Benefit Corporations (B-Corps)
Written by Tiara Dungy
A Benefit Corporation, also known as a Public Benefit Corporation (B-Corp), is a legal designation for a profit generating company that includes social impact indices as an important part of the organizational mission, creates social impact, and evaluates success in terms of financial profits, positive social impact, and environmental sustainability (Barnes 2016). These for-profit organizations, which have been recognized by 31 states and Washington D.C., pledge to incorporate social and environmental concerns in their operations. It should be noted that many Benefit Corporations are founded for the purpose of supporting social or environmental issues, though this is not a requirement (Barnes 2016). While special in its distinction, in that pure financial profits are not the only concern, they receive no special treatment under tax law (Barnes 2016). In other words, unlike nonprofit organizations which are founded solely to address social and environmental issues and receive special legal treatment such as tax exemption, Benefit Corporations are taxed like normal businesses, even if they were founded to address social and environmental issues.
While the names are very similar, and some people use them interchangeably, the distinction between a Benefit Corporation and a B-Corp is definitive. A B-Corp (also: Certified B corporation; certified b corp; certified b corps) is an industry regulating certification similar to LEED, Rainforest Alliance, or Fair Trade (Barnes 2016). The brand B-Corp is managed by a certified 501c3 called B Lab. Their mission is to promote the more responsible operation of businesses by providing a standardized evaluation process that helps guide existing businesses to become more responsible, and new businesses to begin with responsibility in mind (B Lab 2017).
The first Benefit Corporation was incorporated as such in 2010 in the U.S. state of Maryland (Fiedenwald-Fishman 2011). Though many companies existed with the express purpose of pursuing social and environmental responsibility as core components of their business operations (Barnes 2016), the Benefit Corporation legal delineation happened only defined in 2010. Important historical champions of incorporating purpose, accountability, and transparency as guiding principles for the operation of their business include: Ben and Jerry’s, Patagonia, and Kickstarter. Although not a legal distinction, B Lab began certifying companies as B-Corps in 2007 (Barnes 2016).
The function of the Benefit Corporation distinction within the legal business framework is that it guarantees protection from litigation brought by share-holders against a Benefit Corporation for prioritizing social responsibility over the maximization of profits, and therefore potentially compromising payouts to shareholders. More formally referred to as shareholder primacy, the concept is that a managing executive can consider additional concerns outside of the financial enrichment of the shareholders. This concept was established by the Michigan Supreme Court in 1919 in the case of Dodge vs. Ford (Katz and Page 2012). Many scholars says the shareholder primacy norm has the potential to lead to exploitation of non-shareholders in the form of environmental degradation, as well as short changing of employee and consumer safety (Yosifon 2015).
The Benefit Corporation designation is an important development because it reflects a global shift in consciousness about the impact businesses have on the community in which they operate, as well and the anthropological effects of business operations on the environment (Friedenwald-Fishman 2011). Recurring reports of hastening movement toward multiple degree warming of our environment due to human activity and international state reactions in the form of multilateral agreements like the Paris Accord, demonstrate popular support for changing the way businesses interact with the communities in which they operate (Barnes 2016). While there are disagreements about the measurably negative anthropological effects of business on the environment, there is no doubt that there is an objective difference people make on the natural world. As a result of this impact, it is important for customers to demand, businesses to respond to, and governments to ensure that detrimental impact is minimized (B Lab 2017).
The need for the Benefit Corporation distinction was cemented with the corporate acquisition of Ben & Jerry’s by Unilever. In this situation shareholders forced a lucrative sale to a large traditional multinational company rather than the founder’s preference to a smaller company with similarly aligned social and environmental commitments (Barnes 2016). The long standing social and environmental corporate agenda of Ben & Jerry’s was not protected by Benefit Corporation status and shareholders were able to charge the company with negligence in failing to secure their best financial interests (SSIR 2012), but shortly after the sale they became a Certified B Corporation (Barnes 2016).
The certification establishes a standardized scale which is helpful when establishing organizational mission and operations according to a set of norms widely accepted by all sectors as reasonable expectations for more socially and environmental business practices. This set of written norms helps to illustrate actionable steps that can be taken by businesses to improve their level of corporate citizenship. Additionally, the management of the branding authority by a nonprofit reintroduces the important influence of nonprofit trust into the process (Barnes 2016). With strict non-distribution constraint on its income, B-Labs is able to reassure consumers that it is an impartial arbiter of corporate citizenship and responsibility, rather than a financial beneficiary of its work (Learning to Give).
As global demographics continue to shift toward an expanded social heterogeneity, the demand for the services of nonprofits will inevitably increase (Feeny and LeRoux 2015). However, this does not guarantee the increase in philanthropic funding. So, there must be additional avenues to address the needs of the population, rather than just by market forces, but by developing responsible solutions to developing needs.
