Businesses to shed corporate ethics
The primary goal of for-profit corporations is to maximize profits for shareholders, but with a recently passed Oregon law, some corporations may soon become a whole lot friendlier.
Benefit companies are a new type of limited liability company (LLC) or corporation that operates under a recently passed state law. This law uniquely gives corporations with shareholders the ability to make decisions that consider the impact on society and the environment instead of just profit. Currently, because a corporation’s shareholders can sue or vote against actions which affect share price, directors tend to focus on profit. Conversely, shareholders in benefit companies judge business performance based on goals, not profits.
“Benefit Companies, like Gilded Rogue, want to shed the corporate mindset by changing the way businesses operate. Instead of focusing solely on profits, we make business decisions that best serve the interests of our employees, our communities, our suppliers, and our investors,” Gilded Rogue representative Ann Smith said via email on behalf of Elizabeth Bauer, president and founder. Gilded Rogue, which recently opted to become a benefit company, is an Ashland-based consulting and business acquisition firm.
Benefit company LLCs and corporations must still provide transparency through third party assessments or audits.
Because benefit company corporations are new, it is unclear how successful they will be in driving social change. While these companies are required to be assessed by third party standards, they are not currently legally required to meet those standards or be certified by a third party in order to maintain benefit company status, according to B Lab, a third party assessment organization.
One confusing aspect is that any corporation can become certified by B Lab and other organizations for meeting environmental and social standards, but this is not the same as being a benefit corporation (or “company” in the case of Oregon). A benefit corporation is an actual business entity in the states where they exist; however, the certification process by B Lab and other organizations can still be used to meet the third party assessment requirement that benefit companies need to fulfill.
Because benefit company corporations are able to pursue nonprofit motives, it puts these companies at a disadvantage in comparison to corporations who just donate to nonprofits.
According to Gary Gray, UCC business instructor, corporations already do social good today because they are incentivized by brand-image and the tax credits given by the Internal Revenue Service for donating to nonprofits.
Benefit companies can also invest in social change with donations, but the government does not reward them because of it.
And yet, benefit companies clearly need to earn a profit so they can operate and grow. This means benefit corporations can provide income to shareholders, but investors must be willing to support these companies.
“The investors want a rate of return on their invested money,” Gray said.
One way to reassure investors could be to set priorities or restrictions in a benefit corporation’s bylaws in order to limit the extent of nonprofit making activities the company can make.
While corporations benefit more from making nonprofit donations rather than changing their model, the added freedoms of benefit corporations give company leadership the ability to better consider employee concerns, which may lead to more livable wages.
Benefit companies may prove successful in the future, but such success will largely be determined by investors and tax breaks.
“From an accounting standpoint, it is still up in the air until the IRS weighs in on it.” Toni Clough, UCC business instructor, said via email.