Benefit Corporation, B Corp: Changing ‘Profit’ Capitalism to ‘Social Conscience’ Capitalism for New Economy… Paradigm Shift for Social Responsibility…

Many major corporations have already proven that they can be socially responsible for the well-being of societies, communities, and environments in which they operate.

There is a growing movement for a new type of corporation, a corporation structure that  is more socially responsible; namely, the Benefit Corporation. The Benefit Corporation is a class of corporation required by law to create general benefit for society, as well as for shareholders.

The Benefit Corporation must create a material positive impact on society, and consider how their decisions affect their employees, community, and the environment. Moreover, they must publicly report on their social and environmental performances using established third-party standards.

The Public Benefit Corporation is a public corporation chartered by a state designed to perform some public benefit. The chartering of Benefit Corporations is an attempt to reclaim the original purpose for which corporations were chartered in early America. Then, states chartered corporations to achieve a specific public purpose, such as building bridges or roads.

Their legitimacy stemmed from their delegated charter, although they could still earn profits while fulfilling it. Over time, however, corporations came to be chartered without any public purpose, while being legally bound to the singular purpose of profit-maximization for its shareholders.

Advocates of Benefit Corporations assert that this singular focus has resulted in a variety of societal ills, including the thwarting of democracy, diminished social good, and negative environmental impacts.  By law, the mission of a corporation is to maximize profit for shareholders, and the totality of a corporation’s activities must serve that single end.

Should a corporation fail to conduct themselves in that manner; fail to fulfill what is called its ‘fiduciary duty’, they may be held legally liable and face civil penalties.  By contrast, the ‘fiduciary duty’ of Benefit Corporations must include non-financial interests, such as social benefit, employee and supplier concerns, and environmental impact.

Chartering as a Benefit Corporation allows companies to distinguish themselves as businesses with a social conscience, and as one that aspires to a standard they consider higher than mere profit-maximization for shareholders. According to Yvon Chouinard who authored the book  ‘Let My People Go Surfing’ writes; the Benefit Corporation, usually referred to as a ‘B Corp’, creates the legal framework for firms to remain true to their social goals.

To qualify as a B Corp, a firm must have explicit social or environmental mission, and a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment, as well as its shareholders. It must also publish independently verified reports on its social and environmental impact alongside its financial results. Other than that it can go about business as usual.

The B Corp is a deliberate effort to change the nature of business by changing corporate law, led by ‘B Lab’, a non-profit organization. The idea of a legal framework for firms that put profits second is not confined to the U.S. Britain, for example, has since 2005 allowed people to form ‘community interest companies’. Similar laws are brewing in several European countries.

The impetus for all this comes from people who believe that existing laws governing corporations and charities are too restrictive, and they claim that existing laws for co-operatives and mutual companies are inadequate. Hence, the need for B Corps and other novel structures; such  goes their argument. There is no tax advantage for being a B Corp…

In the article “S Corps, C Corps, and B Corps, Oh My! Corporate Structure Matters” by Eric Friedenwald-Fishman writes: The basic structure for corporations is myopic; it focuses on maximizing profits to shareholders. Whether we are protesting the power and greed of corporations or defending them as drivers of the economy, we share the same basic expectation; that a corporation’s job is to maximize profits to shareholders.

This basic expectation is damaging to people, communities, the economy, and ultimately to the companies themselves. There is a better way: There’s an opportunity to make a paradigm shift that harnesses the incredible power of companies to benefit society and the economy; the Public Benefit Corporation.

For those unfamiliar, this structure requires three key elements: purpose (create a material positive impact to society), accountability (consider nonfinancial interests in decision-making), and a fair return to all shareholders with transparency (open disclosure of social performance using third-party standards). In other words,

Benefit Corporations are legally chartered both to consider and to benefit diverse stakeholders (shareholders, employees, the environment, and so on), and are held accountable for doing so. This shift in the corporate form has the potential to drive tangible positive impacts including; increased health and prosperity of the workforce and their families, improved air and water quality, community stability, and ultimately stronger companies that can compete for the long-term.

