Since its adoption in the state of Maryland in April 2010, a new corporate form – the benefit corporation – has now been legislated in 26 US states and Washington DC. The establishment of this new hybrid entity has been positively received by the public, which is perhaps unsurprising given the growing demand for greater accountability and transparency from business in recent years. The creation of a legal duty to generate both public and shareholder benefit accords with the evolving role of business in society today. The Social Impact Hub’s Benefit corporations – a case study of the US and lessons for Australia, presents a strong case for the consideration of a hybrid corporate entity in Australia. Why should Australian businesses be interested? In addition to providing directors comfort that in considering broader social benefit they are fulfilling their fiduciary duties, there are also many financial reasons businesses should consider such a move.
The Business Case
There is already vast literature on the business case for incorporating socially responsible business practices into a company’s ethos: from consumer and investor preference, improved employee performance and talent retention to maintaining a competitive advantage and legitimacy to operate in the market. So how could a hybrid corporate legal entity add value to businesses?
Whilst ‘value for money’ and quality have always been fundamental factors in the way consumers purchase products, ethical considerations and social benefit are now also seen as important considerations. Consumers are increasingly basing their purchase decisions on the values of the company. A recent Australian study shows that 83% of Australians agree it is important for businesses to address social and community issues.[i]
This phenomenon is consistent with the rise of ‘citizen actionism’, which refers to individuals seeking deeper involvement with social issues and their expectations of brands and corporations to provide means of engagement and participation in pursuing social benefit. Individuals now see themselves not as mere consumers of goods and services but as influencers in instigating social change.
There is strong market research to support this, for instance, 58% of Australians claim they would switch brands if a brand of similar quality supported a good cause.[ii] Further, 52% of those surveyed say they would help an organisation promote its products or services if the organisation supports a good cause.[iii]
There is also evidence that this preference is not limited to the consumer market. There are increasing numbers of impact investors seeking investable enterprises that create value not just for shareholders, but also for the wider society. This makes good business sense, given recent studies showing Australian companies with a higher corporate social responsibility (CSR) rating outperformed companies with a lower CSR rating by more than 3% p.a.[iv]
Additional research identifies that institutional investors show a preference towards ‘socially-aligned’ organisations.[v] Benefits of increased competitiveness of a business extend even beyond the consumer and investor market to the employment market. Studies of the labour market in recent years have shown that more and more individuals seek work that connects to a larger purpose. Therefore companies driven towards the social good may naturally be more likely to attract and retain talent, given their potential for higher employee engagement and job satisfaction.[vi]
Incorporation as a benefit corporation sends a clear message to consumers, investors and employees that the company intends to create public benefit, and will consider the effect of decisions on shareholders and other stakeholders. It clearly differentiates between companies that are legally obligated to ‘do good’ versus companies that are merely marketing themselves as socially responsible.
Another benefit of the benefit corporation legal status is maintaining the social or environmental mission of the business despite changes in ownership, and being able to consider factors aside from price at the time of sale.
Differentiating from pretenders
With the rapid growth of companies opting for the cause marketing approach, it can be very confusing for the consumers and investors. Nowadays buzz words like ‘green’, ‘responsible’ and ‘sustainable’ are used liberally to increase the appeal of products and, as a result, are starting to lose their meaning. Consumers would no doubt benefit from a more reliable way of identifying truly ethical companies and of ensuring the companies are behaving in accordance with their stated values.
The key advocate in the recent push for benefit corporation legislation globally is B Lab, a US based non-profit organisation founded by Jay Coen Gilbert, Bart Houlahan and Andrew Kassoy in 2006. B Lab developed the Certified B Corporations (B Corps) certification which is available for businesses and social enterprises that meet certain standards of social and environmental performance and legal accountability. There are currently about 50 Certified B Corps in Australia.
The benefit corporation legal structure would work alongside the existing B Corp Certification system to help the public distinguish between companies merely using social benefit as a marketing strategy and those that genuinely create real and measurable benefit. Whereas B Corp certification signifies fulfilment of a stringent social responsibility standard, benefit corporation status would signify actual legal responsibility.
Businesses that commit themselves to creating social and economic benefit will be eligible to incorporate as a benefit corporation, distinguishing them from traditional for-profit and non-profit entities. Becoming a benefit corporation requires that the business strives to achieve a material positive impact on society, focusing on at least one public benefit purpose, and that it publishes an annual Benefit Report.
Consumers, investors and job-seekers alike would benefit from the certainty that legislation would bring. Instead of having to make guesses as to a business’ commitment to social responsibility, these groups would be able to base their decisions on whether the company is legally recognised as a benefit corporation. Benefit corporation status can emphasise a company’s mission and values, making it more attractive for ethical or impact investors. The mere choice to incorporate as a benefit corporation could help forge the identity of a new company. Crucially, it will be clear that Directors can, and in fact should, consider all stakeholders in making decisions (including the community and the environment), not just shareholders.
There is no question that consumers, investors and workers nowadays are becoming more aware and sensitive to the social impact of their decisions than ever before. However, there is a need for a reliable method of distinguishing the truly ethical companies from competitors, such as through the adoption of Australian benefit corporation legislation.
Written by Jenny Ho. The report was written by Claire Achermann, Bettina Forde and Michael Ouzas for B Lab Australia.
[i] ‘Self-centred Aussies turn blind eye to cause marketing’ 28 June 2012 <http://www.marketingmag.com.au/news/self-centred-aussies-turn-blind-eye-to-cause-marketing-16235/>.
[ii] ‘Self-centred Aussies turn blind eye to cause marketing’ 28 June 2012 http://www.marketingmag.com.au/news/self-centred aussies-turn-blind-eye-to-cause-marketing-16235/. Also see ‘Brands with a cause click with Australians’ 8 October 2013 http://www.marketingmag.com.au/news/brands-with-a-cause-click-with-australians-45081/#.U9GugY2Sx68.
[iii] ‘Self-centred Aussies turn blind eye to cause marketing’ 28 June 2012 <http://www.marketingmag.com.au/news/self-centred-aussies-turn-blind-eye-to-cause-marketing-16235/>
[iv] M. Rey and T. Nguyen, ‘Financial payback from environmental & social factors’, 2005, AMP Capital Investors, Sydney. This study was conducted on 300 listed Australian companies.
[v] Graves and Waddock (1994) quoted in H.Petersen and H.Vredenburg, ‘Morals or Economics? Institutional Investor Preferences for Corporate Social Responsibility’ (2009) Journal of Business Ethics 90, 2.
[vi] H.Petersen and H.Vredenburg, ‘Morals or Economics? Institutional Investor Preferences for Corporate Social Responsibility’ (2009) Journal of Business Ethics 90.