Patagonia Becomes A Benefit Corporation

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Patagonia was among a dozen companies to take the opportunity to become a "benefit corporation" on the first day such a designation went into effect in California. The concept is a relatively new one, but it's a way for responsible companies to fight back against the excesses of capitalism:

It was the first business day they could register under a recently approved state law that gives companies a way to legally structure their businesses to consider social and environmental efforts as part of their missions.

While that may sound like marketing hype, it's important from a legal standpoint because it helps shield benefit corporations from lawsuits brought by shareholders who say that company do-gooding has diluted the value of their stock.

California becomes the seventh state to adopt this relatively new corporate structure. Until now, California corporate law mandated that shareholders' interests trump those of all other parties. Entrepreneurs who wanted to incorporate green initiatives or social causes into their businesses were often forced to become nonprofits, limiting their ability to raise venture capital.

Benefit corporations offer for-profit companies a way to do well and do right, said Assemblyman Jared Huffman (D-San Rafael), the author of AB361, the legislation that created the new type of business.

"There is a way to create jobs and grow the economy while raising the bar for social and environmental responsibility," Huffman said at a news conference outside of the secretary of state's office. "With this new law, we are attracting new socially conscious companies, investors and consumers."

California's new category allows corporations to officially adopt policies "that create a material positive impact on society and the environment" as an integral part their legal charter. The Huffman legislation also expands the fiduciary duty of executives and board members to include the interests of workers and the community.

Approval from two-thirds of a company's outstanding shareholders is needed to become a benefit corporation. A similar vote is needed to return to the traditional type of corporation.

Vermont and Maryland approved similar laws in 2010, followed by New York, New Jersey, Virginia and Hawaii in 2011. Nationwide, as many as 100 companies have become benefit corporations, most of them privately held, supporters of the Huffman bill said.

The movement for benefit corporations is growing and this seems like it could be an important step in changing the way our economy works, if a sufficient number of companies were to move in this direction:

We need a new business model inspired by the old one. Corporations should again come to bolster democratic purposes, not thwart them. To be sure, there will be no return to the legislative short leash, especially now that the Supreme Court has invited corporations to spend treasury funds electing pliant and obsequious lawmakers. But socially minded businesses should at least have the right to operate outside the straitjacket legal requirements of Delaware Code profit maximization.

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But why would public-spirited corporations embrace these exacting duties when they can simply roam free and do a little bit of altruistic good on the side? For one thing, Benefit Corporations can’t be held liable by courts for failing to place profits over everything else. This is an important shift in law. The fear of shareholder litigation has driven many public-spirited businesses, most famously Ben & Jerry’s, to take the high bid rather than the high road in a corporate takeover fight. Becoming a Benefit Corporation declares legal independence from the profits-über-alles model. More important, having Benefit Corporation status sends a powerful message to shareholders, employees, business partners and consumers about what kind of company you’re running. The signal generates instant branding, internal cohesion, consumer enthusiasm and links to a vibrant national B Corp network that brings in more than $4.5 billion in revenues. (Some B Corps are even worker-owned, like Vermont’s famous King Arthur Flour, which has almost 200 employees and may become the poster child for companies doing well in commerce, doing good in society and doing justice in the workplace.) The key to success here is a growing consumer demand for responsible commerce.

In a political sense, the surging popularity of B Corps will change the way people think about business. We can have a market economy without having a market society, and we can have prosperous corporations that act with conscience. Our besieged labor unions and nonprofits should bolster these businesses—green, local, progressive, entrepreneurial, community-focused—as an alternative to an economy controlled by massive state-subsidized corporations that are too big to fail and whose executives are too rich to jail.

North Carolina has a similar entity called a L3C.

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