A new law went into effect last month making New York the seventh state in the nation allowing businesses to be designated benefit corporations.The law creating benefit corporations, also known as B corporations, requires that they write socially responsible goals into their charter, and that they deliver a benefit report to shareholders each year. The non-profit organization B Lab, which created the new form, defines the benefit corporation as a company:
“Having a corporate purpose to create a material positive impact on society and the environment” and “required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment.”
So far, thirteen New York businesses have become the first in the state to register as benefit corporations, joining some 500 companies nationwide. These corporations, certified as “B Corporations”, have committed to pursuing such lofty goals as limiting their carbon footprint, environmental sustainability or ensuring that all their employees earn a living wage.
Aside from the high-minded rhetoric, there are very practical business advantages to being a B corporation. These companies hope to attract “Social investing”. There is a significant amount of venture capital tied to the investor’s sense of social responsibility. Many Venture Capital funds distinguish themselves by emphasizing their social conscience. Investors want to know that they are supporting responsible companies. When people invest in benefit corporations, they are assured that these companies will adhere to their mission in the long term, just as non-profits must.
The other major advantage that benefit corporations enjoy is that they can, and must, pursue their socially responsible goals, even at the cost of maximizing the profits of the business, a freedom that other corporations do not have. Although this may not seem like a great privilege, this relief from an absolute fiduciary responsibility to their shareholders can be a strategic asset in the event of a hostile takeover attempt by a larger corporation that does not share its social mission. Unilever’s purchase of Ben & Jerry’s ice cream in 2000 is cited by advocates as an example of a company whose social mission made it popular, but which was unable to withstand the advances of a large prospective purchaser. If Ben & Jerry’s had not sold, they would have faced lawsuits from shareholders alleging that they failed to get them the largest return on their investment, lofty social goals notwithstanding. A company with the benefit corporation structure cannot be sold to a non-benefit corporation without approval by two thirds of shareholders. If a benefit corporation is comprised of like-minded investors, it can make money and maintain more control over its future.
State Senator Daniel Squadron, a Democrat representing parts of Brooklyn and Manhattan and an author and one of the sponsors of the law, says he hopes it brings new businesses to the state. Squadron says that by recognizing the benefit corporation status, New York is “sending a strong message to the entire business community that this sort of 21st century for-profit business” is possible.
Of course, only time will tell if benefit corporations will continue to grow and thrive. In this economy, will investors forgo possibly higher financial returns just to feel better when they look in the mirror? Regardless, in light of the current sentiment against corporations stoked by the Occupy Wall Street movement, this new law can only help their image.