Behind the Legal Requirement: How U.S. and Canada B Corps Embed Purpose Into Their DNA
March 24, 2022
Benefit Corporation Structure Broadens Companies’ Accountability Beyond Shareholders to Social and Environmental Stakeholders
More companies worldwide are expanding their purpose to benefit more than just shareholders. This approach balances profit with impact on other stakeholders, including workers, environment, and community members. This can play into every business decision, from which company to partner with (do they pay employees a living wage?), product choices (which packaging has the least environmental impact?), and so on. To formalize this stakeholder governance approach, businesses are making it official — where possible, by law — in adopting a business structure known as the benefit corporation or updating their governance documents to protect decision-making inclusive of environmental and community stakeholders.
Why? Traditionally and structurally, corporations in the U.S. and Canada are often required to make decisions that maximize profit, termed “shareholder primacy,” without regard to the social and environmental impact of those decisions. In response, many states have passed laws that allow companies to operate as benefit corporations — a legal status that requires them to consider how corporate decisions affect both shareholder profits and stakeholder well-being.
Where? This corporate form is available in nearly 40 states, British Columbia, Canada, plus a few other countries worldwide.
Who? Where legislation has passed, new companies can launch as benefit corporations and existing companies can elect to become benefit corporations by amending their governing documents. Benefit corporation structure can be a component of B Corp Certification, with the exact requirements differing depending on a company’s location and legal entity type.
To get an overview of the ways companies in the United States and Canada can legally embed purpose in their organizations, B The Change contacted Kevin Christopher, principal at Rockridge Venture Law in Nashville, Tennessee, and Bernie Geiss, founder of Cove Continuity Advisors in Vancouver, British Columbia. Both lead companies that are Certified B Corporation and work to help other businesses legally embed purpose in their companies.
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Embedding Purpose Means Business Must ‘Walk the Walk’
At Rockridge Venture Law, Christopher has built an impact-oriented clientele that includes social and environmental entrepreneurs. As part of his work in corporate law and governance, he has developed corporate conversion guides and other resources for companies looking to embed purpose in their operations.
“A benefit corporation legal structure, or benefit LLC in a few states, helps to bake triple-bottom-line principles into your corporate structure and shield your impact-oriented leadership from shareholder primacy,” he says, noting that the default position in American corporate law for the purpose of a business is to produce maximum returns to non-operating investors.
Christopher says it’s important for companies that incorporate as or convert to a benefit corporation or benefit LLC to “walk the walk” of comprehensive stakeholder inclusion — running their business to make a profit and create positive impact for the community, environment, workers, and customers — to avoid investor politics.
As one example, he says, “You can’t just say that as a benefit corporation you care about racial inequity if you haven’t demonstrated a track record of addressing racial inequalities among customers, investors, employees, and communities.” A company that is a benefit corporation but has never adopted policies to address racial inequality or taken any action to address racial inequality is unlikely to find a sympathetic ally in a courtroom in response to an investor challenge alleging arbitrary and irresponsible decision-making at the expense of shareholder returns, Christopher says.
“If as a company you want to address racial inequality in America, be bold about it, publicly profess it in your organizing documents, and annually report what you’ve done in furtherance of this interest,” he says. “From our perspective at Rockridge, this transparency is the single most important thing you can do as a benefit corporation regardless of where you are registered or what stakeholders you champion.”
Christopher says that because states have adopted differing versions of benefit corporation statutes, they often vary across geographic regions. “Essentially, a benefit corporation in Georgia is not the same as one in Delaware, which is not the same as one in California,” he says. “While they all share a common interest in promoting impactful business structures, the diverse legislation differs in complexity, scope, shareholder recourse, transparency requirements, and many other details among the state frameworks.”
With these differences in process and law, Christopher says it’s important to pair benefit corporation registration with B Corp Certification to effectively validate the benefit corporation premise of triple-bottom-line practices with a legitimate third-party validation of company operations and impact — aka the B Impact Assessment.
The Board Playbook
To help business leaders navigate the journey to adopt benefit corporation status as a requirement of B Corp Certification, B Lab U.S. & Canada provides this downloadable resource, the Board Playbook, to lay out the process and demystify the risks.
A Legal Framework for Accountability and Transparency
Geiss, founder of Cove Continuity Advisors, played a key role in advocating for Canadian benefit company legislation in British Columbia, the only province to adopt such a statute so far. He first learned about benefit corporation legislation at the 2017 Champions Retreat, the annual U.S. and Canada B Corp convening, and in 2018 introduced the concept to the leader of the BC Green Party, which at the time held the balance of power in British Columbia’s Legislative Assembly. The legislation eventually was approved in May of 2019, and the first companies — including Cove Continuity — were able to re-register as a benefit company in July of 2020.
In tandem with another initiative for corporate climate accountability legislation, Geiss says momentum is growing across Canada to push for federal benefit company legislation. “If we’re working to pass federal climate legislation, shouldn’t we also have federal benefit company legislation to allow companies to protect their drive to be more impactful legally?” Geiss asks. “It would be a natural fit and complement that legislation.”
Canadian B Corps that aren’t in British Columbia must alter their company’s articles of incorporation to commit to all stakeholders versus just shareholders, he says.
“One of the roadblocks to large companies in Canada adopting a more aggressive approach to social and environmental sustainability is their inability to have legal support for their progressive values,” Geiss says. “A corporation has a responsibility to shareholders to operate in a manner that minimizes risk. Without legislation, a major company won’t simply change their articles to include multiple stakeholders as it is not supported by law. Benefit company legislation creates the legal framework for a company to act on their desire to be accountable in a way that is legally supported.”
When Geiss talks with other business leaders about benefit company legislation, he highlights how it would enable their companies to meet additional, long-term goals. “A lot of companies feel the social and environmental movement is great, but because it’s not supported in legislation, they feel they’re going to get seen as an outlier versus a mainstream player in the broader market,” he says. “It’s important to have legislation that supports their sense of legitimacy and sense of being able to act with integrity — legally and socially and environmentally.”
Those considering becoming a benefit company often ask about the risks and how the change might expose them in terms of shareholder liability. Geiss emphasizes that leaders must commit to the process and believe in their ability to be better. “The journey is not about turning the business upside down and hoping for the best, it’s about constant incremental steps that can painlessly lead to a transformative change,” he says. “Once we see our path forward, we can turn to advocating for change in the systems around us.”
At Cove Continuity Advisors, he says, supporting systemic change through the modernization of laws and regulations can leverage social and environmental impact.
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