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New California Law Will Boost Social Entrepreneurship New California Law Will Boost Social Entrepreneurship
Business

New California Law Will Boost Social Entrepreneurship

by Tim Fernholz

August 31, 2011


Update: On October 10, 2011, California Governor Jerry Brown signed the Benefit Corporation legislation discussed here into law. 

A new California law that comes before Governor Jerry Brown today could make it easier than ever to combine business with social mission, a welcome respite for those seeking to harness the engines of capitalism in the service of good deeds.

While growing ranks of entrepreneurs are combining business and social missions—think Toms Shoes or Method cleaning products—current law makes it difficult for them to raise money and control their enterprises. 

That’s changing around the country, and California could be the next frontier, if advocates of social business ranging from the Silicon Valley Leadership Group to apparel giant Patagonia have their way and create a new legal category for what they call Benefit Corporations.

“The modern corporation was ‘Born to be bad,’” Patagonia founder Yvon Chouinard wrote in a letter to Governor Brown. “Benefit Corporations are ‘born to be good’ because their corporate purpose must include the pursuit of a material positive impact on society, not just shareholders.”

Corporations are chartered by states, and a historic body of law makes clear that all company directors and executives owe their shareholders is profits, profits and more profits; their fiduciary duty is their only duty.

If you do expect company’s officers to take into account other goals—like environmental sustainability, the well-being of their workers, or general public benefit—conflicts with the profit motive can expose even well-meaning executives to legal difficulties.

The Benefit corporation movement has laid out a set of social impact standards for companies that seek to embrace both profit and impact. It requires privately held B corporations to amend their articles to reflect a commitment to those standards, protecting officers and directors from legal repercussions for their decisions and giving shareholders the power to hold them accountable, by lawsuits if necessary, for protecting the public interest. It also protects customers from deceptive marketing—greenwashing—by forcing corporations to submit public reports that conform to independent benchmarks.

“Entrepreneurs no longer have to choose between a ‘make money now, give it away later’ traditional corporation, or a starving NGO,” says Jay Coen Gilbert, a co-founder of advocacy group B Lab. “We’re creating a middle path that combines the best of the purpose-centered nonprofit community with the ability to scale and attract talent of the for-profit community.”

But there are no public B corporations, because public companies are subject to a variety of legal requirements and existing investors are reluctant to change a company’s goals. With public offerings representing a key way to raise money from investors and create cash incentives for entrepreneurs, the inability to access them would be a problem for businesses trying to adopt a social mission.

B Lab, along with partner organization the American Sustainable Business Council, has been waging a campaign to change this setup by encouraging state legislatures to make the requirements of B corporations a legal reality; so far, they’ve succeeded in Maryland, Hawaii, New Jersey, Virginia, and Vermont.

If Brown signs the law in California, and New York Governor Andrew Cuomo does the same with similar legislation in the near future, it will be an important victory for advocates of shared value because the two states represent such a large share of the U.S. economy.

But it’s only a first step. Public B corporations will need to be chartered, and advocates expect the first experiments in that direction will be B corporations that act as subsidiaries of larger public companies. Corporate governance lawsuits will test and shape the new law in the courts. And B corporations will need to spread across the states, particularly to those like Delaware that attract a large number of corporate headquarters with low taxes or loose regulation.

Still, the momentum behind the legal changes—and the bipartisan majorities that have so far enacted them—signal the beginnings of a sea change in our expectations for the private sector. “Right now the role of a business is to maximize profit for shareholders,” Gilbert says. “B corps are saying, ‘we don’t think that’s the operating system we want to operate under.’”

Photo via (cc) Flickr User Nicolas Boullosa

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