New Law Puts Benevolent Corporations in Protected Category


Seems like this could be a pretty slippery slope, but time will tell. As this article in BusinessWeek relays, interest in socially-responsible corporations has gained a great deal of momentum as generations both young and old seem to become more affiliated with causes (charities, environment, etc.). Maryland has put a law in place offering more protection to said businesses from shareholder lawsuits, and California may be following suit. The concept is certainly well-meant, but could it prove misguided? Or have we found the nexus where capitalism and causes meet? Please offer your thoughts in our comments section regarding the viability of such measures as you see it:

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-term­ism that dominate the public equity markets," says Jay Coen Gilbert, co-founder of B Lab, which has certified 296 companies as B Corporations.

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