The viability of benefit corporations: an argument for greater transparency and accountability.

• Author: Nass, Mitch

1. INTRODUCTION II. BACKGROUND A. Demand by Investors and Consumers B. For-Profit Corporations C. Non-Profit Corporations D. Hybrid Corporations E. The Benefit Corporation III. ANALYSIS A. Provisions in the Existing Legislation 1. The Third-Party Standard 2. The Annual Benefit Report B. Third-Party Oversight in Practice C. Enforcement IV. RECOMMENDATION A. The Need for Stronger Third Party Oversight 1. The Need for Greater Statutory Guidance 2. Audit Requirement 3. Government Oversight B. The Necessity for a Stronger Enforcement Procedure 1. Recommended Improvement to the Benefit Enforcement Proceeding V. CONCLUSION I. INTRODUCTION

   Traditional corporate forms and the existing corporate law framework place limitations on a corporation's ability to consider interests beyond profit maximization. This notion is at odds with the growing demand for companies that promote social responsibility by using environmentally friendly products and practices, or benefit society in other ways. The benefit corporation entity is a corporate form that has the potential to combine the interests of profit generation with the pursuit of social goals. So long as benefit corporation legislation requires compliance with strict oversight and transparency standards, companies that wish to generate a profit and simultaneously create a positive impact on society will be able to do so without the fear of shareholder derivative litigation. By incorporating as a benefit corporation, a company also signals to the market that the company is socially responsible. The benefit corporation entity therefore allows companies to capture demand from consumers and investors that champion ideals beyond simply maximizing wealth.

   Part II of this Note provides a backdrop to the limitations presented by traditional corporate forms, and explores the context of changing investor and consumer behavior that makes the benefit corporation entity an attractive corporate form. Part III analyzes the features of existing benefit corporation legislation and the various requirements for compliance and transparency. Part IV recommends changes to the existing legislation that will make the benefit corporation entity more viable in practice. Finally, Part V offers a brief conclusion.

2. BACKGROUND

   Unlike contemporary corporations formed for the purpose of generating profits, (1) the earliest corporate entities were organized with the intent to achieve a more specific and concrete goal. (2) In light of the current period of economic uncertainty, and the awareness of the necessity and desire for sustainability, many Americans are disenchanted with the operating practices and philosophy of major corporations. (3) Some corporations have attempted to solve the problem by abandoning the restrictions of existing corporate forms and reincorporating in a manner that allows for the freedom to pursue socially beneficial goals without altogether abandoning the distribution of profits to its shareholders. (4) This suggests a growing approach to business that has come full circle, embodying the desire to achieve specific progressive purposes in the semblance of the earliest chartered corporations.

   1. Demand by Investors and Consumers

      The trend of corporations seeking to achieve a purpose beyond generating a profit comes at a time when both investors and consumers desire to align their purchases and investments with their social values. (5) Not all investors want to use their resources solely to generate additional revenue for themselves; many choose "impact investments" to support corporations that share their desire for social and environmental progress. (6) While analysts hesitate to provide an estimate of the current levels of impact investing in the United States, some predict that it will constitute approximately $500 billion of invested funds within five to ten years, representing one percent of total managed assets. (7) Other experts estimate the total capital raised for impact investments will be anywhere from $400 billion to $1 trillion within the next ten years. (8) The wave of demand for socially impactful investments is gaining such significant traction that it is even a growing subject taught at prestigious business schools throughout the United States. (9)

      In addition investor interest, studies demonstrate that consumers support corporations that are socially and environmentally conscious. The Natural Marketing Institute estimated that upwards of 68 million adult Americans make purchases in accordance with their social and environmental values. (10) Furthermore, "consumers are willing to spend up to 20% more on environmentally] sound products and services." (11) This consumer behavior has a significant effect on the socially conscious corporations themselves, as 72% of companies with environmental and social policies outperform the general stock market. (12)

      These studies highlight the principle that individual social values significantly motivate both investor and consumer behavior. This principle has not escaped the corporate world, and companies have sought to capitalize on demand by marketing themselves as socially and environmentally friendly. Such marketing can be problematic for consumers and investors, as it is often difficult to distinguish between companies with legitimate social purposes and those that are simply implementing effective marketing strategies. "Greenwashing" is a marketing strategy that seeks to capitalize on the demand for socially conscious corporations' products and services provided by advertising green initiatives that may or may not accurately represent the company's actual goals and behavior. (13) The remainder of this Part will discuss the limitations of existing corporate forms in eliminating the risk of greenwashing while simultaneously attracting consumer and investor demand.

      It will also provide background information and an explanation of the emerging benefit corporation entity.

   2. For-Profit Corporations

      The primary goal of a traditional, modern corporation is to maximize shareholder wealth. (14) Use of the traditional corporate form carries two significant limitations for a company that has a legitimate, socially beneficial goal. First, there is the risk that an uninformed consumer or investor will not take a company seriously that advertises itself as socially conscious. Because of the abundance of companies that advertise themselves as "green" or environmentally responsible, it would be no surprise for a casual consumer to become desensitized to this marketing approach and to view it with suspicion. This may result in consumers grouping a particular company among other greenwashers, preventing it from capitalizing on demand by investors and consumers for socially responsible companies. (15) While there are some third-party monitoring groups that investigate and apply a numerical rating to potential greenwashers, (16) there is no universally recognized standard or certification process to reassure skeptical consumers and investors. (17)

      Second, there are legal, business, and financial consequences to making business decisions that benefit society without maximizing shareholder wealth. (18) Corporate law in the United States provides shareholders the power to bring derivative litigation against a corporate entity that fails to act in the best interests of its shareholders. (19) This creates a significant barrier to pursue a meaningful social benefit that does not maximize the company's stock price. (20) On the other hand, some experts argue, in the modern business world, it is extremely rare and difficult for shareholders to hold directors accountable for failure to maximize profits. (21) The real upside to the benefit corporation entity may be the societal recognition that the company is socially responsible, and the increased investment and sales revenue that come along with this status, rather than the protection from shareholder derivative suits.

      A more likely liability issue arises in the context of mergers and acquisitions. When the board of directors changes the control or breaks up the corporate entity, the corporation's Revlon duties obligate the directors to sell to the highest bidder. (22) This requirement is the most concrete limitation to a corporation that wants to advance interests other than their stockholders' financial well-being. A relatively recent example of this limitation occurred when the popular ice cream manufacturer Ben & Jerry's, well recognized for their environmental and social values, considered itself obligated to sell to the highest bidder, Unilever, despite the lack of congruity in the two companies' social viewpoints. (23) The sole focus on maximizing shareholder wealth arguably presents the most challenging limitation for corporations that seek to create a social benefit in the course of their economic endeavors. (24)

   3. Non-Profit Corporations

      While non-profit corporations are primarily focused on realizing a socially beneficial goal, they lack the capacity to capture the demand of socially motivated investors. The law does not categorically prevent non-profit companies from generating a profit, but state law prevents them from distributing profits to a class of shareholders, as would a typical corporation. (25) Federal tax law is another barrier to generating investment if the officers form the corporation as a tax-exempt, non-profit company. (26) Non-profits are well suited to place a social goal above profit maximization, but there are clear limitations where the two purposes are of equal importance. In a scenario where a company requires private investment to function and has the dual-motivation of profit generation and advancing a social goal, forming a non-profit corporation is simply impractical because profit-motivated investors have no incentive to invest.

   4. Hybrid Corporations

      Within the past decade, there have been several notable statutory developments in the United States...