B Corp Assessment Governance Considerations: Benefit Corporations
My name is Kevin Christopher. I’m the founder of Rockridge®, a B Corp technology law firm, as well as B Tennessee, a nonprofit advancing uptake of B Corp and benefit corporation frameworks. I’m also pro bono counsel for B Academics, a collection of researchers studying behavioral, market, political, and other metrics of social enterprises. In my professional career I’ve evolved from a neural implant patent nerd to an unabashed social enterprise advocate. Read more about me and my practice in the links that follow.
This article is written for my B Corp consultant friends, as well as entrepreneurs, directors, and officers considering benefit corporation adoption.
What is a B Corp and Why Does it Matter?
Hey, Kevin, didn’t we already cover this in Chris Marquis’ excellent book Better Business? Yes! But let me quickly summarize for purposes of this article. Essentially, a Certified B Corp describes a business entity (LLC, corporation, or even sole proprietor) that operates according to a triple-bottom-line framework prioritizing environmental and social impact in addition to profit as part of its core definition of success. There are more grandiose statements you’ll find out there, but this is perhaps the most concise definition of what it means to be a B Corp. B Corps are a “force for good” because they drive positive broadscale change through consumer choice, as opposed to government regulation or nonprofit donation.
How does a Company become a B Corp?
The B Corp certification is a trustmark. In other words, it’s stamp of approval by a certifying organization meant to engender trust among consumers. Earning a trustmark means that a company has met certain standards sufficient to publicly proclaim its status as a member or qualifying organization. Think: LEED, Fair Trade, 1% For The Planet, USDA Organic. These are all trustmarks, communicating to consumers that the endorsed companies bearing such marks have been vetted and meet criteria targeting respective consumer values.
All Certified B Corps must past a rigorous audit called the Impact Assessment investigating various aspects of how the applicant companies operate. These audits are categorically organized according to impact areas of Governance, Workers, Community, Environment, and Customers. Questions among these categories range in relative impact from less than 1 point to 10 points. A company applying to be a B Corp must aggregate at least 80 points on its audit to be recognized with certification.
Where do Benefit Corporations Come into Play?
As I regularly explain to my clients, the B Corp impact assessment is not perfect. The administrator of the assessment, B Lab, is a nonprofit, and goes to great lengths to ensure that each original and renewal applicant (yes, you must renew every two years) is given personal attention. Additionally, the core framework is applied to small businesses, multi-nationals, public companies, sole proprietors, manufacturers, service providers, etc. You see where this is going. The point is you can only have so much cake and I feel that B Lab serves up a Palet d’Or worthy of the French Laundry.
All companies looking to achieve B Corp certification must score above a certain threshold in the B Lab audit. The test awards points on a scaled basis, meaning some business practices or policies are worth more than others (purely for testing purposes). This is not always intuitive. For instance, if you are an innovative solar company producing products to combat climate change, the products your company provides may be less important than whether you have an advisory board, where you source your raw materials, or the statutory business nomenclature of your company. Which brings me to my next point—benefit corporation status is worth a rainbow toe of points in the impact assessment.
Where are Benefit Corporations Reviewed on the B Corp Impact Assessment?
Here’s the question you’ll see on the impact assessment:
Separate from a mission statement, what has your company done to legally ensure that its social or environmental performance is a part of its decision-making over time, regardless of company ownership?
The following answer will net 10(!) out of the 80 points needed for B Corp certification:
As an independent or publicly-owned business, amended corporate governing documents or adopted a legal entity or governance structure that requires consideration of all stakeholders in its decision-making (e.g. benefit corporation).
(Note that incorporating as a benefit corporation is just one example of how to earn 10 points here. There are other ways to legitimately satisfy the aims of this question without operating as a benefit corporation, but a statutory benefit structure arguably provides the best protection against shareholder primacy discussed below.)
Why is this so important? Unlike the B Corp business designation, Benefit Corporation is a legal designation. Hey, Kevin, isn’t this covered in the excellent book Benefit Corporation Law and Governance by Fredrick Alexander? Yes! But let me quickly summarize for purposes of this article.
What is a Benefit Corporation?
A Benefit Corporation is a formal type of business entity structure, like an LLC, C-Corp, or S-Corp. Essentially, a Benefit Corporation is a C-Corp with certain statutory distinctions that impact how it is operated, as well as the rights and responsibilities of its directors, managers, and shareholders.
Theoretically, a Benefit Corporation may be thought of as a legal framework to best promote corporate social responsibility. Over the past few decades, U.S. corporate law has trended towards something lawyers ominously refer to as the Doctrine of Shareholder Primacy. It basically means that shareholders – often in the form of large institutional hedge funds, pension funds, or venture capitalists – can pressure companies’ managers into maximizing monetary return to shareholders over competing considerations like environmental and social impact. For example, a company could be prevented from rolling out a novel paternity leave program for its employees, or prioritizing sustainability in its supply chain, if by doing so the company were to minimize shareholder dividends. By organizing and operating as a Benefit Corporation, a company can shield its management activities from shareholder pressures; effectively, Benefit Corporation status puts the force of law behind the idea that a company can and will consider people and planet as worthy metrics of success alongside profit.
