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Shanté D. Elliott
April 28, 2015
Sustainable Corporations
Final Paper
As America recovered from The Great Recession, consumers refused to accept traditional
business practices from major corporations and banks as they had done prior to the recession.
Recognizing this, new laws and federal agencies were created and passed. Notwithstanding, the
demand for a greater level of transparency and accountability for these industries continued to
persist. The rise of benefit corporations provide consumers the level of accountability and
transparency they desire from corporations. Benefit corporations continue to bring reform to the
traditional corporate model. By operating with the goal of promoting social good, they do so
without jeopardizing profits. An industry made up with over 30,000 entrepreneurs, investors are
recognizing the importance of this industry and are beginning to see these businesses as viable
investments. This paper discusses the history of the benefit corporation, highlights success
stories, and brings attention to why investing in this industry should be taken seriously.
Creating Reform Through Benefit Corporations
Social entrepreneurs believe social good can be produced along with profits and desire
hybrid forms of organization to smooth a single enterprise’s path to realizing both goals. 1 This
belief is responsible for the rise of a new type of business. One that believes in producing profits,
satisfying stakeholders, and changing and saving the world. This new type of business model is
the benefit corporation.
In order for a new industry to rise in popularity and become fruitful, ordinary
entrepreneurs had to become frustrated with traditional nonprofit and for-profit forms2 of
business. The result of this frustration caused entrepreneurs to chart a new path, creating a new
industry, with keen focus on promoting social good. However, in order to ensure success, new
1
Reiser Brakman Dana. Benefit Corporations – A Sustainable Form of Organization?. 46 Wake Forest L. Rev 592 1634 (2011).
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legislation had to be adopted. A mounting number of jurisdictions have attempted to meet this
demand by enabling new hybrid organizational forms: low-profit limited liability company
(“L3C) available in nine U.S. states and the “B Corp,” a private certification for U.S. for-profits
that demonstrate their commitment to a dual mission of making profits and promoting social
good.3 Benefit corporations would not be successful if jurisdictions did not support their mission,
which impacted new legislation to be passed, allowing more benefit corporations to be
established.
This paper will discuss how benefit corporations continue to bring reform to the
traditional corporation model; its history, how benefit corporations create social good; and how
investors are beginning to discover social business as an alternative ways of investing.
A. Reforming the Corporation
Coined “The Great Recession,”4 lasting from December 2007, to June 2009. This
recession began with the bursting of the eight trillion dollar housing bubble.5 However, prior to
the housing bubble burst, signs of a recession surfaced after the 2007 and 2008 global credit
crunch.6 Although America has made a comeback, it deserves mention that no comeback has
been achieved without accountability. There is no one answer to the question of what caused this
recession; several factors are responsible. Nevertheless, the federal government holds big banks
responsible. Although banks were held responsible, corporations began to function under a
microscope, as consumers demanded more transparency.
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Economic Policy Institute, [http://stateofworkingamerica.org/great-recession/] April 27, 2015
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Banks such as Lehman Brothers provided mortgage loans to applicants, who under
regular review would not have qualified to receive a mortgage loan.7 This repetition resulted in
other banks doing the same. When the time came and homeowners were unable to continue
making their mortgage payments, it resulted in thousands of defaulted loans. (See Figure 1)
Figure 1
This graph shows the proportion of subprime mortgages issued in the United States between 1999 and 20088
Because of this, new legislation and government agencies were created and passed. First,
the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act is a compendium of
federal regulations, primarily affecting financial institutions and their customers that the Obama
administration passed in 2010 in an attempt to prevent the recurrence of events that caused the
2008 financial crisis.9 Secondly, the Obama administration created the Consumer Protection
Financial Bureau. This organization maintains a level of transparency with consumers and
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Investopedia, [http://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reformbill.asp#ixzz3YhgKW6q3] April 27, 2015
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commercial institutions. Since the recession, Americans desire to hold large corporations to a
higher level of accountability. Upon doing so, reform for traditional corporations were created.
Benefit corporations grew in popularity throughout the economic recession. Such
corporations offered an alternative to how companies conducted business. It was no longer about
greed; instead it was about promoting social good that all benefit from. Corporate greed is said to
have caused economic crisis world-wide.10 This alleged greed for profit has thrust to a movement
knows as CSR, corporate social responsibility.11 More than ever, firms care about their
reputation and discover the social purpose of doing commercial business.12 These firms care
about their reputation because consumers are holding them more accountable for how they
conduct business.
