The Hazy Language of Benefit Corporation Laws

What does it mean for a business to “pursue” something? A normal corporation can pursue anything its board wants as long as it’s legal, but a benefit corporation must declare a general public benefit. A general public benefit is a “material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.” This language is designed to be vague, allowing for broad interpretation. Unfortunately, it offers little guidance for potential entrepreneurs and stakeholders. To complicate matters further, not only is the language describing benefits vague, but the powers that can hold firms accountable are as well. What we have here is a perfect storm of legal ambiguity and the lack of clear authority. Let’s break down some key issues and what it means for people trying to navigate this new form of business.

Why Benefit Corporations?

Benefit corporations are for-profit companies that seek not only to maximize financial returns and shareholder value, but also to pursue a social or environmental benefit stated in the company’s articles of incorporation. This benefit can also be the priority of the firm, over shareholder value. This allows a company to pursue its business interests with a broader set of stakeholders in mind. On paper, this is a good thing. It gives business owners more choices. If you want a traditional corporation, or a new benefit corporation, you have a choice. Benefit corporations also offer the means for firms to put their money where their mouth is by baking green or social policies into the company’s DNA. At the very least, it’s worth trying to get right. The problems that start to reveal themselves have a lot to do with hazy language describing limitations and powers as well as the lack of precedent.

Vague Language

Since the language in benefit corporations can be quite vague, in some cases, it might be in an organization’s best interest to commit only to pursuing benefits rather than actually confirming the benefits are realized. In other words, the company should just say they’re doing something that could help, but never confirm they’re actually helping. This isn’t a case of a bad company deceiving the public. It’s a legitimate strategy to avoid risk. In her paper, “Why the New Benefit Corporations May Not Prove to Be Truly Socially Beneficial”, Daryl Koehn points out that, “lawyers counsel that firms should not promise to realize these benefits because it is generally far harder to establish the actualization of benefits than the attempts to pursue them.” The laws were put in place to make it easier for people to have sustainability and the public good as part of a business plan, but the language is presenting an unforeseen hurdle.

This problem with wording is taking center stage in this new and growing corporate form. Legislators often have to balance precision with comprehensiveness. They want the law to be enforceable but not so restrictive as to strangle the possibilities of the new form. Because of these opposing goals, the use of certain terms are leading to problematic ambiguities of interpretation and enforcement.

Accountability

Koehn goes on to mention that the term “pursue” is vague in a deeper way than defining benefits. It also allows for ill-defined measures of effort and competency. “Did the firm,” Koehn asks, “pursue benefits whole-heartedly? Using half-measures? Would a single attempt to realize some benefit count as a pursuit? If management is incompetent when it comes to planning and executing environmental measures, do its efforts to, say, clean up a river genuinely constitute pursuit of this benefit?” It’s nice to have businesses pursue a common good, but this point of competency is salient because it can mean the difference between traditional corporate greenwashing and a company truly committed to change. One of the key sources of value in the benefit corporation label, comes from the idea that a benefit corporation is truly dedicated to a cause. If vague wording allows less committed companies to enter the market, we risk watering down benefit corporations just like corporate social responsibility has been.

Then there is the issue of what a “general public benefit” is. If there are competing definitions of what constitutes a benefit, how can we hold an entity accountable? Since a general public benefit is so vague, businesses can make something most people wouldn’t consider a benefit into the mission of a benefit corporation. Take Can Can Wonderland of St. Paul, MN as an example. Minnesota’s first public benefit corporation is a mini-golf, public art and general community attraction. Its benefit is supporting artists, who will design the mini golf holes and other installations. I can understand how this could be a social benefit, but I doubt that many people would have listed mini-golf course design on the list of possible social and community benefits, especially when it seems that this sort of community attraction could be its own traditional business (artists and all) without the benefit corporation format. Flexibility allows for a wide variety of business types and socially beneficial goals, but again we risk delusion of the form’s value. Play fast and loose with what is and isn’t a general benefit, and soon anything from NFL stadiums, to bowling alleys could be considered a public benefit. What if this artist bolstering business model is an expensive failure? How can we determine if the artists are, in fact, seeing a benefit? Is the benefit realized as soon as construction is finished? Hopefully there will be room for many types of businesses and benefits.

What Next?

There are many issues that could arise from the benefit corporation format. It’s new, so that’s expected. But this doesn’t mean that simply because a format is new, it should be a regulatory free-for-all. The public should be happy to see innovation in this sector, while keeping a close eye on any developments. The legislation in each state is different, but they work from similar model legislation. Reporting requirements range from full public disclosure to disclosing information only to the mayor. Even when the reporting requirements are at their most comprehensive, it doesn’t resolve the core issue. The vague wording and lack of clear accountability gives too much trust the goodwill of management. A big challenge when creating new legislation is forming a balance that enables entrepreneurial creativity and limits abuse and exploitation. Let’s see what happens next.


Originally published at ibpe-benefitcorps.postach.io on March 3, 2016.