A Brave New Corporation? Bringing the B-Corp to California

Illustration by Tim Gough, from "A New Corporation for a New Economy"

In the February 12^th morning report on NPR, April Dembosky discussed the idea of a creating a legal framework for socially responsible businesses in California. Pragmatically, the underlying problem is evident – businesses that register as nonprofits have trouble tapping private capital to expand, while for-profit companies risk compromising their missions because they must put shareholders’ returns first. Morally, it makes sense to reward businesses committed to minimizing societal externalities of their activities and implementing a mission to improve the world around them.

The Benefit Corporation, or “B-Corp” is not in itself a solution to the legal quandary that social entrepreneurs face when seeking to incorporate in California. Rather, B-Corp status is at the moment a certification via the “B Impact Rating System” that considers the company’s social and environmental performance.  However, investors’ and shareholders’ ability to fully adopt such standards legally in California (in addition to 19 other states) is impeded by the current corporate code, which adopts a “shareholder-centric” standard whereby directors may not invoke reasons for their decisions that are unrelated to the best interests of shareholders. “Best interests” in legalese translates to immediate maximum dollar value.

Nonshareholder constituency requirements, which permit directors to consider the effects of their decisions on a variety of nonshareholder interests, such as employees, customers, suppliers, and local communities, have an interesting history. The first of such statutes was enacted by the Pennsylvania legislature in 1983 in response to the enormous rise in hostile takeovers springing out of anti-takeover activities and essentially broadened the meaning of “best interests” of the corporation that could be considered by directors. While some business commentators have argued that such constituency statutes “decenter” shareholders by allowing management to “choose courses of action that are inconsistent with traditional notions of shareholder primacy,” the current B-Corp momentum bucks the traditional economic view that shareholders are focused on short term economic profit above all else.

So what does the B-Corp mean for states like California?  Current proposed legislation in California would require corporations to name at least one social or environmental purpose for which the company exists and to which it is willing to be held accountable through greater transparency. Unlike B Corps, which are required to consider the impact of their decisions on all stakeholders, the proposed amendment to the California corporate code would require these alternative legal entities to focus on one non-financial purpose. The specificity of the “purpose” is unclear, as there is no official bill language at this point. (i.e., whether the purpose is central to the corporation’s mission or is a more peripheral purpose)

For obvious reasons, it will be more difficult for the government to require the same criteria for “benefit” corporate status than those of the B-Corp certification organization. However, states should at least allow corporations to create bylaw provisions where directors can consider non-shareholder interests that are clearly tied to the public interest.  While the California business bar will certainly argue that such provisions “could leave [directors] so much discretion that [they] could easily pursue their own agenda, one that might maximize neither shareholder, employee, consumer, nor national wealth, only their own,” the prevalence and duration of these statutes suggests otherwise. Conversely, it can be argued that maintaining a corporate code that lags behind the public interest is archaic and adverse to free market demands of investors and entrepreneurs who desire to legally create such entities and are willing to take the risk to do so.

While legal corporate status is not absolutely necessary to the progress of the B-Corp movement, the recognition of its corporate form in states like California would enable growth of an emerging market and would allow the imposition of stricter and clearer standards for businesses. This ultimately would strengthen corporate social responsibility efforts and would ensure greater accountability to consumers, stakeholders and shareholders.

For more on the B-Corp in California, as well as discussion of the the prior (failed) Bill, AB 2944, see “A New Corporation for a New Economy.”

For more blogging on the B-Corp and CSR, check out Amelia Timbers’ blog

Read the Businessweek Special Report on Social Entrepreneurship