even though Y may earn income from the investment in an amount comparable to or higher than earnings from conventional portfolio investments.” When assessing whether a “significant purpose” of a foundation’s proposed investment is the production of income for purposes of the PRI rules, the IRS finds it “relevant whether investors solely engaged in the investment for profit would be likely to make the investment on the same terms as the private foundation.”

Such an investment is less likely to be a PRI to the extent that for-profit investors would enter it on the same terms as a foundation. The clear corollary is that for-profit investors may enter such investments on terms more favorable to them than those under which a foundation is willing to invest. Thus, L3C can bring together foundations’ PRIs and investments on more favorable terms by for-profit investors to accomplish the L3C’s primary charitable purpose through a business that, because of its inherent risk and low likelihood of profit, simply would not be attractive solely to for-profit investors.

photo: Kate Gaensler

419 L3C’s IN THE US

According to a recent report from our good friends at L3C Intersector Partners the L3C movement is growing. There are now 419 L3Cs in the US. Below is the breakdown by state. Click here for the full report.

169 L3Cs organized in Vermont (since April 2008)
93 L3Cs organized in Michigan (since January 2009)
25 L3Cs organized in Wyoming (since February 2009)
36 L3Cs organized in Utah (since March 2009)
1 L3C organized – Oglala Sioux Tribe (since July 2009)
63 L3Cs organized in Illinois (since January 2010)
22 L3Cs organized in North Carolina (since August 2010)
8 L3Cs organized in Louisiana (since August 2010)
2 L3Cs organized – Maine (starting July 2011)
0 L3Cs organized – Rhode Island (starting July 2012)
———————————————————————————
419 social entrepreneurs blazin’ a path

Photo: Himalayan Trails

NEW YORK UNANIMOUSLY PASSES BENEFIT CORPORATION BILL

On June 16th and 17th, New York Senate and Assembly unanimously (62-0 in the Senate and 139-0 in the Assembly) passed a bill that, when signed by Gov. Cuomo, will make New York the 5th state to allow businesses to organize as a Benefit Corporation.

“Benefit Corporations require companies to have a legal responsibility to stakeholders as well as shareholders so they can have a positive impact on their surrounding communities,” said Speaker Sheldon Silver (D-Manhattan). “This legislation demonstrates that profit and social responsibility are not mutually exclusive and that socially and environmentally-friendly business practices can enhance a company’s strength and profitability.”

Under the legislation (A4692-A/Silver) companies organizing as a benefit corporation would be required to pursue a general public benefit, defined as a positive material impact on society and the environment as assessed against a third party standard. The third party standard would include a comprehensive report card, used to measure a corporation’s material positive impact. The report card would score how the corporation handles employees, consumers, the community, the environment, and overall corporate accountability and transparency.

The third party standard would provide points for each positive impact – for example, paying a living wage, providing health benefits, or using renewable materials. In addition to pursuing a general public benefit, a corporation could pursue a specific public benefit encompassing the environment, the arts and sciences, public health, under-served communities, employees, or other benefits for society.

The bill, sponsored by Senator Daniel Squadron (D-Brooklyn) in the Senate, will now be sent to the Governor to be signed.

THE BENEFIT CORPORATION: CAN BUSINESS BE ABOUT MORE THAN PROFIT?

New laws take effect in Vermont and Virginia today, giving ethical business a boost. If Vermont’s law had been around 11 years ago, Ben Cohen and Jerry Greenfield might not have had to sell their ice cream company.

Back then, Unilever made the highest bid for Ben and Jerry’s, so the laws of shareholder responsibility forced the hippie founders to sell, even though they wanted to keep control. Now, with today’s law, a new kind of corporation is created that prevents exactly that, the Benefit Corporation. Vermont and Virginia join Maryland and New Jersey in recognizing the new form of company. More than a dozen other states are taking steps to catch up.

“This new class of corporation is a milestone for two reasons,” says Kyle Westaway, a lawyer who studies corporate forms and represented Launcht, the first company to file and officially become a Benefit Corporation in Vermont. The law, he says, “broadens the goals of the corporation from [just] profit to: profit, people and planet. Secondly, the Benefit Corporation increases transparency and accountability, by using an independent third party to verify that a business is acting in a socially and environmentally conscious fashion.”

Each Benefit Corporation must adhere to third party certification meeting certain environmental, social, or other non-financial standards. Many use the similarly named B-Corp Certification and Impact Assessment, which we’ve covered multiple times on GOOD.

