Making a difference while making a profit
On Nov. 27, 2017, Gov. Scott Walker signed into law a statute that allows Wisconsin corporations to adopt “benefit corporation” status. The law passed with overwhelming bipartisan support from the Wisconsin Legislature, and it makes Wisconsin the 34th state to embrace the benefit corporation movement. Maryland was the first, back in 2010. Benefit corporations are intended to allow for-profit corporations to formally embrace socially responsible corporate purposes, even if it means that the owners of the corporation earn less profit.
What are the general rules for corporations without benefit corporation status?
A corporation that is not a benefit corporation generally has the legal obligation to pursue one overarching goal: maximizing profits for the benefit of its shareholders. This goal is backstopped by what are called the “fiduciary duties” of the corporation’s board of directors (its governing body). If directors do not act in the “best interest” of the corporation and its owners (shareholders) by maximizing profits, the shareholders may be able to successfully sue the directors for this failure. The legal primacy of profit maximization can chill the ability of a corporation to commit to other socially positive goals — such as helping the environment and the poor — if prioritizing these other goals costs the corporation too much money. The legal framework in which regular corporations operate is designed to motivate people to invest in businesses by helping ensure that their money is put to profit-making use, and that their interests will be prioritized over all others. There is value to this structure. However, it can also impair the ability of corporations to act in the public good.
Isn’t the public good already served by charities?
Unlike corporations, which are built around a profit motive, charitable organizations are organizations built around a mission to explicitly serve the public good. They are critical players in the socially responsible space, and donors are provided incentives to give through tax deductions (along with feeling good about supporting an important cause). However, charities are legally restricted in their ability to make money for third parties. This means that, unlike a corporation, they cannot seek outside investors to provide operating cash in the hopes of getting a big return. As a result, nonprofits often have to spend a lot of their time fundraising because, even with tax incentives, it can take a lot of work to convince people to simply give away their money. In addition, some benefit corporation advocates argue that one reason benefit corporations are so important is that modern society faces significant social and environmental issues (such as wealth disparity), including problems that are getting increasingly worse (such as climate disruption), suggesting that governments and nonprofits may need private sector help in effectively meeting these and other challenges.
What is the purpose that benefit corporations are intended to serve?
Benefit corporations help bridge the gap between traditional corporations and charities. Benefit corporations are intended to allow for-profit corporations to formally combine the profit maximization purpose with other purposes designed to advance the public good. Directors who govern benefit corporations are required to take into account certain socially responsible purposes as they make their corporate decisions. Shareholders of benefit corporations invest knowing that the corporation will prioritize the enumerated social goals, even if doing so may result in less return to the shareholders. The idea of the benefit corporation is that the corporation can advance these social goals without the directors having to fear shareholder reprisals and lawsuits. Yet unlike nonprofit donors, shareholders can still expect some return on their investment, making it easier for the company to raise operating capital. In fact, especially given the rise of socially responsible investing in recent years, the hope is that there will be a sizable pool of investors who will gravitate toward an investment that allows them to do good for the planet while also making a profit. In addition, benefit corporations may be able to capitalize on their “benefit” status with socially conscious consumers to sell their products and services.
Benefit corporations vs. certified ‘B Corps’
Benefit corporations are entities that have registered or otherwise qualified under a state's benefit corporation statute. They are similar, but not the same, as certified “B Corps.” B Corps are companies that received a “B Corp” certification from B Lab, a nonprofit organization that certifies companies as “having met a high standard of overall social and environmental performance.” B Lab analyzes a company based on a set of specific criteria, known as a “B Impact Assessment,” to determine if the company is operating in accordance with a broad range of socially responsible principles. Currently, there are more than 2,000 B Corps and 4,400 benefit corporations globally. B Corps range from small, neighborhood businesses — like the Let ’Em Have It Hair Salon in Denver, Colo. — to global corporations, such as Ben & Jerry’s, Etsy, Kleen Kanteen, Patagonia, and Warby Parker. Earlier this year, Laureate Education, the world’s largest higher education company, became the first benefit corporation to go public, raising $490 million from investors in its February IPO. Despite their varied sizes and industries, B Corps and benefit corporations all share one thing in common: a commitment to having a material positive impact on society, while at the same time making money for their investors.
