New ‘Benefit Corporation’ Status Could Benefit Health Care Companies

Companies that deliver health care services and make products in California should be taking a close look at legislation on the governor’s desk that allows creation of a new type of corporation, one that puts social responsibility over profit maximization and shareholder value.

AB 361, by Assembly member Jared Huffman (D-San Rafael), would create a new category of business, one called a “benefit corporation,” or B corp as it has become more commonly known.

Huffman says that California is an incubator for businesses that emphasize social responsibility and environmental awareness but that those businesses lack legal protections for directors and officers who put the greater good above their fiduciary duty to maximize profits for shareholders.

However, opponents like the California Association of Nonprofits and the Corporations Committee of the Business Law Section of the California State Bar say this is a bad idea because it allows directors to select third party standards for determining social responsibility and it creates a fundamental shift in their fiduciary duties to shareholders. Opponents say directors of new corporations, or those that decide to shift from their not-for-profit status, can pretty much ignore shareholders as a B corp.

AB 361 has implications for health-related businesses because a large number of B corps operating in other states are involved in delivery of products or service in health care.

About 20% of companies listed by B Lab — which offers third party certification standards for B corporations — as being registered benefit corporations in the U.S. are in health-related fields such as providing insurance, wellness promotion, medication delivery, medical marijuana production, and development of  products ranging from diagnostic equipment to organic teas for humans and treats for dogs.

B Lab, a Pennsylvania-based not-for-profit largely funded by the Rockefeller Foundation, has been a leading proponent of benefit corporation legislation across the U.S. So far, only Maryland, Virginia, New Jersey, Vermont and Hawaii have enacted B corp laws, but B Lab officials are hoping the major dominoes of California and New York will fall this year.

“The health care industry, in particular, provides goods and services that are intended to benefit society’s health. Because of that, there is a greater desire to go that extra step and consider the company’s impact on society and the environment, not just the products and services they are providing,” said B Lab’s director of policy Erik Trojan.

“Benefit Corps are completely different from nonprofits because they are for-profit entities and have a very wide variety of for-profit purposes and missions.  Unlike non-profits who raise capital through donations, these for-profit entities raise capital through equity investments, the same way as any other for-profit corporation. However, they are looking for statutory release from the mandate that they must consider profit only.”

The B Lab mission statement says:

“Our vision is simple yet ambitious: to create a new sector of the economy which uses the power of business to solve social and environmental problems. This sector will be comprised of a new type of corporation—the B Corporation—that meets rigorous and independent standards of social and environmental performance, accountability and transparency.”

Obtaining B corp certification is similar to becoming fair trade certified or securing the USDA organic seal of approval, according to B Lab officials.

Huffman said 214 companies based in California are already meeting standards of a B corp, but are doing so at some legal risk because company directors remain obligated to put good profits ahead of good deeds. In addition to providing companies with legal protections as they balance the social and environment impacts of their businesses, he said status as a B corp may make companies attractive to social impact investors and to consumers seeking to put their money in socially responsible companies.

“This new class of corporation would be required to create a material positive impact on society and the environment, and in so doing, would need to meet higher standards of accountability and transparency,” Huffman said.

For example, CAP Global, located in South San Francisco and a subsidiary of Napo Pharmaceuticals, says it obtained B Lab certification in December,  2008 in order to accelerate its development of medications that treat chronic diarrhea in children across the world.

“CAP Global became a B Corp to allow Napo to embrace and communicate in a legal manner to our shareholders and other business partners the importance of considering the interests of all stakeholders when evaluating various strategic business opportunities,” a company statement said.

AB 361 would create a new category of corporation, in addition to the more traditional ones of nonprofits, for-profit companies and limited liability corporations.  Its definition of public benefit includes improving public health, as well as others such as serving low income communities, preserving the environment, and promoting arts or sciences.

The bill requires annual public reporting of how companies are living up to new standards they adopt under designation as a benefit corporationThe bill was approved in August by the Senate on a 23-7 vote and later that month approved by the Assembly on a 57-17 vote.

It is similar to SB 201, which was also approved by the Legislature. SB 201 is generally viewed as less stringent than AB 361 and is more specifically aimed at businesses that wish to incorporate for a special purpose like a charitable or public activity.

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