As The New Metrics of Sustainable Business Conference draws closer, we will be building up the conversation around industry developments to explore future investments in sustainability. One of the latest developments is the enactment of benefit corporation legislation in Delaware on July 17th.
Benefit corporation legislation seeks to protect for-profit companies that want to do well and do good at the same time, by allowing them the freedom to pursue higher corporate purposes, aside from maximizing profits.
While DE is the 18th state to sign benefit corporation legislation into law, it is undoubtedly one of the most important states to do so.
With over a million of the world’s leading businesses incorporated in Delaware, including approximately over fifty percent of all U.S. publicly traded companies, and sixty-three percent of the Fortune 500, the state is seen as the home of capitalism. Therefore, enacting benefit corporation legislation in DE indicates that the business world is gradually acknowledging the importance of creating long-term sustainable value as part of their core structure.
On July 18th, I was fortunate to attend an event co-hosted by the World Economic Forum and B Lab to celebrate this new legislation, and to gain further insight into the new opportunities and challenges that come with it. Entitled 'A New Model of Capitalism: The Significance of B Corp Legislation in Delaware,' the intimate event hosted an impressive and diverse range of attendees, including attorneys, investment firms, CEOs, and of course, Delaware Governor Jack Markell.
Here are the key takeaways:
The difference between a B Corporation and a benefit corporation
The first question often asked is, aren’t they the same thing? While there is certainly overlap, the answer is no.
A company can be a benefit corporation without becoming certified as a B Corporation, and vice versa. The similarity is that they have the same goal – to recognize organizations that desire to provide social good as part of, or in addition to, their core business.
A B corporation (commonly referred to as a B Corp), can be either a non-profit or for-profit, and is required to score a minimum of 80 out of 200 points on a rigorous social and environmental impact assessment. This is certified by the non-profit organization, B Lab, which also provides B Corps access to a range of support services including marketing, sales and the B Corp community of like-minded companies.
On the other hand, designed with for-profit companies in mind, benefit corporation status does not grant companies access to support services but rather provides legal protection.
Under traditional corporate law, the purpose of for-profit business is to create maximum profit for stockholders, which does not take into consideration the needs of all stakeholders, which includes the interests of employees, environment, and the communities in which the organizations operate. Therefore, under traditional corporate law, directors would be liable for pursuing social and environmental good at the expense of pursuing maximum profit.
Benefit corporation legislation protects directors and management, by creating a legal obligation to pursue the triple bottom line, rather than simply profits. The process for becoming a benefit corporation differs by state, but in general, companies that are interested in operating as a benefit corporation must explicitly list that part of their corporate purpose includes creating a general public benefit. That is, they are now required to have a material positive impact on social and environmental goods as part of their corporate purpose.
This is a boon for firms that have already built social and environmental missions into their core business, such as Etsy, whose CEO Chad Dickerson was a speaker at the event.
“The world needs new ways of solving problems. Benefit corporation legislation would give our company the option to be publicly recognized that we do more than make a profit,” said Dickerson. “Etsy focuses on creating social impact, and benefit legislation would formalize what we do.”
Finally, benefit corporation status does not currently affect a company’s tax status — only its corporate purpose and accountability.
The importance of metrics — putting your money where your mouth is
Both B Corps and benefit corporations are required to complete regular social and environmental assessments. B Corporations are assessed annually by B Lab, whereas individual state laws determine the frequency at which benefit corporations are assessed against third-party standards. This, once again, reinforces the need for metrics in sustainable business.
If a company elects to become a benefit corporation, the organization must explicitly list that part of their corporate purpose includes creating a general public benefit. Having companies regularly assess their social and environmental performance enables their stakeholders to quantify the impact of their business on their outlined public benefit. It also allows the company to identify new forms of value delivered through environmental and social products and services.
However, for companies looking to become benefit corporations, the burden of compliance and restructuring their company to regularly prove that they are creating a public benefit is a significant challenge that cannot be overlooked.
Assuming his assigned role as devil’s advocate, Michael Drexler, Senior Director and Head of Investor Industries at the World Economic Forum, remarked that adaptation would be a challenge as financial box-ticking is much easier than having to prove a material social impact. As a result, there is some initial skepticism about the rate at which benefit corporations can be scaled.
However, Delaware Chancellor Leo Strine commented that if a company has already built social impact into its business DNA, such as Warby Parker or Etsy, it would be able to navigate these tradeoffs while maximizing the benefits of this legislation.
Long-term value of benefit corporation legislation
“There is both a market and a societal need for benefit corporation legislation,” said Delaware Governor Jack Markell. “It harnesses the energy, intellect and power of entrepreneurs who are absolutely focused on making money, but also focused on giving back at the same time.”
Many entrepreneurs who desire to create innovative solutions to social and environmental problems, are often conflicted about whether they should be a 501 c(3) or an LLC. Benefit corporation status bridges these two worlds.
“There are a lot of large-scale problems that still exist,” said Albert Wenger, CEO of Union Square Ventures, “from environmental issues to uneven income distribution that, quite frankly, need business investment to be solved.”
Benefit corporation legislation is positioned to provide companies the latitude to go after these issues, while still making a profit.
However, there remains some concern from many companies that they would lose investors if their legal primary corporate purpose is not to maximize profits. Neil Grimmer, CEO and co-founder of Plum Organics, a B Corp-certified organic baby food producer that was recently sold to Campbell’s, spoke on his company’s experience to relieve fears.
“In 2008, we had sales of $1 million and by 2013, our sales have grown to $135 million,” Grimmer said, “Benefit corporation status will not impede sales but drive it. Our customers value our mission, and continue to buy our product. We also continue to receive venture funding, because investors like it when you stick to a mission.”
Overall, there has been an evident, though gradual shift, in business to adopt long-term vision when it comes to providing social and environmental value. This shift has not only occurred within relatively new businesses such as Etsy or Plum Organics, but also with global companies such as Puma, Darden Restaurant Group, FEMSA and Air New Zealand, who all presented at Sustainable Brands 2013 conference in June about their natural capital investments.
Therefore, the continued adoption of benefit corporation legislation, including in Delaware, is not too surprising.
Grimmer remarked, “If you don’t focus on taking care of communities and environment, then the wealth that your company acquires will not be sustainable.”
Time will tell how benefit corporation legislation will disrupt the way for-profit and non-profit companies operate.