New Legal Protections for Social Entrepreneurs | IDEAA IT

New Legal Protections for Social Entrepreneurs

April 22, 2010

Maryland allows companies to put principles before profits; California and Vermont may be next

By John Tozzi

When Ben Cohen and Jerry Greenfield sold Ben & Jerry’s to Unilever (UN) for $326 million a decade ago, they did so reluctantly. They liked the payout but feared the new owners would ignore the social goals famously embraced by the ice cream maker. The board, though, felt it had no choice but to accept Unilever’s offer. “The legal advice was that the primary concern for the directors was the financial interests of the shareholders,” says Greenfield.

Entrepreneurs who want to put principles before profits—even after their companies go public—may soon have the legal cover to do just that. On Apr. 13, Maryland Governor Martin O’Malley signed a law creating legal entities known as “benefit corporations” and giving them greater protection from shareholder lawsuits. California and Vermont have similar bills in the works and legislators in at least three other states, including New York, are considering them. While many entrepreneurs applaud the measures, corporate governance experts worry about the rights of shareholders.

Interest in so-called socially responsible businesses by investors and entrepreneurs has grown in recent years. More than $2.7 trillion —about 11% of all assets under professional management—were in some kind of socially responsible investment in 2007, the latest data from Bloomberg show. More than 30,000 U.S. companies are members of socially responsible or sustainable business organizations, according to B Lab, a Berwyn (Pa.) nonprofit that certifies businesses as socially responsible.

Under the new Maryland law, benefit corporations must spell out their values in their charters, report annually on activities that benefit the public, and submit to third-party auditing of their societal impact. Becoming a benefit corporation, or shedding that status, would require approval of two-thirds of shareholders.

A California bill would have similar provisions for what it calls “flexible-purpose corporations.” In Vermont, a bill creating benefit corporations passed in the state senate and is awaiting action by the lower house. Such measures would “better insulate [companies] from the pressures of short-term ism that dominate the public equity markets,” says Jay Coen Gilbert, co-founder of B Lab, which has certified 296 companies as B Corporations.

Many more privately held companies are likely to seek benefit corporation status. Small Dog Electronics is a 40-employee Apple (AAPL) reseller with two stores in Vermont and annual sales of $20 million. CEO Don Mayer wants to recharter as a benefit corporation if the Vermont law is passed, in part because he is considering selling a stake in the company to raise funds for a third store. Small Dog, which is 15 years old, operates e-waste drives that recycle hundreds of tons of discarded electronics. It also matches customer donations to charities and pays 90% of its workers’ health premiums. It even covers some veterinary care. “This will give us another tool in our quiver to attract the kind of investors that we want,” says Mayer, 61, who hopes to ensure that future owners will preserve the company’s mission after he retires.

Will shareholders want to invest in companies that don’t have a laser-like focus on profit? “Most shareholders invest for the return to them, not for the return to somebody else,” says James J. Hanks Jr., a corporate lawyer at Venable in Baltimore. Others think managers could cite these alternative aims as justification for bad decision-making. “If your goal as a corporation is to better the environment, then you should be working philanthropically,” says Charles Elson, director of a corporate governance program at the University of Delaware.

That’s not the view of Jeffrey Hollender, co-founder of Seventh Generation, a $150 million maker of environment-friendly household products based in Burlington, Vt. Hollender took Seventh Generation private in 2000 after seven years as a public company and recently wrote environmental values into his corporate charter. When the company was public, “brokers promoted the stock on primarily financial metrics: Buy this stock and get rich quick,” he says.

Hollender, 55, says Seventh Generation’s board will consider incorporating as a benefit corporation if the Vermont law passes. He calls the bill “part of a larger transition to a more just, equitable, and sustainable economy. It’s the beginning of creating institutions that support that transition.”

The bottom line: Activists like the idea of protections for companies with social aims, but corporate governance experts worry about shareholder value.

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