3Qs: Benefit corporations raise new questions on business, civics

December 17, 2012 by Matt Collette

Sev­eral states across the nation have con­sid­ered or approved the cre­ation of a "ben­efit cor­po­ra­tion," a class of cor­po­ra­tion that gives spe­cial status to com­pa­nies like King Arthur Flour, ensuring that their cor­po­rate values can be pro­tected in the event of sales or mergers. But the clas­si­fi­ca­tion may not nec­es­sarily be good for busi­ness, con­sumers or even democ­racy, warns Rae André, a pro­fessor of orga­ni­za­tional behavior and theory in the D'Amore-McKim School of Busi­ness, who wrote about the topic in a paper pub­lished this year in the Journal of Busi­ness Ethics.

What is a benefit corporation? Why would a company choose to incorporate as one?

A ben­efit cor­po­ra­tion is a new form of busi­ness cor­po­ra­tion ded­i­cated to improving cor­po­rate social respon­si­bility. Most are pri­vate busi­nesses without stock­holders. Even though they are a sep­a­rate cor­po­rate clas­si­fi­ca­tion, they must obey all the same laws as tra­di­tional corporations.

The way this works is that ben­efit cor­po­ra­tions are cer­ti­fied by an inde­pen­dent third-​​party eval­u­ator, in many cases the non­profit orga­ni­za­tion B Lab, which is the thrust behind most of the ben­efit cor­po­ra­tion leg­is­la­tion that has passed in the United States. Ben­efit cor­po­ra­tions pay a fee to B Lab and, in return, they're given a ques­tion­naire that reflects cer­tain values of these orga­ni­za­tions and how they are cer­ti­fied. Often they are asked com­plex ques­tions such as, "Is your supply chain designed to address issues of poverty alle­vi­a­tion and job cre­ation for under­served pop­u­la­tions?" and com­pa­nies answer simply yes or no.

I sup­pose these com­pa­nies believe that becoming a ben­efit cor­po­ra­tion pro­vides some ben­efit legally. I don't see it that way, though, and this has not been tested in the courts. I see them more as a public-​​relations effort and a way to net­work with other com­pa­nies that share their values.

You describe benefit corporations as businesses that fall within a new "gray sector." What do you mean by that?

As cit­i­zens, we always have to be looking at ques­tions such as, 'Who does our cer­ti­fi­ca­tion?' We have to under­stand who is doing the reg­u­lating and why, and we have to keep on top of these cor­po­ra­tions and orga­ni­za­tions. Groups like B Lab, which ben­efit cor­po­ra­tions pay on a sliding scale for cer­ti­fi­ca­tion, fall into what I call the gray sector and that's hard to monitor.

Tra­di­tion­ally, the orga­ni­za­tional uni­verse con­sists of busi­nesses, non­profits and gov­ern­ments—three very sep­a­rate sec­tors. But cer­ti­fiers like B Lab fall some­where between busi­ness and non­profit, and in fact act on behalf of the gov­ern­ment, serving in the place of our rep­re­sen­ta­tive gov­ern­ment. It's very hard for cit­i­zens to keep track of these orga­ni­za­tions and what they're really doing. I don't like to see cit­i­zens lose con­trol of the orga­ni­za­tions in their society.

We assume that some­thing called a ben­efit cor­po­ra­tion is going to be some­thing for the ben­efit of society. But what if the orga­ni­za­tion that is doing the eval­u­ating of the ben­efit cor­po­ra­tion is dia­met­ri­cally opposed to the goals of society? What if it's not green, for example? I as a cit­izen have no con­trol over the "inde­pen­dent third-​​party provider," who leg­is­la­tures have empow­ered to cer­tify ben­efit cor­po­ra­tions; there aren't any spe­cific cri­teria for them involved in that legislation.

What are the dangers of blurring the line between government and private groups like the ones certifying benefit corporations?

The way to think of ben­efit cor­po­ra­tions and their rela­tion­ship with B Lab is that they're a trade asso­ci­a­tion, and that's fine. Trade asso­ci­a­tions often keep busi­nesses on a straight path, which is good for insti­tu­tional mar­keting. But the ques­tion is: Why do we need gov­ern­ment to do that? In my mind, we don't. Ben­efit cor­po­ra­tion leg­is­la­tion out­sources cit­izen values to an unelected third party.

When B Lab, which is the pri­mary eval­u­ator involved in this right now, gives out its ques­tion­naire, it's essen­tially sub­sti­tuting its own values for that of society's. We voted for the leg­is­la­tion that covers these topics, or at least for the law­makers behind them; we as cit­i­zens do not, how­ever, get a vote with these orga­ni­za­tions. They dis­en­fran­chise citizens.

This should not be some­thing the gov­ern­ment is involved in. Part of my con­cern is that ben­efit cor­po­ra­tions going for­ward will get tax ben­e­fits because, after all, they're sup­posed to be doing some broader good. But why should my tax dol­lars go to mem­bers of this orga­ni­za­tion that we as cit­i­zens did not cer­tify and that we did not select? And why should ben­efit cor­po­ra­tions get tax pref­er­ence over tra­di­tional corporations?

This would totally change the com­pet­i­tive playing field. What is also impor­tant is that this sep­a­rate clas­si­fi­ca­tion also implies that other cor­po­ra­tions are not doing good and that's simply not true. Tra­di­tional cor­po­ra­tions give to char­i­ties, create foun­da­tions and sup­port employ­ment, and cre­ating a sep­a­rate ben­efit cat­e­gory cre­ates a dis­tinc­tion where I don't think one exists in reality.

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