By Kelsey J. Nunez
Throughout the world, for-profit entities are declaring their commitment to “using business as a force for good”TM [i] and matching their ability to generate profits with their desire to create social and environmental benefits. Businesses led by social entrepreneurs have gained market share and the attention of impact investors (i.e., investors who also seek to create social and environmental benefits).[ii] But what happens when a social entrepreneur promises these benefits but fails to deliver?
But First, What’s a Benefit Corporation?
Benefit corporations were formed after decades of litigation and debate over the doctrine of “shareholder primacy.” When asked if corporate directors and officers may make decisions that did not seek to maximize shareholder profits, the prevailing view – put extremely simply – was no. Directors and officers have fiduciary duties to the shareholders, not external stakeholders who are affected by the corporation.
|The terms “benefit corporation” and “B-Corp” are related but not synonymous.|
Following some key judicial opinions, many states enacted “constituency statutes” that allowed corporate decision-makers to consider other constituencies (such as workers, the environment, suppliers, etc.) if they wanted to. But even in states with constituency statutes, the dominant ethos in corporate governance prioritized shareholder profit over other impacts. So advocates for corporate social responsibility continued to pursue alternatives.[iii]
In 2006, the nonprofit organization B-Lab created a robust third-party certification system that allows entities to earn designation as a “Certified B-Corporation” (aka B-Corp).[iv] Any entity form (LLC, C-corp, S-corp, partnership, etc.) can apply for the certification, which has no impact on the legal status of the entity. However, a corporation certified as B-Corp would still be subject to shareholder primacy constraints. Thus, B-Lab proceeded to create model legislation for states to establish a new corporate form with different fiduciary duties.
Since 2010, 34 states have enacted benefit corporation legislation, including Idaho in 2015.[v] In a benefit corporation, directors and officers must create (or at least attempt to create) a “general public benefit” while considering and reporting on impacts to a broad range of issues and stakeholders. A “general public benefit” is “a material positive impact on society and the environment, taken as a whole, as assessed under a third-party standard, resulting from the business and operations of a benefit corporation.”[vi]
In addition to making it quite clear that shareholders are just one of the many relevant considerations, the legislation created a “benefit enforcement proceeding” as the mechanism to ensure decision-makers are fulfilling the public benefit purposes.[vii]
Benefit Enforcement Proceedings, Generally
The Idaho Benefit Corporation Act (the “Act”) establishes the benefit enforcement proceeding (“BEP”) as an exclusive and limited remedy for issues related to the “benefit” part of a benefit corporation. The BEP is the exclusive forum for claims of: (i) failure to pursue or create the required public benefit; or (ii) violation of an obligation, duty, or standard of conduct under the Act.[viii] Only certain parties can initiate a BEP. The corporation may bring an action directly, and the following parties may bring one derivatively: (i) a person or group of persons that own at least 2% of the shares; (ii) a director; (iii) a person or group of persons that own at least 5% of the parent company; or (iv) anyone else specified in the articles of incorporation or bylaws.[ix] No monetary damages may be sought unless otherwise stated in the articles of incorporation.[x]
Interestingly, but perhaps not surprisingly, there are no judicial opinions involving a BEP in any state yet.[xi] This doesn’t mean that the management of benefit corporations is conflict-free, of course. It just means that no conflicts have resulted in litigation that has made it through the court system. I’ve reached out to my colleagues in the Benefit Corporation Bar Association, and so far we have only heard of one lawsuit and it settled quickly. In Pirron v. Impact Makers, a founder and former CEO of a Virginia benefit corporation sued the board of directors to (among other things) reverse a sale of shares that threatened the philanthropic mission of the company. The 147-page, multi-count complaint was filed on May 3, 2019, and the settlement was announced about a month later.[xii]
While we don’t have judicial guidance yet, it’s only a matter of time before one of these cases goes all the way. Practitioners in this field should understand what a BEP might entail so we can help our clients uphold the commitments they make when choosing this corporate form. What follows are some ideas about how a BEP could be handled, depending upon what went wrong.
