A Look at The Benefit Corporation
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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowFifteen years into the new millennium, the idea that corporate profit should be a business’ main objective has mellowed. Consumers want more, and they expect more. Led in large part by Millennials incorporating their social values into their everyday lives, more and more consumers are basing their purchasing decisions on a company’s social and environmental responsibility.
However, it can be difficult for for-profit entities to incorporate social and environmental awareness into their business enterprises. Not only are investors reluctant to invest in enterprises with a low, if not doubtful, rate of return, but corporate law traditionally requires for-profit entities to give high priority to shareholder value—often over all other considerations. Businesses that do not prioritize profits may be at risk of lawsuits from shareholders concerned with only profits.
This risk exists even in states such as Indiana where corporate law allows directors to take factors other than profit into consideration. There is little case law interpreting these statutes. Thus, while a director may be legally allowed to pursue social goals at the expense of profits, no one wants to be the test case to see how much flexibility the law allows.
A new type of business entity may put these difficulties to rest. Effective January 1, 2016, Indiana will become the twenty-eighth state to recognize a new kind of business entity—the benefit corporation. Concerned with more than just profits, a benefit corporation is a for-profit entity formally and legally committed to benefitting society and the environment along with generating a healthy bottom line. This is known as the triple bottom line: people, planet, profits.
This legal commitment provides a benefit corporation the protection to pursue socially and environmentally responsible business practices it desires (along with its consumers), without having to worry about shareholder reprisals. In contrast to the traditional emphasis for a for-profit entity on maximizing profits, Indiana’s statute actually requires benefit corporations to consider factors other than profits when making business decisions. These additional considerations are required to support the purpose for which a benefit corporation was initially formed: to pursue a "general public benefit."
The statute defines a "general public benefit" as a "material positive impact on society and the environment taken as a whole, assessed against a third party standard, from the business and operations of a benefit corporation." This definition shows how a benefit corporation is ideologically different than a traditional corporation—the corporation’s "business and operations" are required to support the general public benefit. For those considering this type of entity, profits need no longer be the only consideration, and can no longer be the only consideration, behind business decisions. Furthermore, the statute allows for the creation of a "specific public benefit," which allows founders to incorporate a specific social and environmental mission into their corporate structure should they so desire.
In addition, the benefit corporation structure creates another advantage for socially conscious business—the ability to raise capital. As benefit corporations are a form of for-profit entity, investors are likely to be more willing to invest in a philanthropic enterprise tied to profit generation since they are more likely to see a return on their investment. This opens the door for sources of funding that may not have been available before to socially and environmentally responsible business enterprises.
More and more investors are engaging in socially responsible investing (SRI) and designing portfolios around triple bottom line companies. This may even provide benefit corporations a competitive advantage in the capital market by attracting investors other for-profits are unable to reach.
The concept of what a business should be is changing. The idea that the bottom line should drive all business decisions is making room for the idea that businesses not only can, but should, operate in ways that benefit their local communities in addition to turning a profit. With the passing of this new law, Indiana is not only recognizing this change in business practices, but is offering a way to protect that practice as well.
Sarah Marisa Studzinski is an associate at Bose McKinney & Evans LLP. She concentrates her practice in the Business Services, Tax and Real Estate Groups.