NCPA - National Center for Policy Analysis

With New Law, Profits Take a Back Seat

January 24, 2012

Businesses in a half dozen states will be taking advantage of a new and untested corporate charter, allowing a company's governing board to consider social or environment objectives ahead of profits.  The legal structure, called a benefit corporation, is intended to shield the board from investor lawsuits -- an action that typically follows decision making that does not prioritize profits, says the Wall Street Journal.

  • Benefit corporations have been implemented in seven states, and another four, including Michigan and Pennsylvania, are expected to pass them in the near future.
  • It costs about $30 to incorporate as a benefit corporation, not including fees paid to outside lawyers.
  • A B-Corp certification, the most similar legal structure for a company, can be obtained in any state for fees ranging from $500 to $25,000 annually depending on revenue.

The spread of the benefit corporation structure is occurring alongside the rise of social entrepreneurship in recent years, as businesses attempt to take on a broader responsibility beyond profits.  Outdoor-apparel company Patagonia Inc., for example, places high priority on sustainable and renewable production methods, and it already incorporated as a benefit company this month.

Charles Elson, who teaches corporate governance at the University of Delaware, was quick to point out that the new structure, and those businesses that take advantage of it, will not be short of critics.  Shareholders in companies will almost certainly oppose moves to become a benefit corporation, as this compromises the prioritization of profits.

By law, a benefit corporation's social and environmental goals must be laid out in the bylaws and the company must publish an annual "benefit report" to measure itself against those goals.  Yet critics continue that this requirement is a charade, as the same process could have taken place under current law without the new structure.

Source: Angus Loten, "With New Law, Profits Take a Back Seat," Wall Street Journal, January 19, 2012.

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