B-Corps vs. Public Benefit Corporations
February 16, 2016 | By Rad Wood
One of the many inside jokes at Vela Wood is that Kevin is a Capitalist, while I’m a Socialist (bleeding heart and all). Kevin usually busts out some form of this joke at company gatherings when I’m showing pictures of my family marching at a climate change rally, discussing the historical impacts of colonialism upon Africa and the Middle East, or advocating for more pro bono time for attorneys. It usually gets a good laugh because Kevin has solid timing and, like all good jokes, it has an element of truth to it. (Though, the reality is, however, that if every capitalist in the world were like Kevin we would live in a utopia and if every socialist were like me, Vela Wood would already have a Stockholm office.)
What’s interesting about our seeming contradictions is that they actually work well together. We keep each other in check and together we make a formidable team that tackles issues from different angles. And honestly, that’s how all good businesses should work; economic progress and social consciousness are not incongruent — they often correspond. This is the lesson that our economy has learned the past several decades and why today we have the advent of the Public Benefit Corporation and the B-Corp. While these two forms of entities have similar purposes – to recognize the positive social impact as well as the positive economic impact of businesses – they are actually quite different.
Before diving into what Public Benefit Corporations and B-Corps are and why they are necessary, I think it is important to discuss how we arrived at this point in time—where the pendulum has swung so far toward a profit-only focus that legislatures have decided it’s necessary to affirmatively bring a social conscience into the work place. To do this we need to go back in history over one-hundred years and talk about a guy named Henry Ford.
In the early 1900s, Mr. Ford’s company was doing great. And while Henry owned 58% of the stock of Ford Motor Co., he had a select few minority owners, including the Dodge brothers, who owned 10% (yes, these brothers would eventually form Dodge Motors). By 1908, the Company was paying a regular annual dividend of $1.2 million to its stockholders and between 1911 and 1915 it also regularly paid huge “special dividends,” totaling over $40 million—I’m not sure what the inflation-based conversion of these amounts are, but it’s safe to say these people were incredibly rich. But in 1916, Henry Ford announced that the company would stop paying special dividends. Instead, he said, the firm’s money would be devoted to expanding its business and lowering the price of its vehicles while improving their quality. Angered with no longer receiving the dividends they had grown used to, the Dodge brothers sued, asking the court to order Ford Motor to resume paying the special dividends and to enjoin the proposed expansion of the firm’s operations.
At trial, in defense of his actions, Ford testified that he believed the company made too much money and that the company had an obligation to benefit the public, its workers, and its customers. The Dodges disagreed. They argued that Ford’s alleged altruism toward his workers, customers, and the public were improper. Thankfully for the Dodges’ bank accounts, the Supreme Court agreed, holding that,
“A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes.”
And this law has been the general standard till today—corporations are meant “primarily for the profit of the stockholder.” This is fantastic, of course, for stockholders’ economic wellbeing, but it doesn’t always make sense for the public at large. The true measure of a society is not simply the number of dollars it makes, but what it does with those dollars. Are the companies being good stewards and citizens of the communities in which they live? Or do they take, exploit, and seek only to profit without accounting for their actions?
This, by the way, is where the Public Benefit Corporations and B-Corps come in. We now have entities that allow businesses to not only pursue the wealth of their owners, but the health of the communities in which they exist. So what are Public Benefit Corporations and B-Corps and how do they differ?
A B-Corp is a generic for-profit company that receives a certification (also known as B-Lab certification or B-Corporation certification) from B Lab, a non-profit organization that grants certificates to companies that receive a minimum score on an online assessment for “social and environmental performance.” The assessment measures a company across five different strata, determining the company’s social impact upon the (a) environment, (b) workers, (c) customer, (d) community, and (e) corporate governance. And it is not a one-time test. B Lab randomly monitors B-Corps over time as well as requires a B-Corp to go through the assessment test once every two years.
In addition to the test, the company must also satisfy B Lab’s requirement that the company integrate certain commitments to stakeholders into company governing documents, and pay an annual fee ranging from $500 to $50,000. There are many popular U.S. companies that are certified B-Corps, including Patagonia, New Belgium Brewing, and Ben & Jerry’s Ice Cream. While the B-Corp allows companies to retain traditional business entity forms, it also allows the B-Corp certified company to consider social and public benefit by requiring the certified company to amend its governing docs to require the company to comply with the required socially conscious standards. These companies, by making changes to the documents that control how the companies are run and organized, are able to pursue socially conscious agendas as well as profits. It’s a great combo and the workers, shareholders, and customers of the Patagonias, New Belgiums, and Ben & Jerrys of the world can attest to it. In fact, the B-Corp movement has been so successful that today there are 1,577 certified B-Corp. companies in 42 countries across 130 industries.
PUBLIC BENEFIT CORPORATION
Unlike the B-Corp, which allows businesses to maintain a generic for-profit company structure and only requires a certification, which a company can forfeit and return to a normal for-profit company, a public benefit corporation (“PBC”) is a new class of corporation that voluntarily meets different standards of corporate purpose, accountability, and transparency. More specifically, PBCs must:
- Have a corporate purpose to create a material positive impact on society and the environment
- Be required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment
- Generally be required to make available to the public an annual benefit report that assesses their overall social and environmental performance
Once formed as a PBC, the company’s board of directors must manage or direct the business and affairs of the company in a manner that balances the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation. In addition to complying with these socially conscious standards, the PBC must also submit to periodic statements to shareholders and in general corporate governance documents that address the public benefits the company is seeking to promote.
Currently thirty one states, including Delaware, New York, and California, have statutes that allow for the formation of PBCs, and there are five more states considering similar laws. In other words, this trend is not going away, it’s growing. And while there may not be as many high profile PBCs as there are B-Corps, Ello is a good example of a very successful startup that has chosen the PBC corporate structure. Another PBC close to my heart is a Vela Wood client, Charity Charge. This Austin-based startup has created a platform whereby you can donate your credit card points to the non-profit charity of your choice, proving that you can be a credit card company, make money, and also serve your community.
In the end, the next generation of corporations that are B-Corps and PBCs need not only think of their shareholders, but will be able to think about the communities in which they exist. People want to work with, buy from, and be a part of companies that clean up after themselves, care about issues effecting those around them, and try to make the world a better place.
This is one of our main mottos at Vela Wood—we have a mural painted on our Dallas office wall that says, “Above All Else, Be A Good Person.” Now you might think that tag line would come from the alleged socialist of the group. But it doesn’t. It’s been Kevin’s work philosophy since he opened the firm seven years ago. And one we all take very seriously. So, while Vela Wood is not a B-Corp itself (I’ll have to talk with Kevin about this), we are here to help our clients create the next generation of socially conscious companies—regardless if you consider yourself a Capitalist or a Socialist.