Public Benefit Corporations: The evolution of capitalism

published in McAfee & Taft Business Legal Update | April 14, 2015

By Michael E. Joseph

Senate Bill 367, which was introduced in the Oklahoma Legislature this year, included a number of improvements and clarifying amendments to the Oklahoma General Corporation Act and the Oklahoma Limited Liability Company Act. The proposed changes were thoughtful and sensible for governance, ownership, operations, and transactions involving nonprofit, nonstock and investor-owned corporations and LLCs. The bill ended quietly in a legislative committee meeting.

Significantly, Senate Bill 367 provided for public benefit corporations. Approximately 25 other states have adopted comparable legislation during the past five years. That leaves Oklahoma behind, and it may be an indication to new generations of socially responsible entrepreneurs that Oklahoma doesn’t offer a business-friendly environment. Hopefully, the Legislature will reconsider this legislation again next year.

A public benefit corporation is an investor-owned corporation that has voluntarily and formally committed to creating social benefits, in addition to operating to generate profits for its shareholders. Senate Bill 367 provided that a public benefit corporation is intended to produce a public benefit, operate in a responsible and sustainable manner, and be managed in a manner that balances the shareholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit identified in its certificate of incorporation. Public benefit corporations are not nonprofit corporations, and they are not exempt from income taxation. They pay taxes and generate tax revenue. Unlike traditional business corporations that operate to maximize profits for their shareholders, public benefit corporations operate with specifically identified social or environmental concerns, in addition to a profit motive.

By law, directors, officers and managers of public benefit corporations are authorized and enabled to shift their focus from solely considering the interests of shareholders to creating a positive effect on one or more categories of persons, entities, communities or interests. For example, they may designate or utilize a portion of corporate profits or assets for preserving the environment, improving human health, reducing human suffering, providing low-income or underserved individuals or communities with beneficial products or services, promoting the arts and sciences, promoting cultural exchanges, supporting religious endeavors, advancing knowledge, implementing animal welfare programs, or accomplishing other societal benefits. Senate Bill 367 defined a “public benefit” as one having a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests, including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.

Corporations already engage in charitable giving and public service projects, but they pursue those activities with undefined legal limits. Additionally, those programs and activities are not identified as corporate purposes, but instead are subordinate and ancillary to the corporation’s principal business purposes, which involve maximizing profits for shareholders. Laws authorizing public benefit corporations would not affect the ability of business corporations to engage in charitable or other public benefit activities.

The purpose and mission of the public benefit corporation is not necessarily compatible with maximizing profits and earnings for shareholders or maximizing shareholder value and financial returns in any sale, merger, acquisition, or similar transaction.

The emergence of public benefit corporations has arisen as a result of the interest of new generations of entrepreneurs, consumers, business leaders and investors to enhance corporate responsibility and generate a positive social impact through their business activities. There is an increasing market demand for products and services of socially responsible businesses from the perspective of both consumers and investors. To some consumers, the products and services of these businesses alleviate a sentiment of mistrust of corporations. Purchasing their products and services is coupled with a good feeling of providing a benefit to needy populations or to society. For some investors, the investment of their funds in these businesses meets their moral, ethical or religious objectives.

Directors of a public benefit corporation are protected in the exercise of their duties to the shareholders and the corporation with respect to the pursuit of the corporation’s public benefit. Typically, a director will be deemed to have satisfied his or her fiduciary duties to the shareholders and the corporation if the director’s decision is informed, disinterested, made in good faith, and ordinarily prudent.

States that have enacted this type of legislation require accountability. One way is to require public benefit corporations to publish annual or other reports describing how they pursued their general public benefit and the extent to which general public benefit was created. These reports, which are usually distributed to shareholders and must also be made available to the public, provide a social auditing function.

Another method of accountability is requiring public benefit corporations to use a third-party standard or attain a periodic third-party certification addressing the corporation’s promotion of the public benefit or benefits identified in the certificate of incorporation. A number of independent certifying organizations now provide social benefit certifications, including B-Lab, which is a nonprofit certifying organization. Laws relating to third-party assessments and certifications vary, and Senate Bill 367 did not provide for any detailed standards. At a minimum, assessments should be comprehensive; be based on established criteria; include measurable standards in terms of dollars, outcomes, and success; should be provided by third-parties that are independent; and should include other criteria and standards relating to social responsibility, public benefit, accountability, and transparency.

This type of legislation is appealing to entrepreneurs who are interested in building social values into corporate identities, free market proponents who are interested in creating economic value, and consumers who are committed to improving local, regional, national or world communities. It is a means of social enterprise innovation.

Here are some examples of public benefit corporations:

  • Ben & Jerry’s Ice Cream (manufacture and distribution of ice cream with environmental management, fair trade, community engagement and volunteerism, responsibly sourced packaging, >5% of profits donated to charity)
  • Patagonia (outdoor sports apparel for hiking, climbing, skiing, environmentally responsible, paid time off for employee volunteerism, portion of profits donated to environmental organizations)
  • New Belgium Brewing (beer, donates $1 to charity for every barrel of beer produced, paid time off for employee volunteerism)
  • Better World Books (selling, recycling, and donating books, funding literacy projects)
  • Namaste Solar (solar electric, portion of profits donated to charities, paid time off for employee volunteerism, recycled energy generated onsite, recycled products used, >30% women/ethnic minority board)
  • Abacus Wealth Partners (financial planning and management, >5% of profits donated to charity, paid time off for employee volunteerism, focus on socially responsible investments)
  • Etsy (eCommerce marketplace, provides bikes and maintenance to employees to encourage biking to work, compost food waste at local community farm, implemented waste reduction programs with landlord)
  • King Arthur Flour (flour, paid time off for employee volunteerism, school bread baking programs)