Approximately 68 million U.S. consumers have stated a preference for making
purchasing decisions based upon their sense of social and environmental responsibility.13 Now
more than ever, consumers care about the environment and other important issues such as,
education and hunger relief. Furthermore, some consumers use their purchasing power to punish
companies for negative corporate behavior,14 and many other consumers use their purchasing
power to reward companies that positively address a social or environmental issue.15 Consumers
are loyal to the companies they believe serve a greater good, and continue supporting these
companies through their purchases. However, if consumers feel that companies do not operate in
10
Fischer Sven, Goerg J. Sebastian, Hamann Hanjo, Cui Bono, Benefit Corporation? An Experiment Inspired By Social
Enterprise Legislation in Germany and the US. 2012
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Jr. Clark H. William, Babson K. Elizabeth “How Benefit Corporations Are Redefining the Purpose of Business
Corporations” 48 William Mitchell L. Rev 2. 817-838 (2012)
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a way that benefits society, they will not support them. Forty-nine percent of Americans have
boycotted companies whose behavior they perceive is not in the best interest of society.16 As
consumer demand for socially responsible products and companies is increasing, consumer trust
in corporations is decreasing.17 Benefit corporations are one way to regain consumer trust.
B. The Benefit Corporation
“When social entrepreneurs’ frustration with traditional and for-profit forms became
apparent, jurisdictions began to respond with new hybrid forms.” Dana Brakman Reiser
As consumers continue to demand more from corporations, the role the shareholder plays
in the corporation continues to be evaluated. It is against the paradigm of shareholder primacy
that benefit corporation statutes have been drafted. These statutes address not only the need for a
new corporate form that changes the paradigm of shareholder primacy, but also respond to the
demand from the marker place for a corporate form that meets the needs and expectations of
increasingly socially and environmentally conscious consumers, investors, and entrepreneurs.18
Unlike traditional corporate models, benefit corporations are held to a higher standard, and must
meet specific requirements in order to achieve benefit corporation status. There are three major
provisions in benefit corporation legislation that are consistent from state to state. A benefit
corporation:
(1) Has the corporate purpose to create a material, positive impact on society and
the environment;
(2) Expands fiduciary duty to require consideration of nonfinancial interests; and
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(3) Reports on its overall social and environmental performance as assessed
against a comprehensive, credible, independent, and transparent third-party
standard.19
These three provisions address corporate purpose, accountability, and transparency.20 Each allow
consumers a direct entrance into the practices of the company. Furthermore, benefit corporations
are required to have a purpose of creating “general public benefit” and are allowed to identify
one or more “specific public benefit purposes.”21
While the law has accepted the practices of benefit corporations by changing and
enacting new legislation. The main thrust of benefit corporation statutes is to require these
entities to pursue purposes beyond profit-making.22 Benefit corporations must benefit the general
public. All statutes permit the benefit corporation to pursue more “specific public benefits,”
including:
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Providing [low income or underserved] individuals or communities with beneficial
products or services;
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Promoting economic opportunity for individuals or communities beyond the creation of
jobs in the normal course of business;
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Preserving [or improving] the environment;
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Improving human health;
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Reiser Brakman Dana. Benefit Corporations – A Sustainable Form of Organization?. 46 Wake Forest L. Rev 592
17. (2011).
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Promoting the arts, sciences, or advancement of knowledge; Increasing the flow of
capital to entities with a public benefit;
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Accomplishing any other particular [identifiable] benefit for society or the environment.23
These statues hold benefit corporations accountable, this differs from general corporations,
which are allowed to form for any lawful purpose, but have no explicit purpose requirement.24
Twenty-seven laws have been passed in the United States to protect benefit corporations. (See
Figure 2)
Figure 2
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23
Id
Jr. Clark H. William, Babson K. Elizabeth “How Benefit Corporations Are Redefining the Purpose of Business
Corporations” 48 William Mitchell L. Rev 2. 839 (2012)
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Certified B Corporations, [https://www.bcorporation.net/] April 28, 2015
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While benefit corporations were first protected under the law, a similar form of this
corporations has gained recognition. B Corps operate similarly to benefit corporations. They too
serve a social good and are also held accountable by consumers. However, benefit corporations
and b-corps do differ. (See Figure 3)
Figure 3
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One key difference between benefit corporations and b corps is that in order to acquire b corps
certification, the company must pass a formal certification process. During this process they are
required to report back to the B Lap the governance of their company. Although this process
does require additional fees, in certain instances, it can prove to be more beneficial. The B Lap
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Certified B Corporations, [https://www.bcorporation.net/] April 28, 2015
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that b corps have access to provide additional support and resources that are needed when
attempting to grow a company. As of today, there are 1,257 certified b corporations, operating in
41 countries, in over 121 industries;27 though they may operate in vastly different industries and
companies, they each serve one unifying goal.
