January 19, 2012
Meet the Benefit Corporation
Posted by Usha Rodrigues

Today's WSJ discusses a new corporate form.  Yes, you read that right, a new corporate form!  A few states, beginning with my home state Maryland in October 2010, now allow firms to incorporate as benefit corporations.  As Glom readers know, I'm interested in how entity choice can be an expression of identity.  I was eager to learn more.

So what are benefit corporations?  Although they are for-profit entities, they have as a purpose creating a "general public benefit": '"a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promotes a combination of specific public benefits."  "Specific public benefits" include, among other activities,  providing beneficial products or services, promoting economic opportunity beyond regular job-creation, preserving the environment, improving human health, and promoting the arts, sciences, or advancement of knowledge.  Each year the corporations send shareholders an annual benefit report describing the benefits they have accomplished.

Ordinary corporations become benefit corporations by amending their charters, and according to the WSJ "hundreds of existing businesses" plan to reincorporate as benefit corporations in the coming months--Patagonia already has, and Ben & Jerry's will soon. 

On one hand, it's hard to see the need for the benefit corporation.  The WSJ quotes William Clark, a partner at Drinker, Biddle & Reath LLP, observing that the form's structure "tells directors that it's their duty to consider other interests, rather than say they 'may' consider them."   Sure, this codifies a rejection of shareholder wealth maximization as a governing principle, but all corporate law scholars know that shareholder wealth maximization is squishy. Garden variety corporations can donate to charity or go "green" and plausibly claim that they are, ultimately, increasing shareholder wealth. So why do we need a benefit corporation?  Charles Elson doesn't think we do--he's quoted as saying "for an investor, this is a terrible idea." 

I'm not sure if we need benefit corporations either, but I see the appeal. Again, I think entity matters.  Choosing the benefit corporation form is a kind of credible commitment--it signals to shareholders more powerfully than any slogan can that maximizing wealth isn't the ultimate goal of this particular corporation.  I think, at first blush at least, that this idea sounds a whole lot better than the L3C.  Like Bill Callison, I'm skeptical of that form--largely because it presupposes non-profit minded investors living cheek by jowl with investors who are looking to make a market return. Not only does that seems like a recipe for owner vs. owner conflict--it also dilutes the "warm glow" for nonprofit participants to know that some of their fellows are just looking to make a buck.

In contrast, with the benefit corporation all shareholders are on the same page.  The public benefit corporation won't generate the same kind of warm glow that a nonprofit would, but it may generate enough to succeed.  We'll see...

 Update: J. Haskell Murray has a chart comparing the various state benefit corporation statutes.

Update 2: Bill Callison reminds me that he posted on benefit corps last year.  Sorry, Bill--I'm getting old!


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