LAW AND SOCIAL ENTREPRENEURSHIP

WITH NEW LAW, PROFITS TAKE A BACK SEAT

Today in Wall Street Journal

By ANGUS LOTEN

A brownie supplier to Ben & Jerry’s ice cream, a skateboard maker and a payday lender are among the hundreds of existing businesses that plan to incorporate as “benefit corporations” in coming months.

They will be taking advantage of a new and untested corporate charter, available in only a half dozen states, allowing a company’s governing board to consider social or environment objectives ahead of profits. The legal structure is intended to shield the board from investor lawsuits.

That anything other than maximizing shareholder value should be considered in a company’s decision-making normally can open the door to investor suits.

But in the past two years, lawmakers in seven states, including Maryland, Virginia and New Jersey, passed legislation to create benefit corporations as an alternative business model.

California opened up the option Jan 1. New York will do so as of Feb. 10.

Outdoor-apparel company Patagonia Inc., which places high priority on sustainable and renewable production methods, incorporated under the new structure in California this month.

Operating as a Benefit Corporation Makes Room for Other Priorities

What is a ‘benefit corporation’?
A company whose charter allows the board to consider social or environmental objectives ahead of profits.

What is the advantage?
Protection from investor allegations of not maximizing shareholder value.

Does that make it a nonprofit?
No, a benefit corporation isn’t a nonprofit nor is it tax exempt.

How many states allow it? Seven. With bills introduced in four additional states.

What are the downsides? ’For an investor, this is a terrible idea’ due to lack of accountability, says Charles Elson, who teaches corporate governance at the University of Delaware. If management makes a bad decision, ‘there’s very little you can do about it as a shareholder.’

“We’re trying to preserve for the long-term the way our company is run,” says Casey Sheahan, chief executive of the Ventura, Calif., company, which was founded in 1972 and had nearly $500 million in revenue in 2011.

In Mr. Sheahan’s view, traditional corporate structures don’t encourage boards of for-profit companies to sacrifice shareholder value for a public good.

The benefit corporation isn’t tax-exempt, nor is it a nonprofit. It is one of several new legal structures to emerge alongside the rise of “social entrepreneurship” in recent years.

Some proponents of the benefit corporation believe its biggest value may come at the time of the sale or breakup of a business, because directors might be able to consider factors other than maximizing shareholder value. The legal structure “tells directors that it’s their duty to consider other interests, rather than say they ‘may’ consider them,” says William Clark, a partner at Drinker, Biddle & Reath LLP, who helped draft model benefit-corporation legislation.

This was an issue for Ben & Jerry’s Homemade Inc., the ice cream company sold to Unilever PLC in 2000, despite the objections of co-founder Ben Cohen and some directors. “There was a lot of pressure from the lawyers to sell,” says Jeff Furman, a Ben & Jerry’s director since the 1980s and its current chairman.

If benefit corporations had existed back in 2000, the board probably wouldn’t have agreed to the Unilever deal, Mr. Furman says.

Ben & Jerry’s now plans to incorporate as a benefit corporation in Vermont within the next few months, he adds, through pressure from its current board. Unilever declined to comment.

By law, a benefit corporation’s social and environmental goals must be laid out in the bylaws and the company must publish an annual “benefit report” to measure itself against those goals.

The idea has its share of critics. “For an investor, this is a terrible idea,” says Charles Elson, who teaches corporate governance at the University of Delaware. “The structure creates a lack of accountability,” he adds, so if the management of a benefit corporation makes a bad decision, “there’s very little you can do about it as a shareholder.”

Others say that companies can simply add specific goals into their articles of incorporation under existing corporate codes, making a benefit-corporation designation unnecessary.

States Open Doors to ‘Benefit’ Firms

Benefit corporation laws passed
Maryland effective Oct. 1, 2010
Vermont effective July 1, 2011
New Jersey effective March 7, 2011
Virginia effective July 1, 2011
Hawaii effective July 8, 2011
California effective Jan. 1, 2012
New York effective Feb. 10, 2012
Benefit corporation bills introduced
Colorado Jan. 13, 2011
North Carolina Feb. 1, 2011
Pennsylvania Feb. 11, 2011
Michigan May 4, 2011
Source: B Lab and WSJ research

 

It costs about $30 to incorporate as a benefit corporation, not including fees paid to outside lawyers. The incorporation isn’t to be confused with “B Corp” certification, which is a privately administered program to label companies aiming to tackle social and environmental problems.

B Corp certification can be obtained in any state, for fees ranging from $500 to $25,000 annually, depending on revenue, according to B Lab, the Berwyn, Pa., nonprofit that developed benefit corporation legislation and oversees the certification process for about 500 firms.

While B Corp certification can be used for do-good marketing purposes, it wouldn’t hold up in an investor lawsuit.

