Corporations
want to be viewed as socially responsible enterprises for many reasons: it is
good for business; it attracts and helps retain motivated employees; it has the
chance of attracting additional investment from impact investors and it links
entrepreneurial skills and drive for financial gain with environmental, social
and governance impacts.
However, this notion is possibly
at odds with two realities. The first is that current corporate law regimes
governing for-profit corporations in North America have directors focused
almost exclusively on the corporation’s short term, financial bottom line. The
second is a belief by some that social enterprise is limited to non-profit
entities focused primarily on public benefit objects in an environment that is
regulated and entitled to tax incentives.
The benefit corporation model may
be a solution that enables the for-profit, socially responsible enterprise. It
also represents a way to connect social impact investors with qualified,
socially responsible corporations. The benefit corporation is a strictly
voluntary status and serves as a for-profit model that enables a corporation to
pursue profit-generating activities while contemporaneously promoting positive
effects on society and the environment. This benefit corporation is also
complementary to non-profit and charitable activities, but on a much larger
scale.
Delaware’s new legislative regime creating a “public
benefit corporation” or “PBC” status defines a public benefit corporation as a
for-profit entity “intended to produce a public benefit or public benefits and
to operate in a responsible and sustainable manner.” Directors of a Delaware
PBC are required to manage it in a manner that balances the shareholders’
financial interests, the best interests of stakeholders materially affected by
the corporation’s conduct, and a public benefit.[1]
In an article by Kyle Westaway and Dirk Sampselle,
published in the Emory Law Journal, the authors summarize what the benefit
corporation model can achieve: “The rise of the benefit corporation simply
presents a much needed option for those who wish to incorporate values-based
decision making into their business practices and procedures. It also marks a
return to corporate form in which the limitation on investor liability is given
in exchange for enterprises that are dedicated to benefitting the society and
environment in which the enterprise operates.”[2] The
notion of a private enterprise for public gain is no longer an oxymoron,[3] as
benefit corporations allow for a broader definition of what “shareholder value”
includes.[4]
While the model legislation adopted by many states in the
United States points directors to pursue a “general public benefit,” directors
of PBCs are also free to pursue a “specific public benefit purpose.”[5] Flexibility
offered to PBC directors as a specific purpose is balanced with pecuniary
interests of shareholders and best interests of those materially affected by
the corporation’s conduct.
The public benefit corporation model began in 2012 and
has been adopted in varying forms in 27 states in the United States and is
being considered in many more. So far there are 1,550 known registered pubic
benefit corporations in the USA.[6] Support
has been bipartisan for a number of reasons. In its simplest form the PBC
requires amendments to existing corporate legislation on a strictly voluntary
basis. It does not seek any tax exemptions or incentives and it avoids the need
for new regulatory regimes. It does this by a commitment to its public purpose,
transparency, and accountability.
What is Happening in Canada
In 2014, the Government of Canada called for submissions
on its review of the Canada Business Corporations Act (CBCA), including the role of the
socially responsible enterprise and in the Canadian context, the extent to
which current CBCA incorporation provisions and structures facilitate the
creation of socially responsible enterprises. There were many submissions,
including one from the Canadian Bar Association, which included recommendations
supporting the benefit corporation model. To that end, the proposed amendments
included language to clarify the business judgment rule which governs the
standards for corporate directors in making decisions about the best interest
of the corporation.[7]
The key recommendation would incorporate the common law
principles set out in the BCE Inc v 1976 Debenture Holders[8] decision
of the Supreme Court of Canada that directors, in considering what is in the
best interest of the corporation, should be permitted to consider not only the
interests of shareholders, but also other stakeholders, including employees,
creditors, consumers, governments and the environment in their decision-making.
Directors should also be allowed to consider both short and long-term interests
of the corporation, including benefits that may accrue to the benefit
corporation from its long-term plans, and need not give priority to any
particular interest. Changes to the business judgment rule, if any, are
unlikely to be considered before the next mandatory review of the CBCA in 2016.
In 2013, the Ministry of Consumer Services in Ontario
announced a social enterprise strategy entitled “Impact
- A Social Enterprise Strategy for Ontario.”[9] The
Government stated in that report that, among other things, it wants to “support
and attract both entrepreneurs and investors to do business in Ontario while
contributing to the social good.” It is focused on social entrepreneurs, impact
investors and accomplishing gains in the social sphere.
The “Dual Purpose
Corporate Structure Legislation: Stakeholder Engagement Report” was
released in 2014 as part of the impact mandate from the ministry to “explore
introducing legislation to enable the creation of new ‘hybrid” corporations.”[10] While
the panel was unable to reach consensus on whether dual purpose corporate
structure legislation should be introduced, it did develop recommendations on
what it should look like if it were introduced. The report documents areas
where the panel achieved consensus and where it has not been possible to reach
agreement. The report makes a total of 15 recommendations.
