Benefit Corporations and the Public Markets — Will We Ever See a Public Benefit Corporation?

Lois Yurow-Nov 14-016eQuestion:  Benefit Corporations and the Public Markets — Will We Ever See a Public Benefit Corporation?

by Guest Commentator Lois Yurow

The United States is home to over 1,100 privately-held benefit corporations—for-profit entities organized under state statutes that require them to pursue a general public benefit in the ordinary course of business.  Many commentators have discussed whether directors of socially-oriented companies need legislation to protect them from liability for breach of fiduciary duty when they strive for goals other than financial return.  Others have argued that benefit corporation legislation is counterproductive because it wrongly implies that traditional corporations are required to make shareholder value their exclusive priority. 

This essay will not revisit those issues.  Instead, I want to consider whether it would be viable for a public company to become a benefit corporation, or for a benefit corporation to go public.  I will describe benefit corporations and some distinct obligations of public companies, and then explain why benefit corporations are not suited to the public markets.

Benefit corporations, B corporations, and public companies

Corporate law in 26 states and the District of Columbia permits for-profit entities to become benefit corporations.[1]  The various state statutes differ, but all benefit corporations have three distinct features: charter documents must state that the corporation’s purpose is to create a material, positive impact on society and the environment; benefit corporation directors must consider the interests of stakeholders other than shareholders, such as employees and the surrounding community; and benefit corporations must report periodically on their social and environmental performance. 

The first benefit corporation statute was enacted (by Maryland) roughly five years ago, placing benefit corporations among the rare subjects that garner bipartisan support and inspire legislative speed.  Currently, there are 1,140 known benefit corporations in the United States.  The most familiar are Method Products (which makes cleaning supplies) and Patagonia (which specializes in outdoor apparel).

Benefit corporations are easily confused with B corps, but they are different.  A B corp is an entity—not necessarily a corporation—that is certified by B Lab, a nonprofit organization committed to “using the power of business to solve social and environmental problems.”  Unlike programs to certify a particular product (say, Fair Trade coffee) or facility (an LEED building), the B Lab certification is comprehensive.  The idea is to identify good companies instead of just good products or good marketing.  As of this writing, there are 1161 B corps in 37 countries.  Some are benefit corporations, but most are not.  The most recognizable B corp is Ben & Jerry’s.

Public companies offer their shares to the general public, typically on a stock exchange.  To become public, a company must file with the Securities and Exchange Commission (the “SEC”) a registration statement that contains audited financial statements and describes the business and the risks of the investment.  Once public, the company is subject to ongoing reporting and auditing requirements.  According to B Lab (a driving force behind benefit corporation legislation), no existing benefit corporation is publicly traded.[2]

Existing corporations cannot convert into benefit corporations without the approval of a supermajority of their shareholders.  It would be difficult for a public company to muster that support.  But could a benefit corporation go public?  That would be a bad idea, for two reasons: becoming and remaining a public company is too expensive, and broad ownership might jeopardize the company’s mission. 

Going public is too expensive

According to a 2011 study prepared by the IPO Task Force for the U.S. Treasury Department, it costs approximately US$2.5 million for a company to achieve regulatory compliance for an initial public offering, and another $1.5 million per year for ongoing compliance. These costs include underwriting commissions; filing fees; and fees for lawyers, accountants, and transfer agents.  Even typical for-profit companies need to be large and successful to absorb those costs.  For a benefit corporation that already may need to sacrifice potential earnings, steep compliance costs would further diminish the company’s resources for engaging in business and pursuing a public benefit.

Moreover, the SEC’s disclosure regime focuses on financial and economic analysis; it does not elicit the type of social benefit assessment that benefit corporations must provide under state law.  Indeed, many investors have complained to the SEC about inadequate reporting of environmental, social, and governance (ESG) information.  Thus, a public benefit corporation that produced the periodic reports required by federal law would still need to prepare an annual benefit report to satisfy state law. 

Under the Model Benefit Corporation Legislation, which is the starting point for most state laws, the benefit report must describe “[t]he ways in which the benefit corporation pursued general public benefit during the year and the extent to which general public benefit was created,” and assess “the overall social and environmental performance of the benefit corporation against a third-party standard.”  This is not an inconsequential or inexpensive undertaking. 

