Creating Reform Through Benefit Corporations

1

Shanté D. Elliott

April 28, 2015

Sustainable Corporations

Final Paper

As America recovered from The Great Recession, consumers refused to accept traditional business practices from major corporations and banks as they had done prior to the recession. Recognizing this, new laws and federal agencies were created and passed. Notwithstanding, the demand for a greater level of transparency and accountability for these industries continued to persist. The rise of benefit corporations provide consumers the level of accountability and transparency they desire from corporations. Benefit corporations continue to bring reform to the traditional corporate model. By operating with the goal of promoting social good, they do so without jeopardizing profits. An industry made up with over 30,000 entrepreneurs, investors are recognizing the importance of this industry and are beginning to see these businesses as viable investments. This paper discusses the history of the benefit corporation, highlights success stories, and brings attention to why investing in this industry should be taken seriously.

Creating Reform Through Benefit Corporations

Social entrepreneurs believe social good can be produced along with profits and desire hybrid forms of organization to smooth a single enterprise’s path to realizing both goals.[1] This belief is responsible for the rise of a new type of business. One that believes in producing profits, satisfying stakeholders, and changing and saving the world. This new type of business model is the benefit corporation.

In order for a new industry to rise in popularity and become fruitful, ordinary entrepreneurs had to become frustrated with traditional nonprofit and for-profit forms[2] of business. The result of this frustration caused entrepreneurs to chart a new path, creating a new industry, with keen focus on promoting social good. However, in order to ensure success, new legislation had to be adopted. A mounting number of jurisdictions have attempted to meet this demand by enabling new hybrid organizational forms: low-profit limited liability company (“L3C) available in nine U.S. states and the “B Corp,” a private certification for U.S. for-profits that demonstrate their commitment to a dual mission of making profits and promoting social good.[3] Benefit corporations would not be successful if jurisdictions did not support their mission, which impacted new legislation to be passed, allowing more benefit corporations to be established.

This paper will discuss how benefit corporations continue to bring reform to the traditional corporation model; its history, how benefit corporations create social good; and how investors are beginning to discover social business as an alternative ways of investing.

1. Reforming the Corporation

Coined “The Great Recession,”[4] lasting from December 2007, to June 2009. This recession began with the bursting of the eight trillion dollar housing bubble.[5] However, prior to the housing bubble burst, signs of a recession surfaced after the 2007 and 2008 global credit crunch.[6] Although America has made a comeback, it deserves mention that no comeback has been achieved without accountability. There is no one answer to the question of what caused this recession; several factors are responsible. Nevertheless, the federal government holds big banks responsible. Although banks were held responsible, corporations began to function under a microscope, as consumers demanded more transparency.

Banks such as Lehman Brothers provided mortgage loans to applicants, who under regular review would not have qualified to receive a mortgage loan.[7] This repetition resulted in other banks doing the same. When the time came and homeowners were unable to continue making their mortgage payments, it resulted in thousands of defaulted loans. (See Figure 1)

Figure 1

This graph shows the proportion of subprime mortgages issued in the United States between 1999 and 2008[8]

Because of this, new legislation and government agencies were created and passed. First, the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act is a compendium of federal regulations, primarily affecting financial institutions and their customers that the Obama administration passed in 2010 in an attempt to prevent the recurrence of events that caused the 2008 financial crisis.[9] Secondly, the Obama administration created the Consumer Protection Financial Bureau. This organization maintains a level of transparency with consumers and commercial institutions. Since the recession, Americans desire to hold large corporations to a higher level of accountability. Upon doing so, reform for traditional corporations were created.

Benefit corporations grew in popularity throughout the economic recession. Such corporations offered an alternative to how companies conducted business. It was no longer about greed; instead it was about promoting social good that all benefit from. Corporate greed is said to have caused economic crisis world-wide.[10] This alleged greed for profit has thrust to a movement knows as CSR, corporate social responsibility.[11] More than ever, firms care about their reputation and discover the social purpose of doing commercial business.[12] These firms care about their reputation because consumers are holding them more accountable for how they conduct business.

Approximately 68 million U.S. consumers have stated a preference for making purchasing decisions based upon their sense of social and environmental responsibility.[13] Now more than ever, consumers care about the environment and other important issues such as, education and hunger relief. Furthermore, some consumers use their purchasing power to punish companies for negative corporate behavior,[14] and many other consumers use their purchasing power to reward companies that positively address a social or environmental issue.[15] Consumers are loyal to the companies they believe serve a greater good, and continue supporting these companies through their purchases. However, if consumers feel that companies do not operate in a way that benefits society, they will not support them. Forty-nine percent of Americans have boycotted companies whose behavior they perceive is not in the best interest of society.[16] As consumer demand for socially responsible products and companies is increasing, consumer trust in corporations is decreasing.[17] Benefit corporations are one way to regain consumer trust.

