The New Pennsylvania Benefit Corporation
Pennsylvania has a new corporate form called a “Benefit Corporation”.
It was signed into law October 24, 2012. Written by Philadelphia lawyers William Clark and Lizzie Babson, the new law has received wide bipartisan support across the country. Pennsylvania is the 12th state to adopt the legislation, joining California, Illinois, New York and other states. The legislation is currently pending in 15 more states. Several high profile companies, including the California apparel company Patagonia, have already become benefit corporations in other states where the legislation has been adopted.
The current legal framework for companies is structured to ensure profit maximization, not social responsibility. In their white paper, “The Need and Rationale for the Benefit Corporation: Why it Is the Legal Form That Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public,” principal authors William H. Clark, Jr. and Larry Vranka state: “As consumer demand for socially responsible products and companies is increasing, consumer trust in corporations is decreasing.
Marketers use the terms ‘green,’ ‘responsible,’ ‘sustainable,’ ‘charitable,’ and words like them on a daily basis to describe their products or their companies. However, the more these terms are used, the less meaning they have because there are no standards to back up the claims. This problem, often referred to as ‘greenwashing,’ is misleading for consumers and frustrating for businesses that try to distinguish themselves based on their social and environmental business practices.”
The benefit corporation isn’t tax-exempt, nor is it a nonprofit. Benefit corporations are required to create a material positive impact on society and the environment and to meet higher standards for accountability and transparency. It is a new legal structure in response to the rise of “social entrepreneurship.”
The three major characteristics of the new benefit corporation form are:
1) a benefit corporation must have a corporate purpose to create a material positive impact on society and the environment;
2) the duties of directors are expanded to require consideration of non-financial stakeholders as well as the financial interests of shareholders; and
3) an obligation to report on its overall social and environmental performance using a comprehensive, credible, independent and transparent third-party standard.
What is different about a benefit corporation and an ordinary Pennsylvania business corporation? The governing law for a benefit corporation
Makes it clear that the fiduciary duty of its directors and officers includes creation of public benefit and consideration of non-financial interests, even in the event of a sale.
Provides legal protection for its directors and officers to consider the interests of its workforce, its community, and the environment when making decision;
Expands shareholder rights to enforce this expanded definition of fiduciary duty and standard of consideration;
Requires a 2/3 super-majority vote of shareholders to remove these higher standards;
Provides the opportunity to name and enforce pursuit of one or more specific public benefit purposes.
Provides greater access to capital than current alternative approaches.
Supporters of the new business form hope that it will differentiate true responsible and green businesses from the false claimers. They also hope that companies will demonstrate leadership by voluntarily electing to hold themselves accountable to higher standards of corporate purpose, accountability, and transparency.
Don’t confuse a benefit corporation with “B Corp” certification. B Corp certification can be obtained for a company in any state from B Lab, a Berwyn, Pennsylvania, nonprofit. B Lab has developed a set of standards designed to enable the marketplace to identify and support companies that meet their third-party standards for social and environmental performance. B Lab is also a supporter of benefit corporation legislation.
Some non-profit industry groups are critical on the new benefit corporation legislation. One criticism is that benefit corporations blur the line between nonprofit and for-profit entities, which can result in misleading the consumer. Another concern is that the benefit corporations will compete with non-profits and funding for nonprofit work might be diverted to benefit corporations.
But as Shelly Alcorn and Mark Alcorn, writing for Associations Now put it: “Call us altruistic, but don’t nonprofits want for-profit enterprises to do more good for society and the environment? And, as an association leader, if a benefit entity is helping address the same problem as my association, shouldn’t I be happy about that? For example, if I lead the American Polio Association and a benefit corporation finds a way to eradicate polio, leaving APA with no reason to exist, should I complain? If you are focused primarily on protecting your turf, you need to do some serious reflecting on your mission.”