Successful Step for California’s Benefit Corporation Legislation

by Melinda Cheel

RSF is committed to transforming the way the world works with money. Transformation of our economic system is multifaceted and complex so we look to our values to inform our actions for creating such change. We value interdependence and believe that as transformation takes place, economic success will be defined by social and ecological impact, not by financial results alone. Given this, we were excited and proud to participate in the legislative process that is changing how businesses account for impact.

Last Tuesday, California’s Assembly Judiciary Committee approved Assembly Bill 361, which proposes a new corporate structure category known as a Benefit Corporation. Businesses incorporated as Benefit Corporations are required to include environmental and social impact in their decision-making and reporting. Don Shaffer, our President & CEO and Adam Lowry, co-founder of Method, joined Assemblymember Jared Huffman (D-San Rafael) to testify at the hearing.

Currently, there are two options for structuring an organization: non-profit or for-profit. Non-profit entities are mission-based and are often focused on alleviating or eradicating social injustice and environmental degradation. For-profit corporations, whatever product or service they offer, are controlled by fiduciary duties and required under the existing corporation law to maximize returns for shareholders.

For several years social enterprises have been blending the two structures by expanding the for-profit model to include social and environmental benefits. California does not have a legal designation for such a model. AB 361 has the potential to change that. If the bill is signed into law, businesses incorporated as Benefit Corporations will be able to create profit and pursue a social mission.

AB 361 outlines specific requirements for Benefit Corporations including a mission to create material positive impact on society and the environment, consideration of non-financial interests when making decisions, and annual reporting on performance using a recognized third-party. In addition, directors will be required to consider the impact of any actions on stakeholders (employees, suppliers, the environment, etc.) and would be allowed to consider how the intention of any person seeking to acquire control of the business would impact these stakeholders.

Maryland was the first state to pass Benefit Corporation legislation in April 2010. Vermont, Virginia, and New Jersey followed and seven other states are considering similar legislation.

Assemblymember Huffman knows that California is ready to move forward with the new entity structure, “A growing number of California businesses and investors believe this legislation is the start of something transformational, that it embodies their vision of businesses that benefit communities, workers and the planet, in addition to just profit. This bill sends a clear message that California is open for this very hopeful new form of business.”

Our friends at B Lab are helping to lead the charge. For more information on Benefit Corporations, check out their public policy page.

The bill moves to the Assembly Appropriations Committee for a hearing later this month. We’ll keep you posted on the progress and hopefully soon be announcing the passage of a transformational law.

Melinda Cheel is Senior Associate, Partnerships and Communications at RSF Social Finance.