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On Jan.3, Patagonia, the outdoor apparel company, signed on to become California’s first Benefit Corporation. The formation and operation of benefit corporations are now authorized in seven states, including California, New York, New Jersey, Vermont, Maryland, Virginia and Hawaii and has been introduced in several other states.

This new corporate structure is necessary in order to give companies legal protection to consider non-financial factors.  Otherwise, the company's sole fiduciary responsibility is to maximize value to shareholders. This traditional way of doing business, with a focus on the short term only is counterproductive in light of our country’s current economic turmoil. Long-term sustainable value, one cornerstone of the benefit corporation model, is the new approach to capitalism.

A benefit corporation is a for-profit corporation, but in addition to creating value for its shareholders, it has three additional attributes: 1. purpose, 2. accountability, and 3. transparency. This article sets out the elements of a benefit corporation, the advantages of a benefit corporation over other forms, and the importance of sustainable capitalism in the new economy. 

PURPOSE

Benefit corporations fundamentally change how a company is permitted to act. In addition to creating shareholder value like other for-profit companies, a benefit corporation must provide general public benefit, namely, a material positive impact on society and the environment taken as a whole.  Specific examples include providing low income individuals or communities with beneficial products or services, preserving the environment, promoting economic opportunity, and improving health.

To provide a contrasting illustration, the subprime mortgage crisis that overvalued real estate portfolios provides one obvious example of what happens when there is a lack of public purpose and rampant shortsightedness in corporate operations.

ACCOUNTABILITY

To avoid these types of situations, the corporation must consider the impacts of any action upon not only the shareholders, but also employees, customers, the community, the environment, short or long-term interests of the corporation, and the ability of the corporation to accomplish its public benefit purpose.

The corporation must assess its overall social and environmental performance on a yearly basis using an independent third-party standard, many of which are free to the public. The standard must be developed by an entity that has no material financial relationship with the corporation, and the criteria and standard development process must be publicly available.  In addition, the amount and sources of financial support for the entity developing the standard must be publicly disclosed, along with any relationships that could reasonably be considered to present a potential conflict-of-interest. The purpose of these requirements is to prevent the corporation from using an assessment tool that is self-serving. 

TRANSPARENCY

A benefit corporation must report on its overall social and environmental performance to its shareholders and the public in an annual benefit report.  The report must include the third-party standard selection process, the ways in which the benefit corporation pursued any general or specific public benefit during the year, and any circumstances that hindered the creation of the public benefit.  If the corporation fails to pursue its public benefit purpose or issue the benefit report, the shareholders may bring an action in court to force the corporation to do so in order to assure transparent operations. 

BENEFITS OVER FLEXIBLE PURPOSE CORPORATION

The flexible purpose corporation, a rival structure, is one that exists only in California.  It allows corporations to choose one or more specific public purposes.  Unlike the benefit corporation, it does not require the consideration of multiple stakeholders and requires no assessment or report on the operations of the corporation as a whole.  Importantly, the flexible purpose corporation need not carry out its special purpose in any way.  The board of directors may decide, in its sole discretion, whether or not to carry out the special purpose.  The shareholders have no right to enforce the special purpose either. 

Unfortunately, the lack of both assessment and reporting requirements and the inability of shareholders to demand that the corporation actually carry out its special purpose, may allow companies to mislead shareholders and consumers about the nature of the company, its products, and operations.

CONCLUSION

Benefit corporations, embracing purpose, accountability, and transparency, represent the new breed of capitalism in the U.S.  The benefit corporation structure paves the way for a new sustainable economy where capitalism can work again for all of us....

 

Jonathan S. Storper, is the co-chair of the legal working group which drafted the benefit corporation legislation in California, and a partner at the law firm of Hanson Bridgett LLP in San Francisco, California where he chairs the firm’s corporate and sustainable business practice groups.