What To Look For When Considering A Benefit Corporation: A Comparison

social, enterprise, entrepreneur, houston, texas, nonprofit, public, benefit, corporation

I finally have a chance to circle back to this post. Really, the timing couldn’t be better. I’m losing track of the companies announcing social enterprise initiatives recently, like Salesforce and Cadillac.

You’ll remember my post from weeks ago about the Benefit Corporation bug FINALLY hitting Texas. As excited as I was, in reading the statute I couldn’t help but feel much was to be desired. So I looked at similar statutes in California and Vermont.  Spoiler alert I was right — shocker.

The differences between the different statutes range from small to giganor (yes, I’m using that as a word).

But some of the key differences are:

  • California took a middle of the road approach, leaving discretion the corporation’s board by not requiring too much disclosure to shareholders or the public at large.
  • California and Vermont require reporting WAY more vigorous than Texas; in the creation of the reports, standards the reports use and when the reports have to be released.
  • Vermont went as far as to require a “Benefit Director.” A fancy way of saying an “impact knark,” it’s essentially someone who tracks impact within the organization and keeps the company honest (which I love).

In the end, the biggest differences came down to transparency.  Vermont requires much more transparency in decision-making and reporting than the others. With stronger consequences for not doing so.


Why Does Any of This Matter?

As a company founder, the decision: 1. To form a benefit corporation, and 2. On where to form the benefit corporation will always be strategic. It’s done by formulating a list of considerations; looking at the founder’s priorities, expectations, needs and resources.  And looking at the statutes to see which align with the founder’s take on the considerations. Fundamentally, the considerations with focus on them will come down to the founder’s specific strategy.  But by way of example, I’m running through a few things founders will want to think about in general below.

 

Does the Benefit Statute Have Your Back?

Why do the differences between the statutes matter? A founder looking for control in ensuring the social impact side of the business is strong, a priority and kept intact will look at a state with statute language that takes the “public benefit” aspect seriously. Offering a strong definition, ways to monitor and requiring public benefit be woven into every consideration.

This founder probably wouldn’t look at states with statutes  that read more like lip service (*cough* Texas).

How each state defines “public benefit” will be a clue. States like Texas define it pretty broadly (“a positive effect, or reduction of negative effect…”). The broader public benefit is defined, the more give a board has on what they themselves define as a public benefit, which may allow for things people don’t traditionally associate with the term or fall outside of what a founder contemplated. Whereas states like Vermont more specific with the definition (“a material positive impact on society and the environment, as measured by a third-party standard, through activities that promote some combination of specific public benefits”). Great for founders who want a more focused statute, disallowing board members and successors from getting cheeky with what they allow to fall under a “public benefit.”

 

Is the Status Worth it? 

Each statute had a reporting requirement, where the company communicates its impact standards and how it’s meeting (or not meeting) them. How often this report goes out varies from biannually to quarterly. A founder looking at this will want to think about what it takes to put together a comprehensive report 4 times a year (in addition to their other financial reporting requirements). That could become not so fun pretty quickly.

More importantly, companies report out against an impact standard it adopts. Some statutes require more rigors around what  can and can’t be a standard. For example, Vermont requires the standard come from an independent third party and even goes into what the standard has to include. With Texas only requiring a standard and allowing the standard to come from a third party.  Serious time may go into choosing a standard that works for the company, and way more time into actually accounting and measuring against that standard. That said, the resources (time, people, money) a benefit corp. requires could outweigh the benefits of incorporating under it. Especially if the intent is more related to marketing or branding.

 

Who’s the Boss?  

One of the most cited reasons for creating the Public Benefit status was the belief that board members wanting to give social impact more play in day to day operations needed special protection. The example is always the company that has a big focus on impact (Company A), and a bid to buy them by a company that pollutes rivers for fun (Company B). The question for many was, if Company A got an amazing offer from Company B, would they be violating their duties to the company if they didn’t sell?

How each statue addresses this, and other questions like it, is in a section outlining the director duties along with the considerations directors may keep in mind when making decisions.  Texas’ statute has a small list of considerations directors should balance, while the Vermont statute goes into specifics around who should be considered when making decisions and what priority, if any, should be given. Again, founders who want to make sure impact remains the Number 1 priority will look toward states with clearer language around what directors have to consider, like Vermont.

 

Is There Flexibility? 

As startups get up and going agility becomes invaluable; the ability to pivot based on feedback, data coming in or opportunities. For some founders, flexibility is more important than for others but it’s especially important for those diving in and want the ability to take a 180 turn if need be. Some states made it easier to convert or terminate benefit status than others. This would also back to how public benefit is even defined, with more wiggle room for those incorporated in states with loose definitions like Texas.

Selling, merging, or terminating the public benefit status of the company is another reality that might require flexibility. For the most part, the statutes all seemed to track the same language here.  The primary difference being the threshold for becoming a public benefit corporation if the company wasn’t one to begin with. California required 2/3’s the vote of the outstanding shares, with Texas requiring 90% — guess they want to make sure everyone’s on board before putting a ring on it.

 

Takeaway? 

Other considerations a founder will look at is liability, and possibly other maintenance requirements. If you’re a founder who reads this and thinks, “no thanks” there may be other ways of gaining legitimacy without jumping into the Benefit Corp. pool. For example, and accreditation process. This definitely won’t be for everyone.

 

 

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