Few people are expected to take advantage initially of a new type of corporation that aims to blend private profits with public good, according to an adviser with the Secretary of State’s Office who helped draft the new law.
About 30 new public benefit corporations will probably form in the first two weeks after the law takes effect Jan. 1, Bert Black, a legal adviser with the office, said Wednesday during an event at the University of St. Thomas. Black expects about five more to form the rest of the year.
By contrast, the state had a total of 58,260 new business filings in 2013, of which 5,889 were Minnesota business corporations and 29,175 were Minnesota limited liability companies, according to the Secretary of State’s Office.
Public benefit corporations pursue both profits and social causes that are spelled out in their articles of incorporation. They are subject to the same laws as other Minnesota corporations and are not exempt from any taxes. They must also file annual reports on the progress they’ve made toward their social mission, which Black said should hold them to their mission.
“We believe in guilt and shame,” he said.
Minnesota is one of 24 states with such laws on the books since Gov. Mark Dayton signed the enabling legislation this session. The new types of companies arose to support so-called “social entrepreneurs” who wanted to create for-profit companies that aim for more than just maximizing profits.
Before the new law, social entrepreneurs were vulnerable to litigation without costly and time-consuming planning. Case law dating back to a 1919 lawsuit between Henry Ford and the Dodge brothers, who would go on to launch a rival car company, has determined that companies operate for the benefit of their shareholders, not larger social goals.
Opposition to those alternative goals is usually minimal when companies are owned by just a few people who are on the same page. But Black said the rise of institutional investors has created an “unrelenting pressure” on quarterly margins.
Even nonprofit organizations focus on maximizing returns and safeguarding their funds, said Kim Lowe, a shareholder at the Minneapolis-based Fredrikson & Byron law firm who drafted the legislation.
Minnesota’s new law indemnifies public benefit corporation executives from shareholder challenges when a social purpose is emphasized over profit because they knew beforehand that the company had other goals.
“They want to do good in the world — and they want to do it without getting their butts sued off,” Black said.
Despite the passage of such laws, 700 public benefit corporations have formed nationwide, according to the B Lab, a nonprofit that tracks public benefit corporation legislation and assesses how well companies are meeting social entrepreneurship goals.
Among the nation’s public benefit corporations are big and small companies including Ventura, California-based Patagonia. The retailer has committed to fulfilling a “general public benefit,” as measured by a third-party standard.
Wayne, Pennsylvania-based B Lab’s “B Corporation certification” is one of those standards. The certification is a voluntary verification of social entrepreneurship that’s distinct from the legal framework Minnesota’s new law provides. Companies need a score of 80 out of 200 on a B Lab assessment that examines governance, treatment of workers, impact on the environment and relationship to the community. The median score is 80; Patagonia received 107.
In Minnesota, companies will set their own goals and measure progress against those goals, although they can choose to use a third-party metric.
Holly Ensign-Barstow, a policy associate at B Lab, said in an interview that one of the organization’s goals is to ensure people know about the option to form a public benefit corporation.
“I think that it’s hard to get the word out,” she said.
Spreading the word among the CPAs and attorneys who advise entrepreneurs will be important. Lowe noted that there will be further education on the new law for attorneys later this year.
Chris Hanson, CEO and co-founder of thedatabank, which sells Web-based software for nonprofits, said colleges and other institutions also need to provide training on social entrepreneurship because it requires a different way of thinking about doing business. Hanson, whose Minneapolis-based company has received the B Corporation certification, described his accountants and lawyers scratching their heads over some of his decisions when he first started.
“As social entrepreneurs, we don’t make decisions the same way most businesses do,” he said.
Black shrugged off the low forecast and said any new entity starts off slowly. He expects that millennials using social media to rally around socially conscious companies will eventually cause public benefit corporations to take off. These companies will have “General Benefit Corporation” or “Specific Benefit Corporation,” or the abbreviations GBC and SBC, added onto their legal name, which could help with branding.
That’s exactly what Jack Ray is afraid of. Ray, who’s married to state Sen. Patricia Torres Ray, DFL-Minneapolis, and works with a Colombia NGO on similar efforts, worried that the distinction could become watered down as corporations use it for branding.
“I think a lot of corporations are going to want to be on this train because they’re going to want to sell to millennials,” he told the audience.
Lowe added that she could see for-profit universities seeking public benefit corporation status since the for-profit brand has been so tarnished.
Black said public benefit corporations could be bigger 40 years down the road than anyone expects.
“I do think, just like the LLC, it’s going to build over time,” Black said. “I think we’re going to see an increase as it becomes more popular and more well-known.”