Moving towards shared value: the benefit corporation as a hybrid business model

August 13, 2022

The modern corporation has its roots in the Renaissance, when corporations were created to accomplish specific projects of benefit to the public, such as the construction of roads or bridges. Over time, the corporation has evolved into a purely private entity, with the principle purpose of making profit for shareholders. Although the corporation is the world's most common business form today, there is currently much debate about its effects on society and the planet.

A key question is whether corporations should be primarily responsible for making profits, or if they also have a responsibility to create social value. One solution that attempts to bridge the divide across this debate is the benefit corporation. A hybrid between a for-profit and a non-profit, the benefit corporation is a type of business entity that balances social impact with profitability.

How do benefit corporations differ from traditional corporations? Unlike traditional corporations, benefit corporations are legally required to consider the social and environmental impact of their decisions, not just the financial bottom line. One of the distinguishing factors is that benefit corporations do not adopt the shareholder primacy rule, which essentially holds that the interest of the shareholders supersedes the interests of employees and the community. Instead, benefit corporations are required to take into account the impact of their decisions on all stakeholders, including employees, the community, and the environment.

This model is gaining popularity around the world as more and more businesses seek to balance social responsibility with profitability. Benefit corporations have been established in various countries, including the United States, Canada, Italy, Chile and Spain. In the United States, approximately 40 U.S. states have passed legislation authorizing the creation of the benefit corporation. In the EU, Italy was the first member state to create the società benefit legal status; today, more than 475 Italian benefit corporations exist, thanks also to a favorable tax regime.

There are a number of advantages to setting up a benefit corporation. For one, it allows businesses to have a social impact without sacrificing profitability. Additionally, because they are required to consider the social and environmental impact of their decisions, benefit corporations can be more sustainable than traditional businesses.

While each country has its own benefits and requirements, one of the defining characteristics is that the benefit corporation must publish an assessment of how it responds to its social benefit goals as well as the interests of the stakeholders affected by its conduct. Another common theme is the mission statement, ideally developed in coordination with stakeholders, which is used to guide the decisions of the corporation, measure progress towards social goals and ensure that stakeholders are aligned. Another aspect is selecting a board of directors that is committed to furthering the social and environmental goals chosen by stakeholders. Equally, partnering with investors who are interested in supporting the social business model is critical, such as social impact funds, foundations, endowments and faith-based investors.

Despite these advantages, there are some challenges associated with setting up a benefit corporation. One challenge is that the hybrid business model can be confusing to investors, who may not be sure what to expect in terms of returns. Additionally, because the social and environmental impact of business decisions must be taken into account, benefit corporations can be more time-consuming and expensive to run than traditional businesses. Impact measurement, moreover, is also an important area of attention given the number of competing and overlapping standards that vary based on jurisdiction. There is also currently no globally recognized standard for benefit corporations, which makes it difficult to compare different companies. Third-party certification is another important consideration, such as through B-Labs, a non-profit that assesses entity performance on six key social welfare parameters.

The hybrid business model of the benefit corporation appears to be an innovative way to create social value while still generating profits. Indeed, several traditional public companies have chosen to convert from the traditional corporation form to the benefit corporation form. For example, Veeva Systems Inc., did so in 2021 with overwhelming approval by its shareholders. Other companies are choosing to pursue initial public offerings as benefit corporations instead of traditional corporations, including Lemonade Inc. and Coursera Inc.

Nonetheless, critics argue that this type of hybrid model does not do enough to hold businesses accountable for their social and environmental impact, shielding boards from liability and allowing too much discretion in measuring social goals. Others argue that the hybrid model is simply a way for businesses to impact-wash without actually changing their practices. While it is clear that this type of business is still in its infancy, it appears to provide one basis for progress in coordination with social and solidarity economy principles.

CPM