Incorporation Matters: New Legislation Makes Corporate Sustainability Viable
By Kaela Colwell, Staff Editor
Over the past four years, more than half of states have passed legislation enabling business leaders to place greater emphasis on social and environmental responsibility.
Corporate executives have a legal responsibility to act in the best interest of the corporation. As articulated by Milton Friedman, decisions in the best interest of the corporation are generally understood to be those that maximize shareholder value. A narrow interpretation of that principle may suggest it would be unreasonable to expect corporate executives to implement environmental protection measures at a financial cost: corporate officers who choose to prioritize pollution reduction or fair trade sourcing over short-term profits may even run the risk of breaching their fiduciary duties. Thus, many believe that the laws governing public companies must be amended before social and environmental efforts can be maximized in the corporate world.
“The laws governing public companies must be amended before social and environmental efforts can be maximized in the corporate world.”
Fortunately, interest groups and government representatives have already begun to make progress in this direction. B Lab, a nonprofit organization founded in 2006, is a third party informational resource and certifier for companies interested in expanding their mission beyond shareholder profits. To become a certified “B Corp,” a company must pass a review pertaining to the treatment of employees, the environment, and the community, subject to standards set by B Lab. The business must also convince its shareholders to amend the corporation’s bylaws “to allow business decisions to consider the impact not only on shareholders, but also the workforce, community, and the environment.” Although it is more difficult for public corporations to obtain B Corp status, certification is available to all types of business entities.
In addition to certifying B Corps, B Lab has helped model and pass legislation establishing a new type of business entity known as a “benefit corporation.” B Lab’s Model Benefit Corporation Legislation states that the purpose of a benefit corporation must be to create “general public benefit,” which is defined as “a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.” This new business structure allows directors “the freedom to pursue the creation of general public benefit and any identified specific public benefits without concern that they will be accused of straying from the exclusive goal of creating economic benefits for the shareholders.” Socially and environmentally driven entrepreneurs in twenty-six states and the District of Columbia can incorporate their businesses as benefit corporations instead of choosing between for-profit and nonprofit status.
“Entrepreneurs in twenty-six states and the District of Columbia can incorporate their businesses as benefit corporations.”
While the end-goals of benefit corporations are similar to B Corps, the two titles are not interchangeable. B Corps are corporations who have achieved certification from B Labs whereas benefit corporations are legally acknowledged entities within states that have passed enabling legislation. A company can be a B Corp, a benefit corporation, or both.
In addition to passing benefit corporation legislation, several states have created similar kinds of entities, such as the social purpose corporation, which like the benefit corporation allows management and investors to pursue both social and economic objectives.
Benefit and social purpose corporation legislation facilitate greater social and environmental responsibility in the for-profit business world. Although these new legal forms are most viable for closely held businesses, the associated ideals and legal protections have the potential to be extended to public corporations of all magnitudes. With appropriate increases in consumer pressure and legislative support, social and environmental sustainability can become norms in the business world.