Delaware Unites Business and Social Good With B Corp Legislation

EMAILPRINT

Java PrintingWith over 1 million of the world’s leading businesses incorporated in Delaware, including over half of all U.S. publicly traded companies and 63 percent of the Fortune 500, the so-called “First State” is seen by many as the home of capitalism.

In other words, when Delaware does something, it means business. Most recently, by enacting benefit corporation legislation, the state showed that the world is finally acknowledging the importance of creating long-term social value as part of their core structure.

“There is both a market and a societal need for benefit corporation legislation,” said Delaware Governor Jack Markell, “It harnesses the energy, intellect and power of entrepreneurs who are absolutely focused on making money, but also focused on giving back at the same time.”

Delaware is the 18th state to provide companies with the legal freedom to combine business with social good when Governor Markell signed benefit corporation legislation into law on July 17th.

The following day, I was fortunate enough to attend an event co-hosted by the World Economic Forum and B Lab to celebrate the new legislation, which gave me further insight into the new opportunities, and challenges that came with it.

Titled “A New Model of Capitalism: The Significance of B Corp Legislation in Delaware”, the event hosted an impressive and diverse range of attendees, including attorneys, investment firms, CEOs, and of course, Governor Jack Markell.

What is the difference between a B Corporation and a benefit corporation?

This is the first question many ask, as they believe the two are one and the same. But they aren’t – a company can be a benefit corporation without becoming certified as a B Corporation, and vice versa. However, they do have the same goal – to recognize organizations that desire to provide social good as part of, or in addition to, their core business.

Both also require organizations to complete regular social and environmental assessments. B Corporations (often simply referred to as ‘B Corps’) are assessed annually by the non-profit, B Lab, whereas individual state laws determine the frequency at which benefit corporations are assessed against third-party standards.

To be branded a B Corp, a non-profit or for-profit organization is required to score a minimum of 80 out of 200 points on a rigorous social and environmental impact assessment. B Corps also have access to a range of support services from B Lab.

On the other hand, benefit corporation status is designed with for-profit companies in mind. While the process for becoming a benefit corporation differs by state, companies that are interested in operating as a benefit corporation generally must list that part of their corporate purpose includes creating a general public benefit. Benefit corporation status does not currently affect a company’s tax status, but only its corporate purpose and accountability.

What is the purpose of benefit corporation legislation?

Many entrepreneurs who desire to create innovative solutions to social and environmental problems, are conflicted about whether they should be a 501 c(3) or an LLC. Benefit corporation status bridges these two worlds.

Many entrepreneurs who desire to create innovative solutions to social and environmental problems, are conflicted about whether they should be a 501 c(3) or an LLC. Benefit corporation status bridges these two worlds.

William H. Clark, Jr., of Drinker Biddle & Reath LLP, authored benefit corporation law in 16 states (excluding DE), as well as the white paper entitled, “The Need And Rationale for the Benefit Corporation.”

In this paper, Clark discusses that benefit corporation legislation seeks to protect for-profit companies that want to do well and do good at the same time, by allowing them the freedom to pursue higher purposes, rather than only maximize profits.

More specifically, benefit corporation legislation protects directors and management, by creating an obligation to pursue the triple bottom line, rather than just profits, as they are now required to have a material positive impact on social and environmental goods.

He states that under traditional corporate law, the purpose of for-profit business is to create maximum profit for stockholders, which does not take into consideration the needs of all stakeholders, which includes interests of employees, environment, and communities that the business serves. Therefore, under traditional corporate law, directors would be liable for pursuing social and environmental good at the expense of pursuing maximum profit.

This is a boon for firms that have already built social and environmental missions into their core business, such as Seventh Generation, and Etsy, both in attendance. Electing to be a benefit corporation would protect their inherent business structure, and also confirm to their stakeholders that essentially, they are putting their money where their mouth is.

“Benefit corporation legislation would give our company the option to be publicly recognized that we do more than make a profit,” said Etsy CEO Chad Dickerson, “The world needs new ways of solving problems, and benefit legislation would formalize what we do.”

Challenges

For companies looking into becoming benefit corporations, the burden of compliance and restructuring their company to regularly prove that they are creating a public benefit is a significant challenge that cannot be overlooked.

Michael Drexler, Senior Director, Head of Investor Industries, for the World Economic Forum, remarked that adaptation would be a challenge as financial box-ticking is much easier than having to prove a material social impact.

The second oft-quoted challenge was scaling. For comparison purposes, Drexler also pointed out that currently there are only 786 B corps globally, but more than 1 million companies structured in DE. Therefore, there was skepticism about how quickly one could expect the rate at which benefit corporations could scale.

Another challenge included what would be the tradeoffs if a company cannot ruthlessly pursue profits? How will a company retain investors and prioritize all stakeholders?

However, Delaware Chancellor Leo Strine commented that if a company has already built social impact into its business DNA, such as Warby Parker or Etsy, it would be able to navigate these tradeoffs, while maximizing the benefits of this legislation without much inconvenience.

Where do we go from here?

Albert Wenger, CEO of Union Square Ventures, said, “There are a lot of large scale problems that still exist, from environmental issues to uneven income distribution that, quite frankly, need business investment to be solved.”

Benefit corporation legislation is positioned to provide companies the latitude to go after these issues, while still making a profit.

For those companies concerned that they would lose investors if their primary purpose is not to maximize profits, Neil Grimmer, CEO and co-founder of Plum Organics, a B Corp-certified organic baby food producer, which was recently sold to Campbell’s, spoke on his company’s experience to relieve fears.

“In 2008, we had sales of $1 million dollars, and by 2013, our sales have grown to $135 million dollars,” Grimmer said, “Benefit corporation status will not impede sales but drive it. Our customers value our mission, and continue to buy our product. We also continue to receive venture funding, because investors like it when you stick to a mission”

Overall, there has been an evident, though gradual shift, in business to adopt long-term vision when it comes to providing social and environmental value.

Grimmer remarked, “If you don’t focus on taking care of communities, and environment, then the wealth that your company acquires will not be sustainable.”

This shift has not only occurred within new businesses such as Etsy or Plum Organics, but also with global conglomerates, such as Nestle, which invests in the

communities by creating shared value programs and natural capital investments. Therefore, the continued adoption of benefit corporation legislation, including in Delaware, is not too surprising.

Time will tell how this will not only impact the way for-profit companies operate, but also the non-profit industry.

About Candice McLeod

Candice D McLeod writes on the intersection between business and the environment. She received a Master’s degree in Environmental Studies, concentrating in Energy Management & Policy, as well as a bachelor’s degree in Chemical & Biomolecular Engineering from the University of Pennsylvania. You can follow her @candicedmcleod
Posted in: Business, Environment, Policy, Politics, Society