Many companies are embracing the concept of social responsibility in their business practices. The idea that profits are paramount to all other considerations is slowly changing. More companies are becoming concerned about how their business activities will affect the environment and the well being of their employees. Taking these considerations into account when operating a for-profit business does not always lead to higher profits. In fact, many business decisions that positively affect the environment and employees can cost more and result in lower profits. In traditional corporations, business managers who make decisions that lead to lower profits can be held liable by shareholders. Benefit corporations, also known as “B-Corporations,” are designed to allow a for-profit business to be more socially responsible even if it results in lower profits without the risk of liability for managers.
A benefit corporation (B-corporation) is a new business entity similar to a traditional corporation. It is comprised of a board of directors, officers, employees, and shareholders. The shareholders are typically the owners and/or investors. The main difference between a B-corporation and a traditional corporation is the accountability standard for managers and the requirement that business activities positively affect the community, environment, and employees. Traditional corporations allow shareholders to hold managers accountable for producing profits and making decisions that will ensure the production of profits. B-corporations allow managers more flexibility in their decision making when it comes to choosing between profits and socially responsible activities. The responsibilities of the managers in B-corporations are shifted away from pure profit and include socially and environmentally sound practices.
In April of 2010, Maryland became the first state in the U.S. to enact legislation authorizing the creation of the B-corporation. As of January of 2012, seven states had enacted B-corporation legislation including: California, Hawaii, Maryland, New Jersey, New York, Vermont, and Virginia. There are other states considering B-corporation legislation. Common to B-corporation legislation is the requirement that these entities have a general public benefit purpose. In other words, B-corporations must make a material positive impact on society and/or the environment. A higher standard of transparency is another common requirement of B-corporation legislation.
Managers and executives of regular corporations have a duty to develop and increase the investments of their shareholders. Shareholders can enforce these duties through various legal processes including shareholder lawsuits. In contrast, managers of B-corporations have a duty to achieve the general public benefit purpose of the company. This gives managers and directors the right to consider employees, the community, and/or the environment in addition to profits. Legal requirements of transparency will allow shareholders of B-corporations to hold managers accountable for failing to accomplish the company’s public benefit purpose.
The real question is whether shareholders will want to invest in companies that are not required to focus solely on profits. After all, shareholders who put their money at risk want to see a return on investment. If managers can put employees benefits ahead of shareholder value, will anyone want to put their money at risk? In addition, shareholders might be concerned that managers would use the public benefit purpose as an excuse for wasting corporate assets.
The B-corporation is a great concept for entrepreneurs who want to promote social or environmental objectives. The question remains whether this untested structure will provide sufficient security for investors.