Colorado House Rejects Benefit Corporation Law

On Tuesday, May 15, 2012, the Colorado House allowed legislation to die in committee that would have given firms the opportunity to incorporate in Colorado as "benefit corporations."  Similar legislation passed overwhelmingly in the Colorado Senate earlier this month.  If the law had passed, Colorado would have been the ninth state to adopt benefit corporations. 

The Colorado Bar Association lobbied against the legislation, claiming that the social benefit purposes were defined too narrowly, and that the requirement for third-party certification (such as B-Corp) was too restrictive.

The eight benefit corporation states (in order of passage) are: Maryland, Vermont, New Jersey, Virginia, Hawaii, California, New York and Washington.  Several other states are considering this sort of legislation.  A complete list of the status of benefit corporation legislation in each state is on my website.  It is updated regularly.

Benefit Corporations are FOR-PROFIT firms that have an explicit social or environmental purpose stated in its founding documents. The idea is that its officers will be free to pursue these social purposes without fear of retribution or revolt from shareholders. Benefit corporations will still try to earn a profit for their shareholders, but will not be required to pursue profits exclusively. A comprehensive list of companies that are organized as benefit corporations is provided on my website, and is updated regularly. As of the writing of this article, there are a total of 94 firms that have elected to incorporate as benefit corporations. The two most well-known firms are Patagonia and King Arthur Flour.


Craig R. Everett, PhD
Graziadio School of Business and Management
Pepperdine University

Washington State Adopts Benefit Corporation Law

On March 30, 2012, Washington become the eighth state to adopt benefit corporation legislation.  As of June 7, 2012, firms will be able to incorporate as "Special Purpose Corporations," or existing firms can convert to this new status with at least a two-thirds shareholder vote.

Special Purpose Corporations in Washington are similar to other for-profit firms, except that there will be a social purpose included in the articles of incorporation.  A social purpose is defined as some goal related to social responsibility, such as environment, human rights or any other charitable purpose.  The idea is that officers and directors of these firms are no longer required to exclusively pursue shareholder financial profits.

The new legislation in Washington State differs slightly from benefit corporation statutes in other states so far.  The first main difference is that using a third-party assessment is optional.  More specifically, the organizers may optionally include a third-party assessment requirement in the articles of incorporation, but it is not required that they do so.  Second, it is optional whether or not to require the officers and directors to consider the social purpose impact of every decision.  These modifications to the standard benefit corporation "boilerplate legislation" were intended to give firms more flexibility about how to accomplish their social purpose.

A full list of states with benefit corporation statutes is available on my website, along with a listing of companies that have adopted this new corporate entity type.

Craig R. Everett, PhD
Graziadio School of Business and Management
Pepperdine University

More States Adopt Benefit Corporation Legislation

On April 13, 2010, Maryland become the first state to allow businesses to incorporate as "benefit corporations."  Vermont followed a month later.  As of this publication, there are now seven states that allow this for-profit entity type, including (in order of adoption) Maryland, Vermont, New Jersey, Virginia, Hawaii, California and New York.

So, what exactly is a benefit corporation?  It is a for-profit firm that has an explicit social or environmental purpose stated in its founding documents.  The idea is that its officers will be free to pursue these social purposes without fear of retribution or revolt from shareholders.  Benefit corporations will still try to earn a profit for their shareholders, but will not be required to pursue profits exclusively.  A comprehensive list of companies that are organized as benefit corporations is provided on my website, and is updated regularly.  The two most well-known firms are Patagonia and King Arthur Flour.

In addition to the states listed above, ten additional states have legislation pending: Alabama, Colorado, Connecticut, Florida, Illinois, Louisiana, Michigan, Minnesota, North Carolina and South Carolina.  In two states, Wisconsin and Pennsylvania, legislation has either failed or has been tabled (respectively).  Specific status of legislation is available here.

So what does all of this have to do with finance?  Well, benefit corporations are financially fascinating for several reasons. I'll address a couple of them.  First, most of financial theory assumes that the purpose of a corporation is to maximize shareholder wealth.  Once this assumption is weakened - as it is with benefit corporations - governance becomes more complicated.  Another interesting complication is in calculating the firm's cost of capital.  Since part of a benefit corporation's shareholder's gain is social rather than financial, how does this actually impact the shareholder's required return?  I have a forthcoming paper on this exact topic.

All and all, benefit corporations will undoubtedly prove to be a fertile field for business research.  Their adoption appears to be accelerating and although there are now only approximately 70 firms that are benefit corporations, this number is likely to grow quickly, as more entrepreneurs realize that incorporating in this manner allows them a unique path to "doing good while doing well."

Craig R. Everett, PhD
Graziadio School of Business and Management
Pepperdine University