Benefit corporations are more likely to succeed with a small number of investors

Benefit corporations commit to pursue (in some states, to “create”) a public benefit, which serves as a signal to socially responsible investors.  As corporate law professor Lynn Stout says, “‘it’s like hanging a sign around your neck: Nice people invest here.’”[3]  One commentator likens benefit corporations to multiparty contracts because they “average the collective desires” of unrelated investors with a variety of social concerns.[4]  Those who invest in a benefit corporation—or opt in to the contract—are  “a self-selected, ideologically similar group” that is likely to remain committed to the company’s mission, even in circumstances that might prompt profit-oriented investors to insist that management defer social endeavors to pursue better returns.

This contractual dynamic could shift if a benefit corporation were to go public.  Activist investors often buy stock with complete understanding of a company and then agitate for change anyway.  Witness the public battles waged by investors urging EBay, EMC, and JDS Uniphase (among others) to spin off assets. 

If a benefit corporation’s business model has substantial earnings potential absent the “public benefit” mission, there is nothing to stop frustrated investors from campaigning to amend the company’s charter.  Even if activists cannot attain the supermajority vote that benefit corporation statutes require, defending the company’s mission would be a significant distraction and expense for management.

Conclusion: 

Benefit corporations appeal to the subset of investors that are willing to sacrifice some earnings to support more responsible business practices.  These companies are unlikely to generate enough new capital in the public market to justify the expense of being there.  In addition, offering stock to the general public, without any opportunity to assess the purchasers’ commitment, can jeopardize a benefit corporation’s mission.  This class of companies should stay in the private market.

Footnotes:


[1] This tally includes Arizona, where the statute is not effective until December 31, 2014, and Minnesota and New Hampshire, where the statutes are not effective until January 1, 2015.  Legislation is pending in twelve other states and Puerto Rico.

[2] Plum Organics, a benefit corporation, is wholly-owned by Campbell Soup Company, a public company.

[3] Quoted in Gunther, M. (2013, August 12). B corps: Sustainability will be shaped by the market, not corporate law. The Guardian. Retrieved from http://www.theguardian.com/sustainable-business/b-corps-markets-corporate-law.

[4] Hasler, J. E. (2014, October). Contracting for good: How benefit corporations empower investors and redefine shareholder value. Virginia Law Review, 100(6), 1279-1322, 1305.

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Guest Commentator Lois Yurow is founder and president of Investor Communications Services, LLC, where she specializes in converting complex legal, business, and financial documents into plain English.  Lois was Managing Editor of Wall Street Lawyer, a monthly newsletter focused on securities law, for seven years, and Managing Editor of RealCorporateLawyer.com, a website serving corporate and securities lawyers, for five.  Mutual Fund Regulation and Compliance Handbook, a book Lois co-authored and updates annually, is published by Thomson West.  Lois writes and speaks frequently about plain English, disclosure, and other securities law matters.  Before forming Investor Communications Services, Lois practiced corporate and securities law, first in Chicago and then in New Jersey.  Email: lois@securitieseditor.com

 

 

We’re a Long Way from NYC’s Stonewall Inn, But Still a Ways to Go for Corporate LGBT Policies, Says Investor Coalition

by Hank Boerner – Chairman, G&A Institute

We’ve come a long way since the gay & lesbian communities mobilized and began in earnest their civil rights campaigns of the 1970s and 1980s and into the1990s. It was the New York City Police Department’s wrongheaded “raid” on the Stonewall Inn in Greenwich Village neighborhood in June 1969 that provided the important spark for the long-term, winning campaign by LGBT community for equal rights and equal protection under the laws of the land. “Stonewall” became a rallying cry for the next installment of the continuing “journey” of the civil rights movement in the United States.

The 1960s/1970s were the era of civil rights protests — we were involved in or witnessed and were affected by the civil rights / voting rights movement; the counter-culture “revolution” (remember the hippies?); the drive for adoption of the ERA (Equal Rights Amendment to the Constitution); and the anti-war movement protests against the conflict in Vietnam.  These were catalysts as well for the LGBT equal rights warriors of the decades that followed the 1969 Stonewall protests.

Finally, in recent years, after years of campaigning by LGBT advocates, most states have been adopting protective measures to protect the LGBT community.  Same gender marriage is a reality in many U.S. jurisdictions.

