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The rise of benefit corporations

The benefit corporation phenomena is causing legislative changes but it remains unclear to what extent it can impact corporate governance in the mainstream market.

In the US, new corporate legislation is helping to expand mission driven businesses. In July, Delaware became the 19th state (plus D.C.) to sign benefit corporation (B Corp) legislation into state law. This new corporate model could “create high quality jobs and improve the quality of life in our communities” says Jack Markell, Delaware’s governor. He believes B Corps “will help combat the plague of short-termism”, which in his view is the biggest threat to sustainable prosperity.

 

A B Corp is essentially a new type of company that follows a “triple bottom-line” approach to business in combining environmental and social considerations with economic ones. Their goal is to be profitable for their shareholders while at the same time creating public benefit by striving for a positive impact on society and the environment.

 

The central actor behind the movement is B Lab, an NGO that promotes benefit corporation legislation and also certifies companies that meet high standards of social and environmental performance. This allows companies in jurisdictions that lack this type of legislation to be recognised as a B Corp. They have so far signed up 837 B Corps from 27 countries across 60 industries, ranging from a pet store in Maryland to Patagonia, the Californian outdoor clothing company with annual sales of more than $414m.

 

Mr. Kassoy and his co-founders strive to change US corporate law, which in their view obliges directors to prioritise shareholder interests above all else. According to John Montgomery, a corporate lawyer who co-chaired the legal working group behind the California benefit corporation legislation, the new legal status offers a safe harbour for entrepreneurs who fear outside investors may force them to give up their social or environmental principles in return for new finance.

 

But critics say this new corporate form is unnecessary and may be counterproductive. Mark Underberg, a former partner at Paul, Weiss, Rifkind, Wharton & Garrison, said B Corps’ “crabbed view of directorial fiduciary duties perpetuates the unfortunate misconception that existing law compels companies to single-mindedly maximise profits and share price, and in so doing undermines the very values that corporate governance advocates should seek to promote: responsible, sustainable corporate decision-making by companies of any stripe”. Charles Elson of the University of Delaware says that the new legislation could “completely destroy managerial accountability” since “management can do basically anything it wants and claim that one or other stakeholder is being satisfied”. Prof Elson also foresees disputes between outside investors and other stakeholders.

 

Nonetheless, B Corps could be an important driver of responsible and impact investment and unlock billions of dollars in socially focused investment capital. An important impediment to the flow of institutional funds into impact investments is one of supply. “There’s a finite number of social enterprises in the world, so the investment opportunities have so far been relatively small,” says Gavin Power, deputy director of the United Nations Global Compact. Although some B Corp leaders aspire to be listed, this type of companies remain closely owned, often by their founders, and are thus untested in the public market.

 

It remains to be seen whether the B Corp movement could have an impact in the UK, though there are signs that the public might be supportive. A recent poll by YouGov, which was commissioned by the Fabian Society, showed that around 53 per cent of the people surveyed agree that company law should be changed so that directors have a duty to consider social, community and environmental objectives, as well as the interests of shareholders. Governments will play a vital role in creating incentives and policy signals, whether through tax codes or lowering regulatory hurdles, that will allow more mission-driven companies with long-term goals rather than short-term objectives to thrive. This may be a development worth monitoring.

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