Rick Trilling, The Daily Record Newswire
Allowing for-profit business entities to incorporate as so-called benefit corporations is one of various corporate forms that states are making available to socially minded entrepreneurs and intrapreneurs, along with low-profit limited liability corporations and flexible purpose corporations. Collectively, these are known as "other constituency statutes."
Traditional fiduciary obligations require corporate leaders to focus primarily on the goals of shareholders, to the exclusion of almost all else. This has long been based on Dodge v. Ford, the 1919 Michigan Supreme Court decision stating that a "business corporation is organized and carried on primarily for the profit of the stockholders."
Directors and officers can be personally liable for violation of this obligation, and D&O insurance will not cover willful such acts; a manager faces at minimum termination of employment.
There have been contrary arguments: In the 1953 case A.P. Smith Mfg. Co. v. Barlow, the New Jersey Supreme Court stated that "modern conditions require that corporations acknowledge and discharge social as well as private responsibilities as members of the community within which they operate"; and the business judgment rule generally causes courts to defer to board decision-making, absent a conflict of interest.
Yet the prevailing Ford doctrine has given boards pause in taking any action detrimental to shareholder interests. Enter the benefit corporation, through which corporate leaders are not merely allowed, but rather required, to consider the effects of their company decision-making not just on the shareholders but also their employees, the local community, society in general, the environment, the corporate entity itself, and other specifically identified public benefit purposes.
The situation encountered by Ben & Jerry's, the ice cream company, is generally cited by social entrepreneurs as the motivating force behind the "other constituency statutes" movement.
The company was founded in 1978 on principles of corporate social responsibility, including giving 7.5 percent of its pre-tax revenues to charity, locally sourcing ingredients, and limiting executive salaries to five times that of the lowest paid employee.
The two owners and their employees created a three-part mission statement based on linked prosperity: a product mission, a social mission and an economic mission. However, to finance growth the owners sold stock (at first to employees and Vermont residents only), which eventually obligated them to maximize shareholder value, resulting in a 2000 sale of the company to Unilever.
This episode led to the creation of what became known as "Ben & Jerry's Law" in Vermont, the original benefits corporation act. Ben & Jerry's Homemade, Inc. has since become the first wholly owned subsidiary to gain "B corp" status, an independent certification by the nonprofit B Lab to meet standards of social and environmental performance, accountability and transparency.
Such standards of accountability and transparency drive the enforcement of benefit corporations. Various provisions require publication of annual benefit reports of their social and environmental performance using third-party standards.
Shareholders may bring a benefit enforcement proceeding, to enforce the company's mission, if they believe that the business has failed to pursue or create general public benefit. Boards must designate an independent benefit director to oversee and report on the corporation's public benefit goals, and may also designate a benefit officer.
The fiduciary discretion, formal oversight of public benefit mission, accountability and transparency of benefit corporations allow directors and officers to prioritize the social and environmental impacts of decision-making; overseen by a required, formally designated benefit director; and documented in an annual "benefit report" to shareholders that includes descriptions of public benefit pursued during the year and any circumstances that may have hindered the creation by the benefit corporation of general and/or specific public benefit, assessed by independent third-party standards.
As social entrepreneurship becomes an increasingly relevant aspect of business law, it is important to understand the opportunities and limitations in the nascent field of "other constituency statutes" in general and benefit corporations in particular.
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Attorney Rick Trilling is an associate professor of business management at Wentworth Institute of Technology in Boston.
Published: Mon, Jan 12, 2015