One of the recommendations of the Stakeholder Report was
that public input be obtained. Submissions on the Stakeholder Engagement Report
were due in May 2015. The authors of this article submitted a recommendation
supporting the enactment of amendments to the Ontario Business Corporations Act to permit the benefit corporation
model in Ontario.[11]
British Columbia passed legislation effective July 2013
to permit the creation of Community Contribution Corporations (CCCs)[12] and
Nova Scotia has proposed legislation (which has not yet been enacted) to permit
Community Interest Corporations (CICs).[13] Both
forms of legislation permit entities that are akin to non-profit enterprises
with limited ability to engage in business activities and restrictions on
providing returns to investors. However, it is unlikely that the federal
government or the provincial governments will extend tax exemptions and
incentives to a new class of corporation and as a result, non-profits and
charities structured as “hybrid” corporations are unlikely to be attractive as
a vehicle for attracting private investment and carrying on socially
responsible enterprises using for profit means. Fewer than 30 CCCs have been
created under the British Columbia legislation.
The benefit corporation model is
a model for socially responsible, for-profit corporations. Legislative
solutions that require new legislation, complimentary amendments to tax laws
and new regulatory regimes that limit returns to investors are unlikely to be
achieved in the foreseeable future and represent a solution at a different
point in the spectrum of corporate enterprises. Instead, amendments to
incorporate principles of taking into account broader stakeholder interests are
possible in the short term and would enable for-profit corporations to embrace
the benefits and responsibilities of being corporations committed to a public
benefit as well as making a profit.
The Need to Clarify Basic Terms
All of the foregoing can be very
complicated. One of the main complications is the understanding of and use of
terms. Recommendations made under one understanding of a term will not result
in the same recommendations applied to a different definition.
“Public Benefit Corporations”
For instance, public benefit
corporations are defined in the legislative amendments enabling for-profit
corporations to become public benefit corporations, such as the Delaware
language referred to above. Delaware PBCs are for-profit entities, not subject
to the types of restraints that non-profits and charities face, whose directors
and officers are provided with enhanced freedom to pursue goals outside of
profit-maximization, while sparing the fear of potential liability for doing so.
Benefit corporations have the same freedom as other for-profit corporations
with the addition of having a societal mission. Such flexibility provides the
corporation the ability to succeed in both its financial and non-financial
goals. This means there are no constraints such as asset locks or dividend
restrictions.
On the other hand,
Ontario’s Not-for-Profit Corporations Act,
2010, (ONCA) introduces the term “public benefit corporation”
(PBC), and outlines special requirements for PBCs as not-for-profit entities
compared to non–public benefit corporations. ONCA is yet to be implemented but
it will replace theOntario Corporations Act which currently governs non-profit
organizations.
“Social Enterprise”
There seems to be an assumption
that the definition of “social enterprise” and “socially responsible
enterprise” is limited to the non-profit/charity end of the spectrum with the
unfortunate connotation that for-profit corporations cannot “by definition” be
“socially responsible”.
The Impact Strategy defined
“social enterprise” as “an organization that uses business strategies to
maximize its social or environmental impact.” The Stakeholder Report clarifies
the definition to mean: “A corporate entity that exists primarily to promote
public benefit using business strategies, building social and financial capital
and offering innovative ways of operating for social and/or environmental
purposes.”
The terms “socially responsible”
and “socially responsible enterprises” denote enterprises that strive to have
positive impacts on society, the environment and communities. Consider removing
the requirement that they are “primarily” focused on the stated goals. In this
way, the definition would enable a larger number of enterprises across the
corporate spectrum and provide access to a vastly larger pool of private
capital
“Social Entrepreneurs”
Our experience with the
relatively new concept of a for-profit public benefit corporation in Canada is
a very paternalistic reaction with a quick focus on regulation. However, we
question how to set loose the free market methods and entrepreneurial energies
in such an environment.
Social entrepreneurs are referred to in the Ontario
Impact Strategy. It quotes Jeff Skoll, a Canadian and the first president of
eBay, who said “Social Entrepreneurs are disruptive innovators.” Mr. Skoll went
on to say “[f]irst of all, social entrepreneurs are entrepreneurs. Like
business pioneers, social entrepreneurs are utterly determined to drive change
with their innovative ideas. Both aim, in effect, to disrupt a status quo they
see as sub-optimal …. If the goal is to drive change and be disruptive in an
industry, confining the definition of ‘social enterprise’ strictly to the
non-profit and charity sphere is a misnomer. Many for-profit companies have
acted in a way to change the face of the industries in which they operate.”[14]
“Hybrid Corporations”
Benefit corporations were
originally referred to as “hybrid” corporations. The word “hybrid” is used to
suggest something that is a combination of two distinct breeds. Benefit
corporations are not “hybrid” corporations but a single breed of corporate
entity where new capabilities are enabled – a for-profit corporation with a
social benefit purpose.
