New Virginia law adds legal structure of ‘benefit corporations’

Benefit corporations will have to meet social and environmental standards

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Print this page by Zak Kozuchowski

Last year Maryland became the first state to allow a new class of businesses known as “benefit corporations.”

Michael Pirron, CEO of Impact Makers in Richmond, believed Virginia could benefit from the same type of corporate entity because it allows companies to think beyond the bottom line. His company, an IT management and consulting firm, already had a mission of donating profits to charities.

So Pirron sent a copy of Maryland’s law to Delegate Jennifer L. McClellan (D-Richmond). By late March of this year, a similar bill had been passed unanimously by Virginia’s House of Delegates and Senate and signed into law by Gov. Bob McDonnell.

Virginia’s law lets a company state in its articles of incorporation that its purpose includes creating a general public benefit. Although a benefit corporation still would be expected to earn a financial return for shareholders, profit would not be the overriding concern. Benefit corporations are required to consider non-financial interests, such as economic development, and report on their social and environmental performance using third-party standards.

Pirron says that the law, which takes effect July 1, will allow company directors to think beyond maximizing shareholder value. It opens the door for what he calls “stakeholder capitalism” — maximizing profit while making an impact in the community.

“It’s something that both liberals and conservatives can agree on,” Pirron says. “From the liberal perspective, benefit corporations help with social justice, and from the conservative perspective, they allow the free market to take care of societal problems.”

In his case, Impact Makers would have to make major structural changes to become a benefit corporation. “We’d like to become a benefit corporation, but it won’t happen on July 1,” he says. “[Impact Makers] didn’t need capital investment at the start — we were able to grow organically. To become a benefit corporation, we would have to become two entities, a nonprofit foundation with a benefit corporation arm.”

When he started Impact Makers in 2006, Pirron chose to make it a for-profit company, but he decided against having stockholders. That move allowed him to pursue his goal of developing a company that would help the community without facing the fiduciary duties of making a profit for shareholders. A company’s board of directors can face litigation for making decisions that do not maximize shareholder value. Benefit corporations protect directors as long as they pursue their stated public benefit, Pirron says.

Benefit corporations add to a company’s accountability, he says. “This whole social enterprise movement is a whole new segment of the economy. They will help differentiate between companies that say they’re green and those that actually are.” Pirron says people will want to buy products from socially responsible companies, and a new segment of investors will want to invest in these companies.

Jay Coen Gilbert, a founder of B Lab, a Pennsylvania-based nonprofit that certifies socially responsible companies, helped draw up the benefit corporation legislation adopted in Maryland.  Requiring benefit corporations to meet third-party standards, he says, is an important part of the law. “[A benefit corporation] will be publicly recognized as a company that has voluntarily met higher standards of transparency,” he says. “In the age of an increasingly skeptical public, that can be a useful marketing tool.”

The third-party provision does not specify any standard or list of standards, however. It states only that the standards must be independent and transparent. Gilbert says that flexibility will encourage the development of a marketplace that would provide businesses with choices about which standard they would follow.

Bill Tate, an attorney at Hirschler Fleischer in Richmond, calls the independent third-party standards one of the legislation’s greatest unknowns. “Who will assure that the third-party evaluations have substance or merit?” he says.  “Will consumer-protection groups provide a rating or certification regime for the third-party evaluators?”

Tate says that the most significant advantage to benefit-corporation shareholders, as opposed to shareholders of another company, is the knowledge that their investments are serving a purpose higher than simply generating more money.

“It may result in little or no change to the capitalist model that has developed over the centuries,” he says. “Requiring a benefit corporation’s directors to think beyond the profit motive is a noble goal, and it raises interesting questions about the nature of a for-profit enterprise, the relationship of a corporation to its community and society in general, and the role of a director of a corporation. Whether anything changes remains to be seen.” 

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