Broadening Fiduciary Duty In California

As a journalist, my job is to cut through the spin and tell the truth to the best of my ability. I stand by my original reporting differentiating the Flexible Purpose Corp. and Benefit Corp.--and the very different motivations behind them. 1. Nobody I interviewed regarding the Benefit Corp. even mentioned the issue of making it easier to raise capital from either mainstream or impact investors--a prime motivation behind creating the Flexible Purpose Corp. When I asked Calif. assemblyman Jared Huffman, who is sponsoring the Benefit Corp. legislation, he said he had not even considered it. In fact, it is not at all clear that certification of corporate social responsibility (CSR) standards would help Benefit Corps. to raise money from impact investors. For example: Companies, when they raise money from foundations using program related investments in the form of equity, can find that they have to rewrite their company's mission so that it is in alignment with the foundation's mission. This has nothing to do with CSR standards required of Benefit Corps--whether they are provided by third parties or not. In contrast, there is good reason to believe that it would be easier for social enterprises to access mainstream capital if they eliminate the conflicts inherent in hybrid forms and are able to adopt a Flexible Purpose form, as I described. (The latter can also help with issues regarding foundation PRIs, but that's another story.) 2. Mr. Storper alleges that the Flexible Purpose Corp. allows "green-washing" because it does not require 3rd party certification with respect to a Special Purpose. Hello? There are no such certifications available! (at least right now.) The whole idea is to make room for social innovation, not stifle it-- with yet more bureaucracy. (By the way, there are all kinds of NGOs and other parties working on these issues--and even a website that aggregates such research. See: www.CSRHub.com. It's already getting harder for companies to green-wash.) That said, there are those who suggest that the B Corporation certification (the only standard available to meet the Benefit Corp. requirement) is itself a form of green-washing. After all, it too is self-reported. And again: there is an inherent conflict of interest when an institution providing a certification or rating is paid to do it by the party it is certifying or rating. Enron anyone? How about the mortgage meltdown? Accountants and rating agencies already have these conflicts, which in my mind should be dealt with and abolished. Must we really [i]legislate[/i] the same conflict-of-interest for CSR standards of all things? 3. In describing the Benefit Corp. I distinguished its right of action by shareholders if a company does not comply with its commitment to CSR standards (though I'm not sure what that specifically means.) It's an interesting idea. But Mr. Storper exaggerates the rights of shareholders who own Benefit Corps. After all, how many shareholders really own at least 5% of a company? As such, one wonders whether the Benefit Corp. legislation actually reduces shareholder and beneficiary rights. In any case, a right of action hardly protects a company's mission. Companies that are not inclined toward responsibility would simply do a cost-benefit analysis and let the shareholder sue. They do this all the time regarding things like toxic chemicals that destroy worker health or destroy the groundwater. Remember, too, that shareholders can vote to eliminate Benefit Corp. status at any time. Beyond that, there are messy corporate governance issues written into Benefit Corp. status that I did not address in my piece-- regarding minority shareholder rights, for example. In sum, I think it's great that different parties are working on new corporate forms and I applaud both. But please: Let's stick to the facts. --Ellie Winninghoff

Dear Ms. Winninghoff:As a corporate attorney representing both entrepreneurs and investors interested in growing sustainable businesses, I would like to correct the mistaken impression from your article that Benefit Corporations are somehow less attractive to investors than Flexible Purpose Corporations. This is not true. In fact, for several reasons, Benefit Corporations might actually be more attractive to investors, especially to the growing community of impact investors seeking both financial return and social impact. (Full disclosure: I am co-chair of the California Benefit Corporation Legal Working Group).Current corporate laws do not provide impact investors with the shareholder rights to guard against their early-stage impact investments suffering mission-creep through successive capital raises. Shareholders of Benefit Corporations possess additional rights to hold the corporation accountable to pursue mission as well as margin. Shareholders of Flexible Purpose Corporations do not possess these rights.In addition, Benefit Corporations are required to report on their overall social and environmental performance against an independent third party standard. This is especially important for impact investors who want credible, comparable metrics on the social and environmental performance of prospective investments. Flexible Purpose Corporation legislation goes against the current trend, particularly in the public capital markets, among policy makers and large public corporations serious about sustainability, of encouraging integrated sustainability reporting using credible third party standards.The Flexible Purpose Corporation requires self reporting based on no standard and only for the special project undertaken by the corporation. The proposed FPC legislation in California as currently drafted, would provide the government's imprimatur for a structure that does not protect consumers from being mislead by the corporation about the true nature of all the corporation's operations. For instance a Flexible Purpose corporation could be a terrible polluter, put out shoddy products, treat its labor force poorly, and not be a positive force in its community, but yet, only have to disclose the limited special project it undertakes for social or environmental good. This will lead to consumer confusion rather than rewarding companies that are trying to do right in the entirety of their operations. Furthermore, the Flexible Corporation need only undertake one limited project which, once complete, appears to insulate the company from needing to provide positive social and environmental good on a going-forward basis. The Benefit Corporate form has none of these deformities.For impact investing to scale we need generally accepted standards for measuring impact and we need the legal infrastructure to protect mission-driven businesses. The Benefit Corporation legislation proposed in California provides both.Regards, Jonathan StorperPartner Hanson Bridgett LLP [email protected] (415) 995-5040 Direct (415) 995-3466 Fax 425 Market Street, 26th FloorSan Francisco, CA 94105 San Francisco | Sacramento | North Bay | Silicon Valley