CASE STUDY 12.2 The Public Benefit Corporation Corporate officers, This fiduciar

Question

CASE STUDY 12.2 The Public Benefit Corporation Corporate officers, This fiduciary duty can into as we saw in Chapter 10, serve the financial interests of ystem or restoring the environment. Shareholders m prove come into conflict with other goals, like helping to i the panies should focus less on corporate responsibility and more on the bottom ft Com. example, Costco, which pays it employees well and provides them with he o under constant pressure from Wall Street to pay workers less in order to and raise the stock price. In recognition of the fact that many companies have other goals besi Delaware, New York, a new category of corporation called the public benefit corporation. Public b rations (BCs) are for-profit entities that create a material positive impact on society an the environment. Their social purposes are written into their corporate charters, whid enables them to pursue social as well as financial objectives. To maintain their stand BCs must file yearly reports on how well they are reaching their social or environmental goals. Alter Eco, Plum Organics, Method, and New Leaf Paper are some of the firms that have registered as public benefit corporations in Delaware. Yves Chouinard, found the Patagonia outdoor clothing company, was the first corporate leader to file under California's public benefit corporation law. Patagonia is known for its strong envi mental emphasis, giving 1 % of sales to environmental causes, manufacturing recyclable clothing, funding a national park in Chile, and encouraging consumers to only purchase their products if they really need to do so. Chouinard registered the company as a BC because he feared that when he died, his successors might set aside the sustainability values and practices of the company in favor of higher financial returns. es California, and a number of other states have passed laws Benefit corporations aren't for everyone. The vast majority of companies will continue to focus on the bottom line and investors will continue to demand high returns. (Delaware law requires that existing publicly held corporations receive 90% stockholder approval before changing to BC status.) Some worry that managers will use the 8 designation as cover for poor business decisions. Other observers are leery of the annual rpoting requitement arguing that measuring social progress is much more compe than tracking financial objectives. It may take years to demonstrate progress goals and there is no "one size fits all" standard that applies to all types of p Then, too, tis not clear what happens to companies that fail to meet their tives in a given year on socia Since benefit corporations are a recent development, it remains to tive they will be in attracting investment and fulfilling their stateoses,rate social proponents are optimistic, saying that BCs are the latest development i responsibility and should be attractive to the millennial generation, many blighted be seen how effec n co social entrepreneurs who start businesses to meet social ne neighborhoods and training unskilled workers. Delaware governor Jack r that benefit corporations will increase investment, "helping to build pub are of trust in busin

Explanation / Answer

What advantage or disadvantage do you see in public benefit corporation?

A traditional business exists solely to maximize profit, while a non-profit uses revenue to achieve goals rather than increase profit. How can the ability to seek profits while also considering the potential benefits to society effectively combine? Benefit corporations fulfill such a need.

A benefit corporation differs from a typical for-profit corporation by allowing the entity to consider how it can provide a greater good for the public, otherwise known as a public benefit. An advantage of benefit corporation legislation is that it allows the entity more freedom to provide a benefit to society by not being required to have a single goal of maximizing the profit of its shareholders. Although these companies still strive to make profits to continue their business, this legislation allows them to consider society's needs as well as the needs of their employees in conjunction with the desire to make a profit. The benefit is that this change in corporate purpose allows entrepreneurs and investors to promote social interests while still generating an investment return.

tHE POTENTIAL DISADVANTAGES OF A BENEFIT CORPORATION IDENTITY

Expanded reporting requirements are a significant drawback to operating a benefit corporation. Transparency is an important aspect for a benefit corporation, and an annual report to the shareholders and the public is required. Included in this report is the Corporate Director's opinion on whether the benefit corporation operated within its specific purpose and if it did not, the reasons why.

THE DIFFERENCE BETWEEN A NOT-FOR-PROFIT ORGANIZATION AND A BENEFIT CORPORATION

To be clear, benefit corporations are not not-for-profit organizations, and any investments made in benefit corporations are not tax deductible. The benefit corporation is a new type of entity that allows companies to be socially responsible while still generating profits. Corporations that have adopted this model include King Arthur Flour Company, whose corporate mission is environmental sustainability, and Patagonia, a company working to promote safe, fair, legal and humane working conditions.

THE POTENTIAL IMPACT ON NOT-FOR-PROFIT ORGANIZATIONS

While there is concern that benefit corporations will impact contributions to traditional not-for-profit organizations, those that are looking for a tax deductible contribution will continue to invest in traditional not-for-profits. Additionally, benefit corporations can make contributions to other not-for-profits in order to further their goals as a company as well as provide funding to current not-for-profits. However, only time will tell if these entities will divert charitable giving away from the traditional not-for-profit.

