Higher standards: The attraction of benefit corporations

Steve Prostano
Posted by Steve Prostano
Family Wealth Advisors

This blog post is part of a year-long series that examines key concepts in our glossary of philanthropy services terms.

At first glance, the clothing company Patagonia, the cleaning products manufacturer Method, and the funding platform Kickstarter might seem radically different. After all, they come from vastly different industries.

However, they are all benefit corporations, which means they belong to a new class of corporation in that they voluntarily meet higher standards of corporate purpose, accountability, and transparency.

Companies can incorporate as benefit corporations in any state where such legislation has passed, and the process to become a benefit corp varies by each state. See Benefitcorp.net for a state-by-state list of what is entailed.

A framework for impact

Then, once a company is incorporated as a benefit corp, it is up to the company and its stakeholders to decide the company’s next steps. As NPR explains, states create a “legal framework” for benefit corporation to work in, and then the company and its stakeholders “can hash out what benefit the corporation will provide.”

That said, generally speaking, benefit corporations have three things in common:

1) They have established a corporate purpose to create a material positive impact on society and
the environment;
2) They are required to consider the impact of their decisions not only on shareholders but
also on workers, community, and the environment; and
3) They are required to make available to the public an annual benefit report that assesses their overall social and environmental performance against a third-party standard.

What are the benefits of benefit corporations?

As Benefitcorp.net explains, investing in benefit corps can yield both good financial return and philanthropic return because:

  • The transparency that benefit corporations provide helps investors make wise, and better-informed, investment decisions based on financial, as well as non-financial, disclosures;
  • Prudent sustainability practices tend to have a positive influence on investment performance, according to research conducted by the University of Oxford and Arabesque Partners; and
  • Good Environmental, Social, and Governance (ESG), another glossary term discussed earlier in this series, increases the likelihood that companies will perform well in the long term and manage risk effectively, according to CalPERS.

Moreover, benefit corporation shareholders have rights that surpass those of traditional shareholders, according to Benefitcorp.net. These include: “high vote into and out of form,” “private right of action,” an annual benefit report, and “in the absence of applicable case law, director decisions will be treated with similar deference to that afforded other business judgements under current law.”

Since benefit corporations have a broader purpose than just making money, it is important to note that, because of the legal framework that state legislation creates, shareholders cannot sue benefit corporations for “valuing the environment as much as profit,” according to NPR.

Weighing the possible outputs

Yet even with that legislative framework, some legal professionals caution that, if a benefit corp does not yield the financial return that an investor expects, he or she might be tempted to take legal action. As University of Tennessee law professor Joan MacLeod Heminway writes in a recent journal article, “Benefit corporations in the public markets, like a shiny new penny, are likely to get special notice and, as a result, be subject to enhanced scrutiny. This attention may also increase the risk of securities fraud and misstatement litigation.”

That said, investing in benefit corps doesn’t necessarily mean sacrificing financial return. On the contrary, a survey of 200 academic studies found that 80% of the sources had concluded that more prudent sustainability practices positively impact investment performance, as reported by Benefitcorp.net.

Nevertheless, in case financial returns happen to be lower than expected, to avoid disappointment you may have to evaluate your own motivations for investing in a benefit corp. Ask yourself: Are you attracted to a benefit corp because of what the company stands for, in terms of the social and environmental benefits, or because the concept is a “shiny new penny”?

Bank of the West and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, investment, tax, legal or accounting advice. You should consult your own tax, financial, legal and accounting advisors before engaging in any transaction.

Reminder: All comments are moderated prior to publication and must follow our Community Guidelines.

Submit an Idea

[contact-form-7 id="32" title="Share An Idea"]

You are leaving the Bank of the West Change Matters site. Please be aware: The website you are about to enter is not operated by Bank of the West. Bank of the West does not endorse the content of this website and makes no warranty as to the accuracy of content or functionality of this website. The privacy and security policies of the site may differ from those practiced by Bank of the West. To proceed to this website, click OK, or hit Cancel to remain on the Bank of the West Change Matters site.