Practically, a company might choose to launch or restructure as a Benefit Corporation if:
- its founders are mission-oriented and don’t wish to risk this motivation for doing business (e.g. selling one unit of product, giving one unit to a population in need);
- its management sees an audience specific advantage to being recognized as embodying corporate social responsibility principles (e.g. a company competing with nonprofits in selling goods or services to Government); or,
- its management wishes to justify certain atypical expenditures that are tied more towards its mission than its industry (e.g. a law firm buying kayaks to steward a local river the firm has adopted J).
What’s a Practical(ish) Example of Shareholder Primacy?
Let’s say a company called Corby Walker is founded by a couple of social entrepreneurs in Nova Scotia interested in selling designer earmuffs and also providing earmuffs to populations in need with icy ears. For every pair of earmuffs Corby Walker sells to its primary U.S. and Canadian customers, it provides a pair of earmuffs to Intuit and other polar populations. Corby Walker’s 1:1 model is a core function of its business and an integral component of its corporate identify. Soon Corby Walker’s earmuffs are on the cover of Vogue and its impressive e-commerce platform is pushing earmuffs by the sledfull. Corby’s founders need capital to meet demand, which leads them to Sandhill Road and other VC strongholds. Eventually, Corby’s cap table includes not only founders and early stage employees, but institutional investors including angel collectives, venture capitalists and pension funds. The darlings of the earmuff and social enterprise world, Corby’s founders are blindsided one shareholder meeting afternoon when they hear, “Hey, this whole 1:1 thing was cute and all, but people are buying Corby Walker earmuffs because they’re accessible, affordable, and trendy. It’s extremely costly getting hundreds of thousands of earmuffs distributed to these so-called “populations in need,” and it’s cutting into our returns. We’ve decided that the 1:1 program needs to go, or you need to go.” (Okay, maybe this is somewhat whimsical, but it’s meant to illustrate the tension between mission-oriented business initiatives and shareholder interests.)
What are the Main Things to Know about Operating as a Benefit Corporation?
The essential elements of a Benefit Corporation are accountability and engagement. Since states are free to pass their own interpretations of benefit corporation statutes, including in noteworthy examples fairly watered down, ugly cousin versions, how to legally operate will be determined by a company’s incorporating state in addition to internal governance documents.
Walking the Walk: Concerted Activity & Transparency
Why should a company be shielded from shareholder derivative suits if it’s not acting in accordance with its PR? In other words, why should corporate officers and directors be excused from obligations to provide maximum shareholder return unless they are publicly and measurably committed to the environmental and social impact causes that might reduce immediate shareholder returns? A Benefit Corporation is thus obligated to profess its stakeholders and to be audited by third parties like B Lab that investigate corporate actions in furtherance of stated causes.
- Note: Some states require identification of specific environmental and social impact objectives of benefit corporations, whereas other states broadly allow any stated interest (e.g. academic, religious, athletic). Consequently, it is possible to be a “Benefit Corporation” in an ugly cousin state where your public benefit is the promotion of your local high school football team.
- Note: Some states require annual audits demonstrating efforts in furtherance of invoked public benefits to be published on Benefit Corporations’ websites and otherwise made available to interested consumers, but our recent study of Tennessee Benefit Corporations found less than 1% compliance here.
Benefit Corporation Examples:
- The biotech startup Phlow Corproration was able to land an $800M Department of Defense pharmaceutical reshoring contract. Phlow’s status as a public benefit corporation was emphasized in the DOD’s press releases.
- Viva was the first publicly traded company to convert to a public benefit corporation.
- Lemonade and Laureate Education were recent public benefit corporations with successful IPO’s.
About Kevin Christopher
Kevin Christopher is the founder and principal of Rockridge Venture Law®, a B Corp Best For The World and Real Leaders Top 150 impact company. Kevin is a Berkeley Form + Fund Fellow, Yale CBE Business Leader, SuperLawyer, and Conscious Company Magazine Top Business Leader. Kevin is a registered patent attorney with practice areas including: patent and trademark prosecution, licensing and litigation; corporate law, with an emphasis on benefit corporations, socially responsible businesses and high-growth emergent companies; government contracts, with an emphasis on innovation funding; corporate and investor financing; and, technology commercialization. Kevin is also an entrepreneur, having co-founded companies in biotech, renewables, and consumer product industries, all active and growing. Kevin mentors entrepreneurs as program advisor with Bethesda Green Hub, First Flight Venture Center, Nashville Entrepreneur Center, University of California Venture Catalyst, and Yale Tsai CITY. With a background in public-private partnerships, Kevin is also a National Institutes of Health (NIH) RadX faculty member, and National Science Foundation (NSF) IUCRC program evaluator.
RVL recommended reading by Kevin:
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