1. The Benefit Corporation

“When social entrepreneurs’ frustration with traditional and for-profit forms became apparent, jurisdictions began to respond with new hybrid forms.” Dana Brakman Reiser

As consumers continue to demand more from corporations, the role the shareholder plays in the corporation continues to be evaluated. It is against the paradigm of shareholder primacy that benefit corporation statutes have been drafted. These statutes address not only the need for a new corporate form that changes the paradigm of shareholder primacy, but also respond to the demand from the marker place for a corporate form that meets the needs and expectations of increasingly socially and environmentally conscious consumers, investors, and entrepreneurs.[18] Unlike traditional corporate models, benefit corporations are held to a higher standard, and must meet specific requirements in order to achieve benefit corporation status. There are three major provisions in benefit corporation legislation that are consistent from state to state. A benefit corporation:

(1) Has the corporate purpose to create a material, positive impact on society and the environment;

(2) Expands fiduciary duty to require consideration of nonfinancial interests; and

(3) Reports on its overall social and environmental performance as assessed against a comprehensive, credible, independent, and transparent third-party standard.[19]

These three provisions address corporate purpose, accountability, and transparency.[20] Each allow consumers a direct entrance into the practices of the company. Furthermore, benefit corporations are required to have a purpose of creating “general public benefit” and are allowed to identify one or more “specific public benefit purposes.”[21]

While the law has accepted the practices of benefit corporations by changing and enacting new legislation. The main thrust of benefit corporation statutes is to require these entities to pursue purposes beyond profit-making.[22] Benefit corporations must benefit the general public. All statutes permit the benefit corporation to pursue more “specific public benefits,” including:

• Providing [low income or underserved] individuals or communities with beneficial products or services;
• Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
• Preserving [or improving] the environment;
• Improving human health;
• Promoting the arts, sciences, or advancement of knowledge; Increasing the flow of capital to entities with a public benefit;
• Accomplishing any other particular [identifiable] benefit for society or the environment.[23]

These statues hold benefit corporations accountable, this differs from general corporations, which are allowed to form for any lawful purpose, but have no explicit purpose requirement.[24] Twenty-seven laws have been passed in the United States to protect benefit corporations. (See Figure 2)

Figure 2

[25]

While benefit corporations were first protected under the law, a similar form of this corporations has gained recognition. B Corps operate similarly to benefit corporations. They too serve a social good and are also held accountable by consumers. However, benefit corporations and b-corps do differ. (See Figure 3)

Figure 3

[26]

One key difference between benefit corporations and b corps is that in order to acquire b corps certification, the company must pass a formal certification process. During this process they are required to report back to the B Lap the governance of their company. Although this process does require additional fees, in certain instances, it can prove to be more beneficial. The B Lap that b corps have access to provide additional support and resources that are needed when attempting to grow a company. As of today, there are 1,257 certified b corporations, operating in 41 countries, in over 121 industries;[27] though they may operate in vastly different industries and companies, they each serve one unifying goal.

1. Social Enterprise Done Right: Muhammad Yunus

“We must replace the one-dimensional person in economic theory with a multidimensional person—a person who has both selfish and selfless interests at the same time.” Muhammad Yunus

Muhammad Yunus is a Bangladeshi social entrepreneur. In 2006 he received the Nobel Peace Prize for founding the Grameen Bank. His path to social entrepreneurship is highlighted in his book, “Building Social Business.” In it, he writes about how he developed the concept of starting a bank through his career as an academic. He realized how poor villagers were unable to further grow their crops and harvest because of lack of equipment. These villagers were unable to obtain loans that would allow them to purchase the equipment they needed. To solve this problem, Yunus became the guarantor of loans to the poor;[28] earning his the name “banker to the poor.”

Yunus writes,

By the middle of 1976, I started giving out loans to the village poor, signing all the papers the bank gave me to guarantee the loans personally and acting as a kind of informal banker to my own. I wanted to make sure that the poor borrowers would find it easy to pay back the loans, so I came up with simple rules, such as having people repay their loans in small weekly amounts, and having the bank officer visit the villagers rather than making the villagers visit the bank. These ideas worked. People paid back the loans on time, every time.[29]

This method of lending allowed villagers to pull themselves out of poverty. Poverty is an artificial, external imposition on a person.[30] Poverty is a state of living. It has many facets. It has to be approached from many directions, and no approach is insignificant.[31] Yunus’ approach to ending poverty is through social business.