Ties to the Philanthropic Sector
As the share of philanthropic funding grows inconsistently alongside social needs of communities and operational needs of organizations, the Benefit Corporation model is seen by many as a way of combining philanthropic inclinations with income generating activities (Friedenwald-Fishman 2011). It is a response to system failure, so that an organization that addresses a social issue like poverty, lack of education, or poor access to healthcare, can use a more businesslike approach focused on measurable impact, and can make it easier for philanthropic donors to understand the difference the program makes. Philanthropists are becoming more interested in engaging with the work of organizations to which they donate, approaching donations as ‘business’ investments, and allowing for additional transfer of social capital and other in-kind skill giving. Sweat equity rather than checkbook funding, has been proven as a useful tool to maintain sustainable relationships with major donors (Wilburn and Wilburn 2015) and Benefit Corporations offer another medium to create positive social and environmental change.
Key Related Ideas
- B Corporation is a third-party designation by a nonprofit organization called B Lab, which uses a standard scale to measure the social and environmental responsibility (B Lab 2017).
- Impact Assessment is the standard set of indicators that are used to determine the social and environmental impact of businesses who apply to become a certified B Corporation through B Lab (B Lab 2017).
- Share Holder Primacy Norm: The concept that businesses mostly agree to pay more attention to the financial enrichment of their shareholders, rather than other concerns like the proper treatment of employees and the environment (Yosifon 2015).
Important People Related to the Topic
In 2006, cofounders Jay Coen Gilbert, Bart Houlahan, and Andrew Kassoy started the nonprofit B Lab, the third-party voluntary organization that provides a standard scale of measure with which a business’ operations and impact can be measured for social and environmental responsibility (B Lab 2017). They are also the team behind successful entertainment, apparel, and basketball outfit AND1 (B Lab 2017) which rose to prominence by leveraging the consumer loyalty of traditionally underserved populations, i.e. young urban youth. By integrating popular mediums of youth expression including hip-hop music, basketball, and fashion they were able to build a brand that grew to become an important part of popular culture, a defining concept that allowed for a counterculture mainstream. Their concept of developing enterprises, both for-profit and nonprofit, based on the idea that consumers develop a relationship with the ethos underpinning brands, and not just the products produced, can be consider a critical shift in the way business is conducted.
Related Nonprofit Organizations
- B-Lab is the 501 c 3 nonprofit organization that provides the third party certification that is associated with, but not a requirement of Benefit Organizations (www.bcorporation.net).
- The Rockefeller Foundation is a large private foundation that has invested in the work of B Lab (www.rockefellerfoundation.org).
- YouTube video: TEDx talk on Benefit Corporations (https://youtu.be/NfNF9u7X0GU).
Reflection Question - Do you think businesses have a responsibility to make the world a better place?
- Barnes, Abi. “An Entrepreneur’s Guide to Certified B Corporations and Benefit Corporations”. Yale Center for Business and the Environment. March 29, 2016. https://cbey.yale.edu/programs-research/an-entrepreneur%E2%80%99s-guide-to-going-b
- Brokaw, Leslie. "The Benefit Corporation Movement." MIT Sloan Management Review. November 28, 2012. http://sloanreview.mit.edu/article/the-benefit-corporation-movement
- Cohen, Rick. "Some Unanswered Questions About Benefit Corporations, L3Cs, and Social Enterprise More Generally." Non Profit News Nonprofit Quarterly. May 20, 2014. https://nonprofitquarterly.org/2014/04/28/some-unanswered-questions-about-benefit-corporations-l3cs-and-social-enterprise-more-generally
- Friedenwald-Fishman, Eric. "S Corps, C Corps, and B Corps, Oh My! Corporate Structure Matters “. Stanford Social Innovation Review. December 20, 2011. https://ssir.org/articles/entry/s_corps_c_corps_and_b_corps_oh_my_corporate_structure_matters
- Katz, Robert A. & Page, Anthony. “The Truth About Ben and Jerry’s”. Stanford Social Innovation Review. Fall, 2012. https://ssir.org/articles/entry/the_truth_about_ben_and_jerrys
- Learning to Give. Non-Distribution Constraint. https://www.learningtogive.org/resources/non-distribution-constraint
- LeRoux, K., Feeney, M. Nonprofit Organizations and Civil Society in the United States. New York: Routledge. 2015.
- Nass, Mitch. "The Viability of Benefit Corporations: An Argument for Greater Transparency and Accountability." Journal of Corporation Law 39 (4): 875-893. 2014.
- Wilburn, Kathleen, Ralph Wilburn. "Evaluating CSR Accomplishments of Founding Certified B Corps." Journal of Global Responsibility 6 (2): 262-280. 2015.
- Yosifon, David. “Opting Out of Shareholder Primacy: Is the Public Benefit Corporation Trivial? Santa Clara Law Digital Commons. February. 2015. Available from Santa Clara Digital Law Commons.