According to the award-winning documentary, “The Corporation,” if a for-profit corporation were a human being, it would be psychopath. The reasoning behind this conclusion is that a corporation only acts in its own self-interest and feels no guilt. In fact, the corporation is required to act in its shareholders’ best interest and to maximize profits, even at the expense of customers, employees or the environment. Similarly, a corporation can only take action to benefit a third party if the ultimate motivation is maximizing shareholder profits. For example, if the Apple board of directors decides to donate money to the Make-A-Wish Foundation, this would only be permissible if the directors believe that the donation improves Apple’s corporate image or somehow benefits Apple’s shareholders. But if the Apple board donates more than necessary, it could be sued for violating its fiduciary duty to shareholders. On the other end of the spectrum, a non-profit corporation has a charitable purpose, but it cannot be run for a profit.
Beginning January 1, 2012, the State of California has given business owners two new, cutting-edge options for corporate structure: the flexible purpose corporation and the benefit corporation. These corporations are both operated for a profit (and will be subject to for-profit state and federal tax treatment), but their characteristics fall between the traditional for-profit corporation and the non-profit corporation. Both of the new types of corporations give shareholders the opportunity to earn a profit while simultaneously giving directors the freedom to make decisions based on maximizing shareholder value and social, environmental and community purposes.
A flexible purpose corporation is a company that has a special purpose or mission in its articles of incorporation. Directors are then allowed to consider the best interests of the corporation as well as the special purpose when taking action. Directors and officers must distribute an annual report to shareholders that analyzes the previous year’s efforts in working towards the corporation’s special purpose. The annual report must also include financial statements showing cash flow related to the special purpose.
A benefit corporation is even closer to a non-profit corporation in that directors are required to consider the interests of the company, shareholders, employees, customers, community, and environment when taking any corporate action. Each benefit corporation must have the purpose of creating a “general public benefit,” or an overall positive impact on society and the environment. A benefit corporation also has significant accountability obligations. Each company must select a “third party standard” – created by an independent third party – for “defining, reporting, and assessing overall corporate social and environmental performance.”1 The corporation will also be required to make an annual report, most of which must be publicly available on its website. Patagonia, the first major company to publicly announce the use of the benefit corporate structure, was converted from a corporation to a benefit corporation in January 2012. The outdoor clothing maker was a prime candidate to use this corporate structure because it has donated some of its profits to charitable causes each year since 1986.
Because the flexible purpose corporation and the benefit corporation are both so new, it remains to be seen how popular they will be and how companies using them will balance shareholder returns with social, community and environmental concerns. However, these new corporate structures are innovative additions to California corporate law. They give entrepreneurs and shareholders the opportunity to make social change while simultaneously pursuing a profitable business.