In the article “Adam Smith Was Not Schizophrenic” by Kyle Westaway writes:  Adam Smith, the father of modern economics, was the first to assert the concept of free market capitalism. In his most popular work, ‘The Wealth of Nations’ he wrote about the often-quoted ‘invisible hand.’ But in his first work, ‘The Theory of Moral Sentiments’, which he considered to be his most meaningful contribution; he writes about our duty to fellow members of society.

Given the gap between modern capitalism and the morals-based approach from his first book, one can’t help but wonder if Smith was an intellectual schizophrenic, essentially promoting two competing theories. I don’t think he was. In fact, I see his two preeminent works amounting to a unified theory, a blueprint for a more stable and sustainable version of capitalism; a conscious capitalism.

‘The Wealth of Nations’ presupposed that the capitalist system would operate on the moral framework he laid out in the ‘Theory of Moral Sentiments’. He was seeking to create a system defined by efficient allocation of resources driven by self-interest, but guided by self-restraint. However, the current version of capitalism’s guidance has the legal duty to maximize shareholder value.

Many are seeing the need for a new legal structure that embraces conscious capitalism by broadening the fiduciary duty from maximizing shareholder value to maximizing stakeholder value.  That is the legal mandate to make decisions that pursue not only a positive benefit on the bottom line of the shareholders, but also the positive benefits for the community, environment, employees and suppliers.

This broadening of fiduciary duty is a fundamental shift at the very core of the existing corporation. This new type of corporation that embraces both conscious capitalism and self-interest by broadening the fiduciary duty is known as Benefit Corporation…

In the blog B Corp is Not a New Legal Form by Ellis Carter writes: Although the terms B Corporation (B Corp) and Benefit Corporation may sound the same; they are distinctly different concepts. ‘B Corp’ formally known as a ‘Certified B Corporation’, is not a legal form, whereas the Benefit Corporation is a legal form.

The ‘Certified B Corporation’ is a label given by ‘B Lab’ (independent not-for-profit organization) to businesses that pass a ‘socially responsible certification’ process.  There are 3 key differences between B Corp and Benefit Corporation structures, and they are:

  • B Corporation (B Corp) is a voluntary certification.  ‘B Corporation’ certification recognizes companies that are purpose-driven and which create benefit for the community, the environment, and employees–as well as for shareholders. ‘B Corporation’ status is conferred on companies that apply with a passing score on the ‘B Rating System’ and that agree to take steps to legally expand their fiduciary duty beneficiaries beyond shareholders.  The certification is granted by an advisory committee from ‘B Lab’–a non-profit organization dedication to ‘B Corporation’ certification.
  • Benefit Corporation is a legal corporate structure.  You’ve likely heard of corporate structures such as; a ‘C Corp’ or an ‘S Corp’, similarly ‘Benefit Corporation’ is a another class of corporation that serves society and the environment, as well as shareholders.
  • Becoming a ‘Certified B Corporation’ is one way to meet statutory requirements for Benefit Corporation status. This is true for states that have passed ‘Benefit Corporation’ legislation.

A growing number of business people say that another kind of corporate legal structure is needed; a structure that requires companies to operate for the good of society, not just for their shareholders. According to Marc Gunther this vision is simple, yet ambitious; creating a corporate structure that uses the power of business to solve social and environmental problems. The B Corporation (B Corp) is a corporate structure that has the rigor and independent standards for meeting the requirement of social and environmental performance, accountability, and transparency.

According to Jay Coen Gilbert, a founder of ‘B Lab’: We can’t have a new economy unless we have a new type of corporation: Current law, he argues, require company executives to put shareholder’s interests ahead of everyone else’s and that is not socially responsible; we need a different structure. On the other hand, Marc Gunther says; the ‘B Corp’ concept is great in theory but the problem is that the majority of the world’s large corporations will not re-incorporate as a ‘B Corp’.

Thus, the idea of ‘business for the public benefit’ is not going to get big enough or important enough to make a real difference. It will just sit on the sidelines of ‘shareholder capitalism’. There are many existing corporations that are making the world a better place; by serving their customers, enabling their workers to flourish, and giving back to their communities. Even with the good deeds of many existing corporations; there’s no doubt that some key corporation reforms are needed; for a kinder gentler social conscious capitalism

Together, we can establish a 21st century corporate structure that provides returns to society, for granting its charter, while creating strong stable and responsible businesses. ~ ‘B Lab’