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Feb. 17 — A relatively new type of corporate form is rapidly gaining traction in the U.S., as state lawmakers, investors and companies open up to the idea that for-profit businesses should be allowed to expand their corporate purpose beyond profit maximization.
A benefit corporation, in addition to making money, has the objective of benefiting society as part of its legally defined goals. Since 2014, there has been a spike in the number of organizations incorporating as benefit corporations, according to B Lab, a nonprofit that tracks and certifies such businesses.
B Lab estimates that there are now about 3,000 benefit corporations in the U.S. Moreover, B Lab has certified 1,600 entities around the world as “B Corps” and 40,000 businesses are using the nonprofit's free online assessment tool to measure their company's social and environmental performance, B Lab Communications Director Katie Holcomb told Bloomberg BNA in an Feb. 18 e-mail.
Frederick H. Alexander, B Lab's head of legal policy and a former corporate attorney at Morris, Nichols, Arsht & Tunnell LLP, said Feb. 17 that the increase of U.S. jurisdictions authorizing benefit corporations and growing awareness of the corporate form are contributing to its popularity.
Currently, 31 states have passed legislation allowing companies to incorporate as benefit corporations. Among several other states that are mulling such laws, Kentucky's House of Representatives passed legislation (HB 50) earlier this month that supports the corporate form. The state senate is now considering the bill.
Kelly Flood (D-Lexington), a Kentucky state representative who is co-sponsoring the bill, told Bloomberg BNA Feb. 18 that bipartisan support for the legislation is growing and she is optimistic that the bill will pass.
Flood said use of the corporate form is being driven by investors and entrepreneurs who want to get issues such as sustainability and employee relations into corporations' long-term values. “It really is a tool in the toolbox” that will attract investors at a time when Kentucky is diversifying its economy, she said, adding that many millennials starting their own businesses are interested in the model.
For companies that are interested in restructuring, Alexander cited several advantages of benefit corporations, including that the form can increase an organization's long-term value.
Becoming a benefit corporation also can allow an entity to show that it has aligned the interests of all its stakeholders—employees, investors, the management and the community, he said.
As a result, the status can help in employee recruitment and retention, and can also be used as a communication tool for expressing a corporation’s values to consumers, particularly customers that care about supply chain issues, Alexander said.
Importantly, the status also may help in the organization's relationships with regulators, he added.
Two organizations that have incorporated as benefit corporations—King Arthur Flour Co. and Patagonia Inc.—also cite additional advantages.
Carey Underwood, King Arthur Flour's chief of staff, told Bloomberg BNA in a Feb. 18 interview that beyond increased consumer recognition, the status has been helpful to her company in forming third-party relationships with businesses that have similar benchmarks.
King Arthur Flour was one of the first companies to be certified as B-Corp in 2007. The employee-owned company later became a benefit corporation under state law in 2012.
Underwood said that when Vermont passed benefit-corporation legislation, her company saw it as an opportunity to take the next step in balancing its financial and non-financial values. The benefit-corporation status gives directors and officers protection to consider the company's overall goals, she added.
Meanwhile, benefit-corporation status has allowed Patagonia to “institutionalize the strong values, culture and environmental mission on which the company was founded more than 40 years ago and has embodied throughout its history,” Hilary Dessouky, Patagonia's general counsel, told Bloomberg BNA in a Feb. 19 e-mail.
“The transition provided a legal framework that will ensure everyone involved with Patagonia over the next 100 years and beyond is accountable to deliver on those very same foundational values, even in the face of inevitable change,” she said.
In addition, the status gives Patagonia a new way to examine its own performance and share those results publicly, Dessouky continued.
“We review our performance annually with the board and bi-annually with B Lab,” and “we always find areas of improvement,” she said. “This process also generates data we can use to set goals and drive strategies to do better.”
In an era of hectic deal activity, the corporate form may be particularly important for directors who are involved in selling the company.
Profit can become the overriding factor in mergers and acquisitions, Flood said. She noted that the benefit-corporation form can protect the sustainability and other goals of the company beyond profit maximization.
The corporate form does have drawbacks, observers told Bloomberg BNA.
For one, directors and executives will have greater responsibilities, Alexander noted. However, the extra effort ultimately will allow the company to create “more long-term and resilient value for all stakeholders, including stockholders,” he said.
Alexander also warned that restructuring into a benefit corporation, on its own, is not a panacea for an organization's sustainability and long-term growth issues.
For Patagonia, the primary challenge is how the organization will roll out its benefit-corporation commitments internationally, Dessouky said.
“While the movement is strong in Europe and gaining momentum around the world, it’s not always easy to apply the same set of standards everywhere,” she said. “This year, though we weren’t required to do so, we’re running our international operations through the same rigorous assessment we perform here in the United States and are looking forward to see where we come out.”
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