Public Benefit Corporations and B Corps: Promoting Conscious Capitalism

“Conscious capitalism,” a stakeholder-focused business approach designed to consider social impact in tandem with profit generation, has gained traction in recent decades in response to consumer demand for transparency surrounding corporate business practices.[1] In response, legislators established public benefit corporations (“PBCs”) and Benefit Corporation (“B Corp”) certifications to recognize and hold corporations accountable for socially responsible practices.[2] PBCs attain their status through a legal designation recognized in the majority of states.[3] PBCs must codify environmental, social, and governance (“ESG”) strategies into their incorporation documents.[4] B Corps, which meet and are committed to maintaining a high standard for social and environmental performance, are certified through the non-profit B Lab.[5]

Entrepreneurs can derive a multitude of benefits by structuring their startups as PBCs, including the ability to legally safeguard their company’s social mission.[6] This framework positions startups to develop and execute a long-term growth strategy in terms of both profit and the advancement of the public benefit from its early stages.[7] Gaining PBC and/or B Corp status also equips a startup to attract capital and mission-driven talent while generating customer loyalty for its socially-conscious practices.[8]

PBCs & Legislative History

Since 2010, over 40 states have either enacted or proposed legislation recognizing public benefit corporations.[9] California and Delaware were two of the first states to enact PBC legislation. Legislation passed under the California Corporations Code in 2012 set forth three legal requirements: (1) a PBC must pursue the general public benefit by creating a “material positive impact on society and the environment” as assessed by a third-party, (2) consider the non-financial interests of all stakeholders (including the PBC’s shareholders, employees, customers, and the community), and (3) prepare an annual report which demonstrates how it has pursued the public interest.[10] The statute is intentionally vague to allow corporations flexibility to innovate in furtherance of the public benefit.[11]

In 2013, the Delaware General Corporation Law (DGCL) enacted legislation defining a PBC as a “for-profit corporation organized under and subject to the requirements of this chapter that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner.”[12] Under the DGCL, PBCs should choose a specific public benefit to pursue in their business strategy, whether educational, charitable, economic, or otherwise.[13] Under § 365, the board of a PBC must balance the stockholders’ pecuniary interests with both the interests of those who are materially affected by the corporation’s business practices and the public interest that the corporation has identified in its certificate of incorporation.[14] Under § 366, a PBC must share a statement with its stockholders demonstrating the PBC’s promotion of its public benefit and the interests of those affected by its practices.[15]

B Corp Certification

Unlike PBCs, B Corp certifications can be granted to both incorporated and unincorporated entities.[16] The certification process largely depends on annual revenue and legal entity type.[17] The general guidelines for certification include (1) high social and environmental performance, as determined by the B Impact Assessment, (2) making its corporate governance structure accountable to all stakeholders, and (3) demonstrating transparency by making their performance publicly available on B Lab’s website.[18]

Certified B Corps are legally required to practice stakeholder governance, a model that involves the consideration of the impact of the entity’s decision-making on all stakeholders, including its “workers, communities, customers, suppliers, and the environment.”[19] The legal requirements for B Corp certifications differ depending on legal entity type, but may require amending its formation documents.[20] The certification process is designed to be straightforward to encourage participation.[21]

Considerations

Despite differences in requirements and implementation, both PBCs and B-Corp certifications share the same basic purpose: to recognize companies that are prioritizing ESG initiatives and practicing “conscious capitalism” while providing legal frameworks that hold these companies accountable in furthering their positive social impact. We will further explore these initiatives in future posts on the Forum for Entrepreneurship & Law.

---

[1] David Henzel, How and Why to Apply ‘Conscious Capitalism’ To Your Business, Forbes, https://www.forbes.com/sites/theyec/2023/08/04/how-and-why-to-apply-conscious-capitalism-to-your-business/?sh=2cb8bb8b2856 (last visited Nov. 4, 2023). [2] Id. [3] Id. [4] Matt Whittaker, Public Benefit Corporation vs. B Corp: What’s the Difference? U.S. News & World Rep., https://money.usnews.com/investing/articles/public-benefit-corporation-vs-b-corp-whats-the-difference (last visited Nov. 4, 2023). [5] Id. [6] 5 Reasons Your Startup Should Be a Benefit Corp, B the Change, https://bthechange.com/5-reasons-your-startup-should-be-a-benefit-corp-b5ad16c7e626 (last visited Nov. 6, 2023). [7] Id. [8] Id. [9] Currently, 29 states and the District of Columbia have legislation that recognizes B Corps, while 14 states have introduced legislation. See B Corp States: Everything You Need to Know, Upcounsel, https://www.upcounsel.com/b-corp-states (last visited Nov. 4, 2023). [10] 1 Cal. Corp. Code § 14601(c) (West 2012). [11] Benefit Corporations and Flexible Purpose Corporations in California: New State Legislation Permits Socially Responsible Corporate Formations, Just. & Diversity Center, Bar Ass’n of San Francisco, https://www.sfbar.org/wp-content/uploads/2019/10/benefit-corp-memo-.pdf (last visited Nov. 4, 2023). [12] Del. Code Ann. tit. 8, § 362(a) (West 2015). See also Michael R. Littenberg, et al., Delaware Public Benefit Corporations - Recent Developments, Harvard Law Sch. F. on Corp. Governance, https://corpgov.law.harvard.edu/2020/08/31/delaware-public-benefit-corporations-recent-developments/ (last visited Nov. 2, 2023). [13] Del. Code Ann. tit. 8, § 362(a) (West 2015). [14] Id. [15] Del. Code Ann. tit. 8, § 362(a)(1) (West 2015). [16] The Legal Requirement for Certified B Corporations, B Lab, https://www.bcorporation.net/en-us/about-b-corps/legal-requirements/ (last visited Nov. 1, 2023). [17] About B Corp Certification: Measuring a Company’s Entire Social and Environmental Impact, B Lab, https://www.bcorporation.net/en-us/certification/ (Last visited Nov. 1, 2023) [18] Id. [19] Id. [20] Id. [21] Id.