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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 [email protected]

 

 

 

 

B CORPS: FIRMS WITH BENEFITS

Originally posted in The Economist

 

By: Matthew Bishop

He likes to do things differently. Yvon Chouinard changed his favourite sport, mountaineering, by introducing reusable pitons (the metal spikes you bang into the rock face and attach a rope to). Climbers often used to leave pitons in the cliff, which is environmentally messy, another of Mr Chouinard’s peeves.
In business, Mr Chouinard, the founder of PatagoniaOriginally posted in The Economist He likes to do things differently. Yvon Chouinard changed his favourite sport, mountaineering, by introducing reusable pitons (the metal spikes you bang into the rock face and attach a rope to). Climbers often used to leave pitons in the cliff, which is environmentally messy, another of Mr Chouinard’s peeves. In business, Mr Chouinard, the founder of Patagonia, an outdoor-clothing firm, says he believes that well-treated employees perform better. (He wrote a book called: “Let My People Go Surfing”.) Before it was fashionable, Mr Chouinard preached a philosophy of sustainability and long-term profitability that he calls “the slow company”.

On January 3rd Patagonia was anything but slow in becoming the first firm to take advantage of a new California law designed to give businesses greater freedom to pursue strategies which they believe benefit society as a whole rather than having to concentrate on maximising profits for the next financial quarter. According to Mr Chouinard, the new “benefit corporation”—usually referred to as a B Corp— creates the legal framework for firms like his to remain true to their social goals. To qualify as a B Corp, a firm must have an explicit social or environmental mission, and a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders. It must also publish independently verified reports on its social and environmental impact alongside its financial results. Other than that, it can go about business as usual.

The B Corp is a deliberate effort to change the nature of business by changing corporate law, led by B Lab, a non-profit outfit based in Pennsylvania. California is the sixth state to allow B Corps; the first was Maryland, in April 2010. Patagonia was followed immediately by another 11 Californian firms, including Give Something Back Office Supplies, Green Retirement Plans and DopeHut, a clothing retailer. Across America, there are now several hundred B Corps. Before Patagonia, the best-known was probably Seventh Generation, a maker of green detergents, paper towels and other household products.

California’s B Corp legislation took effect alongside a new law creating the “flexible purpose company” (FlexC), which allows a firm to adopt a specific social or environmental goal, rather than the broader obligations of a B Corp. Another option in America is the low-profit limited liability (LC3) company, which can raise money for socially beneficial purposes while making little or no profit. The idea of a legal framework for firms that put profits second is not confined to America. Britain, for example, has since 2005 allowed people to form “community interest companies”.  Similar laws are brewing in several European countries.

The impetus for all this comes from people like Mr Chouinard, who believe that existing laws governing corporations and charities are too restrictive. For-profit firms, they argue, often face pressure to abandon social goals in favour of increasing profits. Non-profit firms and charities are needlessly restricted in their ability to raise capital when they need to grow. This prevents socially minded organisations from pursuing their goals as efficiently as possible. Existing laws for co-operatives and mutual companies are inadequate. Hence the need for B Corps and other novel structures, goes the argument. There is no tax advantage to being a B Corp, but there is to some of the new legal structures.

Whether these new legal forms will change business that much remains to be seen. Supporters of existing corporate law say it does not prevent firms, if they so wish, from setting social and environmental goals or rigorously reporting on their performance in delivering them—and that pursuing profit is often the best way to benefit society. Nor is it clear how much difference in practice will be made by the obligation of a B Corp to weigh interests other than profits. How does one measure such things? What counts for more: a clean lake or a happy neighbour? .
Mr Chouinard argues that making a firm’s social mission explicit in its legal structure makes it harder for a new boss or owner to abandon it. Perhaps so. B Corps will be tested in the market. Anyone who feels inspired by a B Corp’s mission is free to invest in its shares, or work for it.

 

 Photo: Wanaku

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.