30 Sep 2019 “Positive Impact Business: Legal Framework”, Dissertation by Evelyn Sukadolnik
The second paper of a three-part series based on the dissertation presented in September 2019 for the LLM in Comparative Law, Economics and Finance at International University College of Turin (IUC) and Università degli Studi di Torino (UNITO) with the assistance of Prof. Dr. Daniela Carosio. It proposes to discuss legal, economic and financial aspects regarding for-profit companies that incorporate sustainability in their practices and, beyond, as their core business.
Dissertation title: For-benefit corporations and a business culture shift
by Evelyn Sukadolnik, BBA (Hons), LLB, PgD Branding, LLM, Professional in the Financial Market, volunteer at Trê Investindo com Causa (non-profit association for positive impact investment), independent consultant at IFAD-UN. E-mail: sukadolnik@alumni.usp.br
We propose to discuss legal, economic and financial aspects regarding for-profit companies that incorporate sustainability in their practices and, beyond, as their core business. They seek to generate profits as well as a positive impact, changing the way of doing business and becoming “for-benefit” companies. In this paper, we analyze how hard and soft-law have developed in this context.
The legal framework historically took for granted the profit maximization paradigm, protecting shareholders’ interests above others. Besides that, legislation improved over time to address inappropriate corporate behavior, prevent labor exploitation, pollution, etc. and keeps advancing, resulting in some stakeholders’ interests must be respected. Likewise, different countries passed laws of new corporation structures, enabling for-profit companies to incorporate with a legal purpose rooted in social and environmental goals. We can briefly analyze two different models:
First, there is a hybrid legal status between for-profit and nonprofit organizations that facilitates social investments and gives some financial return. The idea is to provide benefits to the community rather than make profits – a second goal. This model sets a limit for dividend payments and defines that most profits must be used for community purposes, retained or transferred to charities. Examples of this legal structure: Community Interest Company (CIC) in the UK since 2005, Low-profit Limited Liability Company (L3C) in the U.S. since 2008 and Community Contribution Companies (C3) in Canada since 2012. This model has a “philanthropic approach” and it is not allowed for some companies, such as public-listed. Instead, many have created foundations for social and environmental goals to complement the company’s operations.
In contrast, there is the “benefit corporation model”. It was based on the B-Corp certification, a third-party validation that considers the company’s balance of profit and purpose, requiring high standards of social and environmental performance, public transparency and legal accountability. The scope is broader than the “hybrid model” previously shown, aiming to cover all for-profit companies seeking to generate positive social and environmental impact as well as financial returns. This law has passed in 35 of U.S. states (the first was Maryland in 2010) and it was considered for the Italian “Società Benefit” law approved in 2016. Just to clarify, B-Corp certification is not a precondition to a company become Benefit Corporation as well as this legal status is not mandatory to get the B-Corp certification: a company can have both. We may say Benefit Corporation (legal status) was motivated by the skepticism that sustainability and long term strategies do not conflict with the pressure for short term profits demanded in the business context.
Furthermore, the legal concept of a for-profit entity with social and environmental goals, as observed by Strine (2014:242), “puts some actual power behind the idea that corporations should be governed not simply for the best interests of stockholders, but also for the best interests of the corporation’s employees, consumers, and communities, and society generally” by allowing the directors decide considering broader goals in the long term. However, Mattei & Quarta (2018:127) point that[1] “a great revolution will hardly start if left only to the goodwill of the companies” and conclude that “Strict environmental and social standards, responsibility and transparency should actually be a prerequisite for any granting of legal personality.” We agree the legal framework must advance without count on the best will of the companies. But simply rely on government legislation improvements, that might move too slowly, is little to what needs to be done.
Soft-law may contribute to promote advances at a faster pace than traditional legislation does – and can be worldwide adopted. As we discussed, the B-Corp certification since 2006 has influenced the drafting of the first Benefit Corporation laws after 2010. It is a “soft” way to disseminate new practices and harmonize conducts, contributing to improving the economic and social scenario even without creating legal obligations. Guidelines regarding Corporate and Social Responsibility (CSR) and Environmental, Social and Governance (ESG) are continuously being followed due to its benefits and the raise of customers and investors’ awareness. As observed by Druzin (2017:361), “these instruments, despite possessing no legal force and wielding no coercive mechanisms, are nevertheless often widely adopted and (…) generally followed”, in his opinion, particularly when an increasing number of agents in the same sector are using those rules – a “network effect” that creates positive externalities. At this point, we emphasize B-Corp certification requires companies to amend their own statutes to include stakeholders’ interests as an objective of the company and also as a fiduciary duty of the executive board. Complying with that, managers must consider workers, customers, suppliers, community and the environment’s interests in the same way as shareholders’ interests when making business decisions. This innovative solution builds enforceable protection to B-Corps’ purpose in the long term, even in case of leadership substitution, changes in the company’s capital structure or mergers and acquisitions.
As we can observe, the legal framework is moving towards society’s demands that urge companies to consider the full cost involved in doing business and take responsibility. Advances in hard and soft-laws have been creating space for for-profit companies become increasingly sustainable, and we emphasize it is not about putting shareholders last. We would appreciate the opportunity for a further debate that this kind of business exceeds long-term financial results compared to the traditional ones, calling into question if profit maximization actually destroys shareholders’ value in the long term. It is not only a moral choice to promote positive change, but should be “rational”: which model is more efficient? For-benefit corporations probably will be the only kind of business possible, and allowed, to exist in the near future.
References
B-Lab Legal Requirement Tool. 2019. Retrieved from: https://bcorporation.net/certification/legal-requirements
Benefit Corporation. State by State Status of Legislation (in the U.S.). Retrieved from: https://benefitcorp.net/ policymakers/state-by-state-status
Community Interest Companies. Retrieved from: https://www.communitycompanies.co.uk/community-interest-companies
Druzin, B. H. (2017). Why does Soft Law have any Power anyway?. Asian Journal of International Law, 7(2), 361-378.
Government of British Columbia, Ministry of Finance. (2013, July 29). Registration opens for innovative new business model. BC Gov News Canada. Retrieved from: https://news.gov.bc.ca/ releases/ 2013FIN0067-001172
Mattei, U., & Quarta, A. (2018). Punto di svolta: ecologia, tecnologia e diritto privato. Dal capitale ai beni comuni. Sansepolcro: Aboca.
Strine Jr, L. E. (2014). Making it easier for directors to do the right thing. Harvard Business Law Review, 4, 235.
Zouhali-Worrall, M. (2010, February 9). For L3C companies, profit isn’t the point. CNN Money. Retrieved from: https://money.cnn.com/2010/02/08/smallbusiness/l3c_low_profit_companies