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27 States Adopt Benefit Corp Laws; Michigan Still in Limbo

LegisMapAugust

Twenty seven states and counting. That’s the number of legislatures across the U.S. that have adopted Benefit Corp laws for business incorporation. Another 10 states are expected to move ahead in the next year.

Michigan has had proposed legislation since 2010 and would have been the third state in the nation to adopt the law. The House bills will expire at year-end. Supporters say Michigan businesses are missing out on social impact investing valued in the trillions in the U.S.

Benefit Corp legislation allows businesses to make socially responsible goals such as environmental and community sustainability a legal part of their incorporation. It would add to the options for business incorporation, such as LLC, S-Corp, LLP, Non Profit 501(c)(3), that have been added to law over the years as market demands warrant them.

Rep. Vicki Barnett, D-Farmington Hills, introduced House Bill 4615 and 4616 in 2010. Her time representing the 37th House District expires at the end of 2014 with term limits. She and Rep. Wayne Schmidt, R-Traverse City, have reintroduced the bill since 2010. Sen. Mark Jansen, R-Gaines Township, introduced legislation in the Senate.

“People more and more are beginning to vote with their dollars,” Barnett said. “Social impact investing has really boomed in the last 20 years, so we must understand that people will invest where their values are. In most other states, legislatures and chambers have jumped on board.”

Why hasn’t Michigan moved ahead with the legislation? That’s a question Method cleaning products company asked this year after speaking at the Mackinac Policy conference. They said the lack of Benefit Corp status in Michigan was one reason why they did not incorporate here.

The answer? One side says the proposed legislation would cast the wrong image on current businesses, painting socially responsible companies as less than those with Benefit Corp status. The other side says it is a “myopic” view in Michigan that is stalling the law.

Here is some background from benefitcorp.net:
Benefit Corporations: 1) have a corporate purpose to create a material positive impact on society and the environment; 2) are required to consider the impact of their decisions not only on shareholders but also on workers, community and the environment; and 3) are required to make available to the public an annual benefit report that assesses their overall social and environmental performance against a third party standard.

Becoming a benefit corporation gives entrepreneurs and investors an additional choice when determining which corporate form is most suitable to achieve their objectives.

In a nutshell, the legislation allows directors of companies to make decisions that follow the goals of the company that are not solely based on profit. It also protects them from shareholder lawsuits. Current Michigan law allows investors or shareholders to sue, for injunctive relief, directors not deemed to be making decisions beneficial to the bottom line. Benefit Corp legislation also ensures the continuance of original company goals in the event of an acquisition or sale. Equally important, supporters say, the law provides transparency for investors and the public through an annual report assessing social and environmental performance.

Gabe Wing, director of Safety and Sustainability at Herman Miller.

Gabe Wing, director of Safety and Sustainability at Herman Miller.

Turning a big public company into a Benefit Corp, however, is seen by many as too cumbersome. Getting two thirds of shareholders to approve changes in articles of incorporation just has “too many hurdles,” said Gabe Wing, director of Safety and Sustainability at Herman Miller.

“I’m not an expert, but I think there are a lot of hurdles there. For a company like Herman Miller, changing articles of incorporation, that’s a huge obstacle, a lot of legal hurdles. Just a tough transition process for a company that is not privately held.”

For a newly formed company it makes sense, Wing continued. “You are recognizing as a company that you have an obligation to do more than just make money. When you think about maximizing shareholder/stakeholder value, the way that our company looks at it, if you’re not working on sustainability you are probably not maximizing shareholder/stakeholder value.”

He said that for privately held or new companies, “it is one way to make those values front and center and visible to everybody.”

Herman Miller has long believed that sustainability and profitability aren’t mutually exclusive. It has been an advocate of environmental responsibility since 1953, when then CEO D.J. De Pree said, “We will be good corporate neighbors by being good stewards of the environment.”

Herman Miller in 2013 attained its tenth consecutive listing on the Dow Jones Sustainability World Index. The index comprises the top 10 percent of the largest stocks in the Dow Jones Global Indexes in terms of their sustainability and environmental practices.

