Understanding and Improving Benefit Corporation Reporting

About the Authors:

J. Haskell Murray is an assistant professor at Belmont University, Massey College of Business.

Introduction

Beginning with Maryland in 2010, 30 states and the District of Columbia (links to the legislation are included on the website) have now passed benefit corporation statutes. Benefit corporations, which are for-profit entities meant to serve a social purpose beyond the financial interests of shareholders, are the most prominent of a plethora of recently created social enterprise legal forms. Social enterprise legal forms also include public benefit corporations, benefit LLCs, social-purpose corporations, and low-profit limited liability companies (L3Cs). Proponents of the benefit corporation form claim that the entity “meets higher standards of corporate purpose, accountability, and transparency.”

Based on a longer academic work published in the West Virginia Law Review, this article provides a brief overview of benefit corporations, followed by their statutory reporting requirements, which are the basis for the proponents’ claim of greater transparency. This article shows that reporting compliance among a data set of early benefit corporations was under 10 percent, and argues that not only are the statutory reporting requirements lacking appropriate enforcement mechanisms, but the substantive requirements lack sufficient specificity as well. The article concludes by offering suggestions for statutory amendments to improve the benefit corporation reporting requirements.

Overview of the Benefit Corporation Legal Form

The benefit corporation statutes create a legal framework specifically intended to meet the needs of the social business movement, which is often associated with terms like “impact investing,” “triple bottom line,” and “sustainable business.” The Model Benefit Corporation Legislation, upon which most of the state statutes are based, makes clear that the benefit corporation’s purpose is to “creat[e] a general public benefit.” A general public benefit is defined as “[a] material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.” A white paper authored by benefit corporation proponents claims that the major requirements of the benefit corporation form are: (1) pursuit of a general public-benefit purpose; (2) consideration by directors of both nonshareholder stakeholders and shareholders; and (3) annual reporting on social and environmental impact as measured against a third-party standard. A separate white paper on benefit corporations by the Corporate Laws Committee of the ABA’s Business Law Section includes guidance for drafting benefit corporation legislation, but notes that the committee could not reach a consensus on whether benefit corporation laws were necessary or wise. In their white paper, the ABA committee recommends Delaware’s approach to benefit corporation law. The Delaware approach provides more flexibility in most areas than the Model Benefit Corporation Legislation. The Delaware version of benefit corporation law, which it calls “public benefit corporation” law, only requires reporting once every two years instead of annually, does not require use of a third-party standard, and does not require public posting of the benefit corporation reports. Currently, benefit corporations do not receive any state or federal tax benefits. Interested readers can find a bibliography of selected articles on social enterprise law, including benefit corporation law, here.

Requirements and Results of Benefit Corporation Reporting

The Model Benefit Corporation Legislation requires annual reporting. In the annual report, the Model requires a narrative description of the pursuit and creation of a general public benefit, and a narrative description of any hindrances encountered in attempting to create that general public benefit. Moreover, the process and reasons for selecting the third-party standard, and the results of the social and environmental assessment using the third-party standard, must be reported. The benefit corporation report does not have to be audited or certified by any third-party. (B-Corp certification is optional and is also open to nonbenefit corporations. If unfamiliar, the differences between benefit corporations and certified B corporations are explained here). The benefit corporation report must be completed annually, within 120 days of the end of the entity’s fiscal year or at the time of another annual report. The report must be posted on a publicly available portion of the benefit corporation’s website, or, if the benefit corporation does not have a website, the report must be made available free of charge to anyone who asks for the report.

