Assessing Impact: A Guide to Third Party Standards for Benefit Corporations

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“…in many ways the third-party standard is the heart of benefit corporation legislation, and for many observers, the most contentious and misunderstood provision”—Clark and Babson “How Benefit Corporations are Redefining the Purpose of Business Corporations”[1]

Introduction:

Benefit Corporation legislation carves out unique legal protection for enterprises that are concerned not only with profit for their shareholders, but for making a positive social and environmental impact.  Unlike the previously existing choices for mission-oriented organizations (like the 501c3 non-profit and the traditional corporation), it can more successfully accommodate the needs of social enterprises and will encourage the development of the social enterprise sector by creating a public and transparent infrastructure for such businesses to operate and get access to capital flows and investment.  This new legal entity has already been passed in several states including New York and California and more states will likely follow suit in the near future.

As a Benefit Corporation, it is required that the business provide an annual public benefit report which, similar to the annual report published by regular corporations, presents information about the business’s social and environmental performance to the public.  Furthermore, this report must make use of a third party standard for measuring public benefit.  While it is the discretion of the company to select which third party standard to use for the report, it is not the discretion of the company to simply choose what information they wish to relay regarding their social and environmental performance.

The purpose of this third party standard requirement is simple; it is meant to prevent benefit corporations from deceiving the public regarding the benefits and harms that they have caused.  Like the standards governing financial reporting, it is meant to establish accountability for performance and ease the burden on investors, stakeholders, and the general public by freely offering the appropriate information for proper analysis and evaluation.

Even though the third party standard requirement is a central part of benefit corporation legislation, there is still a great deal of confusion and ambiguity surrounding it.  Clark and Babson, in their defense of benefit corporation legislation, describe the requirement as perhaps “the heart of the benefit corporation legislation” but also “the most contentious and misunderstood provision.”[2]

This report will examine the third party standard requirement in depth.  It will:

(1)   Explain the requirement, in both its details and its intentions,

(2)   Highlight the specific standards that are available, and classify those standards into three types, and

(3)   Address criticisms of the requirement and the inherent difficulties in creating standards for assessing benefit and impact.

With these goals in mind, this report will be useful for any number of people involved in and interested in benefit corporations, particularly: newly formed benefit corporations choosing a third party standard, entrepreneurs considering the benefit corporation form, impact investors looking to understand the nature of benefit corporations, legislators and advocates interested in perfecting the legal landscape for social enterprises, and finally anyone with an interest in the field of social enterprise and impact investing in general.


[1] William Mitchell Law Review (Vol. 38:2, 2012) p. 817-851

[2] Ibid.