Should purpose-driven or mission-oriented entrepreneurs in Colorado launch their startups as, or convert their existing businesses into, public benefit corporations (“PBCs”)?FN1
PBCs on the Rise?
PBCs have been grabbing lots of attention lately. The Business Roundtable (an association whose members are CEOs of the largest U.S. corporations) recently announced their collective commitment to pursuing not only stockowner wealth, but also value for all stakeholders – from their employees and customers, to their communities and the environment, more generally.FN2
This has generated quite the buzz not only in the business news, but it is also creating front-page and other mainstream headlines.FN3 And it is both significant and emblematic of the times that the largest corporations in the world are proudly and publicly pronouncing that they are changing their ways, from a pure profit focus, to pursue widespread social and environmental benefits.FN4
Yet even before this pronouncement, PBCs were fast becoming a hot topic not only in the news, but also in state legislatures and academic literature. For example, the American Bar Association’s summer edition of The Business Lawyer included an article by David Berger entitled “Reconsidering Stockholder Primacy in an Era of Corporate Purpose,” where he favorably examines the development and rise of PBCs in the United States.FN5
Each year additional states join the ranks of those permitting the creation of PBCs, allowing social entrepreneurs... to form and operate businesses that pursue purpose as well as profits.
Thirty five (35) states as well as the District of Columbia now have public-benefit corporation statutes. Each year additional states join the ranks of those permitting the creation of PBCs, allowing social entrepreneurs and others to form and operate businesses that pursue purpose as well as profits.
In May of this year, Ellen Berrey described PBCs as “the most widely adopted innovation in state corporate law in nearly two decades” (FN) Despite constituency statues and other methods of trying to permit conventional for-profit corporations to create value for all stakeholders, it was PBCs that caught on among entrepreneurs and others as a way to broaden corporate purpose.FN6
This enthusiasm isn't a fad of the moment, but has been steadily growing. Even in 2016, PBCs were being called “the most significant development in corporate law since New York combined limited liability and free incorporation in 1811.”FN7 Thus, according to John Montgomery, the PBC is the most significant legal development since the corporation itself.
These PBCs provide “the most prominent structural alternative to stockholder primacy in recent years.”FN8 In a PBC, directors, officers or other managers are supposed to consider the interests of all stakeholders and any of its particular missions, in addition to stockholder value, and ultimately achieve general or specific public benefits. The innovation here is that management decisions are not constrained by shareholder primacy.
Benefits of Operating a PBC:
But why would someone want to form or convert an existing business into a PBC? In the previous entry, I discussed several reasons to structure an LLC as a public benefit entity. Those same reasons apply in the case of PBCs and include:
Consumers: modern consumers expect businesses to consider their health, safety, and other interests as well as the interests of the environment and other stakeholders (like the business’s employees or local community). Businesses that ignore or disregard these consumer preferences may find themselves falling behind and missing out on important opportunities.
Employees: potential employees are increasingly looking for their employer to provide more than just a paycheck. They are looking for businesses that can provide purpose and meaning in and for their professional lives. PBCs not only have an easier time attracting and keeping talented workers, but studies suggest that their employees are more fulfilled and profitable and experience lower rates of absenteeism.
Investors: socially conscious investors – generally referred to as “social impact investors” – look to invest in businesses that have locked themselves into a mission dedicating that business to pursuing social and/or other benefits. Impact investors are not necessarily seeking the highest rate of return, but expect their investments to make a positive contribution to social and/or environmental causes.
Donations: some public benefit businesses may be able to register as charitable organizations under the Colorado Charitable Solicitations Act and, thereby, seek donations that are related to their charitable functions. For these qualifying businesses, this can be a significant source of revenue that helps them achieve their desired public benefits.
Community Support: the benefit-business community, especially in Colorado, is a generous, growing, and supportive community. This community support can be an invaluable resource for new and growing PBCs. Moreover, benefit businesses often prefer to do business with other benefit businesses and have sometimes incorporated a company pledge to favor working with such vendors.
From consumers, to investors and employees, people increasingly see the appeal of PBCs which make stakeholders matter to managers by requiring their consideration. Unlike a conventional corporate governance structure that permits corporate gains by pitting stockholders against other stakeholders, PBCs link the prosperity of all stakeholders by building and sharing value.
PBCs vs. B Corp Certification:
Relatedly, B Corp certification is increasingly utilized by businesses to transparently verify their achievement of social and environmental benefits and to clearly signal that fact to customers and investors. Indeed, an important advantage of B Corp certification is precisely its ability to communicate to the public that the business is not only committed to the pursuit of this general value, but also going a long way to actually achieving those results.FN9
Customers rely on certifications like Fair Trade or U.S.D.A. Organic to communicate information that matters to them about products or services, or how they were created or produced. B Corp certification indicates that a certified business operates responsibly and sustainably, with a genuine and demonstrated commitment to all of their stakeholders.
PBCs and B Corp certification can overlap or stand alone, since “an organization can be a B Corp, benefit corporation, or both.”FN10 Purpose-driven and mission-oriented LLCs, partnerships, and sole proprietorships can certify as B Corps so long as they meet the certification requirements. But B Corp certification is only available to corporate entities that are willing to (re)organize as PBCs.
Of course, no PBC or other business has to become a certified B Corp, but this certification can help hold them accountable to their stakeholders and the public benefits they pursue. Accordingly, to make this certification meaningful, B Corp certification requires, among other things, attaining a sufficient, verifiable score on B Lab’s Impact Assessment and re-verifying this score every three (3) years with the nonprofit organization.
Because it is a gold-standard certification of corporate responsibility, certifying as a B Corp can be an involved process for a business, but “the bar to entry to the benefit corporation status is very low.”FN11 In order to organize as PBCs, companies “simply need to make the election to file state paperwork and… [include within their bylaws] a short paragraph about the benefits they provide.”FN12
One option to help bridge the gap is B Corp certification, which is open to any for-profit business that has committed itself to attaining significant social and environmental benefits and verifying the achievement of those results...
PBCs must also produce an annual benefit report, where the achievement of benefits is measured against a third-party standard, and which, in some cases, may need to be filed with the state. However, Colorado does not require that these reports be made public and companies “are obligated to provide only a narrative description of the benefits they have created and any obstacles they have encountered toward achieving those benefits."FN13
But PBCs must do more than conventional for-profit corporations. That is precisely their point; PBCs in principle and practice are businesses that aspire to do more.
These efforts are often rewarded because potential consumers, investors, and employees are all increasingly looking for businesses that have a dedicated and proven commitment to building and sharing real wealth. PBCs, especially those who are B Corp certified, demonstrate this fact to the marketplace and thereby have a considerable advantage.
Colorado is among the top five (5) states for PBC creation, and first among the states in B Corp certification.FN14 This makes Colorado an even more welcoming environment than most states for public benefit businesses. For Colorado corporations in particular, when faced with the question of to PBC or not to PBC, often on balance the considerations favor the public good.
If you would like to find out whether a purpose-driven or mission-oriented business makes sense for you, or would like assistance forming a PBC or certifying your business as a B Corporation, please Reach out, Today!