Wisconsin’s benefit corporation statute
Wisconsin’s new benefit corporation law takes effect on Feb. 26, 2018. The law will allow any Wisconsin corporation (not LLCs or partnerships, as discussed below) to become a benefit corporation. All benefit corporations must have a purpose of creating “general public benefit,” which the law defines as “a material positive impact on society and the environment by the operations of [the] benefit corporation taken as a whole, through activities that promote some combination of specific public benefits.” In addition, there are “specific public benefits” a benefit corporation may elect to pursue in addition to the general public benefit, including the following:
- Providing low-income or underserved individuals or communities with beneficial products or services;
- Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
- Preserving the environment;
- Improving human health;
- Promoting the arts, sciences, or advancement of knowledge;
- Increasing the flow of capital to entities with a public benefit purpose; and
- The accomplishment of any other particular benefit for society or the environment.
The statute specifically allows the benefit corporation's directors and officers to take into account these public benefits when making corporate decisions. But the law also strives to balance the interests of shareholders with the objective of promoting a social good: the statute lists seven additional considerations that must be taken into account when a director makes a corporate decision, including the local and global environment, community and societal factors, the ability of the benefit corporation to accomplish its public benefit purpose, the corporation’s employees and workforce, and the shareholders. The directors are not required to prioritize any of these interests over one another, unless the benefit corporation states in its articles its intention to give such priority.
The law also requires a measure of accountability and transparency. It is not enough for a benefit corporation to simply claim that it is acting in the public interest. A benefit corporation is required to adopt measures to track its progress in promoting the general public benefit and any other specific public benefit the corporation decides to pursue. The benefit corporation also must give its shareholders an annual statement discussing its efforts to promote the public benefits. This statement must include objective, factual information about the benefit corporation’s success in meeting its stated public benefit objectives. The corporation has the option, but not the obligation, to make the statement available to the public. However, the law seeks to limit the benefit corporation’s liability to non-shareholders (including persons who may be part of the public community the benefit corporation is intended to serve) for failing to meet its stated public benefit objectives. The law specifically states that directors do not owe a duty to the beneficiaries of the corporation’s stated public benefit goals.
Local business response
One Madison-area business, Always Be Sustaining LLC, founded by former university professor Dr. Mark Starik, is currently in the process of becoming a Certified B Corp, as well as a benefit corporation. This sustainability management consultancy, which coaches organizations and individuals in implementing more environmentally- and socially-sustainable practices, is a good example of a for-profit business that will gain from this legislation. According to Starik, “Becoming a benefit corporation not only legally provides protection from other would-be owners who are only profit-motivated, it will also help our business identify and conduct business with organizational and individual customers, suppliers, and other community stakeholders who share our environmental and social mission.”
Becoming a benefit corporation under Wisconsin’s new law
In order to become a benefit corporation, the entity must be incorporated under chapter 180 of the Wisconsin Statutes. This means that only traditional corporations are permitted to become benefit corporations. LLCs, partnerships, co-ops, and other entity types would first need to convert to a chapter 180 corporation before becoming a Wisconsin benefit corporation. Many smaller businesses in Wisconsin are operated as LLCs. Conversion from an LLC to a traditional corporation typically is straightforward, especially if all the owners agree with the conversion (and, in this case, with becoming a benefit corporation). At least two-thirds of the corporation’s shareholders must formally consent in order for a corporation to become a benefit corporation. If the shareholder vote passes, the corporation would simply amend its articles of incorporation to state that the corporation is a benefit corporation, and the process is complete. Other than the amendment, no additional filings or fees are required to become a benefit corporation.
The benefit corporation movement is in its relative infancy. It is not yet clear what the overall impact of state benefit corporation laws will have on the corporate social responsibility space. It is also not clear how much protection the new statute will ultimately provide to directors. What is clear is that this movement is gaining steam, and Wisconsin’s socially responsible businesses will soon benefit from a law that allows them to make a profit and a difference.
Patrick Berry and Kirsten Spira are attorneys at the Boardman & Clark LLP law firm, where they work with corporations, LLCs, community banks, and nonprofits to provide legal services throughout the business life-cycle, including formation, expansion, and sale.
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