B-Corp certification is similar to Fair Trade or Organic, but deals with all aspects of how the company does business. Rigorous as the B-Corp label is, it’s still a stamp from a nonprofit. Benefit Corporations are recognized by the state as a distinct new category of company. Like B-Corps, Benefit Corporations are required to consider the environment, community, and employees in business decisions along with company profit. A typical company—like Ben and Jerry’s circa 2000—is required to maximize returns to shareholders at all costs. With Benefit Corporation status, there’s recourse if a future investor or CEO veers from the company’s ethical principles. Just like shareholders were able to force Ben and Jerry to sell because shareholder value was paramount, with a Benefit Corporation, shareholders, or the founders, could claim that environmental and social impacts weren’t fully considered, even in court.

Ben and Jerry themselves issued a statement when the law passed saying they were thrilled. “Giving entrepreneurs and directors the legal protection to build values-based companies and retain the discretion to make decisions based upon both financial and social factors is a first step forward.”

Four B-Corps have already signed up and re-incorporated as Benefit Corporations in Vermont. Clean Yield Asset ManagementMerritt & Merritt & MoultonStartUp Owl, and Launcht, which did so even though it is based in New York.

“Frankly, I was born in Vermont and endorse many of Vermont’s policies and want Launcht’s state taxes to support a state I really like,” explains founder Freeman White on why he decided to pull a reverse-Delaware and incorporate his company out of state. “If our only responsibility was to our shareholders, we were concerned about loosing our core values. By establishing ourselves as a Benefit Corporation, we intentionally put ourselves on the hook to live up to our values … and by virtue of our legal structure we will be able to protect these values as we scale.” Launcht is a for-profit platform that helps nonprofits or other organizations crowdfund good projects. So it also mattered to White that his clients see Launcht as a trusted brand, even if the founders plan to cash out in a few years.

“If we were just a C-Corp we would be fighting the stereotypes some of our users, both founders and funders, might have about such corporations. My co-founder and I wanted ownership, so we can take advantage of the upside of potential exit opportunities in 3-5 years, thus we didn’t go the 501c3 [nonprofit] route,” he says.

Right now, being a Benefit Corporation is a statement to the world and a promise to yourself that the company does business with high social and environmental standards, and will continue to do so. Down the road though, being a distinct legal category of business could enable pretty incredible possibilities like preferential tax rates for more socially focused businesses. If that happened—politicians and B-Corp advocates are mum on this—then we could see persuasive new incentives and legal tools remake businesses of all stripes.

It could change how investments are made too. Impact investing is a growing field, where money managers steer their funds to good causes that earn a financial return as well as make a social impact, just like many potential Benefit Corporations. By requiring these companies to get certified by a third party, the law will enable investors to measure and compare companies on non-financial performance according to a single standard, or a small number of them. So that means, down the road, a company that serves the poor with affordable health services could attract new investment that supports the cause, even if its profit margins were lower than those of other healthcare providers, because it couldprove its social value.

That’s all a bit down the road, but we get a hint of the potential from the Green Mountain State. Small as it is, Vermont is a big player when it comes to values-infused companies, Seventh Generation chief among them. But even the flag bearer of better business stumbled. Founder Jeffrey Hollender was notoriously ousted in part because he disagreed with some of the new investors on just how far to take social responsibility, as he explained at length to GOOD in his first public comments after the ouster.

Chris Miller, of Seventh Generation’s Corporate Consciousness team tells GOOD it’s looking likely they’ll reincorporate as a Benefit Corporation, “we are a founding member of B-Corps, and our bylaws were changed to reflect that, so we think it’s a really logical next step.”

Even a $150 million a year business has cause to plan ahead to protect values. “It’s an important way for us to ensure that the things that we care about around our business are here for years to come as the company evolves, as we grow, as we go through leadership changes.” The change requires a shareholder vote.

Jay Coen Gilbert of B-Lab, the nonprofit leading the charge for all of this, says today’s milestone shows this is an “accelerating movement.” But he points out, even if this is happening in a state already famous for businesses such as Ben and Jerry’s and Seventh Generation, there are way bigger moments on the horizon.

New York and California are the on the cusp of enacting Benefit Corporation laws and that could cause a snowball effect if a critical mass of companies sign on and spread the word about the concept. California’s version of the bill has passed the assembly and could come up for a Senate vote soon. New York’s bill is waiting for the governor’s signature.

