sign in sign up
<<
Home , Corporate behaviour

Trends & special topics

Benefit : A sophisticated and worthy reform

By Sam Morrissy, Lawyer and member of the B Lab Australia Policy Working Group

In the United States in 2008, meet particular standards of verified • Benefit corporations a new type of for-profit social and environmental performance, place both profit- public and legal company limited by shares .2 While there are a great making and the public was conceived, known as many certified B Corps which are also good at the forefront the ‘benefit ’. benefit corporations, it is equally possible of the purpose of the The in many US jurisdictions to be legally corporation. incorporated as a benefit corporation has been introduced via without being a certified B Corp. Further, • Benefit corporation legislative amendment in there are many certified B Corps in legislation has been more than half of all US jurisdictions outside the US (including Australia) where the benefit corporation enacted in 31 states in states over the past five does not exist as a legal form. the US. years. Taking inspiration Despite this distinction, B Lab has • In 2015 a working from this process, a group been at the forefront of promoting party was established of Australian academics, and agitating for legislative reform with the aim of lawyers, business leaders to introduce the benefit corporation and governance experts around the world. B Lab Australia & introducing the New Zealand was incorporated in benefit corporation are working towards the 2013, and in early 2015 oversaw the in Australia. introduction of the benefit establishment of a policy working corporation in Australia. group to advocate for legislative reform in Australia. A benefit corporation has two core purposes: to make a profit and to create a public benefit. Recognising the What is the benefit corporation? limits of voluntary action by companies, The benefit corporation is a for-profit the benefit corporation enshrines the company limited by shares. It is subject triple bottom-line principles of ‘profit, to the usual solvent trading obligations people and planet’1 in statute and in imposed on for-profit companies, a company's governing documents, and is distinct from legal forms representing a significant shift in commonly associated with charities. and governance practice. While the benefit corporation legislation The benefit corporation modifies varies as between states in the US, in directors' duties and imposes auditing a majority of jurisdictions and under and reporting requirements beyond the model legislation first developed in those of a traditional limited 2008, there are four key ways in which liability company. the benefit corporation differs from a The benefit corporation is not to be traditional for-profit company: confused with the voluntary 'B Corp' 1. The benefit corporation is required certification awarded by not-for-profit to have as a core objective the organisation, B Lab, to companies that creation of a ‘general public

24 benefit’, along with the creation benefits of the corporation’s activities disharmony between profit-making of one or more specific public should flow to the shareholder.7 The activities and the active consideration of benefits unique to that entity. These alternative ' primacy' wider stakeholder interests. specific benefits may including view contends that corporations owe Australian companies are free to adopt the protection of a particular duties to both shareholders and the voluntary codes and corporate social environment, supporting a local community, that incorporation is a responsibility measures to achieve community or may be more general privilege bestowed solely by the state sustainability targets or deliver social (contributing to the advancement of which carries significant advantages justice outcomes. However, these science, for example).3 (limited liability and perpetual measures do not remove the legal succession) and in turn society is 2. A modified auditing and reporting uncertainty which directors are forced justified in expecting the corporation to requirement, which mandates that to confront when considering non- act in the general public interest.8 the company produce a yearly shareholder interests. The benefit benefit report and requires third The benefit corporation revives corporation attempts to address this party certification that the company stakeholder primacy in the context by placing both profit-making and the has complied with its general public of the modern contract theory of public good at the forefront of the benefit and specific benefit mandate. corporate law, which defines the purpose of the corporation. 3. Directors have a procedural duty to corporation as a ‘nexus of contracts’ consider non-shareholder interests in between constituencies including Development of the benefit the course of their decision-making. shareholders, employees, suppliers 9 corporation in the US These interests are specified in the and even the community. Under legislation, and include shareholders, this model, even where the business As at 10 January 2015, a total of employees, suppliers, customers, judgment rule may legally protect 31 US states had enacted benefit communities, societal considerations, directors from making decisions that corporation legislation, including the local and global environment, the don’t always maximise shareholder Delaware (although its own legislation short-term and long-term interests of profits, if there is no connection differs in some respects to the model the corporation and the ability of the between a business decision and laws adopted nearly unanimously corporation to accomplish its general shareholder value, then that decision by the other states). The legislation and specific public benefit purposes. will itself open to shareholder criticism. in Delaware is significant given that Practically, the shareholder wealth Delaware is home to over one million 4. An enforcement procedure that maximisation principle remains the companies, including half of all publicly gives standing to shareholders to 'light on the hill' in modern corporate listed companies in the US. require compliance with the general decision-making.10 public benefit obligations in the The rapid success of the benefit company's constitution. As a consequence, the legal structure corporation in the US is reflected in of the company itself gives rise to many businesses of all sizes. A high A ‘general public benefit’ is defined a somewhat irreconcilable tension. profile example is Patagonia, a privately under the model legislation as a Directors have a practical duty (arguably owned outdoor apparel and accessories ‘material positive impact on society more perception than legal obligation retailer, which has revenues of over and the environment, taken as a in Australia) to maximise profit for $500 million and was one of the first whole, as assessed against a third- their shareholders. It is an oft-cited entities to incorporate as a benefit party standard, from the business and failure of the free market system that corporation under the Californian operations of a benefit corporation’.4 maximisation of profit creates a great legislation when it was introduced.13 Its number of negative externalities, and founder Yvon Chouinard has stated that Rationale for the benefit provides insufficient public benefits, the attraction of the benefit corporation corporation particularly when measured against was that it institutionalised the values, 11 culture, processes and high standards For close to a century, academics have key social and environmental metrics. of his company, and allowed these to debated whether a corporation is solely While directors continue to be saddled remain constant through capital raisings responsible to ownership interests, or with a profit-maximisation duty (whether or a future change of ownership.14 whether it also possesses obligations perceived or otherwise) directors can to benefit the welfare of other only consider public or non-shareholder Arguably the most effective aspect of stakeholders.5 Fundamental to this interests to the extent that they do not the benefit corporation legislation is question is the role of the shareholder. materially impact on the corporation’s the positive protection that it offers A shareholder is the only person that bottom line (and therefore shareholder directors who wish to allocate the ‘owns’ a corporation in any sense.6 The returns), or to the extent that some company’s resources to activities that shareholder contributes equity in return other long-term benefit accrues to do not maximise shareholder profits.15 12 for this ownership stake. Those who shareholders. This constrains the William H Clark, a pioneer of the benefit take a 'shareholder primacy' view argue ability of directors in a traditional corporation movement in the US, sums that in return for this investment, all the company structure to consider non- this up poignantly: shareholder interests, and creates a

