Perpetual argument surrounds the discussion for businesses to play an increased role in social and environmental agendas. While the bulk of commentators once suggested a shareholder profit-maximization approach, recent statutory enactments across the country suggest the emergence of a more utilitarian perspective, where businesses have a moral worth. These developments signify the notion that businesses can generate public benefit through responsible conduct, and that this concept is not mere idealistic discourse.
On May 19, 2010, Vermont Governor James Douglas signed the nation’s second benefit corporation act into law. At the core of the Vermont’s statute is the requirement for a corporation who files under the act to dedicate its business toward creating a general public benefit. General public benefit is defined as “a material positive impact on society and the environment.” This impact is derived from “activities that promote some combination of specific public benefits.” Specific public benefits include:
- providing low income or underserved individuals or communities with beneficial products or services;
- promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
- preserving or improving the environment;
- improving human health;
- promoting the arts or sciences or the advancement of knowledge;
- increasing the flow of capital to entities with a public benefit; and
- the accomplishment of any other identifiable benefit for society or the environment.
Furthermore, an independent third party must measure the impact. The Vermont statute defines a third party standard as a “recognized standard for defining, reporting, and assessing corporate social and environmental performance that is developed by a person that is (1) independent of the benefit corporation and (2) is transparent.” Thus, while the statute establishes broad definitions for general and specific benefits, the third party standard requirement is construed narrowly. As the independent third party measures the public benefit, understanding the various requirements is vital to corporations that file under the Vermont statute.
The Vermont statute first mandates that the third party be independent of the corporation. A third party is independent if it has “no material relationship with a benefit corporation or any of its subsidiaries…either directly or as an owner or manager of an entity that has a material relationship with the benefit corporation or any of its subsidiaries.” A material relationship occurs under three circumstances. First, a material relationship is presumed where the third party is an employee of the benefit corporation, or has been within the last three years. A second scenario arises when an immediate family member of the third party is an executive officer of the benefit corporation, or has been within the last three years. Lastly, if the third party holds an equity interest in the benefit corporation in excess of five percent, a material relationship will be found to exist. If the third party is found to be a part of one of the aforementioned relationships, it will not be considered independent. Thus, the corporation would not meet the requirements of the Vermont statute.
The statute also includes a transparency requirement. A third party will meet the transparency requirement if certain criterion is made publicly available. First, the factors that the third party analyzes in measuring the performance of the benefit corporation must be made available. Additionally the relative weightings of each factor and the identity of the standards’ creator must be publicly disclosed. Lastly, the process by which changes to the standards are made, and under what authority these alterations may be made, need to be revealed. A third party that fails to make their standards publicly available will not be in compliance with the transparency provision. As such, the benefit corporation would not meet the requirements of the Vermont statute.
While the Vermont statute details the kind of third party standard benefit corporations should implement, it does not provide any additional information on organizations that would meet these standards. Based on the language of the statute, presumably so long as the measuring entity assessed the corporation’s social and environmental performance and was independent and transparent, the corporation would satisfy the statute’s requirement for measuring material positive impact. Consequently, Vermont may experience a proliferation in independent certifiers. As such, ingenious social entrepreneurs who are looking to create a brand or image to sell to businesses may be sitting on top of a gold mine of prospective licensing agreements.
Yet the business opportunities generated by the need for independent certification programs may present adverse consequences. Two such consequences are quite likely. First, the increase in third party certification systems that is likely to result as benefit corporations and other hybrid social enterprises continue to develop may confuse consumers. Potential consumer confusion arises in the following scenario: Group A certifies the ABC benefit corporation, but Group B certifies the XYZ benefit corporation. The adoption of numerous certification programs makes it difficult for the consumer to evaluate what goes into a measurement system. Unlike other certifications that have been around for a while and are household names in the field of sustainable initiatives, such as the Forest Stewardship Council (FSC) and the Marine Stewardship Council (MSC), certification programs in mixed-motive business ventures are recent phenomena. While one can certainly argue that the market should dictate which certification regime rules supreme, it will likely take a considerable amount of time. In the meantime, consumers will just have to put their trust into various certification regimes.
A second major consequence of numerous certification systems deals with the motivation behind the statute. Competing certifiers may detract from the main purpose of the Vermont Benefit Corporation Act: to contribute to social, economic, and environmental agendas through profit-making vehicles. While social enterprises are typically concerned with a triple bottom line, the monetary aspect of the bottom line still plays a vital role in the business decision-making process. For example, if Group A and Group B each offer similar certification programs, but Group B charges less for licensing its trademark, the benefit corporation is likely to choose Group B, even if Group A has a superior examination process. As such, the certification program that is most likely to prevail is the certifier that offers services at the best price, and not the certifier who offers the most comprehensive measurement system.
Instead of promoting a new social certification market, Vermont, and other states considering social venture legislation, should look to adopting a single, unitary certification program. This concept is by no means novel. While social enterprises are new to the United States, they have existed in Europe for years. As such, much can be learned from European models. For example, in Northern Ireland, the Social Economy Agency began promoting social auditing in 1996. These social audits involved mentoring various organizations on audit methodology, training, and support. The creation of a networked cluster of local auditors based within a range of organizations, who use common standards, research methodology, and training, is an excellent model for Vermont to base its certification programs on because this method eliminates the issues of consumer confusion and cost-based preference. Additionally, by adopting a single research and training strategy, Vermont could establish a higher bar for certifiers than the statutory language provides. Instead of simply making its standards publicly available, perhaps the certifier would be held accountable by an overseeing company or corporation. If all independent certifiers worked under an umbrella company or agency, not only could consumers access the measurement standards through a single resource, but also the state’s cost in overseeing the measurement system would be greatly reduced.
The enactment of the Vermont Benefit Corporation Act demonstrates a significant shift within the existing legal framework. As society’s consciousness toward social and environmental surroundings has become more vocal, state legislators are looking to business as a viable contributor to social and environmental benefit. However, absent a single certification system, the procedures and accountability of this process may confound consumers. As such, building and maintaining a concrete and uniform certification system will likely be the next obstacle. At the time of this writing eight states were considering enacting benefit corporation statutes. As the explosion of benefit corporation statutes continues to spread across the nation, it will certainly be interesting to follow the development of third party certifiers.
