Letter From The President Of The Washington Metropolitan Area Corporate Counsel Association

2010-11-02 01:00

To The Readers of The Metropolitan Corporate Counsel:

In reading the business press and scanning websites of leading companies over the last few years, I have noted with interest the increasing number of organizations touting their commitment to Corporate Social Responsibility (CSR) as a core value. In fact, CSR is now part of the strategic framework guiding the behavior of many Fortune 500 companies, and with good reason. Investors, including private equity firms, are increasingly putting their money into organizations that promote environmental stewardship, consumer protection, human rights, diversity and other societal improvements. And studies show that 70 percent of consumers are willing to pay a premium for products from socially responsible companies.

CSR has, in fact, recently moved from being a good advertising slogan or business goal to the "big time" of being an authorized corporate form called the "Benefit Corporation," more commonly known as the "B" Corporation. This corporate animal is quite real, with the Maryland legislature this year becoming the first to pass legislation recognizing the B Corporation. Given the potential for this movement, in-house counsel should actively monitor legislative and other developments in this emerging area.

B Corporations - Structure and Form

The B Corporation is intended to use the power of business to address social and environmental problems. Traditionally, companies have the fundamental purpose of serving the interests of their shareholders. Company directors are responsible for safeguarding shareholder interests and ensuring that other activities or potential interests do not adversely affect the sanctity of shareholder interests. The rules for B Corporations, meanwhile, enable and protect their directors to also take employee, community, and environmental interests into consideration when making decisions.

The principal proponent of the B Corporation is B Lab, a 501(c)(3) non-profit governed by an independent board of directors. The organization's website (bcorporation.net) states that there are more than 300 B corporations nationwide representing 54 industries and sales of $1.1 billion. Notably for WMACCA members, there are eight certified B Corporations in D.C., two in Maryland, and four in Virginia. B Lab's mission includes the certification and support of B Corporations that achieve a minimum score on the B Ratings System, which is governed by an independent standards board.

The non-profit organization's website explains that B Corporations address two critical problems that hinder the creation of positive social and environmental impact through business. One issue is the existence of shareholder primacy which makes it difficult for corporations to take employee, community, and environmental interests into consideration when making decisions. The second problem B Corporations claim to address is the absence of transparent standards, which makes it difficult to tell the difference between a "good company" and just good marketing.

The standards established by B Lab for obtaining a B Corporation certificate vary depending on whether a state has a constituency statute (a corporate statute that explicitly allows directors to consider the interests of stakeholders). Many states have such a statute; however, 20 states (including Virginia and Delaware) do not. If your organization's state of incorporation has a constituency statute, the B Corporation certification process requires modification of the company's charter documents to include consideration of employees, consumers, the community and the environment. The modified charter documents must be approved by the company's board of directors and the requisite number of shareholders, and then filed with the secretary of state, if applicable.

For states without a constituency statute, B Lab's standards for B Corporation certification require the company to (i) consider the impact of its decisions not only on shareholders, but also on its employees, customers, suppliers, community and the environment; and (ii) support B Lab's objectives of passing legislation to create a new corporate form with higher standards of corporate purpose, accountability and transparency.

Regardless of whether your organization's state of incorporation has a constituency statute, B Lab certification requires that a company complete the B Impact Assessment, receive a passing score, and comply with certain intellectual property requirements including use of the name "B Corporation." Companies are also required to pay B Lab an annual certification fee based on a tiered structure ranging from $500 to $25,000 depending on annual sales.

Maryland - First State to Pass B Corp Legislation

Notably, Maryland became the first state to adopt legislation recognizing a Benefit Corporation as a distinct corporate form. The new state law (adopted on April 13, 2010 and effective on October 1, 2010) provides that a director of a Benefit Corporation, "in determining what the director reasonably believes to be in the best interests of the Benefit Corporation, shall consider the effects of any action or decision not to act on": the stockholders; the employees and workforce of the Benefit Corporation, its subsidiaries and suppliers; the interests of customers as beneficiaries of the general or specific public benefit purposes of the Benefit Corporation; community and societal considerations, including those communities where offices or facilities of the Benefit Corporation are located; and the local and global environment.

Importantly, Maryland's law accords the same immunity from liability to directors of Benefit Corporations as it extends to directors of other corporate entities. Additionally, the Maryland statute requires the Benefit Corporation to deliver to each stockholder an annual benefit report describing how the corporation pursued a "general public benefit," any "specific public benefit," and the extent to which such public benefits were created. The annual report is required to be posted on the Benefit Corporation's website and include an assessment of the societal and environmental performance of the corporation prepared in accordance with a third-party standard.

Vermont recently became the second state to enact legislation authorizing businesses to establish themselves as benefit corporations. Such laws are also under consideration in New York, Pennsylvania, New Jersey, Oregon, Washington and Colorado.

What Lies Ahead for B Corporations

The future of B Corporations is difficult to predict, but there are some encouraging factors to consider. B Corporations may command higher valuations if they have established a trusting, transparent relationship with their customers, employees, suppliers and other stakeholders. Such loyalty may translate into substantial goodwill for which buyers may be prepared to pay. In addition, private equity and venture capital firms are paying increasing attention to and funding B Corporations according to information provided by B Lab. Social investors wanting to invest in companies whose missions are aligned with their values are another fertile source of capital. While there are currently no public B Corporations, the B Corporation legal framework does not preclude the company from going public.

We may be seeing the leading edge of a wave of B Corporation legislation. In-house counsel are well advised to become knowledgeable about B Corporations and educate their management and boards. You may even find your company taking a position on Benefit Corporation legislation proposed for your state of incorporation.

Sincerely,

Curtis Schehr

Vice President and General Counsel,

DCS Corporation