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California Law Creates New "Flexible Purpose" Category of Positive Impact Corporation

Posted by Sheila Shayon on October 17, 2011 11:07 AM

Even as Occupy Wall Street cuts a broad swath of attention through business, government and media, a revolutionary model for corporations to "do good" better was just signed into law by California Governor Jerry Brown. Assembly Bill 361 creates two new classes of corporations that are legally required to pursue a positive impact on society and the environment: Benefit Corporations and Flexible Purpose Corporations.

The new legal structures widen traditional corporate shareholder value to include stakeholder value, extending to environmental and social responsibility and increased transparency and accountability.

"Entrepreneurs, investors and consumers are calling for this type of legislation," says Assemblymember Jared Huffman (D-San Rafael), who sponsored the law. "They believe this is the start of something transformational. AB 361 rolls out the welcome mat for businesses and investors ready to create high quality jobs in California and make economic and social contributions that will improve the quality of life in communities across to our state for years to come."

California is the first state to pass the Flexible Purpose Corporation model but the sixth state to approve the Benefit Corporation classification. California joins New Jersey, Virginia, Hawaii, Vermont and Maryland that officially allow Benefit Corporations, while similar legislation is pending in Michigan and New York:

By mandating that corporations only focus on profits, the current system almost assures a negative outcome for society. By removing mandating stakeholder primacy and increasing transparency and accountability, directors are freed up to use the market as a force for good without risking suit from their shareholders.

MOOMilk of Maine, perhaps the best known benefit corporation, is a group of small dairy farmers who use the structure to leverage conventional capital as well as philanthropy while honoring a social mission beyond pure profit.

Frontline SMS is a community interest company (C.I.C.), a British designation that has influenced the evolution of U.S hybrids in corporate law. C.I.C.’s are required to have a social purpose, and their locked assets limit shareholder and employee distributions.

Frontline is a spin-off from California non-profit Kiwanja.net that creates technology for non-profits. “The value proposition is inherently defined in terms of social benefit,” said Sean Martin McDonald, executive director of Frontline. “That reduces a lot of concerns you might normally have from traditional financial investors by making it clear that your mission is primarily social, not primarily about making profits.”

The new legislation is roiling waters on both sides of the aisle: charities are concerned about increasing competition for limited philanthropic dollars while corporate lawyers fear an intrinsic conflict of interest that skews trustee duties.

As more states embrace laws that address the divide between business and non-profit, Venture Beat’s Kyle Westaway suggests the best way for companies to make the choice:

You should use either of these new forms if you are serious about operating a sustainable business, and if you are comfortable enough to allow the public to see how well you are performing. If you just want to greenwash your business, or want to look socially conscious without actually changing your core business model, then these new classes of corporations will just make you look ridiculous.

I think the best analogy is, if you’re going to be naked, you’d better be buff.


David Bright United States says:

Two comments on this story:
First, MOOMilk operates in Maine, not Vermont. (MOOMilk stands for Maine's Own Organic Milk). I suspect the writer saw the Vermont reference in a New York Times piece published Oct. 13, 2011 which made that same mistake. The company did first incorporate in Vermont because at the time Maine did not have an this type of law (known in Vermont as an L3C incorporation). Our company was then incorporated in Maine as a normal LLC. Thus the official name of the company is Maine's Own Organic Milk Company L3C, LLC.
Our situation was much like the many businesses that incorporate in Delaware. They don't operate in Delaware but chose to incorporate there because the incorporation laws there better fit their business plan. In our case, Vermont's law better fit our business plan than did Maine's at the time. I'm guessing other social-purpose companies around the country are having this same problem, but it will dimninish as more and more states adopt this kind of legislation. (Maine now has an L3C law and we are planning to reincorporate as an L3C in Maine.)

The second comment is about the sleeper theme in your report, i.e. "The new legislation is roiling waters on both sides of the aisle: charities are concerned about increasing competition for limited philanthropic dollars while corporate lawyers fear an intrinsic conflict of interest that skews trustee duties."
We found a similar situation existed in Maine during the time the legislature was considering the L3C legislation. In Maine, many of the tax attorneys opposed this type of law because it would make it much easier for organizations such as ours to navigate the state and federal tax laws -- thus making it much less expensive -- something the tax lawyers didn't like. There currently is a push for a national L3C law that would allow IRS to deal with L3Cs the same was as it now deals with 501c3s. This would eliminate the need to spend literally thousands of dollars in legal fees to obtain a private letter from IRS to guarantee socially-minded investors that their investments and grants to an L3C would be sheltered. You can bet there is some heavy lobbying opposing this. The issue of lawyers fearing "an intrinsic conflict of interest that skews trustee duties," didn't surface at first, but has become a familiar talking point in the last year or so. Clearly as support for this type of legislation has spread across the county, the law firms who oppose it have been talking to make sure they have a consistent message.
As for charities, we also initially saw some blow back from existing 501c3s, which saw L3Cs as being in competition for limited pools of funding. In our case, however, that has not been the case, but just the oppposite. We work closely with the Wayside Food Program in Portland Maine, a 501c3 dedicated to ending hunger. Working collectively, we have been able to raise additional capital for our little company while providing Wayside with a source of milk it did not have before. For details on how this program works see the DownEast Magazine article  at downeast.com/.../moo-milk-and-wayside, or visit the Maine's Own Organic Milk company website at MOOMilkCo.com.

David Bright
Deputy Treasurer and Secretary to the Board of Directors
Maine's Own Organic Milk Company, L3C, LLC

October 17, 2011 02:59 PM #

S.R. Shayon United States says:

Thanks for your correction from my source, and for your additional comments.

October 17, 2011 03:17 PM #

Peter Feld United States says:

Thanks, we have changed the story to read "Maine."

October 17, 2011 10:56 PM #

Comments are closed

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