Impact investing in the boardroom: for boards considering a broader focus on social responsibility, the benefit corporation model may be attractive.

Author:Raymond, Doug

The United States is experiencing the beginnings of what is expected to be a $30 trillion transfer of wealth from the Baby Boomers to their Generation X and Millennial children. As the younger generations assume control of their inheritances, companies will learn how their investment styles and objectives differ from those of their parents. While investment advisors and others try to predict the implications of this for their business models, one trend is becoming more clear: these younger investors will be much more focused on the broader societal impacts of the companies in which they invest. Indeed, many will make it a priority to more closely align their investments with their personal concerns about issues such as the environment, fair trade, social justice, sustainability and other broader societal issues.

This has significant implications for enterprises seeking to attract such investors, as they must focus not only on economic returns but also on specific social, humanitarian or environmental outcomes. According to one recent study, investments characterized as socially responsible almost doubled between 2012 and 2014, to about $6.5 trillion. This market for socially and environmentally responsible investments is expected to continue to grow rapidly.

For boards considering a broader focus on social responsibility, the benefit corporation model is a fairly recent development that may be attractive. The benefit corporation structure provides a legal framework to establish a for-profit (but still) socially responsible business that can attract impact investors as well as other sources of capital.

Benefit corporations generally are the same as traditional business corporations, but unlike a typical corporation: (1) they must have a corporate purpose that includes creating a material, positive impact on society and the environment; (2) the fiduciary duties of directors are expanded to require consideration of nonfinancial and stakeholder interests beyond the economic interests of shareholders; and (3) they must periodically report on their overall social and environmental performance as assessed against a credible, independent, and transparent third-party standard.

The laws authorizing a benefit corporation provide its board with tools, including an expanded business judgment rule and special liability protections that allow the boards of these corporations to make commitments to stakeholders that are equivalent to their commitments to...

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