To B or not to B… Benefit Corporations redefining business success

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18 September 2014 | By Jeremy King (Partner)

The recent establishment of B-Lab in Australia provides companies, which aim to generate both profits and social and environmental benefits, with the ability to seek an independent stamp of approval.

B-Lab, a non-profit organisation, certifies B-Corps. Conceptually, it’s like Fair Trade or Organic certification. Companies that attain B-Corp certification voluntarily meet higher standards of social and environmental performance, accountability and transparency that involve every aspect of their operations.

Since it began in 2006, B-Lab has certified more than 1,000 B-Corps in 33 countries, with almost 40 enterprises being in Australia.

Prominent among them are Patagonia and Ben and Jerry’s ice cream (owned by Unilever) -- companies that have successfully integrated societal and environmental benefits with profit-seeking goals. Closer to home, we find companies like the Impact Investment Group, the first Australian fund manager to become a B-Corp.

B-Corps share many of the same characteristics as the new US Benefit Corporations, but they are different. B-Corps are certified by B-Lab whereas Benefit Corporations are an entirely new type of legal entity that more than half the States in the US have established.

The frameworks for both B-Corps and Benefit Corporations provide companies with a means to overcome some of the rigidities of a traditional company structure and the directors’ duties that limit opportunities to pursue environmental or social goals.

Such companies still have a fiduciary duty to make profits for shareholders, but it’s not the only priority. Directors of B-Corps and Benefit Corporations are obliged to consider the interests of other stakeholders, like company workers and the community, alongside shareholder concerns.

Directors may be permitted to weigh up the pros and cons of interests that are intended to improve social outcomes but could result in lower profits. However, shareholders of Benefit Corporations are still the only stakeholders able to bring a legal action against the company or its directors for failing the usual “corporate benefit” test.

B Corps and Benefit Corporations must also publically release reports that measure their social and environmental performance against an independent third party standard.

A recent US White Paper[1] says the “sustainable business movement, impact investing and social enterprise sectors are developing rapidly but are constrained by an out-dated legal framework that is not equipped to accommodate for-profit entities whose social benefit purpose is central to their existence.”

It says Benefit Corporations offer “clear market differentiation, broad legal protection to directors and officers, expanded shareholder rights and greater access to capital than current alternative approaches.”

They also are more likely attract and retain employees interested in working for organisations with social and environment impact objectives.

Benefit Corporations are required to have a purpose of creating ‘general public benefit’ and are allowed to identify one or more ‘specific public benefits’ like, for example, ‘improving public health’ or ‘creating the flow of capital to entities with a public benefit purpose’.  

The inclusion of the ‘general public benefit’ stops companies being able to abuse the legislation by focusing on an overly narrow benefit like keeping a part of the environment around the factory in good condition.

COULD AUSTRALIA INTRODUCE BENEFIT CORPORATIONS?

At a superficial level, there is no need for Benefit Corporations in Australia: charitable organisations and not-for-profits operate as incorporated associations or companies limited by guarantee, so they don’t need a new legal entity. However, incorporated associations and companies limited by guarantee can’t return profits as dividends in the same way that a corporation can.

There is no doubt Australia could legislate to give birth to Benefit Corporations in this country. However, it requires both political and bureaucratic will at the Federal level to introduce the concept into the Corporations Act, or introduce an entirely new piece of legislation into parliament.

Assuming Federal Parliament received a positive report on Benefit Corporations from an entity such as the Corporations and Markets Advisory Committee, one of the key legislative design factors will be that of directors’ liability.

Without the statutory protections that would come with legislation, directors of Benefit Corporations would remain concerned that their overriding fiduciary obligation is to maximise financial returns to shareholders. And in an era of class actions, litigation funders and expansive judicial interpretation of directors’ duties, this could be enough to scare off high-quality Benefit Corporation directors.

Directors of Benefit Corporations would need to be afforded the statutory protection that a board’s consideration of all stakeholders (not just shareholders) shall not constitute a breach of the usual directors’ duties (e.g. the duty to act in good faith in the best interests of the company). 

Of equal value would be statutory protection for directors and the company itself for monetary damages. This would remove directors’ concerns that they could be subject to personal liability in circumstances where there is no precedent by which such liability could be quantified. It would also mean the Courts would have to focus on remedies of declaratory or injunctive relief (i.e. requiring the Benefit Corporation to stop doing something deleterious or to live up to its express commitments).

Finally, legislation should protect directors from legal proceedings by the very beneficiaries of the Benefit Corporation’s social or environmental purpose. If Benefit Corporations are going to be accountable for a much wider purpose than simply the pursuit of profit, directors cannot be exposed to liability from an unknown cohort of third parties.

THE VEHICLE FOR IMPACT INVESTMENT

In past articles, we have written about the emerging trend of, and growing need for, impact investment in Australia.  Australia now has a written strategy to develop an impact investment market.[2] Benefit Corporations would be the corporate vehicles by which these social outcomes are delivered.


 [1] The need and rationale for the benefit corporation. 

 [2]Delivering on Impact: The Australian Advisory Board Breakthrough Strategy to Catalyse Impact Investment, September 2014. 




The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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Jeremy King

Partner. Melbourne
+61 3 9672 3431

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