If you read Kyle Westaway’s informative post on SocialEarth, “Revolution for Good,” you probably know that two social innovation bills were signed into law in California last week. They create new kinds of corporations, called benefit corporations and flexible purpose corporations that are for-profit entities which are also committed to benefiting the community and/or the environment. (You can find a list of key features of each here).
Here are a few questions to keep in mind as we look at the road ahead.
5 Questions on the road ahead for Benefit Corporations and Flexible Purpose Corporations
1. Will there be enthusiastic early adopters?
In California, the new laws will take effect on January 1st, 2012. And with the number of companies supporting the benefit corporation bill and the flexible purpose corporation bill, you can bet that there will be early adopters ready to sign up starting on Day 1. These may include a number of start-up social entrepreneurs looking to start off their ventures as one of the new legal forms.
Some dedicated companies may even decide to reincorporate as one of these legal entities in California. Case in point, method co-founder Adam Lowry has mentioned (listen in around 26:30) that his popular home products company is considering reincorporation as a benefit corporation in California, on passage of the benefit corporation legislation. (Note: both bills require a 2/3 vote from shareholders to reincorporate)
2. Will people know?
Other major questions are whether the general public will know about the new entities, whether they will identify with the mission and vision behind the legal structures, and whether they will be drawn to use their purchase power on benefit corporations and flexible purpose corporations.
This will depend largely on outreach done by organizers, policy makers, and the companies themselves. The products and services produced by these new social ventures will be the key factor in spreading the word–if they are compelling and effective, they are more likely find a loyal audience.
3. Will benefit corporations and flexible purpose corporations be able to distinguish themselves—from each other & from other corporations?
Though both bills passed, they each have distinct requirements. Benefit corporations require companies to pursue a triple bottom line by maximizing stakeholder value (people, planet, and profits) according to a third-party standard. Flexible purpose corporations require companies to identify at least one stated “special purpose” (which can include charitable or public purpose).
Any confusion between B corporations and benefit corporations aside, there are a number of questions about whether the difference between benefit corporations and flexible purpose corporations will be readily apparent, how each kind of company will be governed by law, and whether consumers will be cognizant of the differences between structures.
4. Will the social innovation laws attract new kinds of business and create new value for social enterprise?
Beyond companies that have already been eyeing the new legislation, a test of the bills will be whether start-up entrepreneurs and new kinds of companies will adopt a social innovation legal structure. Such businesses may opt to (re)structure as a benefit corporation or flexible purpose corporation to stay competitive or to distinguish themselves from the pack.
Perhaps incorporating as one of these legal structures will make companies more attractive to socially responsible investors (i.e. impact investors) and consumers and patrons may call on their favorite brands to consider a more socially-aware legal structure.
5. How will benefit corporations and flexible purpose corporations hold up in court?
Another looming question for these legal structures is what the courts will say about them. The structures aim to protect a company’s decision-makers from rebuke by shareholders for making decisions that further the triple bottom line or fulfill a stated purpose. Currently the Business Judgement Rule and constituency statutes protect decisions made by directors. (Note: California has not passed a constituency statute)
Another set of legal questions will come up during the sale or aquisition of a social venture. Benefit corporations enable a company that is being acquired to choose its buyer based on factors beyond monetary share price.
These are a few of the big questions ahead for benefit corporations and flexible corporations.
We can look forward to answers, and more questions down the road.