Embedding Sustainability Principles in the Corporate Structure

by Kellie Delaney

Expect to see more discussion about an emerging business entity with the potential to change the game, or at least to change the conversation:  the “benefit” or “flexible purpose” corporation.  The private initiative to certify “B Corporations” (from the nonprofit B Lab) was started in 2007 and has grown to now certify nearly 500 companies, including a few recognizable names like Dansko (shoes) and King Arthur Flour (an employee owned company).  California recently passed legislation to recognize benefit corporations, joining Hawaii, Maryland, New Jersey, Vermont, and Virginia.  The new corporate designation comes with a statutory mandate that directors consider the social or environmental “benefits” of corporate action under their fiduciary duties.

The new paradigm for corporate governance will be most attractive to new entrepreneurial companies that want to align their corporate structure with a mission that emphasizes sustainability, as there are many obstacles for a larger, established company.  For one thing, it requires a fundamental change to corporate bylaws and validation of sustainability claims against a third-party standard, like that established by B-Lab.  Furthermore, there are scant internal systems and tools to measure and report on performance.  But, companies like Puma are exploring new methodologies for how to assess the company’s footprint on water consumption and GHG emissions.

Even without the corporate form, companies like CAP Global in San Francisco obtained certification from the B Lab (in 2009) to enable its parent company, Napo Pharmaceuticals, to embrace a broader goal—to make certain medications available to children in developing countries—without considering profitability.   In states that have adopted a statute like California, benefit corporations will now be statutorily mandated to consider the wider interests of stakeholders, which may include employees, customers, and the larger communities potentially touched by those corporations.

Is the benefit corporation an idea whose time has come?  Opponents include the California State Bar Business Law Section which voiced concerns  that the statute in California was not sufficiently integrated with the existing Corporations Code, would enable directors to ignore shareholder interests, and define sustainability goals based on arbitrary third party standards.  The California Association of Nonprofits hesitated to embrace the idea, concerned that the legislature acted without adequate study of the legislation.  However, it may usher in a new era of corporate governance, and a platform to showcase commitments a company makes to sustainability.  We have seen that third-party certifications, like LEED standards for energy efficiency, can play an important part in building codes.

It remains to be seen how new statutory schemes for benefit corporations will play out (at least 6 states recognize benefit corporations as legal entities), and how enforcement provisions will hold up.  But certifying sustainability goals with a third-party could prove to have marketing cache for companies that formalize their commitment in this way to a larger sustainability mission.   Plus, there is plenty of evidence mounting that sustainability practices are not anathema to profitability.  Just ask the folks at the Empire State Building, GE’s ecoimagination forum, PepsiCo, and Walmart.

Kellie Delaney is a California attorney and writer interested in climate change issues and the potential of clean technologies. In addition to her law practice, she helps develop legal process solutions for M&As, complex litigation, and corporate governance.


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