Maryland’s Benefit Corporations, 2010
On 13th April 2010, Maryland’s Governor Martin O’Malley signed into law, Senate Bill 690, making Maryland the first US state to legally recognise a new corporate entity, the ‘Benefit Corporation’. While traditional corporation’s primary purpose is dictated by its fiduciary duty to shareholders, which means maximising shareholder profit, benefit corporations have a wider business mandate for social and environmental benefit.
The terms ‘Benefit Corporation’ and ‘B-Corp’ are not interchangeable. While both seek to benefit society and the environment, the Benefit Corporation legal entity is completely separate and distinct from B-Corp certification.
As of mid 2015, there are 28 states that have followed Maryland’s lead in enacting Benefit Corporation legislation, with over 1550 registered Benefit Corporations in the USA, of which 81 are situated in Maryland and 14 other states are looking at implementation.
- In 2010, Maryland became the first US state to pass Benefit Corporation legislation. As of 2015, there are 28 states that have followed Maryland’s lead, with 14 other states looking at implementation.
- Benefit corporations must declare their commitment to creating general public benefit, defined as a ‘material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.’
- Maryland’s legislation encourages boards of directors to consider external stakeholders, as well as shareholders, in their decision-making process.
- Maryland’s Benefit corporation legislation aims to provide standards for corporations that follow a triple bottom line—’People, Planet and Profit.’
- Maryland Code 2010, Corporations & Associations, Title 5 – Special Types of Corporations, Subtitle 6C – Benefit Corporations. [In English]
- Senate Bill 690, Maryland Cong. Corporations and Associations (2010) (enacted). [In English]
- House Bill 1009, Maryland Cong. Corporations and Associations (2010) (enacted). [In English]
- Senate Bill 595, Maryland Cong., 500 Corporations and Associations (2011) (enacted). [In English]
- House Bill 1151, Maryland Cong., 501 Corporations and Associations (2011) (enacted). [In English]
In 2011, having already enacted Benefit Corporation legislation, there were many calls for further corporate policies – Maryland is unique as the only state to have enacted Benefit Limited Liability legislation.
Limited Liability Corporations (LLC) are a corporate structure popular with many small business owners, bringing together features of both business partnerships and corporation. Owners, also called ‘members’, are protected from liability, but the business’ earnings and losses pass through the owners, who report them on their personal income taxes. This makes their structure less complex than traditional corporate structures.
By enacting Benefit LLC legislation, Maryland permits companies already registered as LLC to pursue wider mandates without having to convert over to the more complex corporate structure. Consequently, Benefit LLC legislation is incorporated into the pre-existing LLC statutory framework and expressly recognises that its social mission takes priority over its primary profit objective.
On 13th April 2010, Maryland’s Governor Martin O’Malley signed into law Senate Bill 690, making Maryland the first US state to legally recognise and facilitate the creation of a new corporate entity, the ‘Benefit Corporation’.
In developing and implementing benefit corporation legislation, Maryland has been at the forefront of a new wave of transparent, accountable and environmentally concerned corporate entities. This conscious commitment has made many other US states take note, and in setting this precedent, Maryland has become a leader of a wider movement for the development and growth of a new form of ‘conscious capitalism’. This commitment been further bolstered by Maryland’s unique creation of a benefit LLC option.
The LLC option moreover serves as a key differentiator of Maryland compared to any other US states and this flexibility enables companies to pursue wider social and environmental mandates, while having the ability to decide on the corporate structure that best serves them as a business.
Ultimately, Maryland’s adoption of innovative corporate policy is a clear example of how the power of the private sector can be harnessed to create a material benefit good for the environment and society as a whole. By demonstrating a strong viable alternative business model does exist and by using a network of innovative, passionate, engaged and motivated socially-conscious entrepreneurs, Maryland has demonstrated that social and environmental concerns are not mutually exclusive to profit.
Our “Best Policies” are those that meet the Future Just Lawmaking Principles and recognise the interconnected challenges we face today. The goal of principled policy work is to ensure that important universal standards of sustainability and equity, human rights and freedoms, and respect for the environment are taken into account. It also helps to increase policy coherence between different sectors.
- Maryland Legislation, § 5-6C-01 states that a company must provide a ‘specific public benefit’ which includes: ‘(3) Preserving the environment’, as well as ‘(7) The accomplishment of any other particular benefit for society or the environment.’ Thus the sustainable use of natural resources could be a mandate of a Benefit Corporation although this is not a requirement of the legislation.
- Maryland Legislation, § 5-6C-07 ‘Duties of director’, states ‘A director of a benefit corporation, in performing the duties of a director, must consider in their decision-making under section (v) The local and global environment’, making the consideration of natural resources in the business’ needs mandatory.
