A new breed of company is coming to California in January. A company that cares about the rest of the world, its proponents say. And agrees to be audited each year to prove it. This new business model is what’s called a “benefit corporation.”
California joins five other states allowing companies to have dual, co-equal purposes: Making money and doing good.
What form the second part of the equation takes can be almost anything imaginable from purchasing locally to progressive employment policies. One Maryland benefit corporation, Blessed Coffee, sends 50 percent of its profit to social programs in Ethiopia and the rest to local nonprofits.
“It’s like ‘baked-in goodness.’ If you want to make sure your purchasing decisions support companies that are good by their communities, good by their employees, good by the environment then a benefit corporation is your assurance that is the case,” said Assemblyman Jared Huffman, San Rafael Democrat who authored the legislation allowing the new type of company.
“This is a much higher level of assurance than anything we have now.”
Nothing in California law prevents sole proprietors or partnerships from spending or foregoing some or all of their profit to achieve some societal or environmental benefit.
And numerous companies do: voluntarily using organic materials, renewable energy or aiding foster children and the poor, as examples.
But prior to Huffman’s legislation, California’s corporate structure recognized only one purpose – maximizing return for shareholders. If a company’s board of directors took actions detracting from that mission they could be sued by shareholders for breach of fiduciary responsibility.
Huffman’s bill allows new companies or existing companies to add social responsibility – “a material positive impact on society and the environment” – as a second purpose along with shareholder interests. Doing so is voluntary and has no tax benefit.
Shareholders can sue the directors if they do not carry out the company’s stated social mission or are slow in doing so.
Annually, a benefit corporation’s overall social and environmental performance would be measured by an outside entity with no financial connection.
If sold, a benefit corporation would be able to accept a lower sale price in return for the buyer agreeing to carry on its social mission, an action that would invite a shareholder lawsuit under current state law.
Supporters say the benefit corporation stamp of approval helps consumers and investors.
“It helps customers to figure out who is really walking the walk. And it offers more certainty for investors because companies that voluntarily accept these higher standards are ones who are walking the walk,” said Donald Simon, an Oakland lawyer who helped draft Huffman’s legislation which differs slightly from the laws passed in Hawaii, Maryland, New Jersey, Vermont and Virginia.
Backers hope that the “benefit corporation” brand will help consumers see through “greenwashing” elsewhere in the marketplace – claims of environmental stewardship by companies whose commitment doesn’t match their deeds.
“There are a lot of statistics that show a growing number of people want to give their money to companies that are better stewards of employees and of their community,” said Jonathon Storper, a San Francisco lawyer who also aided in writing Huffman’s bill. “This structure allows the consumer to trust what the company is doing. You know their product is better because its performance is measured by an independent third party.”
Benefit corporations also “use a business model to really amplify the impact of philanthropy,” said Mike Hannigan, the co-owner of Oakland-based Give Something Back, an office supply company whose profits are given to non-profit organizations.
“Twenty years ago, we took $40,000 and with no other investment turned that into $5 million in donations and a $30 million company. That’s what the marketplace can do,” Hannigan told Capitol Weekly.
“If we’d taken that $40,000 and donated it to the food bank it would have been a nice donation but it would have been over at that point.”
That’s why the California Association of Nonprofits opposed Huffman’s bill – a belief benefit corporations would siphon off money that might otherwise come to nonprofits.
Huffman notes that one way benefit corporations can carry out their mission is doing the same thing Hannigan does.
“I think it’ll be a bonanza for nonprofits,” Huffman said.
Maryland was the first state to pass benefit corporation legislation. Blessed Coffee is the second benefit corporation in the country.
Big Bad Woof, is a pet supply store in Washington, D.C. and Takoma Park, Md., is the first.
Big Bad Woof bills itself as offering the “essentials for the socially conscious pet,” selling a variety of eco-friendly products, including holistic and raw dog and cat food.
“It fit our company perfectly. We already had a social and environmental mission attached to everything we do,” said Pennye Jones-Napier, (CQ) the company’s co-owner.
“We’ve always been very successful by utilizing the ‘people, planet and profit’ criteria and that, in turn, is what makes us successful in the marketplace because our consumers respond to that.”
She also sees the annual outside audit as a useful management tool.
Jones-Napier has recently created a new company selling Big Bad Woof franchises. She will require franchisees to be benefit corporations in states that allow them or “B corps” in states that don’t.
A B Corp is a certification awarded by B Lab, a nonprofit created to champion socially responsible business practices. There are more than 430 B corps around the country.
The following truths are held to be “self-evident” in the “Declaration of Interdependence” on B Lab’s website:
“That we must be the change we seek in the world. That all business ought to be conducted as if people and place mattered.