C. Social Enterprise Done Right: Muhammad Yunus
“We must replace the one-dimensional person in economic theory with a multidimensional
person—a person who has both selfish and selfless interests at the same time.” Muhammad
Yunus
Muhammad Yunus is a Bangladeshi social entrepreneur. In 2006 he received the Nobel
Peace Prize for founding the Grameen Bank. His path to social entrepreneurship is highlighted in
his book, “Building Social Business.” In it, he writes about how he developed the concept of
starting a bank through his career as an academic. He realized how poor villagers were unable to
further grow their crops and harvest because of lack of equipment. These villagers were unable
to obtain loans that would allow them to purchase the equipment they needed. To solve this
problem, Yunus became the guarantor of loans to the poor;28 earning his the name “banker to the
poor.”
Yunus writes,
By the middle of 1976, I started giving out loans to the village poor, signing all
the papers the bank gave me to guarantee the loans personally and acting as a kind
of informal banker to my own. I wanted to make sure that the poor borrowers
would find it easy to pay back the loans, so I came up with simple rules, such as
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Yunus Muhammad. Building Social Business. Perseus Book Group. Philadelphia PA. 2010.
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having people repay their loans in small weekly amounts, and having the bank
officer visit the villagers rather than making the villagers visit the bank. These
ideas worked. People paid back the loans on time, every time.29
This method of lending allowed villagers to pull themselves out of poverty. Poverty is an
artificial, external imposition on a person.30 Poverty is a state of living. It has many facets. It has
to be approached from many directions, and no approach is insignificant.31 Yunus’ approach to
ending poverty is through social business.
To Yunus, the goal of social business is “to solve a social problem by using business
methods, including the creation and sale of products or services.”32 Similar to the six components
of the legal statute that permit benefit corporations to operate, Yunus believes that there are
seven principles of social business:
1. The business objective is to overcome poverty, or one or more problems (such as
education, health, technology access, and environment) that threaten people and
society—not to maximize profit.
2. The company will attain financial and economic sustainability.
3. Investors get back only their return investment amount. No dividend is given beyond the
return of the original investment.
4. When the investment amount is paid back, profit stays with the company for expansion
and improvement.
5. The company will be environmentally conscious.
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6. The workforce gets market wage with better-than-standard working conditions.
7. Do it with joy!!!33
Yunus believes that these seven principles are the core of successful social enterprises.
Furthermore, he believes that if entrepreneurs utilize these principles the change they bring to the
world will have a lasting impact.
D. Socially Responsible Investing
The socially responsible investing (“SRI”) movement has grown over the past thirty years
to represent nearly ten percent of U.S. assets under management, or roughly $2.3 trillion.34 In the
United States alone, the annual revenues of non-profit organizations in one recent year amounted
to over $1.1 trillion!35 Investors are realizing that benefit corporations and other similar
organizations, like nonprofits are profitable and can make for a wise investment. A November
2010 report by J.P Morgan titled “Impact Investments: An Emerging Asset Class” estimates the
size of this market opportunity to be between $400 billion and $1 trillion.36 This includes
investment opportunities across five sectors: housing, rural water delivery, maternal health,
primary education, and financial services.37 These sectors represents the most popular issues
social business address. J.P. Morgan estimates the ten-year profit potential from these
opportunities alone ranged between $183 billion and $667 billion.38
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Id.
Jr. Clark H. William, Babson K. Elizabeth “How Benefit Corporations Are Redefining the Purpose of Business
Corporations” 48 William Mitchell L. Rev 2. 817-838 (2012).
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Yunus Muhammad. Building Social Business. Perseus Book Group. Philadelphia PA. 2010.
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Id at 822.
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Entrepreneurs are increasingly recognizing the limitless possibilities that exist from
making a profitable social enterprise. There are over 30,000 social entrepreneurs with over $40
billion in revenues.39 In addition, universities are also recognizing the opportunity to offer
programs tailored specifically to this market. The pipeline of future for-profit social
entrepreneurs is filling rapidly as most top business schools offer a program in Social
Entrepreneurship.40 Universities are not only capitalizing on this new market, they are also
capitalizing on millennials. A network of business school students and young professionals using
business as a tool for social change, is over 20,000 people globally.41 This demographic cares
about the world they live in and are dedicated to addressing its issues, in hopes to bring change.
Conclusion
Socially conscious business practices and socially responsible investing will continue to
rise. As consumers continue to demand more from large corporations, social enterprises and
benefit corporations are one of few ways consumers receive the transparency they desire. Benefit
corporations promote social good without accepting a loss in profits. As the law continues to
support such corporations, it does so while remaining flexible and placing systems of
accountability in place. Recognizing this, investors impart trust in these companies by investing
in them. As findings from J.P. Morgan show, socially conscious businesses are secure and solid
investment options. Social entrepreneurs like Muhammad Yuns prove that when done correctly,
social enterprises can shake the traditional corporate market, generate self-sustaining revenue,
while bringing much needed change to the world.
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