- The reporting system outlined under Maryland Legislation, § 5-6C-08 requires ‘(2) An assessment of the environmental performance of the benefit corporation prepared in accordance with a third-party standard’, requiring a performance review of a company’s usage of natural resources.
- Maryland Legislation, § 5-6C-01 outlines that a ‘Specific public benefit’ includes: ‘(1) Providing individuals or communities with beneficial products or services’ , as well as to ‘(2) Promote economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business’, helping foster greater equity and equal social opportunity.
- As per Maryland Legislation, § 5-6C-01 a specific public benefit includes ‘(3) Preserving the environment; (4) Improving human health.’
- The third-party mechanism described under Maryland Legislation, § 5-6C-01 outlines evaluation procedures, ‘as measured by a third-party standard, through activities that promote a combination of specific public benefits’ , enabling a greater transparency of a company’s activities.
- Maryland Legislation, § 5-6C-01 states that a company is required to publish information about this third-party standard including factors taken into account and their relative weightings. This is intended to reduce ‘greenwashing‘ by providing the general public a means of judging whether a business is meetings the standards of a benefit corporation.
- Under the reporting mechanism of Maryland Legislation, § 5-6C-08 a company has to provide ‘(1) A description of: (i) The ways in which the benefit corporation pursued a general public benefit during the year and the extent to which the general public benefit was created; (ii) The ways in which the benefit corporation pursued any specific public benefit that its charter states is the purpose of the benefit corporation to create and the extent to which that specific public benefit was created.’ This must also be posted publicly.
- Maryland set a precedent in US as the first state to pass new legislation regarding the creation of benefit corporations.
- By implementing Maryland Legislation, § 5-6C-06, Maryland has demonstrated progressive and dynamic governance by allowing companies to ‘have the purpose of creating a general public benefit.’
- Under Maryland Legislation, § 5-6C-07, Duties of director, Maryland has not only protected directors from legal liability by not primarily pursuing shareholder profit, but also allowed companies to mandate it their mission to improve human security and society.
- Maryland Legislation, § 5-6C-01 defines ‘general public benefit’ as ‘a material, positive impact on society and the environment’ , integrating social justice and environmental protection.
- The legislation is well-adapted to America’s cultural values, technology, and finance, meeting market demand by consumers, investors and entrepreneurs for broader business mandates.
- The legislation does not place any inappropriate burdens on vulnerable groups, and encourages provision for those on low-income.
Stockholder primacy was first interpreted in the historic judgment between Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919), where this landmark court ruling decided that ‘a business corporation is organised and carried on primarily for the profit of the stockholders.’ Crucially, the decision stated that the primary duty of a company was the maximisation of shareholder financial gain, rather than the employees or the needs of the community as a whole.
Subsequently, ‘Shareholder primacy’ became a fundamentally accepted principle of US corporate law and when conflicts occur, shareholders can make a legal case that anything that reduces short-term profits is, arguably, corporate mismanagement and this has allowed corporations to behave in a manner which may be at the detriment of employees, the environment, and society. Profit comes at a price.
The power of shareholder primacy has been further developed by ‘Corporate Personhood’, dating back to Trustees of Dartmouth College v. Woodward – 17 U.S. 518 (1819), where the U.S. Supreme Court recognised corporations as having the same rights as natural persons. This and subsequent rulings, have afforded corporations a level of undemocratic power which has shaped US domestic policy and international trade agreements, for shareholder gain over the wellbeing of wider society, environmental sustainability and future generations.
However, in recent years there has been growing demand among stakeholders and consumers for corporations with broader business mandates. The corporate scandals of Enron and WorldCom in the early 2000s sparked public outcry and initiated a corporate reform movement across the United States. These large-scale highly publicised frauds exposed significant problems with regards to conflicts of interest and incentive compensation practices, resulting in calls for greater regulation, transparency, and accountability, bringing corporate law to the forefront of public policy debate.
From these debates, a wider movement was created and in 2006 the non-profit organisation B LAB was founded, based on the principles of ‘serving a global movement of entrepreneurs using the power of business to solve social and environmental problems.’ Initially, the main focus of B LAB’s work was the creation of a certification process which would enable socially and environmental engaged businesses to be assessed towards becoming a certified ‘B Corp’.
In November 2009, the major B LAB proponent Jim Epstein introduced Maryland State Senator Jamie Raskin to B LAB at an Investors Circle event in Washington. Sen. Raskin was so impressed with the concept of creating corporations with wider business mandates, that he immediately supported the drafting of new legislation and the creation of a new corporate entity ‘the Benefit Corporation’ was formally initiated.