WOULD YOU BE MORE LIKELY TO PURCHASE GOODS AND SERVICES FROM PUBLIC BENEFIT CORPORATION THAN TRADITIONAL CORPORATION? WHY OR WHY NOT

A benefit corporation is a new legal tool to create a solid foundation for long term mission alignment and value creation. It protects mission through capital raises and leadership changes, creates more flexibility when evaluating potential sale and liquidity options, and prepares businesses to lead a mission-driven life post-IPO.

Benefit Corporations: 1) have an expanded purpose beyond maximizing share value to explicitly include general and specific public benefit; 2) are required to consider/balance the impact of their decisions not only on shareholders but also on their stakeholders; and 3) are required to make available to the public, except in Delaware, an annual benefit report that assesses their overall social and environmental performance against a third party standard. Such report does not need to certified or audited by a third party, but use the standard as an assessment tool.

Becoming a benefit corporation gives entrepreneurs and investors an additional choice when determining which corporate form is most suitable to achieve their objectives

WOULD YOU INVEST IN A PUBLIC BENEFIT CORPORATION EVEN IF IT MEANS THAT YOU WOULD EARN SIGNIFICANT LESS? WOULD YOU INVEST IN A MUTUAL FUND THAT ONLY HELD SOCIALLY RESPONSIBLE COMPANIES?

"There is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." While that may seem like an extreme view, Friedman does have a point. As the owners of a firm, shareholders hire managers to act as their agents. When managers focus on profit maximization, they also tend to maximize shareholder wealth.

The trouble is that firms do not always bear the full social costs of their actions. Economists call these phenomena negative externalities. For example, a coal power plant that expels its waste into the atmosphere could increase the prevalence of acid rain and make the surrounding area less desirable to live in, potentially hurting property values. Because the power generating firm does not directly bear these costs (in the absence of regulation), it may produce more electricity from coal than is socially optimal. So a narrow focus on profit maximization does not always lead to the most efficient social outcome. A strong reputation for social responsibility may help firms attract and retain better talent, which could further sharpen their edge. It's attractive to many people to be part of an organization they can be proud of and to feel that their work is making a difference

Are there certain companies or types of business you would never invest in

1. Trucking

The trucking business is a highly profitable business with reliable returns on investment for every business owner. Due to the high profitability of this segment, you'll find the business model a bit competitive and capital intensive. But the mindset that will help you succeed and stay miles ahead of others is to start first as a business owner and second as a trucker.

As a business owner, you will realize that the success of your business does not revolve only around your trucking business; that's merely a tool to achieve your aim of profitability. The upshot is that all aspects of your trucking business, including legal concerns, customer satisfaction and accounting, are equally as important as keeping your main equipment running.

2. Drop shipping

Drop shipping is the new ecommerce of millennials. What this requires is that you create a professional ecommerce website using a SaaS platform like Shopify. Your virtual store then helps customers make purchases for items on your website, and all you have to do is forward your buyers' information to the product seller, which will have the goods shipped to them.

3. An elearning website

Becoming successful in life means that people have to study. While most of the extra learning they need to brush up their skills may not come in the form of a formal education, those students will still pay a premium to acquire knowledge.

You can start a website that helps them acquire that knowledge -- either by being a coach yourself or by partnering with experienced coaches and university lecturers. You can even branch away from educational learning and focus on profit-making online tutoring and training.

Some great examples of highly profitable online learning areas you can focus on include:

4. Ecommerce

With ecommerce predicted to top £60 billion in the United Kingdom in 2016, there's no doubt that ecommerce is one of the biggest business you can invest in. You might start by partnering with companies with products they want to sell. Having them offer discounts will help your online store quickly gain ground and win many customers.

Starting an ecommerce business, however, cannot be done on the side, as this model requires a lot of attention once demand starts to soar as growth kicks in. You also can't expect to start reaping profits immediately: Even ecommerce giant Amazon took a while to reach profitability.

Do you think that annual reports will be enough to guarantee that benefit corporation fulfill their objective to create a " positive material impact on society and the environment "

Human resources: The development of protection of people. For example: providing a safe work environment, fairly compensating workers, offering training opportunities, refusing to support organizations that engage in child labor or slavery.

· Community, cultural, and societal involvement and philanthropy. For example: respecting the culture and rights of indigenous people, obeying laws and regulations, giving back to the community through donations, foundations, and volunteerism.

· Environmental protection, waste reduction, and sustainability. For example: restoring biodiversity, eliminating waste, treating animals humanely, recycling, reducing energy and water use.

· Product, consumer, and service contributions and protections. For example: protecting consumers, using renewable materials in manufacturing, providing truthful information about the environmental impacts of products, buying in a socially responsible manner from minority, indigenous, and women-owned businesses.

A third approach ties CSR strategies to the particular stakeholder groups.23 These are various CSR actions directed at six of the stakeholder groups identified earlier in the chapter.

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