Benefit corporations: Redefining business success

ITHACA — “I want to be the Patagonia of the technology industry,” says Elisa Miller-Out, CEO of Singlebrook Technology, Inc. in Ithaca.

Patagonia makes outdoor clothing and gear and is a long-term supporter of the environmental movement. Singlebrook Technology is a Web and mobile-development firm with 13 employees located at 119 S. Cayuga St. in Ithaca.

This year, Miller-Out registered her company as a benefit corporation, a hybrid that bridges the legal gap that separates for-profit companies from not-for-profit companies. According to Allen Bromberger, a partner in the New York City law firm of Perlman + Perlman, LLP and a specialist in hybrid legal transactions, “… a benefit corporation is a legally distinct type of business
corporation that is committed to accomplishing one or more social or public purposes.” (Stanford Social Innovation/Spring 2011.)

“Benefit corporations are the same as traditional corporations, except for three things,” says Miller-Out. They must [first] create a material and positive impact on society and the environment … [Second], the corporation is accountable to a variety of stakeholders, including stockholders, employees, vendors, and their employees, customers, the community, and the environment… [And third], benefit companies must ensure transparency by reporting annually on their social and environmental performance.” Miller-Out adds that her company is taxed the same as any for-profit entity.

Evolution of the benefit corporation

The first benefit-corporation law was passed in Maryland in April 2010 and already 11 states have adopted legislation authorizing the legal structure. Another 16 states are currently considering legislation. The New York State legislature passed the benefit-corporation law on Oct. 13, 2011, and the legislative act became law on Feb. 2 of this year. Cabot Creamery, Patagonia, Dansko, Cascade Engineering, and Seventh Generation are just a few of the 640-plus benefit companies representing 60 industries in 15 countries. Total annual sales of these benefit corporations is $4.2 billion, according to the B Lab website (www.bcorporation.net). B Lab describes itself as “a nonprofit organization dedicated to using the power of business to solve social and environmental problems.” Election of benefit-corporation status is voluntary, and states incur no expense in offering the option.

Bromberger writes that the dilemma for social entrepreneurs is that “… under traditional corporate jurisprudence, a [for-profit] corporation is formed to benefit its shareholders by producing profits … what is sometimes referred to as ‘shareholder primacy’… Courts have historically viewed the interests of shareholders in primarily economic terms … [T]he rule is almost completely the opposite for nonprofit corporations … [which] are formed for the purpose of accomplishing a ‘mission.’” 

For those companies that want to redefine business success, the benefit corporation changes the fiduciary responsibility of the firm’s board of directors, who may now consider non-financial interests when making decisions. The legal innovation protects the company’s officers and directors against lawsuits by shareholders focused only on maximizing profit or the sale price.

Benefits of B Corps

Is there a motivation to establish a benefit corporation other than a commitment to the sustainable-business movement or the environment? “Yes,” says Miller-Out. “Because of my corporate status, I am able to buy supplies from certain vendors at special prices only offered to nonprofits. I also have access to ‘social-capital’ funds, as a potential source of future investment. (It is estimated that 10 percent of all U.S. assets under management are in socially responsible funds.) [Further], by establishing ourselves as a socially responsible company, we are branding our image both in the minds of our customers and of our employees who care deeply about society and the environment. [Finally,] benefit corporations readily network with each other to share ideas and values that help to strengthen their companies and benchmark performance.”

Other advantages not mentioned by the Singlebrook Technology CEO are consideration by universities such as Yale, which forgive student loans to their MBAs who work for benefit corporations after graduation. Also, some benefit corporations find that they generate favorable publicity through their incorporation.

Singlebrook Technology not only incorporated as a benefit corporation but also went on to acquire a certification by B Lab, which is based in the Philadelphia area. While benefit corporations are not required by statute to be certified, B Lab, as early as 2007, initiated a certification process for companies which wanted to distinguish themselves in the marketplace by establishing third-party standards for social and environmental performance. B Lab’s designation as a B-Corp is similar in concept to products certified as fair trade, organic, and LEED (Leadership in Energy and Environmental Design).

In 2011, B Lab launched a new service that grades companies not on their risk/return but on their social and environmental impact. According to the B Lab website, the Global Impact Investing Ratings System (GIIRS) uses a ratings-and-analytics approach analogous to Morningstar investment rankings and the S&P credit-risk ratings. The tool is designed to help change investor behavior by creating ratings in 15 sub-categories and key-performance indicators relevant to the company’s industry, geography, size, and social mission. The methodology is governed by an independent standards board.

For those corporate officers and directors traditionally stymied by the legal options either to make money or to make a difference, the benefit corporation combines profit and mission to create a third option designed to harness the power of the private sector in order to create public benefit.

Miller-Out, a self-described serial entrepreneur who has already created three businesses in her young career, says that “… the benefit corporation is a grass-roots movement capable of changing the business world.” She sees “… accelerating consumer and investor demand for companies that put purpose, not profit, at the center of their business model.”

Only time will tell whether benefit corporations are a fad or the new model for redefining business success.       

Contact Poltenson at 

npoltenson@tgbbj.com