Corporate America has been garnishing lots of attention, and not just because of the hundreds of billions of dollars in bailout money, exorbitant annual salaries of CEOs, or protestors around the country furious with the unfair – not to mention highly unethical – practices imposed by these Goliaths of commerce.
Instead, corporations are getting attention because of some recent legislation in California. Governor Jerry Brown has just signed legislation creating two new types of corporations for the state: Benefit Corporations and Flexible Purpose Corporations. While Benefit Corporations have been created in six other states, the Flexible Purpose Corporation is unique to California.
The Quick Definitions: Understanding Benefit Corporations and FPCs
To start, keep in mind that what we might consider a “regular corporation” is centered around one single overarching goal: increase the profits for a company in order to benefit its shareholders. While the various corporations seen today do indeed have specific tax rules, operational guidelines, and organizational structure, they operate to do exactly what is stated above: increase profits.
Benefit Corporations and Flexible Purpose Corporations are different.
Benefits Corporations
Right from the bill itself, Benefit Corporations “have the purpose of creating a general public benefit” (emphasis added) in addition to increasing profits. Furthermore, “A benefit corporation shall post all of its benefit reports on the public portion of its Internet Web site, if any” in order to encourage and elicit accountability. Here, we see two new themes becomes standards for corporations: social responsibility and corporate integrity.
You’ve got to be careful, though, because labels are already starting to get blurred. Many confuse Benefit Corporations with ‘B Corps’, a term coined by the NGO B-Labs. A ‘B Corp’ is really a normal corporations with a ‘B Corp Certification,’ which many see as a badge of sorts, ensuring that a corporation is really functioning sustainably. (There are a few concerns with this that are mentioned below).
Flexible Purpose Corporations
Flexible Purpose Corporations are essentially the same as Benefit Corporations but, you guessed it, are more flexible. Unlike the Benefit Corporation, the legal entity of a FPC allows a corporation to choose a mission in addition to profits. It also broadens the duties of its board of directors to enable pursuing the mission detailed in its organizing documents.
When it comes down to it, both Benefit Corporations and FPCs are very similar. According to Broc Romanek of the Corporate Counsel, “there is nothing that the B Corp sponsors want to do under their bill that they can’t do under the FPC bill – but the FPC is a broader entity that allows for greater shareholder rights (eg. the shareholders and not the legislature determines the social and environmental goals of the company).”
Arguments Against the New Set Up
While there aren’t many arguments against FPCs (at least that I’ve come across – feel free to mention some in the comment section!), there is some concern over the introduction of Benefit Corporations. To digest them quickly, read the points below (you can also read a full argument against them by the Corporations Committee):
- Marginalization of Shareholders: One of the largest concerns of Benefit Corporations is the how shareholders will be treated. Simply put, after the corporation is voted into a Benefit Corporation, which required 2/3s of the shareholders, the Board of Directors is granted full authority to utilize corporate assets in a manner that it determines to be a benefit to the corporation. Shareholders do not need to approve these actions, and the directors of the company are not obligated to inform shareholders of changes to their fiduciary duty standards.
- Third Party Standard: As explained by the Corporations Committee, “The Bill empowers and requires the directors of a benefit corporation to select a third- party standard by which its actions will be measured.” While this in itself is not a problem, many are worried that the bill is largely designed “to enact in statute a regime that will provide ready constituents for B Lab’s certification service.” B Lab holds trademark rights to the term “B Corporation” which is clearly similar to Benefit Corporation. Simply put, B Lab, whose legislation this bill was adopted from and who strongly promoted the bill as an NGO, is uniquely positioned to take advantage of this Bill.
- Failure to Integrate into the Corporations Code: Because the legislation was developed by B Lab, it has been intended to be “dropped whole cloth” in to the existing system. This “makes only a limited attempt to fit into the existing structure and provisions of the Code…[and] would create an environment conducive to uncertainty and confusion.”
- No Recognizable Identifier: Despite proponents arguing this is creating a new corporate form, Benefit Corporations, like regular corporations, are “formed under the General Corporation Law (the “GCL”) and would largely rely on Division 1 of the Corporations Code.” This means that they do not create a unique corporate form and because they lack identifiable separate statuses, many are concerned that the general public won’t even recognize the difference.
There are other concerns regarding the exclusion of non-profit and for-profit entities, as well as the seemingly unneeded nature of the Benefit Corporation. With the legislation already passed, though, we will be able to sit back and observe how new Benefit Corporations work through the current system.
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