On November 7, 2014 The New York Times carried an update — it was a “milestone year” for LGBT rights advocates, the publication explained.  Voters in the 3Ms — Maine, Maryland and Minnesota – favored same-sex marriage; the first openly-gay US Senator (Tammy Baldwin) was elected by Wisconsin voters.

Still, there was vocal and often fierce opposition to same-sex marriage and equal protection under the law for LGBT citizens.

About LGBT Policies and the US Corporate Community

Many large companies (estimate:70 companies in the S&P 500 Index to date) have adopted non-discrimination policies to protect LGBT employees in the United States, says the 2014 Corporate Equality Index (a national benchmarking tool of the Human Rights Campaign).

We see these policies and programs for inclusion described in the many sustainability and responsibility reports we examine as exclusive data partner for the Global Reporting Initiative (GRI) for the United States of America.

Still, legal protections for LGBT citizens are not sufficient in numerous US jurisdictions. “Homophobic” policies and attitudes still reign in too many US cities and states and local communities.

And policies, attitudes, practices in other countries?  Well, that’s really a problem, say sustainable & responsible investment advocates — and steps are being taken to address the situation.

The S&R investment advocacy campaign is focused on the LGBT employees of US firms working overseas.  In countries like Russia, one of the world’s largest industrial economies, which has harsh anti-LGBT policies. The US investor group points out that 79 countries consider same sex relationships illegal; 66 countries provide “some” protection at least in the workplace; and in some countries, homosexuality is punishable by death.

In a business environment that continues to globalize in every aspect, with American large-cap companies operating everywhere, the investor coalition is calling on US companies to extend their LGBT policies on anti-discrimination and equal benefits policies to employees outside the United States. A letter was sent by the coalition to about 70 large-cap companies (the signatories manage US$210 billion in assets.

Shelley Alpern, Director Social Research & Shareholder Advocacy at Clean Yield Asset Management explains: “Today, most leading U.S. corporations now have equitable policies on their books for their [American-based] LGBT employees. Ther’s a dearth of information on how many extend policies outside of the U.S. In starting this dialogue, we hope to identify best practices and start to encourage all companies to adopt them.”

The objective of the shareowner advocacy campaign is to stimulate interest in the issue and create a broad dialogue that leads to greater protection of LGBT employees of US companies operating outside of the United States.

Mari Schwartzer, coordinator of shareholder advocacy at NorthStar Asset Management compliments US firms with effective non-discrimination policies and states:  “While we are pleased that so many companies have adopted non-discrimination policies in the USA which incorporate equal protections for LGBT employees, the next phase of implementation is upon us — we must ensure that international employees are receiving equal benefits and are adequately protected.  Particularly those stationed in regions hostile to LGBT individuals…”

Signatories of the letters sent to companies include these sustainable & responsible investing advocates:  Calvert Investments; Jantz Management; Miller/Howard Investments; Office of the Comptroller of New York City; Pax World Management; Sustainability Group/Loring, Wolcott & Coolidge; Trillium Asset Management; Unitarian Universalist Association; Walden Asset Management; Zevin Asset management.

Companies contacted include:  Aetna, AIG, Allstate, Altria, Amazon, American Express, Apple, AT&T, Bank of America, Baxter, Best Buy, Boeing, Cardinal health, Caterpillar, Chevron, Cisco, Citigroup, Coca Cola, Colgate Palmolive, Costco, CVS Health, Delta, Dow Chemical, DuPoint, EMC, FedEx, Ford Motor, General Electric, General Dynamics, General Motors, Goldman Sachs, Google, HP, Home Depot, Honeywell, Human, IBM Ingram Micro, Intel, J&J, JPMorgan Chase, Lockheed Martin, McDonalds, McKesson, Merck, MetLife, Microsoft, Morgan Stanley, Oracle, PepsiCo, Pfizer, P&G, Prudential, Sears, Sprint, Starbucks, Target, Texas Instruments, United Continental, United HealthGroup, United Technologies, UPS, Verizon, Visa, Walgreen, Walt Disney, Walmart, Wellpoint, Wells Fargo.

Summing up the heart of the issue for investors (and corporate employees):  “Corporations must take the extra step to ensure consistent application of LGBT-inclusive workplace policies throughout their operations, regardless of location,” said Wendy Holding, Partner, the Sustainability Group of Loring, Wolcott & Coolidge.