A Benefit Corporation is a state government legal corporate structure, which is legally designated to form a new type of corporation, which voluntarily meets higher standards of corporate purpose, accountability and transparency. Through this wider mandate, Benefit corporations must declare their commitment to creating general public benefit, defined as a ‘material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.’ A B Corp while pursuing a similar mandate is a company that is certified by B Lab, an independent third-party non-profit organisation, as meeting B Corporation stringent standards. Ultimately, a Benefit Corporation can submit itself to the B Lab certification process and simultaneously be a B Corp; and a B Corp certified company can incorporate Benefit Corporation legislation, yet the two are not intrinsic or synonymous.
The purpose of a benefit corporation includes creating general public benefit defined as a material positive impact on society and the environment. A benefit corporation’s directors and officers operate the business with the same authority as a traditional corporation but are required to consider the impact of their decisions not only on shareholders but also on society and the environment.
The legal framework provides credibility and helps investors to identify corporations with broader social mandates which fully embrace their corporate social responsibilities. Without the statutory protections that would come with legislation, directors of Benefit Corporations would remain concerned that their overriding fiduciary obligation is to maximise financial returns for shareholders.
Maryland Benefit Corporation Legislation authorises a corporation to gain benefit corporation status by simply amending or including in its articles of incorporation a statement that the corporation is a benefit corporation, as stated under § 5-6C-03, ‘(a) A corporation may elect to be a benefit corporation under this subtitle by amending or including in the charter of the corporation a statement that the corporation is a benefit corporation.’
Benefit corporations are required to have a purpose of creating ‘general public benefit’ and are allowed to identify one or more ‘specific public benefit purposes. Public benefit is defined under § 5-6C-01 as a ‘material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.’
Through electing to become a Benefit Corporation and approval of the amendment by shareholders, a company must then prepare an amendment of the corporation charter to prominently feature that the corporation is a benefit corporation.
As of February, 2015, there are 1550 Registered Benefit Corporations in the USA, with 81 situated in Maryland. Of the 81, at least 40 are LLCs, with the LLC allowance being ‘best suited for small businesses‘.
Maryland Benefit Corporations represent a variety of industries, suggesting cross-sector demand for legislation – with pre-existing and newly formed food and beverage, energy, technology, and marketing and consultancy companies all becoming benefit corporations.
However, The Guardian points out that ‘as a general rule, [benefit corporations] already tend to be concerned with sustainability and often already have a larger social mission. And many … are already certified B Corps when they apply for benefit corporation status.’
In January 2013, ChangeMatters and the State of Maryland conducted a study of the impact of the Benefit Corporation Act. The study concluded that ‘there was a network of innovative, engaged, passionate and dedicated entrepreneurs from a variety of sectors. It also uncovered a network of professionals and agencies willing to support the work of these entrepreneurs.’
The study praised Maryland for its leadership, stating that ‘Since its bold first step as a national leader in this movement, Maryland has continued to expand its focus on innovative, entrepreneurial, locally-focused and sustainable initiatives. As other states rapidly follow its lead, Maryland has the unique opportunity to leverage its existing resources to support the implementation of the Benefit Corporation Act, and retain its position as a national leader in its successful implementation.’ [Read Report here]
Despite the widespread acclaim of the legislation, some limitations have been noted. For example some the charters of public benefit corporations ‘fail to state a specific public benefit‘, despite a statutory requirement to do so. Nonetheless, the rapid diffusion of benefit corporation legislation demonstrates the appeal, effectiveness and viability to businesses of the impact they can make with wider environmental and social remits. In harnessing the power of for-profit businesses, Benefit Corporation legislation demonstrates a clear path for transformative capitalism in creating a sustainable and just world, for current and future generations.
Benefit Corporations offer ‘clear market differentiation… broad legal protection to directors and officers, expanded shareholder rights and greater access to capital than current alternative approaches’ according to a US White Paper. It is a legislative model which has rapidly spread across the USA.
The transferability of the policy regionally, federally, nationally or internationally primarily depends on the corporate laws enacted within individual jurisdictions. For example, UK law already has the ability to facilitate the creation of benefit corporations, yet a representative of B-Lab UK has suggested that ‘the EU constitution will adopt and refine its statues to reflect a more transparent and facilitative approach to the creation of benefit corporations.’
Incentivising benefit corporation status with tax benefits would attract existing companies who are not eligible to become tax-exempt charities to complement the current cohort of community-focused organisations and start-ups.
Indeed Model Legislation exists and has evolved based on comments from corporate attorneys in the states in which the legislation has been passed or introduced. It reflects the expressed needs of business leaders and investors interested in using the power of business to solve social and environmental problems.
American Sustainable Business Council (n.d.) ‘Promote Corporate Responsibility through Benefit Corporation Statutes‘.
The Economist, ‘Firms with benefits’.
Nj.com (n.d.) Growing community of ‘Social entrepreneurs look for ways to establish legitimacy’.
Website: Benefit Corporations.
Benefit Corporation Legislation
The Benefit Corporation legislation is spreading rapidly across the States as a new model for business. Find out more about at bcorporation.net!