B Corporations Set to Take Hold in the Greater Philadelphia Region

When B Lab co-founder Jay Coen Gilbert spoke at TEDxPhilly in 2010, he laid out his argument that business is the most powerful vehicle for positive change. “We have no choice but to harness the power of business to solve social and environmental problems,” he said.

He also noted how businesses, as they exist, are restrained from creating real change by outdated legal frameworks. Current corporate forms, he said, emphasize shareholder benefit as opposed to the environment, the community, or employee wellbeing. We spoke with Gilbert last May about how and why companies become B Corps.

Gilbert’s company, B Lab, is a nonprofit third party certifier that employs specific criteria for corporate social responsibility (CSR) by measuring environmental impact, accountability and transparency. There are now 748 certified B Corps across the world, according to the B Lab website.

In the past three years, B Lab has been trying to bring its standards into the legal system. Not only does it want to certify companies — much like the USDA certifies organic food or LEED certifies sustainable buildings — it wants states to pass legislation that allows for a new form of company that has public benefit in its DNA.

15 states have passed laws allowing for benefit corporations since 2010. Pennsylvania, Maryland, New Jersey and New York have all passed legislation based on the model bill developed by B lab.

Delaware is the last holdout in the greater Philadelphia region, and it is set to pass legislation in June. Once it does, the region will become the densest cluster of states with benefit corporation laws in the country.

But at the tangled intersection of social good and business, where nonprofits and corporate philanthropy already reside, what exactly is the significance of benefit corporations?

Protection for a broader vision
The laws vary slightly from state to state, but a benefit corporation is basically required by its own bylaws to have a “triple bottom line,” where people, planet and profit share space on the corporate agenda.

Specifically, a benefit corporation must have explicit goals in addition to maximizing profit. For example, a company can decide from the outset that it is carbon neutral or that it will give 50 percent of its profits to charity. With the cover of a benefit corporation, a company does not have to worry that shareholders will condemn actions that may or may not benefit their shares, as long as they abide their goal of creating a public benefit. In short, they can’t be sued by their shareholders for putting the greater good above total profit maximization.

In most states, it is also required that the public benefit be measured against a third party standard. The model legislation, at least, requires that the standard be comprehensive, transparent, credible and independent, but it is up to stakeholders to read the annual benefit report issued by the company (which is required) to determine if these criteria are met.

Elizabeth Babson, associate at Drinker Biddle & Reath LLP, the pro bono legal counsel for B Lab, helped draft the model bill. She explained the importance of the third party standard in assuring benefit to the community.

“If one of the goals of the legislation is to provide information based off of facts and avoid greenwashing, using a third party standard provides a benchmark,” Babson said. She added that its also up to stakeholders to determine the validity of the third party standard itself, which does leave open the possibility that corporations could use a less than credible standard.

But considering that benefit corporations are taxed the same as any other corporation (no tax incentives, abatements, credits, etc.) they act more as protection than as a tangible business advantage, according to Babson. They provide companies “the leeway to accomplish their mission and have a broader view of what the purpose of the corporation is,” she said.

Historical perspective

There is no law that demands shareholder profits be placed above social and environmental goals,  but there are a number of legal precedents often cited by corporations to justify shareholder maximization.

One of the first cases to address the issue was the 1916 Michigan Supreme Court case Dodge v. Ford. In this case, Henry Ford was sued for channeling the majority of a capital surplus into raising his employees wages and into the expansion of his company, rather than paying out to minority shareholders.

The court sided with the Dodge Brothers, who were minority shareholders in the Ford Motor Company, establishing the precedent that shareholders should be the primary concern of a corporation, above community, environment and employees.

Today, benefit corporations and other new forms of incorporation like the L3C, or low profit limited liability corporation, are finding new ways of making that precedent obsolete and transforming the idea of a “triple bottom line” from a philosophy to a legal qualification.

It is worth noting that the first state to pass benefit corporation legislation was Maryland in 2010. The movement is just three years old and 15 states have enacted legislation. Currently, there are over 15 additional states where legislation has been introduced.

(Update: a previous version of this article overstated the importance of the Dodge v. Ford case.)