According to its website, Herman Miller tracks its progress toward sustainability, as well as the costs associated with it, on a number of fronts. “Our corporate environmental goals are a key metric of our business success, and our current CEO’s compensation is based, in part, on progress toward those goals. In 2012, almost $2.3 million dollars made it to our bottom line, the result of waste prevention and recycling, conservation programs, and market energy purchases,” the website states.

Erik Trojian, director of policy for B Lab

Erik Trojian, director of policy for B Lab.

Erik Trojian, director of policy for B Lab,, recognizes the social value that global companies such as Herman Miller have built over the years, as well as the hurdles involved to get two thirds of shareholders to approve changes to articles of incorporation. For those companies, the answer is B-Corp Certification conferred by the nonprofit B Lab. Certified B Corporations have been certified as having met a high standard of overall social and environmental performance.

Even so, Wing said obtaining B-Corp certification for huge global companies is still regarded as having too many obstacles. In the first assessment, he said, it is more scalable to smaller companies.

Early on, Trojian said, there was pushback by some that said the new incorporation status was not needed and that companies could already make decisions serving profit and social impact. “It has been generally decided that companies could not do this and be protected,” he said. “The fact that Delaware passed this. We worked with Delaware Secretary of State office and Court of Chancery, and they said that if a company acted like a Benefit Corp and made decisions that did not maximize profits, we would have to rule against them in a lawsuit brought by shareholders.

Created by B Lab
B Lab, a non-profit 501 (c )(3), created the Benefit Corp legislation concept. B-Lab certifies entities that meet a higher level of social and environmental performance. Currently, there are about 1100 certified B Corps and roughly the same number of Benefit Corp companies, by coincidence. About 10 percent of the Benefit Corps are certified B Corps. “We created this concept, because we also certify investment funds, rate the fund managers. We quickly noticed that there was a problem in the legal infrastructure that allows companies to only make a profit, but not consider society and the environment.”

Trillions of dollars of investment on table
Social impact investing keeps growing. These are “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return,” according to the Global Impact Investing Network.

A report by the US-SIF Foundation on “Sustainable and Responsible Investing Trends in the United States 2012” identified the following numbers regarding the scope of the investment sector:

  • $3.31 trillion in US-domiciled assets at year-end 2011 held by 443 institutional investors, 272 money managers and 1,043 community investment institutions that apply various environmental, social and governance (ESG) criteria in their investment analysis and portfolio selection, and
  • $1.54 trillion in US-domiciled assets at year-end 2011 held by more than 200 institutional investors or money managers that filed or co-filed shareholder resolutions on ESG issues at publicly traded companies from 2010 through 2012.

Their conclusion, after eliminating double-counting in both strategies, was that “the overall total of socially responsible investing (SRI) assets is $3.74 trillion, a 22-percent increase since year-end 2009.”

Trojian said, “We heard from many social impact investors who said ‘when I make a conscious decision to invest in companies that contribute socially and environmentally, I am at a disadvantage because I can’t protect my money. I can’t sue the company for not considering the society and the environment unless it is a Benefit Corporation.’” Now because they are assessed against a third party standard investors can make analysis and decide whether to create a dialogue about investment, he said.

Trojian also added that they have also found the legislation creates an economic development engine. “What we are doing is we are organizing these companies under the umbrella of Benefit Corporations, so that makes it easier for social impact investors to find them.”

The trend will also keep growing, he said. Choice is king in a free market.
“We know that this is also generational play in our economy, and that young people coming out of MBA schools look toward becoming Benefit Corps or sympathize with the ideology. We know that students graduating from college, the vast majority would like to work for a company that has morals in their mission and not just focused on making money.

“So for companies to stay current and to keep people. Look at Michigan, it has a brain drain. To keep youth in the state, you have to stay current on how companies grow.”

The argument in Michigan
“I’ve testified twice in Michigan, and it is a real shame that the traditional business community is so myopic in their view on this,” Trojian said. “Basically, in a nutshell, they are afraid of the competition. Their argument is that if this law passes, customers will like those better than traditional companies and it will force us to become Benefit Corporations. A, that is called competition, and; B, it is up to the market to decide that; this law doesn’t do that. If you chose not to do it, then don’t, it is a free market. “But don’t say that we don’t want this law because we don’t want to face this whole sector of the economy that wants to do this. Because unfortunately, the result is brain drain and companies not locating there.”

