California Law Creates New “Flexible Purpose” Category of Positive Impact Corporation

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Even as Occupy Wall Street cuts a broad swath of attention through business, government and media, a revolutionary model for corporations to “do good” better was just signed into law by California Governor Jerry Brown. Assembly Bill 361 creates two new classes of corporations that are legally required to pursue a positive impact on society and the environment: Benefit Corporations and Flexible Purpose Corporations.

The new legal structures widen traditional corporate shareholder value to include stakeholder value, extending to environmental and social responsibility and increased transparency and accountability.[more]

“Entrepreneurs, investors and consumers are calling for this type of legislation,” says Assemblymember Jared Huffman (D-San Rafael), who sponsored the law. “They believe this is the start of something transformational. AB 361 rolls out the welcome mat for businesses and investors ready to create high quality jobs in California and make economic and social contributions that will improve the quality of life in communities across to our state for years to come.”

California is the first state to pass the Flexible Purpose Corporation model but the sixth state to approve the Benefit Corporation classification. California joins New Jersey, Virginia, Hawaii, Vermont and Maryland that officially allow Benefit Corporations, while similar legislation is pending in Michigan and New York:

By mandating that corporations only focus on profits, the current system almost assures a negative outcome for society. By removing mandating stakeholder primacy and increasing transparency and accountability, directors are freed up to use the market as a force for good without risking suit from their shareholders.

MOOMilk of Maine, perhaps the best known benefit corporation, is a group of small dairy farmers who use the structure to leverage conventional capital as well as philanthropy while honoring a social mission beyond pure profit.

Frontline SMS is a community interest company (C.I.C.), a British designation that has influenced the evolution of U.S hybrids in corporate law. C.I.C.’s are required to have a social purpose, and their locked assets limit shareholder and employee distributions.

Frontline is a spin-off from California non-profit Kiwanja.net that creates technology for non-profits. “The value proposition is inherently defined in terms of social benefit,” said Sean Martin McDonald, executive director of Frontline. “That reduces a lot of concerns you might normally have from traditional financial investors by making it clear that your mission is primarily social, not primarily about making profits.”

The new legislation is roiling waters on both sides of the aisle: charities are concerned about increasing competition for limited philanthropic dollars while corporate lawyers fear an intrinsic conflict of interest that skews trustee duties.

As more states embrace laws that address the divide between business and non-profit, Venture Beat’s Kyle Westaway suggests the best way for companies to make the choice:

You should use either of these new forms if you are serious about operating a sustainable business, and if you are comfortable enough to allow the public to see how well you are performing. If you just want to greenwash your business, or want to look socially conscious without actually changing your core business model, then these new classes of corporations will just make you look ridiculous.

I think the best analogy is, if you’re going to be naked, you’d better be buff.

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