Jonathan Harrison, chief executive of Emerge Workplace Solutions, says it plans to incorporate as a benefit corporation in New York next month. He sees the new legal structure as a tool to help his 18-month-old San Francisco business stand apart from other payday lenders that charge higher interest rates and fees for workers needing fast cash between paychecks.

“It’s really important for us to have a designation that we’re the good guys,” he says. His six-employee firm offers short-term emergency loans to hourly workers at annual interest rates from 9% to 19.99%, in contrast to the 400% typically charged by payday lenders. Emerge also provides financial coaching and other services to help the working poor.

The company’s seven investors include a national bank. They support the move to become a benefit corporation, Mr. Harrison says.

Mike Brady, the president of Greyston Bakery, a Yonkers, N.Y., supplier of brownies to Ben & Jerry’s, says benefit corporations “add another level of accountability and transparency.”

The bakery, which had $8 million in sales last year, and has 50 full-time employees, hires from its local, underprivileged neighborhood. It also supports affordable housing and child care for low-income earners through a separate nonprofit foundation.

Comet Skateboards, Ithaca, N.Y., has been preparing the paperwork to incorporate as a benefit corporation since early last year, according to Jason Salfi, owner of the 10-employee firm, which uses eco-friendly materials and recycles old skateboards that are brought back.

Mr. Salfi says the company’s B Corp certification has already earned points with customers. “You’d be surprised how much people care about these issues,” he says.

 

Photo: g.bremer

Write to Angus Loten at angus.loten@wsj.com

 

 

 

 

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

PROTECTING COMPANIES THAT MIX PROFITABILITY, VALUES

Imagine you’re a new baby-food company that wants to promote a certain social vision: You use organic ingredients, and you’re at the cutting edge of employee benefit policies. You also want to grow and make money. But that might jeopardize your social values.

Now, a network of lawyers across the country is working to change the law so that social entrepreneurs can grow their businesses without risking their visions.

There’s a fast-growing company in San Francisco called Method. Every year it sells about $100 million worth of household cleaning products, but the company’s founders say they aren’t just out to make money. They say they strive to use nontoxic materials and renewable resources, and they minimize energy consumption in the manufacturing process. Co-founder Adam Lowry says that is more important than profits.

“What we’re not going to do is say, ‘Let’s do this ugly, dirty, toxic thing because it’s going to make us more money,’ ” Lowry says. Lowry joins a growing number of entrepreneurs driven by a desire to do some social good. The problem, he says, is that corporate law is not on their side.

“In most bylaws of most companies, there’s a provision that says that the shareholder is king,” he says. And if shareholders think you’re sacrificing profits for some other non-profit-making reason, they can sue you.

Case Study: Ben & Jerry’s

Nearly 350 Ben & Jerry’s locations dot the country, but in the early days, Ben & Jerry’s was small and local. It used its product to take political stands. The company sold chocolate-coated “peace pops” and began using hormone-free milk. It donated 7.5 percent of its annual profits to small community projects.

As the company grew, it needed some cash. So it went public. Things went really well, and years later, huge offers rolled in to buy Ben & Jerry’s. Co-founder Ben Cohen thought the company could better protect its social mission if it stayed independent. But he says the law was on the side of shareholders.

“The laws required the board of directors of Ben & Jerry’s to take an offer, to sell the company despite the fact that they did not want to sell the company,” Cohen says. “But the laws required them to sell the company to an entity that was offering an amount of money far in excess of what the stock was currently trading at.”

That entity was European conglomerate Unilever. Lawyers told the board members that shareholders could sue if they turned Unilever’s offer down. Cohen says individual board members were concerned that the company didn’t have adequate insurance to cover a lengthy court battle, and that they’d be personally responsible for the legal fees.

“I think most people that are sitting on a board are not willing to lose their house for the privilege of sitting on that board,” Cohen says. And so they sold to the highest bidder. That helped set the stage for today’s young, idealistic companies.

Efforts To Protect ‘For-Benefit’ Companies

“As it exists today, there’s not a good framework for the entrepreneur who wants to create an entity that really mixes profitability and mission,” says Todd Johnson, who heads a group of California lawyers that’s trying to change that. He says that right now, businesses can be either for-profit companies or nonprofit organizations. The law doesn’t recognize a corporate form that falls in between. “Traditionally, directors of for-profit corporations are, at certain points, required to maximize shareholder profit, over and above other obligations that they have,” Johnson says.

Johnson and others are trying to rewrite laws in seven states, which define “for-benefit corporations” and require their boards to balance social and environmental policies with profit. Johnson hopes California will take the lead. “California is a unique state because it has such a high concentration of these kinds of companies already,” Johnson says.

But Vermont might get there first. Legislation in Ben & Jerry’s home state is expected to pass this spring.

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by April Dembosky for NPR Morning Edition

http://www.npr.org/templates/story/story.php?storyId=124468487