To Yunus, the goal of social business is “to solve a social problem by using business methods, including the creation and sale of products or services.”[32] Similar to the six components of the legal statute that permit benefit corporations to operate, Yunus believes that there are seven principles of social business:

1. The business objective is to overcome poverty, or one or more problems (such as education, health, technology access, and environment) that threaten people and society—not to maximize profit.
2. The company will attain financial and economic sustainability.
3. Investors get back only their return investment amount. No dividend is given beyond the return of the original investment.
4. When the investment amount is paid back, profit stays with the company for expansion and improvement.
5. The company will be environmentally conscious.
6. The workforce gets market wage with better-than-standard working conditions.
7. Do it with joy!!![33]

Yunus believes that these seven principles are the core of successful social enterprises. Furthermore, he believes that if entrepreneurs utilize these principles the change they bring to the world will have a lasting impact.

1. Socially Responsible Investing

The socially responsible investing (“SRI”) movement has grown over the past thirty years to represent nearly ten percent of U.S. assets under management, or roughly $2.3 trillion.[34] In the United States alone, the annual revenues of non-profit organizations in one recent year amounted to over $1.1 trillion![35] Investors are realizing that benefit corporations and other similar organizations, like nonprofits are profitable and can make for a wise investment. A November 2010 report by J.P Morgan titled “Impact Investments: An Emerging Asset Class” estimates the size of this market opportunity to be between $400 billion and $1 trillion.[36] This includes investment opportunities across five sectors: housing, rural water delivery, maternal health, primary education, and financial services.[37] These sectors represents the most popular issues social business address. J.P. Morgan estimates the ten-year profit potential from these opportunities alone ranged between $183 billion and $667 billion.[38]

Entrepreneurs are increasingly recognizing the limitless possibilities that exist from making a profitable social enterprise. There are over 30,000 social entrepreneurs with over $40 billion in revenues.[39] In addition, universities are also recognizing the opportunity to offer programs tailored specifically to this market. The pipeline of future for-profit social entrepreneurs is filling rapidly as most top business schools offer a program in Social Entrepreneurship.[40] Universities are not only capitalizing on this new market, they are also capitalizing on millennials. A network of business school students and young professionals using business as a tool for social change, is over 20,000 people globally.[41] This demographic cares about the world they live in and are dedicated to addressing its issues, in hopes to bring change.

Conclusion

Socially conscious business practices and socially responsible investing will continue to rise. As consumers continue to demand more from large corporations, social enterprises and benefit corporations are one of few ways consumers receive the transparency they desire. Benefit corporations promote social good without accepting a loss in profits. As the law continues to support such corporations, it does so while remaining flexible and placing systems of accountability in place. Recognizing this, investors impart trust in these companies by investing in them. As findings from J.P. Morgan show, socially conscious businesses are secure and solid investment options. Social entrepreneurs like Muhammad Yuns prove that when done correctly, social enterprises can shake the traditional corporate market, generate self-sustaining revenue, while bringing much needed change to the world.

[1] Reiser Brakman Dana. Benefit Corporations – A Sustainable Form of Organization?. 46 Wake Forest L. Rev 592 16-34 (2011).

[2] Id.

[3] Id.

[4] Economic Policy Institute, [ April 27, 2015

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Investopedia, [ April 27, 2015

[10] Fischer Sven, Goerg J. Sebastian, Hamann Hanjo, Cui Bono, Benefit Corporation? An Experiment Inspired By Social Enterprise Legislation in Germany and the US. 2012

[11] Id.

[12] Id.

[13] Jr. Clark H. William, Babson K. Elizabeth “How Benefit Corporations Are Redefining the Purpose of Business Corporations” 48 William Mitchell L. Rev 2. 817-838 (2012)

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Reiser Brakman Dana. Benefit Corporations – A Sustainable Form of Organization?. 46 Wake Forest L. Rev 592 17. (2011).

[23] Id

[24] Jr. Clark H. William, Babson K. Elizabeth “How Benefit Corporations Are Redefining the Purpose of Business Corporations” 48 William Mitchell L. Rev 2. 839 (2012)

[25] Certified B Corporations, [ April 28, 2015

[26] Certified B Corporations, [ April 28, 2015

[27] Id.

[28] Yunus Muhammad. Building Social Business. Perseus Book Group. Philadelphia PA. 2010.

[29] Id.

[30] Id.

[31] Id.

[32] Id.

[33] Id.

[34] Jr. Clark H. William, Babson K. Elizabeth “How Benefit Corporations Are Redefining the Purpose of Business Corporations” 48 William Mitchell L. Rev 2. 817-838 (2012).

[35] Yunus Muhammad. Building Social Business. Perseus Book Group. Philadelphia PA. 2010.

[36] Id at 822.

[37] Id.

[38] Id.

[39] Id.

[40] Id.

[41] Id.