Such was the case with Method cleaning products owners Eric Ryan and Adam Lowry. The Michigan natives founded their home and personal care products company on the premises of being socially and environmentally responsible, and follow the triple bottom line of Profit, People and Planet.

But they incorporated in Delaware, one reason being because they could be a Benefit Corp. They  talked about the importance of the legislation after speaking this spring about innovation at the Mackinac Policy Conference.

“Our mission at Method is to use business to create positive social change – to benefit society,” Lowry said in early June. “Any young person looking for a job these days wants to align their job with their values.”

He said passage of Benefit Corp legislation in Michigan could allow other like-minded companies to settle here instead of somewhere else.

“These are the little things we do to foster an environment were innovation can thrive,” Lowry said. “That would go a long way to say to entrepreneurs, ‘If you want to start a mission-driven company, then here is a way where you can have the legal structure to operate the business the way you want to.’”

Michigan Chamber of Commerce President Rich Studley in 2012 was quoted in Crain’s Detroit Business that there was concern whether the law was needed and if it would shed a light on companies suggesting that some were “better or preferential” over others.

However, Trojian said Benefit Corp law does not say that a company is better.

“There is no statement that says Benefit Corporations are better companies. B-Lab believes that Certified B-Corps are better companies, because they are our companies. Just like the Chamber would say their companies are good companies. That’s why we have the test to become a member of ours. We know definitively through an analytical tool that they are good companies. Only 10 percent of our certified companies are Benefit Corporations.”

The chamber did not return calls and emails seeking to update their comments for this story.

Possible compromise incorporation
One Michigan company, however, has found a way to incorporate and include social and environmental impact in their articles. Design Innovations for Infants and Mothers Everywhere Inc. DIIME is dedicated to improving infant and maternal health disparities in resource-limited settings through design and commercialization of high-quality, locally affordable, innovative medical devices.

The legal team for the Ann Arbor based startup examined the Michigan Business Corporation Act and found they could move ahead and incorporate with social impact in their articles, according to a Forbes article in 2013.

“There was no reason why shareholders couldn’t include a social purpose and other benefit corporation provisions in their articles of incorporation, even without the existence of benefit corporation legislation here in Michigan,” the article said, quoting David Guenther, a partner at Conlin, McKenney & Philbrick P.C. in Ann Arbor.

Trojian doubted the legal protections of the DIIME incorporation.

“With all due respect to them, go to court with that. The Secretary of State does not speak for the courts. It’s a good intention, but you have avoided the real issue. By not knowing for certain that you have the right to do something, show me an investor that will take that action when he or she does not know for certain that legally they have the right. The proper protection is to put it into law. All we are doing is creating a legal structure to protect you.”

In Michigan, the proposed legislation will expire at the end of the 2014 session. So the future of the legislation is again uncertain. Rep. Barnett has said Rep. Schmidt could reintroduce the legislation next term. Schmidt won the primary in his bid to represent the 37th District in the state Senate and now heads to the November election.

For Trojian, spending time in Michigan is now on his back burner.

“I don’t put effort back into Michigan at this time because I have all these other states that are passing it. It has huge bipartisan support. I wish Michigan could get back in the game, but why spend my time when people all over the country are passing it.”

 

Benefit Corp Frequently Asked Questions:

What is a benefit corporation?
A benefit corporation is a new class of corporation that voluntarily meets higher standards of corporate purpose, accountability and transparency.

Benefit Corporations: 1) have a corporate purpose to create a material positive impact on society and the environment; 2) are required to consider the impact of their decisions not only on shareholders but also on workers, community and the environment; and 3) are required to make available to the public an annual benefit report that assesses their overall social and environmental performance against a third party standard.

Becoming a benefit corporation gives entrepreneurs and investors an additional choice when determining which corporate form is most suitable to achieve their objectives.

Does being a benefit corp affect your business tax status?
It doesn’t. Your company can still elect to be taxed as a C or S corp. Benefit corp status only affects requirements of corporate purpose, accountability, and transparency; everything else remains the same.