I collected data on benefit corporation reports in four states: California, Hawaii, New York, and Virginia. I chose these four states because they were among the first to pass benefit corporation laws, and those states also made available the incorporation dates of their benefit corporations. In those four states, I limited my analysis to benefit corporations formed during or before 2012 to ensure that each entity had existed long enough to trigger the reporting requirement. Only 123 benefit corporations were formed in California, Hawaii, New York, or Virginia during or before 2012. Of those 123 benefit corporations, only 100 were active at the time of my research in July 2014. Of the 100 active benefit corporations, only eight posted or otherwise made available at least one benefit corporation report. A majority of the mere eight benefit corporation reports attempted did not, in my opinion, completely comply with the substantive statutory requirements. In short, at least among these early benefit corporations in four states, compliance with benefit corporation reporting has been abysmal—well below 10 percent.

Improving Benefit Corporation Reporting

Identifying flaws in any nascent legal framework is relatively easy; offering superior alternatives is admittedly more difficult. However, states could consider the following routes to improving benefit corporation reporting. First, states could consider not requiring benefit reporting at all and allow market demand to determine whether benefit corporations produce reports and, if so, in what depth and frequency. Second, and alternatively, states could consider creating reporting exceptions for small benefit corporations, and then create effective enforcement mechanisms to ensure higher compliance among the large benefit corporations. Small benefit corporations often do not have the resources to create regular, useful reports. Even for larger benefit corporations that do have the resources, enforcement mechanisms are virtually nonexistent in most states, so the benefit corporation reporting requirements often are overlooked. The Model Benefit Corporation Legislation requires filing the report with the Secretary of State, but many states have not followed this suggestion, making tracking and enforcement difficult. States could follow the lead of Minnesota and Florida by statutorily setting significant penalties for noncompliance with reporting requirements.

The enforcement of benefit corporation reporting is not the only area that needs improvement; the substantive reporting requirements are also suboptimal. Currently, the substantive reporting required is extremely vague, untied to specific metrics, and not especially useful to the public. The Model Benefit Corporation Legislation requires that the benefit report be completed using a third-party standard, but the third-party standards are of varying quality and ill-defined in the statutes. The current version of the Model Benefit Corporation Legislation requires third-party standards to be “recognized,” “comprehensive,” “credible,” and “transparent,” but does not provide much further guidance and does not appear to have an effective screening mechanism. Third-party standards could be overseen by a self-regulatory organization or a government actor to reduce the race to the bottom among standards. Alternatively, as is the case in Delaware, the third-party standard could be made optional, and market forces could determine whether using a third-party standard is valuable. Further, neither the statutes nor the third-party standards currently have consistent objective social metrics that would allow comparison among benefit corporations and make accountability more likely. Although choosing appropriate objective social metrics for benefit corporations across all industries would be virtually impossible, benefit corporation law could require that qualifying third-party standards choose a set number of objective metrics. The statutes could list examples of these standards, such as a percentage of employees paid a livable wage, a percentage of revenue donated to charities, and a percentage of buildings obtaining certain LEED certifications.

Conclusion

Benefit corporation laws are becoming increasingly popular, and the social reporting requirements are used as one of the justifications for the passage of these new statutes. However, early data show that compliance with the reporting requirements is abysmal—below 10 percent. Further, the substantive reporting requirements are vague and subject to virtually no oversight. For states that choose to mandate benefit corporation reporting requirements, the requirements could be improved by enhancing enforcement mechanisms and by mandating more objective metrics in the substantive reporting.

Further Reading and Discussion

Cass Brewer (Georgia State), Joan Heminway (Tennessee), Lyman Johnson (Washington & Lee and St. Thomas), Mark Loewenstein (Colorado), Brett McDonnell (Minnesota), Alicia Plerhoples (Georgetown), Dana Brakman Reiser (Brooklyn), Joe Yockey (Iowa) and I, J. Haskell Murray (Belmont), are among the academic authors who have written on benefit corporations. Our law review articles can be found on WestLaw and LexisNexis. This article is adapted from J. Haskell Murray, An Early Report on Benefit Reports, 118 West Virginia L. Rev. 25 (2015). Benefit corporation issues are also discussed from time to time on the Business Law Prof Blog and on my Twitter account, @HaskellMurray.

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