Failure to Pursue or Achieve Public Benefit
Theoretically, the plaintiffs could argue that the decision-makers didn’t even try to create public benefit. I find this to be unlikely with respect to founders. Why would a group of people incorporate as a benefit corporation and opt-in to a legally enforceable scheme of additional fiduciary duties and reporting requirements if they weren’t even going to try?[xiii] I speculate that a failure-to-pursue claim is more likely to apply to directors and officers who join the company down the road and who may not be as committed as the early managers. But because I’d like to think that someone who takes a job with a benefit corporation understands what they are expected to do, I think BEPs will focus more on failure to achieve rather than failure-to-pursue.
How would one prove “failure to achieve?” This raises so many questions. What if progress is being made but the results just need more time to be realized? When is it too soon to declare failure? And who gets to decide whether something failed or not? Expectations rarely match reality, and some people consider a partial win to be a success while others are never satisfied. The analysis of “failure” versus “success” needs some sort of objective metric if it is going to be litigated.
Creating and improving metrics to measure returns on investment in social and environmental benefits is a rapidly evolving industry. It’s not as easy as reviewing financial statements for profits and losses because the cost-benefit analysis involves more than money. The “right thing to do” is subjective, and the complex nature of cause and effect makes it challenging to assign a value to a social or environmental outcome. But social entrepreneurs and impact investors are not known for shying away from challenges! Many resources are available to measure Return on Investment (“ROI”) and analyze failure or success and these tools are getting more advanced.
Clearly, there is more than one way to skin a social entrepreneur. Anyone initiating, defending, or trying to avoid a BEP would benefit by analyzing the action or inaction at issue using the above resources.
|Social ROI Metrics|
B-Corp Resource Library – contains case studies, templates, best practice guides, webinars, and live recordings to help create benefits and measure impacts to affected stakeholders.[xiv]
B Impact Assessment – known as “the most credible tool a company can use to measure its impact on its workers, community, environment, and customers.”14 The Assessment has supportive analytical tools that benchmark data from over 50,000 businesses around the world using over 300 indicators.[xv]
Impact Portfolio Assessment Reporting (“iPAR”) platform – created by the Global Impact Investment Network to collect and report data relating to capital deployed for social and environmental impact.[xvi]
Bloomberg Professional Services – provides high-quality tools for integrating environmental, social, and governance data into investment portfolios.[xvii]
Sustainability Accounting Standards Board – creates standards for identifying, managing, tracking, and reporting on investments in sustainability.[xviii]
Edwards Mother Earth Foundation’s Impact Investment Study – the experiences of a portfolio dedicated to measurable social and environmental impacts.[xix]
Failure to Analyze Properly
Benefit corporation directors and officers have a standard of conduct that requires them to consider a host of groups and issues when making decisions. This list was developed in response to the case law upholding shareholder primacy in various fact patterns. Impacts on the shareholders must still be considered, but not in a vacuum.
The list of considerations includes: (i) shareholders; (ii) employees; (iii) subsidiaries and suppliers; (iv) interests of customers as beneficiaries of the general public benefit or specific public benefit purposes; (v) community and social factors, including those of each community in which offices or facilities of the benefit corporation, or its subsidiaries, or its suppliers are located; (vi) local and global environment; (vii) short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation; and (viii) ability of the benefit corporation to accomplish its general public benefit purpose and any specific benefit purpose.[xx]
This “stakeholder governance” model requires some sort of structure for decision making to ensure that directors and officers engage in the required analysis before deciding to act or not act. A BEP brought for breach of this duty or violation of the standard of conduct would have to argue that the analysis wasn’t done at all or was done poorly. I advise my benefit corporation clients to document their discussion of these statutory factors in their meeting minutes, referencing whatever research they conducted to arrive at their decisions. The more controversial or costly the decision, the more detail should be preserved in the notes. Each individual should keep their own records as well. Then, if a BEP is brought for this reason, the minutes and other records can be used as evidence of the scope of analysis.
