Businesses seek state’s new ‘benefit corporation’ status
Reporting from Sacramento
A dozen companies committed to maximizing social good while turning a profit have filed papers with the state to become California’s first “benefit corporations.”
Chief executives, led by Yvon Chouinard, founder of Patagonia Inc., a maker and seller of outdoor apparel and equipment, marched into the secretary of state’s office in Sacramento shortly after it opened Tuesday morning.
It was the first business day they could register under a recently approved state law that gives companies a way to legally structure their businesses to consider social and environmental efforts as part of their missions.
While that may sound like marketing hype, it’s important from a legal standpoint because it helps shield benefit corporations from lawsuits brought by shareholders who say that company do-gooding has diluted the value of their stock.
California becomes the seventh state to adopt this relatively new corporate structure. Until now, California corporate law mandated that shareholders’ interests trump those of all other parties. Entrepreneurs who wanted to incorporate green initiatives or social causes into their businesses were often forced to become nonprofits, limiting their ability to raise venture capital.
Benefit corporations offer for-profit companies a way to do well and do right, said Assemblyman Jared Huffman (D-San Rafael), the author of AB361, the legislation that created the new type of business.
“There is a way to create jobs and grow the economy while raising the bar for social and environmental responsibility,” Huffman said at a news conference outside of the secretary of state’s office. “With this new law, we are attracting new socially conscious companies, investors and consumers.”
California’s new category allows corporations to officially adopt policies “that create a material positive impact on society and the environment” as an integral part their legal charter. The Huffman legislation also expands the fiduciary duty of executives and board members to include the interests of workers and the community.
Approval from two-thirds of a company’s outstanding shareholders is needed to become a benefit corporation. A similar vote is needed to return to the traditional type of corporation.
Vermont and Maryland approved similar laws in 2010, followed by New York, New Jersey, Virginia and Hawaii in 2011. Nationwide, as many as 100 companies have become benefit corporations, most of them privately held, supporters of the Huffman bill said.
The California bill passed last year with bipartisan support. It had strong backing from the Green Chamber of Commerce, the Silicon Valley Leadership Group and other business organizations that want to clearly distinguish their members from firms that claim to be environmental advocates but don’t meet certain standards of accountability and transparency.
Corporate law specialists at the State Bar of California opposed the bill, arguing that it did not clearly spell out the responsibility of company officials to shareholders.
The growing interest in benefit corporations reflects a “sense that there’s a better way of doing business out there,” said John Montgomery, a Menlo Park lawyer who helped draft the new California law. “I think this is the vanguard of a movement. It takes iconic companies like Patagonia getting on the bandwagon.”
Staying true to its mountaineering roots, using sustainable manufacturing techniques and earmarking at least 1% of revenues to support groups that protect the environment have been core values at the Ventura County-based Patagonia since its founding in 1956, Chouinard said.
“Patagonia is trying to build a company that could last 100 years,” he said. “Benefit corporation legislation creates the legal framework to enable mission-driven companies like Patagonia to stay mission-driven through succession, capital raises and even changes in ownership by institutionalizing the values, culture, processes and high standards put in place by founding entrepreneurs.”
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