Business Law Legal Topics New Legal Developments

New Year, New Day for California Corporations: They Can Pursue Both Socially Responsible Goals and Profits

With the new year will come a new, socially responsible corporate form in California. New laws will enable California corporations to do something they could never do before:  Pursue both social or environmental goals and financial returns for their shareholders.

Two new laws, effective January 1, 2012, will make this possible:

  • S.B. 201 enacts the Corporate Flexibility Act of 2011 (to be codified at Corp C §§2500–3503), which authorizes the formation and operation of a new type of corporate entity known as a “flexible purpose corporation,” and
  • A.B. 361 (to be codified at Corp C §§14600–14631) authorizes the formation and operation of a similar, but not identical, type of corporate entity known as a “benefit corporation.”

Under current laws, for-profit corporations may choose to promote environmental or socially beneficial causes, but such actions have to serve the long-term economic interests of shareholders or else the directors may be liable in an action by dissatisfied shareholders.

By contrast, non-profit corporations have to act for the benefit of society and can’t engage in substantial profit-making activities without risking loss of tax-exempt status and enforcement actions by the state attorney general.

These new flexible purpose corporations and benefit corporations are hybrids. They are each for-profit entities, but they offer protection from liability for officers and directors who pursue societal objectives at the expense of corporate profits.

Existing for-profit corporations can make the switch and become a flexible purpose corporation or a benefit corporation by a two-thirds’ shareholder vote.

Not surprisingly, some are concerned about these hybrid corporations. As a New York Times article explains, some executives in charge of charities “fear increased competition for philanthropic dollars fueled by the enthusiasm for the new formats among foundations.”

What do you think? Is this the dawning of a new day for corporations in California?

For more details on these two new laws, check out the law alert on On corporations generally, turn to CEB’s Counseling California Corporations, Advising California Nonprofit CorporationsOrganizing Corporations in California, and Selecting and Forming Business Entities. Check out CEB’s wiki on flexible purpose corporations and program California’s New Social Purpose Corporate Entities: What Are They and How Do They Differ?, available On Demand.

© The Regents of the University of California, 2011. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

9 replies on “New Year, New Day for California Corporations: They Can Pursue Both Socially Responsible Goals and Profits”

Confusing. Corporations have for decades been permitted to be philanthropic under the argument that doing so raises positive feelings toward the company and increases the potential for profit. Are the “reformers” who’ve pushed this form now saying that social consciousness is more antithetical to profit than philanthropy? That’s a dubious assertion. So I’d don’t see the need for this new form, except to further circulate the notion that corporations are inherently bad and need to be forced to be socially responsible.

The new corporate forms are indeed necessary. It’s true that corporations today can donate up to 10% of their revenues to tax-exempt charities, but the new laws are not at all concerned with such external philanthropic activities. Instead, the new laws address how corporations may conduct their internal operations. Under existing law, corporate directors are not allowed to operate the company in a socially or environmentally responsible way at the expense of corporate profits without breaching their fiduciary duties. For example, directors may risk liability to shareholders if they opt to retain rather than lay off employees in the face of declining sales revenues. In contrast, the directors of a corporation properly formed under one of the new laws would be protected if they elected to do just that. The two new California corporation laws exemplify a powerful national trend among the younger generation of business entrepreneurs, investors, and their counsel. This trend—variously known as “corporate social responsibility,” “social enterprise,” or “social entrepreneurship”—is bound to gain additional momentum in the years ahead as more and more states adopt similar enabling legislation. Following are links to some informative articles with more details on the new California laws:

Click to access CAAdoptsTwoNewCorporateForms-AdvanceSocialBenefits.pdf

I see quotes like this one from the articles you cite:

“The idea that incorporating environmental benefit and social good into your business will help your business grow and be more profitable, not less, is a progressive idea and has a lot more traction in Northern California,” he said. “That’s why this is a hot spot for B corporations already.”

If the premise is true (incorporating social good makes business more profitable), then the conclusion is a non-sequitur. Such companies could exist under current laws.

But let’s say some court decisions not cited by you or anyone you’ve cited do require that this business form be created. Then the likely scenarios:

Either the new corporation burns through all its capital being “socially conscious” and needs to get more from “investors,” or the new corporation operates at a profitability level that permits self-sustainance but no growth. The first defines a non-profit, and the second is a model followed by 90% of public companies (probably because of poor management but permitted under the business judgment rule) and many private ones (where it’s called a “lifestyle company”). So de facto no new entity was required after all.

But if it makes everyone feel better, I am all for California becoming the leader for these new types of businesses. It seems like an excellent way to transfer wealth from socially conscious investors who are rich not to care whether their investments make a return to the salaries of socially conscious business owners who can’t figure out how to turn a profit from their operations.

Add your comment to the blog post

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s