Monday, May 7, 2012

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

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