Q: Can you explain the pros/cons for entrepreneurs wondering if a benefit corporation classification is right for them?

Benjamin VandenWymelenberg, founder and CEO

Woodchuck USA

A: A benefit corporation is a new legal form of U.S. corporation established to rectify a perceived problem with current corporate governance — namely, uncertainty as to whether directors and managers are legally bound to increase shareholder value or whether they may legally serve stakeholders’ interests as well.

The main advantage for forming a benefit corporation is potential legal protection of public firms with an established social conscience and mission (e.g., Ben and Jerry’s) that may be targeted for takeover by a firm (e.g., Unilever) without such a mission. Such firms are also attractive to socially conscious workers and potentially attractive to customers.

The downside of a benefit corporation is largely due to the legal and ethical complications of operating a new corporate form. One of the proposed advantages of benefit corporations is their charters’ clarity regarding directors’ fiduciary duties. But this advantage has not been demonstrated, since it isn’t clear that large numbers of directors of traditional corporations are concerned about legal liability when they consider shareholders’ and other stakeholders’ interests.

A second disadvantage of benefit corporations is measurement of progress. Any community will have people with multiple, and often conflicting, interests. Reporting is an important part of all benefit corporation statutes; however, it is required even if the company fails to meet its own standards for success, which may prove embarrassing.

A final downside is the possibility that consumers won’t see the company’s social purpose as more important than traditional quality goods and services.

There is an ethical perspective that suggests that the basic problem is that society does not need a new legal form for corporations. What we need is corporations that serve society by delivering “good goods” that meet the needs of the world. Thus, social benefit does not flow primarily from legal structure.

 

Dawn Elm is the David A. and Barbara Koch (Graco) Distinguished Professor of Business Ethics and Leadership at the University of St. Thomas Opus College of Business.