A new flavor of socially responsible investing is opening to clients wanting as much proof as possible that the businesses they put money in are as interested in the general good as in corporate profitability.

Laws permitting the establishment of “benefit corporations,” which have the legally enforceable dual duty of serving the public as well as shareholders, have been put on the books in the last three and a half years in the District of Columbia and 19 states, most notably Delaware, home for the majority of the Fortune 500.

Farmigo was among the first benefit corporation registered in Delaware. Farmigo, which delivers food from farmers markets to pick-up locations in New York and San Francisco, has received most of its start-up money from Benchmark, a Silicon Valley-based venture capital fund. Other benefit corporations registered in Delaware include Plum Organics, a unit of Campbell’s Soup, and Method Products, a home goods company.

In a Practising Law Institute Webinar last week on benefit corporations, Dorsey & Whitney attorney Jeffrey Fromm said benefit corporations offer investors the following social protections above and beyond the norm for regular businesses:
• Benefit corporation directors have a dual fiduciary responsibility to social and shareholder performance.
• The companies have to report regularly to shareholders on their efforts on general or specific public good.
• Often a third-party assessment is required to assess whether the company’s aims are being followed.
 
Fromm said advisors who consult with socially thinking entrepreneurs may want to encourage them to set up their businesses as benefit corporations to attract like-minded investors, employees and customers.

“It can be a marketing advantage,” Fromm said.

For investors, the legal requirements of benefit corporations can protect them against “green washing,” the practice some companies have used to promote themselves as socially responsible but fail to put their words into actions.

What happens after years and no benefit materializes? Misrepresentation? Fraud?

“There is no way of knowing at this point,” he said.

The majority of benefit companies are new businesses rather than firms that have switched their legal structure.

Fromm doubts advisor clients drawn to social investing will limit this activity to benefit corporations. Likewise, Fromm said he doesn’t think there will be socially responsible funds that will only invest in these entities.

The obligation of directors to promote social well-being is one of the many questions about benefit corporations that beg to be answered.

“This opens up, at least theoretically, a new category of shareholder suits claiming that directors did not adequately pursue the public good,” he said.

However, he noted members of the public cannot sue if they feel these businesses are not living up to their promises and the laws make it easy for directors in benefit corporations to win in shareholder litigation.

Another deterrent to these kinds of suits is that shareholders cannot reap financial penalties. The only compensation, said Fromm, is the ability to force a company to own up to its promise of being societally responsible.

As a hypothetical, he said a shareholder of a benefit corporation that is devoted to environmentalism in its charter might go to court claiming it was using high-sulfur coal in a power plant and win a decree ordering the business to use low-sulfur coal in the future.

Andrew Kassoy, co-founder of B Lab, which certifies businesses as socially responsible B corps without necessarily being benefit corporations, said many firms with B Lab’s Good Housekeeping Seal of Approval have funding from venture capitalists including Kleiner Perkins, Tiger Global, Omidyar Network and Union Square Ventures.