As for Ben and Jerry’s, the company, they say they support the law, but signing up doesn’t make sense. Spokesman Sean Greenwood tells GOOD, “To the best of my understanding, we’ve spent considerable time talking with our Leadership Team and our independent board of directors about the Benefit Corporation law and if it makes sense for Ben and Jerry’s to pursue.” He says that because the company has a unique governance arrangement already, it would require considerable legal restructuring. An independent board of directors was created to help keep the company quirky, independent, and honest even as it remains a wholly-owned Unilever subsidiary, an uncommon structure in business.

“Still, we applaud the effort for the businesses in Vermont to continue to lead the way with two scoops of progressive values and vision. We will support the Benefit Corporation law with our voice and our practices of daily business operations.”

Ben and Jerry, the people, did not respond for a request for comment in time for publication.

By: Alex Goldmark. Originally Posted in GOOD.

Photo: David Glover

FLEXIBLE PURPOSE CORPORATION

The Flexible Purpose Corporation is a new class of corporation, much like a C Corp or an S Corp, which allows the directors of a corporation to pursue broader objectives than the narrow focus of maximizing financial return for shareholders. On February 8, 2011 Senator Mark DeSaulnier introduced the Corporate Flexibility Act of 2011 (SB 201) into the California state legislature. It has not been passed into law yet, but we thought we’d give you a sneak peak of a potential new legal structure for social entrepreneurs.

Existing corporate law dictates that directors of corporations’ sole duty is to maximize shareholder value, which means that every decision of must be made with the goal of increasing the price of the stock. When a director makes a decision that does not maximize shareholder value, he opens the corporation up to a lawsuit from shareholders. This poses a problem for corporations that are seeking a financial return as well as other objectives such as positive environmental, social or community impact. The goal of the Flexible Purpose Corporation is to create a legal structure where profits can be pursued along side broader goals without opening the directors up to litigation.

Below are two key attributes of the Flexible Purpose Corporation.

SPECIFIC PURPOSE

As its name implies, the Flexible Purpose Corporation allows the directors a high degree of flexibility to choose a non-financial purpose that they want to pursue. This purpose is called a Specific Purpose and is defined as:

  1. Any charitable or public purpose that a nonprofit would be eligible to carry out or;
  2. Promoting positive or minimizing negative short term and long term affects of among any of the following:
    • employees, suppliers, customers, creditors;
    • the community and society; or
    • the environment.

A Flexible Purpose Corporation may have one or more Specific Purposes. They must be clearly stated in the Articles of Incorporation and approved by 2/3 of the shareholders.

TRANSPARENT REPORTING

After the Flexible Purpose Corporation has identified its Special Purpose, it must set annual objectives to achieve the Special Purpose. At the end of every fiscal year the Flexible Purpose Corporation must give a transparent account in its annual report detailing the actions taken by the Flexible Purpose Corporation to achieve the Special Purpose objectives. The report must include the following:

  1. Identification of short and long term objectives as they relate to the Special Purpose and identification of any changes made to those objectives in the last fiscal year.
  2. Identification and discussion of material action taken during the fiscal year to achieve the Special Purpose objective, the impact of those actions and the causal relationship between the actions and reported outcomes.
  3. Identification of material action that the Flexible Purpose Corporation expects to take in the short and long term to meet its Special Purpose objective.
  4. Identification and discussion of the process of for selecting metrics used for evaluating success of the Special Purpose objective.
  5. Identification of how much money the Flexible Purpose Corporation has spent to achieve the Special Purpose objectives, as well as a good faith estimate in how much it will spend in the next three fiscal years to do so.

The annual report must be publicly available on the Flexible Purpose Corporation’s website and be published within 120 days after closing the fiscal year.

The Flexible Purpose Corporation is focused on giving companies flexibility to choose how they want their company to pursue profit and purpose while requiring a high level of transparent reporting to ensure that they are taking tangible steps toward achieving that purpose. Should the Corporate Flexibility Act of 2011 be passed into law, social entrepreneurs will have more choice in how to structure their business to do well and do good.

Kyle Westaway is the founding partner at Westaway Law– an innovative New York City law firm that counsels social entrepreneurs. He has helped build Biographe – a sustainable style brand that employs and empowers survivors of the commercial sex trade. Kyle is a Cordes Fellow. He lectures on social entrepreneurship at Harvard Law School and Stanford Law School. He writes for Huffington PostGOODTriple PunditSocial Earth and Law for Change.

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photo: PatrickSmithPhotography

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