Greyston Bakery, a business based in Yonkers, New York, that aims to transform lives and renew urban communities, says: “We don’t hire people to bake brownies. We bake brownies to hire people.”
But the bakery’s slogan is more than an aspiration – the company is legally bound to pursue this mission. Greyston Bakery is a benefit corporation, a new kind of business entity that under US law is required to generate social and environmental benefits as well as profits.
Only a few companies are so far incorporated under the new rules, but some believe the model could bring about big changes in the way business is done and unlock billions of dollars in socially focused investment capital.
Under legislation now passed in seven US states, registered benefit corporations must work to create positive social and environmental impact, expand their fiduciary duty to consider the interests of workers, the community and the environment and report publicly every year on their social and environmental performance using a credible third-party standard.
“These are for-profit companies,” says Andrew Kassoy, co-founder of B Lab, a US non-profit group that worked to introduce and support the new legislation. “But those things now become part of the fiduciary duty of these companies.”
This constitutes a significant divergence from the traditional model in which corporate officers and directors have a legal duty to maximise shareholder value, which generally means profit.
“Anything you do that costs money and deviates from that leaves you open to a lawsuit,” says Andrew Greenblatt, a New York University professor and founder of Vendorboon, a social venture that negotiates vendor discounts for its members.
For companies wanting to use market forces to solve some of the world’s biggest problems, benefit corporation legislation is a powerful tool. The law means officers and directors are legally protected when it comes to making decisions that balance profit making with social or environmental goals. One example of how this protection can come into play is when companies face takeover bids.
Under traditional incorporation law, a company would find it hard to resist a bid if it was in shareholders’ financial interests to make the sale – even if the buyer was not driven by social, environmental or ethical values. A benefit corporation could turn down such an offer.
Chid Liberty is founder of Liberty Justice, a for-profit fair-trade-certified company with a garment factory in Liberia that was established to employ women. He comments: “Often people go into business thinking they’ll do good, but sometimes they get pushed up against the wall and need to make tough decisions.”
The ability to base business decisions on a wide range of factors is one of the reasons Mr Liberty is re-registering his company in one of the US states that will allow it to become a registered benefit corporation. “We wanted to make sure that if, say, a large Chinese buyer that didn’t agree with our ethics came in, we had legal grounds to say no, because it doesn’t fit with our organisational structure,” says Mr Liberty.
The legislation also provides certainty for the growing number of investors who want to use their money to generate social and environmental benefits as well as financial returns.
These include socially responsible investors as well as a growing group of investors putting their money into impact investments, which JPMorgan has called “an emerging asset class”, estimating the size of the market opportunity at between $400bn and $1tn.
The legal structure of benefit corporations means these investors can be sure that their investee companies will adhere to their social and environmental goals as they grow, rather than being tempted to switch to pure profit making when the business takes off.
“What this new law does is give investors the accountability to make officers and directors keep their promise to make the world a better place,” says Prof Greenblatt. “And that unlocks intermediaries such as fund managers, who can raise money from people who want to invest in those kinds of things.”
Of course, the emphasis on social and environmental good does not mean benefit corporations can let profits slip. “On a daily basis, you’re definitely struggling with the things any company struggles with,” says Mr Liberty. “The only difference is that you are not only looking at this from the perspective of a typical financial analysis but also at what the impact is socially.”
Benefit corporation legislation exists only in the US at present. However, other countries – including Chile – are looking at the possibility of introducing similar corporate structures. Meanwhile, in the US, several more states are considering introducing benefit corporation legislation in the near future.
This comes as no surprise. For cash-strapped governments looking to the private sector to play a bigger role in addressing issues such as poverty and climate change, benefit corporation legislation offers a cost-effective policy tool.
“There’s a lot of interest,” says Mr Kassoy at B Lab. “Policy makers see this as a development opportunity. All they have to do is change the law – they don’t have to spend a lot of money. It’s a no brainer.”
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