This week, California became the sixth state to charter a revolutionary new kind of corporation: one that seeks profit AND purpose.
Governor Jerry Brown signed into law Assembly Bill 361, which creates two new classes of corporations that are legally required to pursue a positive impact on society and the environment.
The law broadens the duty of a company to go beyond maximizing shareholder value – profits – to include stakeholder value – environmental and social benefits to the community.
"Entrepreneurs, investors and consumers are calling for this type of legislation," says Assemblymember Jared Huffman, who sponsored the law. "They believe this is the start of something transformational. AB 361 rolls out the welcome mat for businesses and investors ready to create high quality jobs in California and make economic and social contributions that will improve the quality of life in communities across to our state for years to come."
Companies can now file as "Benefit Corporations," which by law means they must take the environment, community, employees and suppliers into account when they make business decisions.
It also creates Flexible Purpose Corporations – for companies that want to focus on a specific mission that benefits society in addition to profits.
In contrast, standard corporate law says a company’s sole mandate is to maximize shareholder profits. That means, even if a company wants to protect environmental and social values, it risks a shareholder lawsuit if it impedes profits.
The new law also raises the bar on transparency and accountability. Benefit and Flexible Corps must file a report each year – audited by a third party – that details its performance in reaching its mission on both environmental and social dimensions. And the third party assessment has to be made public.
California joins New Jersey, Virginia, Hawaii, Vermont and Maryland, which also have laws that officially allow Benefit Corporations. Similar legislation is pending in Michigan and New York.
Mandating that corporations only focus on financial returns assures negative outcomes for society. These laws are an important step toward recognizing that corporations have a much larger, more important role to play as a member of society.
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I don’t get it. Wouldn’t it be more beneficial to be a non-profit? At least there would be no taxes to pay!
Benefit corporations and flexible purpose corporations can attract capital from investors.
They have more control, different governance, and more flexibility than nonprofits.
They can embed environmental and social into business operations and processes.
They create their own revenue, not donors or foundations.
They do not need to rely on fickle donors who often change their funding priorities.
They can give to nonprofits with the assurance of being a good vendor.
Nonprofits have to pay taxes on unrelated business activity (not charitable or educational in and of itself).
Is this possibly the beginning of something very powerful?
‘Infusing the better parts of humanity into the Corporation that currently are not there?
Yes, Joe… this IS the beginning of something very powerful. It has its roots in the notion that for-profit America – big and small – ought legally to be able to be part of “the solution.” Benefit corporation status is the not-yet-articulated foundation for much of what Occupy Wall Street is reacting to. It allows makers of, for example, shoes or cookies or investments or soap to make decisions that not only benefit their investors and shareholders, but also their employees, their communities and the environment without risk of shareholder lawsuits charging failure of fiduciary duty (which is possible under the law before AB 361 goes into effect). California businesses interested in becoming benefit corporations should be on the look-out for workshops and how-to sessions. This could be very powerful.
Very exciting news. Congrats to BCorp and the FPO team, now companies with purpose can earn the recognition they deserve.
Look forward to the day this is federal law.
Since a non-profit has to first form a corporation, would this now be the type of corporation to form when setting up a non-profit, or would it be moot since you have to use the non-profit guidelines which change a for profit corporation into a non-profit?