The state of California has created two new legal classifications for corporations that seek both environmental and social objectives in addition to profit: Benefit Corporations and Flexible Purpose Corporations. While the Benefit Corporations classification has already been implemented in five other states, the Flexible Purpose designation is the first of its kind.
Both categories are revolutionary in that they legally protect businesses that aim to promote environmental or social goals. Under current corporate law, a corporation’s legal mandate is to increase value for its shareholders, or generate as much profit as possible. In fact, if directors of a company fail to increase corporate profitability, the shareholders may file a lawsuit against them.
However, if a corporation elects to become a Benefit Corporation, it is no longer legally obligated to maximize profitability as its sole concern. Instead, a Benefit Corporation’s mandate is to take environmental, social, community, employee, and supplier concerns into account as it conducts business. The new shift is considered a shift from “maximizing shareholder value” to “maximizing stakeholder value.”
In addition, a Benefit Corporation must also abide by a certain accountability and transparency framework. At the end of each fiscal year, a Benefit Corporation must publish a “Benefit Report”, outlining how well the company did in regards to social and environmental objectives. Therefore, the new Benefit Corporation designation forces businesses to go public about how well their environmental and social agenda is doing, rather than greenwashing.
A Flexible Purpose Corporation is similar to a Benefit Corporation, except that it allows a business to select a specific purpose or mission that it will pursue in addition to profit. A corporation’s board of directors may elect to carry out a “special purpose” such as hiring workers from underprivileged communities. A corporation’s special purpose must be indicated in its FPC documents, and like a Benefit Corporation, must also release an annual report detailing how well the corporation is achieving its specific mission.
The new legislation is a first for California, and should bring greater accountability to corporations that posit environmental and social objectives. By providing new legal designations for corporations and increased accountability, California’s new laws will ensure that businesses that claim to be “green” can also back-up their claims with a third-party assessment.
Image CC licensed by Philippe Put