In July, the state of Delaware passed a statute allowing incorporation of hybrid companies dedicated to doing good while also making money. Officially called benefit corporations, the special corporate structures they adopt appeal to people who “want to devote significant energies to solving social or environmental problems as well as making a buck,” says Eric W. Orts, a professor of legal studies and business ethics at Wharton.
Benefit corporations open up a way to “address social and environmental issues with sustainable long-term profit-making,” he adds.
While some 19 states allow for hybrid corporations, Delaware’s move is a benchmark because more than half of all large U.S. public companies are incorporated there, including some two-thirds of the Fortune 500. Without a special law to allow the dual goals, a company could fail to meet its fiduciary responsibilities. Traditional corporate and business organization law tends to assume “the primacy of a ‘for-profit’ objective,” Orts says. “Shareholders can sue if a company begins to devote too many resources to projects not intended to maximize returns, at least in some states.” So the hybrids fall between more typical for-profit and non-profit companies. “Clarity of purpose and legitimacy are the main gains of new legislation – and some protection from possible litigation.”
One good example of a benefit corporation is Patagonia. Its company message is that it does not compromise environmental values when it is making and selling clothes and outdoor equipment, says Orts, who is also director of Wharton’s Initiative for Global Environmental Leadership (IGEL). The company has devoted tens of millions of dollars to environmental causes, and “its brand is based on what it does and stands for environmentally, as well as basic quality and cost variables. Many customers are happy to pay a premium for this kind of commitment.”
According to B Lab, a non- profit group that tracks the evolution of these hybrid corporations and operates the Benefit Corp Information Center, “benefit corporations offer clear market differentiation, broad legal protection to directors and officers, expanded shareholder rights and greater access to capital than current alternative approaches. As a result, the benefit corporation is also attracting broad support from entrepreneurs, investors, legal experts, citizens and policy makers interested in new corporate form legislation.” B Lab maintains a list of companies registered as benefit corporations.
While official legal status for benefit corporations may make it a bit easier for them to operate, it will still be “difficult for many hybrid enterprises to compete with traditional business competitors” that focus on one bottom line only, Orts believes.
Yet, interest looks set to grow. Orts has noticed a distinct change in the attitudes of many Wharton students who remain committed to business careers, but who also have become “disillusioned by the narrow focus of ‘maximizing shareholder value’ at all costs,” and by the financial crisis and the “overreaching of greed and myopic pursuits of self-interests by those in positions of significant economic influence and power.” If consumers begin to increase their support for benefit corporations, such as Patagonia and Ben & Jerry’s, and if innovative financial methods such as crowdsourcing can be tapped effectively, then more and more hybrids may begin competing in traditional markets, Orts says.
So far, however, most of the evidence suggests that, while consumers say they believe in the kinds of values benefit corporations serve up, they still often make purchases based on cost and quality. At the same time, there is some evidence from websites like Treehugger that consumers are “beginning to care about these issues, Orts says. “Perhaps the biggest example of a related successful story is the growth of the organic food markets.”
In that context, Delaware’s recognition of benefit corporations may “spark new research into how best to support and structure these new social hybrid enterprises,” Orts adds. And “as global problems of environmental destruction and massive inequality of wealth continue to worsen, we’ll see an accelerating movement to enlist businesses as part of the solution to these major issues facing humanity.”
Orts also noted that the adoption of the statute in Delaware “was also accompanied by a record number of immediate re-incorporations, including by the well-known home goods retailer Method Products (supported by venture capital from European-based Ecover and San Francisco’s Equity Partners). More than a dozen other companies became Delaware benefit corporations as well.”
Orts is the author of a book entitled, Business Persons: A Legal Theory of the Firm, which considers the legal issues surrounding benefit corporations, among many other topics. The book was published this month in the U.K. and will be released in the United States in September.