Governance Directions February 2016 25 Trends & special topics

…material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.

For-profit companies pursuing a social sector, and let the private sector ‘clean the benefit corporation in Australia, mission face increasing difficulty as up after itself’ to a far greater degree alongside B Lab Australia & New they scale; as officers and directors of than is currently possible. Evidence Zealand. This group is currently co- these entities consider investments, in the US to date has shown that the ordinating the development of a set of mergers or liquidity events, the default benefit corporation structure offers draft amendments to the Corporations position tends to favour the traditional discounted capital to investors, a home Act 2001 which will be used as the fiduciary responsibility to maximise for the increasingly large pool of ethical basis for advocating for legislative returns to shareholders over the company’s social mission … whatever investments funds and accompanying reform in 2016. marketing and goodwill advantages the letter of the law, these fears, Simultaneously, thanks to the efforts for those choosing to support it.18 The combined with both prevailing business of B Lab, there are now more than culture and advice of counsel about the research demonstrates that a higher 90 certified B Corps in Australia and risk of litigation if one fails to maximise level of corporate social performance New Zealand, and more than 1000 shareholder value, have a chilling effect leads to more sustainable profits over companies currently working through on corporate behaviour as it relates to the long term.19 pursuit of a social mission.16 the assessment process. The benefit corporation has interesting Whatever the black letter law might say Despite this rapid progress and the implications in a takeover and M&A — and there is no doubt that in both enthusiasm shown by the Australian context. The frequently cited example the US and Australia, directors certainly business community for B Corps, the is that of ‘Ben & Jerry’s’, an American do have scope to consider non- uptake of 'B Corp' certification does ice-cream company that was sold to shareholder interests under the current not overcome the legal and practical Unilever (a multinational corporation) in law17 — directors are uncomfortable impediments for companies looking 2000. The owners of Ben & Jerry’s were in straying too far from the profit- to place profit making on an equal forced to accept Unilever’s offer as it maximisation norm. Removing the footing with and was the highest bid and offered the liability risk for directors and obliging the public good. best monetary value for shareholders.20 them to consider public benefits and There were significant concerns at the The benefit corporation is the most devote corporate resources to this time about local manufacturing and widely adopted dual-purpose corporate end, is a fundamental part of why environmental impacts (two key points structure that has been developed the benefit corporation structure has of differentiation for their business) and in the US. It is a sophisticated and potential to work successfully and that the directors, when considering worthy reform and would accelerate effect change in corporate behaviour. takeover bids, could not take into sustainable business, From an economic perspective, the account these factors. This position and ethical investment in Australia. benefit corporation may assist in would have been different had the Sam Morrissy can be contacted by reforming the underlying capital and company been a benefit corporation email at [email protected]. labour structure of the economy, so as (as it is now). Notes to shift some of the growing burden of 1 Elkington J, 1999, Cannibals With Forks: The externalities from the public sector into of 21st Century Business, the private sphere. Despite criticisms The benefit corporation in Australia Capstone. about efficiency in resource allocation, Since early 2015, a group of 2 'About B Lab', B Lab, available at as at 10 January 2015. this type of corporate structure has academics, lawyers, business leaders 3 Clark W H Jr et al, 2013, ‘The Need and the potential to reduce pressure on and governance experts have been Rationale for the Benefit Corporation: Why tax revenues and the not for profit working towards the introduction of it is the Legal Form that Best Addresses the

26 Needs of Social Entrepreneurs, Investors, 12 For discussion of the scope of this duty in 18 Everett C R, 2013, ‘Measuring the Social and, Ultimately, the Public’ (White Paper, Australia, see Austin R P, Ford H A J and Responsibility Discount for the Cost of Equity Benefit Corp Information Centre,) 5

Governance Directions February 2016 27