Delaware Gov. signs landmark social entrepreneurship law

By creating public benefit corporations, the state wants to ensure that business ethics is no longer an oxymoron

Published July 23, 2013 8:21PM (EDT)

This originally appeared on Next New Deal.

Next New DealSocial entrepreneurship made a huge step forward this month, as Delaware Governor Jack Markell signed legislation creating a new corporate form, the public benefit corporation, that enables companies to “do well while doing good.” Although 18 other states have already enacted similar legislation, Delaware’s status as home to more than one million American companies, including 64 percent of the Fortune 500, bodes well for the accelerating benefit corporation movement.

The benefit corporation, the brainchild of the nonprofit B Lab, is predicated on a simple idea: use the power of business to solve social problems. Companies incorporated under legal frameworks like the one passed in Delaware strive to maximize profits, but can do so while also pursuing a broad range of social and environmental goals, from low carbon emissions to generous employee benefits and transparency in governance. Under traditional corporate law, a firm’s fiduciary responsibility to its shareholders to maximize profits is privileged over other commitments to social or environmental responsibility. The benefit corporation amends this, legally enshrining the interests of stakeholders, including employees, customers, the community and the environment, alongside those of shareholders. Among other things, benefit corporation status shields a company’s social and environmental objectives when it is up for sale. Today, there are at least 200 legally registered benefit corporations (and likely many more, as some states don’t currently track their incorporation), including large companies like Patagonia and many smaller ones like Vermont-based WomenLead and New York-based Clay Marketing. The “shared value” created by these companies is heralded by benefit corporation enthusiasts as a radical refashioning of contemporary capitalism.

The B Lab cofounders Jay Coen Gilbert, Bart Houlahan, and Andrew Kassoy have enthusiastically welcomed Delaware’s adoption of the public benefit corporation form, calling it a “tipping point in the evolution of capitalism” that creates a path to scale for businesses seeking to be a force for good. Social enterprises traditionally have difficulty securing capital for expansion. Access to Delaware’s corporate infrastructure may enable them to become a larger share of the market, on both the consumer and investor side.

While legal incorporation can help benefit corporations become more widespread, it also suggests a more streamlined and transparent future for the fragmented U.S. social business sector, and perhaps a way to channel the demand for responsibly produced goods and services. It is not lost on investors that consumers, particularly Millennials, have demonstrated a willingness to pay for socially responsible products; the socially responsible investing market now represents approximately 10 percent of U.S. assets under management.

Benefit corporations aren’t the only innovation in social business; in the U.S. alone, two other corporate forms have recently emerged that similarly focus on social benefit, transparency, and attracting for-profit investment. Flexible purpose corporations and low-profit limited liability companies haven’t gained as much attention as benefit corporations, but they further underscore the growing appetite for socially conscious business forms. This is a global trend as well – countries like Canada and the UK have unveiled their own frameworks for purpose-driven business in recent years.

In addition to legal efforts, B Lab has pioneered an independent certification system (in the style of LEED or FairTrade) for socially responsible businesses. To date over 700 corporations in the United States and abroad have undergone the company’s rigorous evaluation process to gain “certified B Corp” status. These are not new corporate forms, although they do represent a significant commitment on the part of many companies to examine and improve their business models when it comes to a broad range of social and environmentally responsible practices, and the financial and non-financial value they are creating for a range of stakeholders. As these innovations in market infrastructure continue to evolve, they demonstrate strong demand for socially conscious reforms to capitalism on the part of businesses, customers, and hopefully investors as well.

Despite this global popularity, benefit corporations (both legally and independently certified) are not without their critics. Most vocally, many argue that benefit corporation status is little more than a window dressing technique – similar to the deceptive environmentally-friendly marketing campaigns known as greenwashing – for companies hoping to increase revenue through a superficial commitment to social and environmental issues. And even if the benefit corporation legal form proves able to hold businesses accountable to social purposes, the fact is that benefit corporations and other social business forms remain a fraction of the market share. Small, private companies in 19 states are beginning to take advantage of legal incorporation, but overall impact remains uncertain and nascent, suggesting that the so-called “social business revolution” may be more an optimistic projection than a contemporary reality.

The limited success of benefit corporations is all the more reason, then, that incorporation in Delaware appears to be a crucial watershed, as it will allow access to larger companies and more capital than the movement has seen to date. While legal benefit corporations may not be a panacea for the social ills of capitalism, Delaware’s legislation is an important step advancing the understanding that business has responsibility to a broader set of stakeholders than just shareholders, and that meeting that responsibility can help realize a more equitable, prosperous future.

By Suzanna Fritzberg

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Business Corporations Delaware Law Next New Deal Social Entrepeneurship