Do benefit corps have to get certified?
No. Benefit corporations do not have to become certified. Not by B Lab; not by anyone.  Benefit corporations and Certified B Corps are different. To  learn more about the differences and similarities, go to: www.benefitcorp.net/what-makes-benefit-corp-different/benefit-corp-vs-certified-b-corp.

How would becoming a benefit corp help a  business?

  • Provide clarity to directors and officers that their fiduciary duty includes creating a material positive impact on society and the environment, even in liquidity/sale scenarios;
  • Offer legal protection to directors and officers to consider the non-financial interests of their workforce, community and the environment when making decisions, even in liquidity/sale scenarios;
  • Help maintain mission over time by 1) expanding shareholder rights to enforce this expanded definition of fiduciary duty and standard of consideration; and 2) requiring a 2/3 super-majority vote of shareholders to remove these higher standards; and 3) providing the opportunity to name and enforce pursuit of one or more specific public benefit purposes;
  • Create a marketing opportunity to differentiate the business as a new class of corporation required by law to benefit society as well as shareholders.

Why are benefit corps important?
Business leaders need to be able to satisfy the increasing demands of investors, employees and customers that corporations serve both shareholders and society, considering the impact of their decisions on multiple stakeholders rather than maintaining a singular focus on short term financial returns.

In addition, benefit corps create a new and useful corporate structure that meets the needs of business leaders and investors whose core mission it to create a material positive impact on society and the environment.

Without increasing regulation or impacting state budgets, benefit corporations:

  • Remove legal impediments preventing businesses and investors from making decisions to use sustainability and social innovation as a competitive advantage, particularly in liquidity/sale scenarios;
  • Legitimize and accelerate development of a more inclusive and sustainable economy by providing legal recognition for businesses that adopt higher standards of corporate purpose, accountability, and transparency;
  • Rebuild public trust in business by demonstrating that businesses are willing to be held accountable to create value for both shareholders and society.

How do I become a benefit corporation?
If you are starting a new company, you can simply incorporate as a benefit corporation in any state where legislation has been passed. The procedure for incorporation is nearly identical to that followed for any other corporate structure. For state by state instructions go to: http://www.benefitcorp.net/business/become-a-benefit-corporation/how-do-i-become-a-benefit-corporation.

If you have an existing company, you can elect to become a benefit corporation by amending your governing documents.  Amendment requires a 2/3 super-majority vote of shareholders in most states. The procedure for filing amendments with the state is identical to that followed for any other corporate structure.

Benefit Corp vs. Certified B Corp
Benefit Corporations and Certified B Corporations are often, and understandably, confused. Both are sometimes called B Corps by mistake or as shorthand. They share much in common.

Quick snapshot:
Certified B Corporation is a certification conferred by the nonprofit B Lab. Benefit corporation is a legal status administered by the state. Benefit corporations do NOT need to be certified.

Certified B Corporations have been certified as having met a high standard of overall social and environmental performance, and as a result have access to a portfolio of services and support that benefit corporations do not.

What are the commonalities between benefit corporations and Certified B Corporations?

  • Accountability: Directors of both are required to consider the effect of decisions not only on shareholders, but also on other stakeholders, such as workers, community, and the environment.
  • Transparency: Both are required to publish publically a report  assessing their overall social and environmental performance against a third party standard.
  • B Lab: B Lab is the nonprofit organization that helped to develop the benefit corporation Model Legislation and works with the community of Certified B Corporations and others to marshal support for its passage. B Lab is also the nonprofit organization that certifies and supports Certified B Corporations.

FAQ Source: Benefit Corp Information Center, www.benefitcorp.net/state-by-state-legislative-status

Richard Blanchard

Rick is the Managing Editor of Corp! magazine. He has worked in reporting and editing roles at the Port Huron Times Herald, Lansing State Journal and The Detroit News, where he was most recently assistant business editor. A native of Michigan, Richard also worked in Washington state as a reporter, photographer and editor at the Anacortes American. He received a bachelor of arts from the University of Michigan and a master’s in accountancy from the University of Phoenix.

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