Benefit Corporations: Upholding the Triple Bottom Line

By Allison Butler, Lecturer in Law, Business Organizations

The ability for individuals in the business and legal community to understand the developments in the legal environment is vital. This holds true with the proliferation of entities motivated to comply with Corporate Social Responsibility (CSR). In the past, profit maximization was the maxim of corporations. Today, the motif is the “triple bottom line of people, planet and profit.” (Assembly Judiciary Committee Analysis of AB 361 (5/2/11); Senate Banking & Financial Institutions Committee Analysis of AB 361 (6/24/11)).

Many companies have taken different approaches to obtain these objectives including the decision to become a benefit corporation, a designated business entity election that provides companies to focus on all stakeholders when making a decision. According to B Lab, a nonprofit organization attributed to the creation of the status, 34 states have enacted legislation providing for benefit corporation election with six states currently proposing new laws. This corporation election provides the following:

1. Purpose that will have a material positive impact on society and the environment;
2. Accountability that enables shareholder to bring a legal action if the corporation fails to create or pursue the public benefit
3. Transparency that provides, in some states, that an annual benefit report be filed on fulfillment of its social and environmental performance which is assessed by a recognized third-party standard.

Benefit corporations are for-profit corporations; however, they differ from a traditional corporation in that it is created for a specific public benefit purpose, which can include providing low-income or underserved individuals or communities with beneficial products or services; promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; protecting or restoring the environment; improving human health; promoting the arts, sciences or advancement of knowledge; increasing the flow of capital to entities with a purpose to benefit society or the environment; and conferring any other particular benefit on society or the environment. It should be noted that a benefit corporation is not the same as a “B Corp,” which is a certification mark obtained through B Lab.

Accountability is translated through the directors’ actions in a benefit corporation. For example, under California law, directors of benefit corporations must consider the impacts of any action or proposed action upon any stakeholder which includes shareholder, but employees and workforce of the corporation, its subsidiaries and suppliers; the interests of customers; community and societal considerations; the local and global environment; the corporation’s short-term and long-term interests; and the corporation’s ability to accomplish its general, and any specific, public benefit purpose.

Failure to adhere to these considerations can result in legal action that could be brought (a) directly by the benefit corporation or (b) derivatively by shareholders; director; a person or group of persons owning (beneficially or of record) 5 percent or more of the equity interests in an entity of which the benefit corporation is a subsidiary; or other persons specified in the articles or bylaws. Moreover, the transparency element is achieved through a mandated annual filing report adhering to a third-party standard, which means a standard for reporting and assessing overall corporate social and environmental performance.

The various filings and internal compliance mandates to be a benefit corporation requires close scrutiny in enactment but provides vast incentives and benefits for companies who seek to achieve the triple bottom line. Moreover, companies engaging in business with benefit corporations will have a better understanding of their business partner. Knowledge of the benefit corporation as well as other new CSR mechanisms can assist companies excel in business.