In my experience advocating for corporate social responsibility and supporting social entrepreneurs, I’ve met successful people who are incredibly passionate about using capitalism and entrepreneurship to “save the world.” I’ve also been told that benefit corporations are a millennial ego-stroking tactic. It is my position that there is a place for [almost] everyone in our complex economy. People who enjoy business, as usual, have plenty of options. Now, those who want to do the work differently have support as well. The community of businesses committed to the triple bottom line (i.e., social, environmental, and economic impacts) will continue to grow and work out the kinks together. The benefit enforcement proceeding creates a forum to ensure that those who choose to use business as a force for good can keep each other in check.
Kelsey J. Nunez has a boutique practice dedicated to social entrepreneurship, cooperative culture, and the sharing economy. In addition to practicing law, Kelsey provides sustainability consulting with Warm Springs Consulting (a Certified B-Corp) and is a founder of The Vervain Collective, a plant-based apothecary with a natural health consultation room and classroom space in Garden City.
[ii] A Google search will reveal loads of information on the topic of impact investing. Treasure Valley locals can get involved with the Boise Impact Investing Group, hosted by Figure 8 Investment Strategies (https://figure8investing.com).
[iii] For an analysis of case law and legislative history that inspired the benefit corporation, see generally Frederick H. Alexander, Benefit Corporation Law and Governance: Pursuing Profit With Purpose (2018) (especially Part 1: Shareholder Primacy and Its Discontents).
[v] Idaho benefit corporations are governed by both the Idaho Benefit Corporation Act at Idaho Code §§ 30-2001 et seq. and the Idaho Business Corporation Act at Idaho Code § 30-29-101 et. seq. Chapter 20 provides requirements that are in addition to or in lieu of the general business corporations laws in Chapter 29. Idaho Code § 30-2001(4). For an overview of the Idaho Benefit Corporation Act, see Kelsey Nunez & Mark Buchanan, New Corporate Form Provides More Options For Social Entrepreneurs, 60 Idaho Advocate 42 (August 2017). For a state-by-state status of benefit corporation legislation, seehttps://benefitcorp.net/policymakers/state-by-state-status.
[vi] Idaho Code § 30-2002(5). Benefit corporations may also commit to one or more “specific public benefits” such as: (a) providing low-income or underserved individuals or communities with beneficial products or services; (b) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (c) protecting or restoring the environment; (d) improving human health; (e) promoting the arts, sciences, or advancement of knowledge; (f) increasing the flow of capital to entities with a purpose to benefit society or the environment; or (g) conferring any other particular benefit on society or the environment. Id. at § 30-2002(9).
[vii] If you’re wondering why someone would choose a corporate form with such fundamental diversions from generations of corporate practice, hold that thought. My next article will focus on entity selection for social entrepreneurs (teaser: transparency, accountability, and market differentiation). Here, I discuss what happens when someone who has chosen to be involved with a benefit corporation becomes disgruntled about its social and environmental performance.
[viii] Idaho Code § 30-2011(1).
[ix] Id. at § 30-2011(3).
[x] Id. at §§ 30-2011(2), 30-2007(5)(b). Because there are no monetary damages, the remedy would likely be akin to specific performance where the court would instruct the defendants to act or not act.
[xi] Last Westlaw search conducted July 1, 2019.
[xii] The complaint is posted at https://dunlaponcloud.egnyte.com/dl/CzgQ5pAtMY/. For a summary, see John Reid Blackwell, Richmond-Based Impact Makers and Its Founder Settle Lawsuit, Richmond Times Dispatch (June 18, 2019), https://www.richmond.com/business/local/richmond-based-impact-makers-and-its-founder-settle-lawsuit/article_f591f6b8-3925-5c9e-9f81-210480a31a34.html?utm_medium=social&utm_source=email&utm_campaign=user-share.
[xiii] Practice tip – make sure your clients know what a benefit corporation is before they decide to form one or invest in one.
[xiv] B-Lab’s Resource Library is available at https://bcorporation.net/for-b-corps/resource-library.
[xvi] More about iPAR is available at https://impacttoolkit.thegiin.org/impact-performance-assessment-and-reporting-ipar/.
[xx] Idaho Code § 30-2007(1). The Act does not establish a hierarchy, although the articles of incorporation may prioritize some factors over others if desired. Id. at § 30-2007(3).