Pages Navigation Menu

KEEPING THE “BENEFIT” IN BENEFIT CORPORATIONS:

How and Why New York State Should Continue to Foster and Develop Benefit Corporation Legislation

by Frank J. Tantone

A corporation’s director leans back in his chair as he meets with his fellow directors.  He surveys the New York City skyline stretched across the windows of the conference room and begins discussing possible options for the corporation to pursue.

This corporation is not deciding whether to offer new stock options to its shareholders.  In fact, it is not even deciding on a new methodology to maximize shareholder wealth at all.  There are no hiring or firing decisions to be made in this meeting; no cunning ploys at achieving some sort of tax break; and no promotion of a new advertising campaign.  Perhaps this corporation will provide more jobs to underemployed areas of the community; or maybe it will create sustainable energy.  As a result, this corporation will create a general public benefit by making a material positive impact on society and the environment.  This corporation is a benefit corporation.

New York recently adopted this exponentially growing national trend when its benefit corporation legislation was signed on December 12, 2011.  It now has several dozen benefit corporations operating within the state.  New York State should continue to facilitate the growth of benefit corporations through statutory amendments to its business corporation laws and recognition of important policy justifications behind these novel business models.  In turn, these corporations will yield positive results, both socially and economically, in New York’s unique socio-economic landscape.  Specifically, the inclusion of educational and cultural social good as statutorily permissible pursuits of benefit corporations will result in more corporations tackling these issues.

The Introduction of Benefit Corporation Legislation in the United States

 

ben corp map

Benefit Corp Information Center

Currently, 31 states have enacted such legislation, with several others proposing for it to be passed in the near future.  The rise of benefit corporation legislation in the United States has generated state-specific requirements of what it means to be a “benefit corporation.”  Part of the rationale behind having state-specific legislation is that the enacting state’s statutes can be inserted into existing state corporation laws.  As a result, the state’s existing corporations laws, along with these new and unique benefit corporation laws, may apply to benefit corporations.  In addition, it allows for a more seamless transition into having benefit corporations included into a certain state’s unique legal, economic, and social landscape.

What is a Benefit Corporation?

Defined broadly, a benefit corporation is a classification of corporation, in which the entity voluntarily takes on the responsibility of meeting higher standards of corporate purpose, accountability, and transparency by adhering to its state’s benefit corporation laws.  Specifically, all benefit corporations across the nation must fulfill three general, yet separately identified, requirements in order to obtain and maintain benefit corporation status.  These requirements include: 1) creating a material positive impact on society and/or the environment; 2) expanding fiduciary responsibility to include consideration of non-financial interests when making decisions; and 3) producing annual reports of its overall social and environmental performance through utilization of a third-party measuring standard.

Generally speaking, the traditional corporation model is not a sufficient framework for a benefit corporation because it does not legally insulate directors so they can consider non-financial interests.  Benefit corporation status administered by the state protects the corporation’s directors, officers, and the corporation itself against suits for monetary damages when the company is engaged in pursuit of social and environmental goals.

Statutory Amendments to New York Business Corporation Law (“NYBCL”) § 1702

Currently, this section defines general and specific public benefits in New York.  A general public benefit is defined as “a material positive impact on society and the environment [created by the benefit corporation and its business operations], taken as a whole, assessed against a third-party standard.”  A specific public benefit is one that meets any of the enumerated examples for optional goals beyond the general public benefit.  The objective third-party standard outlines the standard for defining, reporting, and assessing general public benefits.  This section also defines the potential methods of attaining a “third-party standard” measurement.

Amendment Proposals to NYBCL § 1702

Proposal #1

NYBCL 1702’s list of “specific public benefits” should dictate that pursuit of educational improvement of the youth of the state is encouraged.

Proposal #2

NYBCL 1702’s list should also be amended to include “increasing cultural awareness” as an encouraged public benefit because of New York’s vastly diverse population.

Increased attention to benefit corporations that focus on educational opportunities in the NYBCL would open up a whole new area of benefit corporations serving the state’s youth.  The need for this increased focus is evidenced by the scant attention paid to increasing educational opportunities among the currently recognized benefit corporations in New York.

School-aged children currently comprise over a quarter of New York’s population.  With the increased focus on education, especially in the inner cities of the state, these benefit corporations could increase the number of young people in the state with a high school diploma, and combat the state’s current national ranking.

In addition, cultural awareness could also prosper from new benefit corporations being encouraged to raise such awareness.  It is immediately noticeable to even a passer-by walking the streets of New York City, that New York, in general, is home to a population of vastly different backgrounds, as it is a hub for American immigrants.  As many as 800 languages are spoken in New York City alone, and approximately 36% of the population of the five boroughs are foreign born.  Therefore, benefit corporations geared toward satisfying the need for cultural tolerance and understanding can meet these individuals’ needs.

Positive Societal and Economic Impacts of Benefit Corporations in New York

As a result of the proposed statutory amendments, and the overall continued support of benefit corporation legislation in New York, there will be a positive impact on social justice — evidenced through societal and economic lenses.

  1. Societal Impact
  1. Fulfilling the traditional notion of corporate social responsibility

Corporate social responsibility can be defined as the economic, legal, ethical, and discretionary expectations that society has for organizations.  However, corporate social responsibility currently also requires organizations to adopt a broader view of its responsibilities that includes not only stockholders, but many other constituencies as well — including customers, employees, and the local community.  Benefit corporation statutes are aimed at composing an organization “distinct from the standard corporate form.”  In doing so, these statutes satisfy a dual mission by accomplishing not only their own objectives, but also the objectives of traditional corporate social responsibility.

  1. Economic Impact

The continued support of benefit corporations, and the amendment of their statutes, in New York would also have a considerable positive economic impact on the state.  Some have heralded benefit corporations as one of the most important developments in the business sector in decades, due to the shift in the public’s collective consciousness about business practices.

Benefit corporations satisfy economic responsibilities to customers.  There is a documented, systemic response from consumers that demonstrates their admiration and patronage of companies with a strong social mission.  Consumers are increasingly associating their purchases with their values, and buying accordingly.  Benefit corporations offer a viable method of fulfilling traditional responsibilities to such customers in catering to their prevailing values and buying patterns in today’s world.  Thus, continued support of benefit corporations will lead to increased consumption based on the recent trend of socially conscious purchasing.

Benefit corporations also offer an attractive path for young business people looking to form a business in New York.  Across the nation, start-ups are offering fewer and fewer jobs, while possibly still feeling the effects of the recent recession.  Overall, the nation is at a pivotal point regarding the life and sustainability of start-up companies, and continued support and amendment of benefit corporation statutes can help New York prosper in this respect.

In sum, these statutory amendments and enhancements will lead to more vigorous and viable entrepreneurial ventures that serve New York’s unique socio-economic landscape.

Frank J. Tantone is a third-year law student at St. John’s University School of Law. He is currently Senior Associate Editor of the Journal of Civil Rights and Economic Development and a member of the Moot Court Honors Society.

The pictures used herein and in the slider are not the property of the author and can be found at the following web addresses:

http://benefitcorp.net/policymakers/state-by-state-status