Benefit Corporation Governance and Compliance

From our “Becoming a B” series on CSRwire.

So, you’re a Benefit Corporation.  Now What?

There is a broad misconception amongst B Corporation founders that the “legal piece” of being a B Corporation is simply something for the attorneys to handle. Not so, according to B Revolution founder Dirk Sampselle.

As founder of a B Corporation compliance firm, one of the things I do frequently is speak with founders of other B Corporations regarding how they run their B Corporations and leverage and comply with their B Corporation certification.  When the conversation comes to the legal implications of their B Corporation status, typically the can gets kicked down the road to general or outside counsel (an attorney or law firm).  This is problematic because a large part of the B Corporation assessment concerns governance practices, and the legal requirement behind the certification often has significant implications for board process and other functions of corporate governance.

The Importance of Board Process

When I studied corporate governance under Chief Justice Myron Steele of the Delaware Supreme Court, one of the things he stressed ad infinitum was board process.  It was reiterated in almost every case we read in our seminar on corporate governance: courts analyze board process, not board outcomes, in order to determine whether the corporate interests were pursued and board duties were upheld.  Yet, perhaps rationally, most private company boards do focus on reaching the proper outcome of a decision, and do not focus on the process itself.  This seems natural during the day-to-day course of decision-making, but is extremely wrong-headed from a compliance and risk mitigation perspective. When decisions are disputed, it is not the outcome, but the process that courts will analyze. Boards must be prepared to defend their process in the case of such a dispute, and more importantly, articulating a sound board process will mitigate intra-board conflict and help preclude such disputes from arising in the first place.

Board Duty Implications for B Corporations

Becoming a B Corporation affects board duties in at least three prominent ways.

First, as a component of a board’s duty of care, boards of directors (of any corporation) have a duty to implement adequate reporting systems and controls to prevent harm to the corporation’s interests, and then have a duty to monitor the results of those reporting systems, and oversee that the controls are being implemented.  To fail to do so, when such failure results in harm to the corporation, would be neglectful.  The benefit corporation statutes provide a new layer to this duty in that most benefit corporation statutes require that public benefit be pursued and reported according to a third-party standard.  This creates a strong motivation, in my opinion, to integrate third-party metrics into board decision-making processes, and may indeed create a duty to monitor and manage impact performance according to a third-party standard.  This may be the benefit corporation corollary of a Stone v Ritter Duty to Monitor.

Second, benefit corporations introduce a new corporate purpose, and thus a new layer of complexity into the board decision-making process.  Decision-making can no longer be engineered to serve strictly a profit purpose, to the exclusion and denigration of other purposes.  Boards must well-articulate their public benefit purpose(s), how they seek them, and what role they play in relation to one another and to their profit purpose.  This “purpose structure” must guide the decision-making process itself.

Finally, most benefit corporation statutes also introduce a new duty to consider stakeholders, separate from the traditional duty of loyalty and duty of care.  Thus, decision-making processes must be attuned to considering members of these statutorily-enumerated stakeholder groups, and boards should undertake to identify, weight, and prioritize stakeholders in advance.

Conclusion

Most general counsels and outside firms have little to no experience with matters of corporate governance, beyond the basics involved in simple finance transactions and simple formation.  Typically no counsel is given to new venture founders and new B Corporations regarding their duties and responsibilities in operating a board of directors.

Worse yet, many (perhaps most) attorneys recommend clients do not form benefit corporations because, at surface layer, they see these concerns and believe a traditional corporation eliminates them.  The converse is true: the traditional corporation also has a duty to monitor; it has a duty to consider; it has a purpose structure.  The fact is that it monitors the wrong things, it precludes proper consideration of stakeholders, and its purpose structure is, to use a formal, Latin legal phrase, “out of whack.”  The benefit corporation helps resolve issues many attorneys blindly believe don’t exist.

Those considering the B Corporation certification and legal form should consult experienced counsel that can help founders and Boards deal with these nuances. Qualified legal counsel can help boards:

  1. Define your public benefit purpose and create your purpose structure.
  2. Take the time to craft a carefully-designed board decision-making process.
  3. Identify, prioritize, and weight your stakeholders to help analyze and govern trade-offs down the road.
  4. Select an appropriate third-party standard, and develop a protocol for monitoring performance according to it.
  5. Create a compliant decision-making process that integrates public benefit purposes with the firm’s financial goals.
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