A Summary of the Benefit Corporation Third-Party-Standard Requirements

A Summary of the Benefit Corporation Third-Party Requirements

A key feature of the benefit corporation legal entity is that it requires benefit corporations to maintain performance and reporting activity with regard to a third-party standard. Namely, benefit corporations are required to (a) have a purpose of 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 the benefit corporation; and (b) deliver to each shareholder an annual benefit report which includes a narrative description of all the board’s process and rationale for selecting the third-party standard that was used to prepare the benefit report, the ways in which the benefit corporation pursued a general public benefit during the year and the extent to which that general public benefit was created, and, finally, among other things, an assessment of the overall social and environmental performance of the benefit corporation, prepared in accordance with a third-party standard. Importantly, with regard to (b), the statute states that the assessment does not need to be audited or certified by a third party.

To begin with the duties under (a), a benefit corporation must consider its performance as assessed against the third-party standard when making board-level decisions; it must pursue the creation of general public benefit, including at least in part, the creation of positive outcomes as defined by the assessment.  It does NOT require the benefit corporation to CREATE public benefit outcomes – according to a third party standard or any other subjective standard – any more than a traditional corporation is required to CREATE shareholder wealth: traditional corporations are required to pursue the creation of shareholder wealth, and often fail at doing so; such failure does not create an ipso facto breach of directoral duties to the corporation or its shareholders; likewise, there is no duty to create general public benefit in benefit corporations, lest well-intended entrepreneurs would be jailed for every failure.

Important to note for the duties under (a), is the fact that it is clear throughout the statute that benefit corporations are free to select a third-party standard of their own choosing.  The statute sets out a healthy and transparent set of criteria for determining whether a third-party standard will qualify.   The following features are the most notable.

  • The standard must be comprehensive in assessing the impact of the business on the corporation’s stakeholders defined in the statute.
  • The standard must be developed by an entity that is independent (the “independence” set of provisions are some of the most robust in the entire statute and mitigate potential conflicts of interest between standard-setters and standard-users).
  • The standard must be developed using a multi-stakeholder approach including a public comment period; the standard must also access the “necessary and appropriate” expertise to assess social and environmental performance.
  • Finally, the statutes contain a set of sunlight provisions, which state that all the elements of the third party and its standard must be publicly disclosed.

The third-party-standard provisions of the statute effectively relieve courts of the dilemma of measuring and determining the outcomes – a task courts (notoriously backward-looking, precedent-constrained bodies of government) are ill-equipped to undertake.  Consequently, the provisions place benefit corporations in the driver’s seat in determining which third-party standard to utilize.  B Lab proffers the B Corporation standard, which is almost certain to satisfy the benefit corporation statute; the informational site www.benefitcorp.net lists a dozen other standards that are likely to satisfy the statute as well.

Once the benefit corporation has selected its third-party standard (notably, the selection process itself must occur in compliance with the fiduciary duties of the directors and officers), the duties under (b) above become clear: the report must address elements measured and evaluated by the third-party standard and describe the results of that evaluation; the report must then be made publicly available, either by submitting it to the appropriate secretary of state, or by posting the report on the corporation’s website.

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