Social Entrepreneurship Spawns Benefit Corporations

My column from the Nashua Telegraph, December 19, 2012

I’ve written previously about social entrepreneurs. Social entrepreneurs are individuals who found businesses with dual purposes. On the one hand, they want to make a profit. On the other hand, they want to do so in a way that is beneficial to their community, the environment and society in general.

The social entrepreneurship movement continues to gain momentum globally. Visit the website of any top tier graduate business schools and you will fine social entrepreneurship programs. These colleges and universities are breeding the next generation of leaders to be more than just effective leaders. They are being bred to change the world in a positive way. Take, for example, Stanford’s Center for Social Innovation, a branch of the Stanford business school. Its mission is “educating leaders to change the world.”

Further evidence that the movement is growing is the fact that it has wormed its way into American corporate law. The rise of social entrepreneurship has spawned a new type of legal entity known as “benefit corporations”. Benefit corporations have just become legal in Massachusetts, and may soon become a part of New Hampshire’s business landscape.

So just what is a benefit corporation? From a structural standpoint, it is quite similar to traditional corporations. It has officers, directors and shareholders. It can elect to pay taxes as either an “S” or a “C” corporation, just like traditional corporations. It is a “for profit” entity. The big difference lies in the area of corporate purpose. A benefit corporation, unlike a traditional corporation, is required to have a “general public benefit.” Statutes typically require that the company make a “material positive benefit on society and the environment.” Benefit corporations also have the option of reciting in their Articles of Incorporation “specific public benefits” that the founders intend the company to have on society. This represents a major departure from traditional American corporate law.

Without getting too technical, the culture, if not the laws, of American capitalism has demanded that directors of a corporation act at all times with the best financial interests of the company’s shareholders in mind. That duty most often trumps that same director’s obligation to society at large.

Benefit corporations, on the other hand, permit directors to consider and even favor societal interests over the shareholder’s financial interest if those interests are consistent with the company’s stated general or specific public benefits. The best way to illustrate this is with an extreme but instructive example.

Assume you are a member of the board of directors of a traditional corporation. At your next meeting, management presents you with an offer from another company to buy the corporation. During your deliberations, you are informed that the sale will result in a substantial profit for company shareholders. You also learn, however, that the sale will result in the creation of a local manufacturing plant that will increase markedly the levels of pollution in your community. As a director of a traditional corporation, your legal obligation will in all likelihood be to recommend to shareholders that they approve the sale. If you fail to meet that obligation the shareholders could sue you.

If, on the other hand, you are presented with the same scenario but you are a director of a benefit corporation, your duty to shareholders is decidedly impacted by the benefit corporation law. You could vote against the proposed sale because of your concerns about the impact on the environment, without fear of recrimination from the shareholders. In fact, you are charged by statute with considering issues beyond shareholder interests. These issues can include the impact of the transaction on employees, customers, the community and the environment. This is the principle that is at the core of the benefit corporation laws, and it changes the rules for directors dramatically.

There are other differences too. Benefit corporations file each year an “annual benefit report” that reflects the ways in which the company’s actions benefitted the community during the prior year. It includes an evaluation of its effectiveness using a statutorily defined third person standard. This is a nod toward transparency, not unlike the transparency expected of non-profit corporations, which are also required by law to file annual public disclosures. But benefit corporations, despite their societal purposes, remain as “for-profit” entities. Their goal is to make a profit for their shareholders, but in a fashion consistent with the best interests of society.

Time will tell whether benefit corporations make much of an impact in the business world. If nothing else, they are consistent with social entrepreneurship and its agenda for changing the world in a positive fashion. At first glance, New Hampshire seems to be a perfect place for benefit corporations. We value entrepreneurship, and environmental quality is a crucial element of our quality of life. Perhaps our newly elected political leadership will give the concept some thought.

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