A Word about Benefit Corporations
Updated: Nov 24, 2020
by Stewart A. Merkin Esq.
Miami, Florida 33137
In business school, a mantra that we learned early in our first year was that for-profit companies had two main goals: the maximization of profit and shareholder value, regardless of the long-term cost to society. Pursuing social or environmental goals at the expense of profit, we learned, could expose corporate directors to the risk of lawsuits from shareholders interested in profits above all else.
Because of an increase in social awareness due to many factors, many states, including Florida since 2014, have allowed for the creation of social purpose and benefit corporations to pursue substantial public interest goals. What had been the exclusive realm of not-for-profit corporations is now open to for-profit corporations that want to devote some part of their business resources to substantial nonprofit or socially beneficial activities. Toward that end, in August, 2019, the Business Roundtable, an influential trade group that represents 200 of America's largest companies, changed its statement on "the purpose of a corporation" to reflect that corporations should not just meet the needs of shareholders but also those of its stakeholders, such as employees, consumers, and society.
While most states have adopted only the benefit corporation model, Florida created both social purpose corporations and benefit corporations, the primary difference between the two being the public benefit purpose imposed on each entity. A social purpose corporation must pursue a specific public benefit and a benefit corporation must generally pursue or create a public benefit which can be broad and encompass social or environmental matters that are impacted by the business and operation of the corporation in addition to the traditional motive of maximizing profits. Both are subject to the same legal requirements as any other for-profit entity, the primary differences being that they provide a “safe harbor” for board members who take interests other than profit into account when making decisions on behalf of the corporation. In either case, the directors can be held accountable for abandoning their commitment to their public benefit purpose.
Large, publicly traded companies and small companies alike are choosing to be "green" or PBC (public benefit corporation) corporations, as they are sometimes called, for reasons from the ability to attract a certain kind of investor or customer, retain talent to general PR reasons. Many entrepreneurs are choosing these benefit corporate structures in order to better lead a mission-driven corporate life and to ensure that the mission will be permanent.
While the rewards can be satisfying, the ability to pursue social purpose goals more freely as a benefit company, though, comes with additional responsibilities, including transparency and accountability. Under the Florida statutes, among other things, benefit and social purpose corporations must: (1) incorporate for the purpose of engaging in public benefit activities; (2) consider the effect of any corporate decision upon the public benefit goals of the company; and (3) file an annual shareholders report accounting for the activities of the company that further its public benefit goals.
The decision-making process can be soul searching and complicated. It may be much easier to deal with just the maximization of profits. With the benefit corporation, the directors may have questions such as: how much will the closure of an old plant hurt its workers and their community?; how do you weigh these losses against the gains to the would-be workers at the new plant?; should you consider the racial makeup of the two groups of workers in an effort to reduce economic inequality?; does it matter whether the new plant is in South Carolina providing jobs for American workers or in Mexico providing jobs for Mexican workers?
In order for potential investors, employees and others to evaluate whether a benefit corporation meets certain objective standards, a certification process for benefit corporations has been established through B Lab, a nonprofit organization that evaluates a company’s corporate documents, books and records, practices and mission to determine if the company meets its standards for a Certified Benefit Corporation™. If the company qualifies, after paying B Lab an annual fee, that company can hold itself out as a Certified Benefit Corporation™, demonstrating to the public that it has been through third party scrutiny and met certain third party standards in its corporate performance and behavior.
Electing to be a benefit corporation is not a simple, legal decision, is not for every company and is not determined by whether or not the product of the company could be characterized as being “green” (note Ben & Jerry's, the poster child of benefit companies that produces a deeply, unhealthy product). An entrepreneur, in determining whether to establish a benefit corporation, must look to the future in order to evaluate the costs, risks, obligations, rewards and what such a designation will bring to the founders of the company.
And surprise. It may even lead to greater profits and shareholder value.