Benefit corporation
In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation. This law marked a turning point in corporate history by explicitly allowing for-profit entities to pursue social and environmental goals alongside profit. Before this date, conventional corporations typically operated under the belief that increasing shareholder value was their only compelling interest. The new statute allowed companies to change their status merely by stating it in their approved corporate bylaws. A 2013 study conducted by MBA students at the University of Maryland revealed that one main reason businesses chose to file as benefit corporations was for community recognition of their values. This early adoption set a precedent that would eventually spread across the country.
Benefit corporations expand the fiduciary duty of directors to require them to consider non-financial stakeholders as well as the interests of shareholders. Historically, U.S. corporate law has not been structured or tailored to address the situation of for-profit companies that wish to pursue a social or environmental mission. The idea that a corporation has as its purpose to maximize financial gain for its shareholders was first articulated in Dodge v. Ford Motor Co. in 1919. Over time, through both law and custom, the concept of shareholder primacy came to be widely accepted. In 2010, the Delaware Chancery Court reaffirmed this stance, stating that a non-financial mission seeking not to maximize economic value is inconsistent with directors' fiduciary duties. Benefit corporation statutes place themselves within existing state corporation codes so that the codes apply to these entities in every respect except those explicit provisions unique to the form. This legal framework gives directors and officers of mission-driven businesses protection from shareholder lawsuits when pursuing decisions that benefit the public at the expense of short-term profits.
As of now, 36 states and Washington D.C. have passed legislation allowing for the creation of benefit corporations. Alabama passed its law on the 31st of December 2020, which went into effect the 1st of January 2021 under Act 2020-73, Section 8. Arizona followed suit by passing SB 1238 on the 30th of April 2013, effective the 31st of December 2014. Arkansas enacted HB 1510 on the 19th of April 2013, making it effective the 18th of July 2013. California was an early adopter, passing AB 361 on the 9th of October 2011, effective the 1st of January 2012. Colorado's HB 13-1138 became law on the 15th of May 2013, with implementation starting the 1st of April 2014. Connecticut passed SB 23 and HB 5597 on the 24th of April 2014, effective the 1st of October 2014. Delaware enacted SB 47 on the 17th of July 2013, effective the 1st of August 2013. Georgia's HB 230 was signed on the 29th of July 2020, becoming effective the 1st of January 2021. Florida passed SB 654 and HB 685 on the 20th of June 2014, effective the 1st of July 2014. Hawaii enacted SB 298 on the 8th of July 2011, which took effect immediately that same day.
There is a distinct difference between being filed as a benefit corporation in a state and being a certified benefit corporation also known as a B Corporation. Benefit corporations are legal entities created under specific state laws, whereas B Corporations voluntarily promise to run their firm with social and environmental causes as a concern. To receive certification from B Lab, companies must score a minimum of 80 out of 200 on a survey called the B impact assessment. Next, they will have to pass through an audit process. Finally, firms wishing to remain certified will be required to pay an annual fee to B Lab. Furthermore, companies will pledge to incorporate as a benefit corporation before their re-certification. In jurisdictions where regulations have not been enacted, a benefit corporation need not be certified or audited by the third-party standard. Instead, it may use third-party standards solely as a rubric to measure its own performance. Transparency provisions require benefit corporations to publish annual benefit reports of their social and environmental performance using a comprehensive, credible, independent, and transparent third-party standard.
According to William Mitchell Law Review journal, about 68 million US customers have a preference for making decisions about their purchases based on a sense of environmental or social responsibility. Some individuals go as far as using their purchases to punish companies for bad corporate behavior when it pertains to environmental or social cause. Others do the opposite, and use their purchasing power to reward firms that they believe are doing social or environmental good. The Mitchell Law Review also states that around 49% of Americans have at some point in time boycotted firms whose behavior they see as not in the best interest of society. Recent research suggests that when variables like price and quality are held constant, 87% of customers would switch from a less socially responsible brand to a more socially responsible competitor. This shift in consumer behavior has influenced how businesses approach their missions and why many choose to reorganize as public benefit corporations.
Common questions
When did Maryland become the first U.S. state to pass benefit corporation legislation?
Maryland became the first U.S. state to pass benefit corporation legislation in April 2010.
What is the difference between a benefit corporation and a certified B Corporation?
Benefit corporations are legal entities created under specific state laws, whereas B Corporations voluntarily promise to run their firm with social and environmental causes as a concern.
Which states passed benefit corporation legislation by December 2020?
As of now, 36 states and Washington D.C. have passed legislation allowing for the creation of benefit corporations including Alabama which passed its law on the 31st of December 2020.
How many points must companies score to receive certification from B Lab?
To receive certification from B Lab companies must score a minimum of 80 out of 200 on a survey called the B impact assessment.
Why do businesses choose to file as benefit corporations according to a 2013 study?
A 2013 study conducted by MBA students at the University of Maryland revealed that one main reason businesses chose to file as benefit corporations was for community recognition of their values.