“Impact Investor”
The Ontario Impact Strategy
defines an impact investor as “an investor who is interested in achieving a
social return on investment, as well as a financial one.” The Stakeholder
Report recommends “any proposed legislation should enable dual purpose
corporations to attract share capital from investors seeking both a financial
and a social return. It should also enable founders, employees and other
stakeholders to have equity in the organization.”
Impact investors currently
include private investors, foundations, ESG (environmental, social and
governance) funds and ethical funds. With the advent of benefit corporations,
corporations become impact investors through their everyday activities.
B Corporations
“B Corporation” is a certification, much like LEED for
buildings, or Fair Trade for coffee, but it is not actually a type of social
enterprise form. B Lab, a United States based non-profit, began using the
assessment system to accredit socially conscious businesses as “B Corps”. The
designation gained significant traction and has become a highly recognizable
symbol that a company has met rigorous standards of social and environmental
performance, transparency and accountability. Traditional corporations can
receive the designation, and alternatively, a benefit corporation may not have
undergone the certification process to be labelled a “B Corp”.[15]
Why the For-Profit Benefit Corporation Model Will Work in
Canada
While social enterprise
legislation can be implemented at any point along the spectrum of corporate
entities, it may be most useful for achieving goals of social good if
implemented at the end of the spectrum where for-profit corporations live. The
goal should be to enable for-profit enterprises to take action having regard to
profit, people and the planet as a complement to the activities of governments
and charities. A solution at one point in the spectrum does not necessarily
exclude a solution at any other point in the spectrum or diminish the
contribution of an enterprise at any other point. CCC and CIC type legislation
could be effective in the non-profit/charity context; however, legislation
enabling benefit corporations at the for-profit end is a solution that is
likely to be adopted quickly and have a lasting impact.
As of December 2012, there were 1,107,540 employer
businesses in Canada. Small businesses made up 98.2 percent of employer
businesses, medium-sized businesses made up 1.6 percent of employer
businesses and large businesses made up 0.1 percent of employer businesses.
Roughly 35 per cent (389,116) of these employer businesses were in Ontario.[16] Benefit
corporation status is best suited to private, closely held enterprises, just
like the majority of employers in Canada.
On a regional basis, the
jurisdiction that adopts the most attractive and effective legislation will
attract the greatest number of corporations who are looking to solve a
corporate governance problem, who want to pursue a profit, people and planet
bottom line and who want to create an organization based upon meaningful
purpose.
The Government of Ontario should
consider adopting the benefit corporation model. Benefit corporations marry the
idea of capitalism in the free market with the idea that our society should
operate in such a way as to provide the greatest good for the most people.
Benefit corporation legislation could be successful in
attracting investors to do business in Ontario while contributing to the social
good. A major hurdle of attracting investor money is the requirement to provide
investors with a return on their investment. Benefit corporations would be
owned by shareholders who would invest with a view to receiving a financial
benefit through the declaration of dividends, the appreciation of their initial
investment, or both. The introduction of benefit corporation legislation in
Ontario could build on the strength of Ontario’s dynamic and innovative
business climate.[17] The
public demand for corporate social responsibility has provided significant
impetus for the introduction of social enterprise legislation in the United
States.
Corporate legislation is fairly
consistent across the country. Amendments to the OBCA and the CBCA could form
the model for legislative amendments across the country.
Conclusion
Traditionally, for-profit
corporations have one mandate -- to maximize shareholder value. Several
jurisdictions in the United States have recognized the market for a new type of
for-profit corporation, the benefit corporation, which has a triple bottom
line: profit, people, and the planet. The adoption of a modified form of
corporation is driven by a broadly-based demand from businesses as well as
other constituencies within society.
Shareholders, consumers, companies, governments and
investors have become increasingly concerned about facilitating positive
impacts on society and protecting the environment. However, as a result of the
shareholder wealth mandate ingrained in our corporate tradition (if not our
legislation), traditional organizational business forms have evolved to reward
short-term thinking and a profits-first attitude.[18] The
benefit corporation provides a solution to these competing interests, is
strictly voluntary, and serves as a for-profit model that enables a corporation
to pursue profit-generating activities while contemporaneously promoting
positive effects on society and the environment.
- Dennis Tobin, Lauren
Dalton
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