Come January, progressive California companies need no longer fear that pursuit of environmental responsibility means a risk to fiduciary responsibility under a new law that sanctions formation of benefit corporations.
The measure creates a class of corporation that enables companies to make positive impacts on the society and the environment, and not just profit-making, priorities in doing business.
Enactment of AB 361, which was introduced by Assemblyman Jared Huffman and signed into law by Governor Jerry Brown in October, makes California the sixth state to legally redefine fiduciary duty so that firms choosing to become benefit corporations are required to consider non-financial issues in decision making — namely the people and planet factors of a triple bottom line..
“What it does is it provides, in essence, a leadership standard for companies that are the true leaders in corporate social responsibility,” said Donald Simon of Wendel Rosen Black & Dean, one of the three attorneys who were instrumental in developing the legislation. “What we believe is that this [becoming a benefit corporation] will become the badge of honor that companies use to set themselves apart in the marketplace. It says, ‘I am truly a different type of company, and I walk the talk.’ ”
Simon, his colleagues who helped create the legislation, attorneys John Montgomery of Montgomery & Hansen and Jonathan Storper of Hanson Bridgett, and Huffman are conducting an information session on AB 361 tomorrow in Oakland. The discussion is expected to be the first of several sessions for companies interested in learning more about how the new law works.
The B Corp Movement
The push for benefit corporation laws has its roots with the nonprofit B Lab, which certifies companies that meet the sustainability standard developed by the organization. Now 4 years old, B Lab has certified 476 companies, representing $2.27 billion in revenue in 60 industries. The firms include shoe company Dansko, Hanson Bridgett, Method, New Leaf Paper, Numi Tea and Wendel Rosen Black & Dean.
However, as B Lab co-founder Jay Coen Gilbert told GreenBiz Senior Writer Marc Gunther earlier this year, the organization seeks to do much more. The nonprofit is attempting create an economic sector that “uses the power of business to solve social and environmental problems.” Hence the movement for the B Corp laws, which provide the legal protection for companies whose aims go beyond maximizing shareholder value.
California’s New Law
In addition to expanding the definition of fiduciary duty and the considerations that must be made by directors and officers, the California law requires benefit corporations to annually file a report with the Secretary of State’s Office that:
- States whether the firm failed to pursue its general public benefit or any specific public benefit.
- Includes a description of how the benefit corporation pursued the benefits and the extent to which the benefits were created
- Is prepared according to an independent third-party standard for “defining, reporting, and assessing overall corporate social and environmental performance.” AB 361 does not specify which standard should be applied, but the law extensively details a series of essential characteristics for any standard that is used. Those requirements are intended to ensure that the standard and the standard-making party behind it have the necessary expertise, have no material or financial ties to the benefit corporation, and are not dominated by industry interests.
- Explains the process the benefit corporation used to select a standard and the rationale for singling out the one that was chosen.
The rigorous reporting requirement is designed to separate the companies that merely contend they are green from those that actually are green, Simon said. “This raises the bar,” he said. “If you want to really, truly espouse these values, we now have a corporate form for you, if you agree to a higher level of accountability, transparency and purpose. Companies that are not truly dedicated to the triple bottom line are not going to opt for this corporate form. It would expose their greenwashing, so they’re not going to go there.”
Converting to a Benefit Corporation
There is another mechanism in the law to ensure that only the companies intent on becoming benefit corporations do so. New companies would have to incorporate as a benefit corporation, and existing corporations would have to amend their governing documents by obtaining a two-thirds vote of shareholders. If the company changes direction, the conversion can be undone.
“People are always fearful of any irreversible decision, and we purposefully structured this so that it is not one,” Simon said. “It takes a two-thirds vote of your shareholders to become a benefit corporation. It takes the same minimum two-thirds vote to convert back.”
The provision should allay concerns that a company has no recourse if it finds that the conversion does not play well to investors or customers.
Simon and his colleagues believes the reverse will be the case. The law will help investors as well as customers “differentiate fact from marketing fiction,” he said. “I think it helps you attract additional investors that you otherwise would have a hard time attracting, namely the impact investors.”
General information about benefit corporation legislation is available at www.bcorporation.net/publicpolicy. The text of California’s law is available here and details about information sessions are available from the Green Chamber of Commerce and the B Corp site.