Benefit Corporations: Do the Benefits Exceed the Costs?

Benefit corporations are a hot new innovation in corporate law. In just a few years over half of the states have adopted benefit corporation statutes, aiming to provide a form of business association adapted to social enterprises which blend profit-making with other social purposes. Between 1,000 and 2,000 businesses have adopted the new form so far. Is there a need for benefit corporations? What explains the political success of this legal innovation? And what will it take for benefit corporations to become a widely-used tool?

The entrepreneurs who found, and other investors who help fund, social enterprises want to do good and do well at the same time. They aim to advance specific social purposes, and avoid social harms, while still earning a financial return on their investment. These investors both care personally about doing good (at least, the legitimate ones do), and they also hope to attract employees and customers who share their values. A premise of those advocating social enterprises is that there are at least potentially many entrepreneurs, investors, employees, and customers who want to be involved in such businesses, if they can all be effectively brought together.

Why might there be a need for a new legal form for social enterprises? Consider the two traditional types of corporations . Non-profit corporations are generally inappropriate, because they cannot distribute profits to their members (if they have any). But the appropriateness of ordinary business corporations is a closer question. Can the managers of such a corporation pursue both profit and other social benefits? Of course, much of the time the two purposes may not conflict. But what if they do?

That is a much-debated question in corporate law. Many believe that the directors and officers of a business corporation have a fiduciary duty to the financial interests of shareholders alone. A, maybe the, leading justification for benefit corporations is to avoid this conception of duty and allow managers to pursue other purposes in addition to profit. But, others (myself included) dispute that characterization of duty in for-profit corporations. At least in the majority of states that have constituency statutes, it seems clear that managers may consider and pursue interests other than profit maximization for shareholders.

And yet, even states with constituency statutes are adopting benefit corporation statutes. I was on the drafting committee in one such state, Minnesota. What need could there be for this new form in those states? To understand, note that benefit corporation statutes add two elements on top of ordinary business corporations—benefit corporations are ordinary corporations, governed by the business corporation statute of their state of incorporation, except on these points. One, they must regularly report to their shareholders what they have done to pursue their social purposes. Two, not only may they pursue social purposes beyond profit, they must. They have a fiduciary duty to consider public benefits, enforceable by shareholder suit if they fail to do so.

That move from may to must is the key to understanding a crucial potential use for benefit corporations. Becoming one acts as a commitment device. Entrepreneurs who choose this legal form commit to pursuing the public good, and they can be sued if they don’t follow through on that commitment. Why might there be a need to make this commitment? Because potential outside investors, employees, and customers may (quite rightly) worry about “greenwashing.” Unscrupulous businesses, aware of the desire to be involved in worthy social enterprises, may proclaim their green virtues to attract investors willing to accept a lower or riskier return, employees willing to accept a lower wage, and customers willing to pay a higher price. Investors, employees, and customers may find it hard to sort out genuine social enterprises from impostors. The new legal form gives a way to credibly signal that one’s business really means it when it says it is committed to the public good.

Why have so many states adopted the form so quickly? Several factors help explain the phenomenon. One, there is an effective sponsor: B Lab, an organization that certifies social enterprises, and the source of a model benefit corporation statute. Two, there is no interest group hurt by the legislation—managers and shareholders in existing and potential new corporations can just ignore the new form if they don’t like it. Third, the statutes have something to appeal to both parties. Democrats like corporate social responsibility. Republicans like a market-based solution that expands options for entrepreneurs.

But, will businesses be as quick to adopt the form as legislatures? If the risks of suit appear too high, and the burdens and uncertainties of balancing competing interests appear too great, entrepreneurs may fear to form benefit corporations. It remains quite unclear if the potential benefits of the form will outweigh these costs. But if the form does eventually spread widely, it will be because various actors engage in an extended process of social learning. B Lab and networks like the Social Enterprise Alliance may help connect entrepreneurs with investors and spread best practices. Transactional lawyers may help craft organizational documents, board checklists, shareholder outreach programs, and the like to help reduce the risks of liability and clarify managerial duties. Courts faced with suits may limit the chances of liability while still helping to prod businesses to follow best practices.

In the article on which this post is based, I use something called strategic action field theory, an emerging approach within sociology, to help explain both the attractions and the obstacles surrounding benefit corporations. The approach assumes a mix of motives—both self-seeking for profit and power, but also meaning-seeking to advance more altruistic goals. This mirrors the motives of social entrepreneurs themselves. Thus, in considering the growth and potential of social enterprise, not only entrepreneurs and investors, but also scholars and lawyers are called upon to explore whether there are ways to better harness contrasting human desires to enrich one’s self and to better the world.

The preceding post comes to us from Brett McDonnell, the Dorsey & Whitney Chair in Law at the University of Minnesota Law School.  The post is based on his article, which is entitled “Benefit Corporations and Strategic Action Fields or (the Existential Failing of Delaware)” and available here.