Benefit Corporations Aim To Help Capitalism Save Itself

NEW YORK -- With corporate profit margins at an all-time high and more Americans out of work than at any other point in the past three decades, it may seem like an odd moment to look to the business world for hope.

But an idealistic coalition of liberals and conservatives want to show that capitalism can be fixed with a new business classification, the benefit corporation, which is required by law to consider both profits and people. Nine states, including New York and California this year, now recognize such corporations, and businesses like the environmentally conscious sports apparel company Patagonia have jumped aboard. Critics argue, however, that benefit corporations muddy the waters of corporate governance -- and that if lawmakers want businesses to do something for people, they should mandate it.

"Traditional corporations don't measure their success by the impact they have on their employees," said Mike Brady, CEO of Greyston Bakery in Yonkers, N.Y., which was the first company in the state to register for the new corporate class. "We measure our success from our number of employees."

Unlike most corporations, whose directors consider finances first, benefit corporations must balance those needs with social and environmental benefits. Greyston had survived as a traditional corporation since its founding in 1982, but took advantage of the state's new law for added protection of its business model.

This year Greyston has grown from 60 to 75 employees, all of whom are hired without respect to their work histories and many of whom come from tough backgrounds -- homelessness, poverty or worse. After starting at what Brady calls "competitive" entry-level wages, employees can work their way up to better salaries. Profits are funneled into an affiliated nonprofit, the goal of which, Brady said, is "to eradicate poverty in southwest Yonkers."

Customers of Ben & Jerry's might be familiar with Greyston: Its brownies are the key ingredient in the Ben & Jerry's flavors Chocolate Fudge Brownie, Half Baked and Dave Matthews Band's Magic Brownies. Because of that partnership, Greyston hasn't had to lay off any employees during the recession.

The Ben & Jerry's connection also helps explain why Greyston quickly registered as a benefit corporation earlier this year. In 2000, the socially conscious ice cream maker faced a problem: It wanted to sell itself to a group of investors led by founders Ben Cohen and Jerry Greenfield, but the French food giant Unilever was offering a better share price. The laws of corporate governance forced the board of directors to sell the company to the better-funded French, lest they be sued for failing to put shareholders' financial interests first.

That's exactly the kind of dilemma that Daniel Squadron, the New York Senate sponsor of the benefit corporation law, was seeking to eliminate.

"We're trying to create an opportunity for a new mindset and trying to create a space for a certain type of entrepreneur, certain type of investor," Squadron said. "It's a new additional opportunity, and it's also one that I think over time will show that you can be socially responsible and also profitable."

Sixteen companies have signed up to become benefit corporations in New York since Feb. 10, according to Squadron's office. B Lab, a nonprofit that has lobbied for more states to adopt benefit corporation legislation, counts 18 that have signed on in California since Jan. 1.

Meanwhile, critics of benefit corporation laws argue that the business of business should be, simply, business.

"For one thing, it is difficult enough these days to hold directors accountable for incompetence in a corporation when it is clear that the ultimate purpose is increasing shareholder wealth," said Daniel Kleinberger, a professor at the William Mitchell College of Law in Saint Paul, Minn. "You might say it would be easier for a camel to go through the eye of a needle than for a director to be held liable in a Delaware corporation."

Kleinberger thinks the benefit corporation classification will only make matters worse: If the board at such a business falls down on its job, it might be able to point to ill-defined "social benefits" to escape liability for its actions.

"One of the best ways to rip people off is to tell them that you're working for the good of God or the good of the environment or the good of whatever," he said.

Benefit corporation laws appeal to both sides of the political spectrum, Kleinberger said. Liberals disappointed with capitalism want to fix it, and conservatives tired of being told it's broken want to show it can work. But rather than creating a whole new corporate form, he argues, legislatures that want to protect the public good should require businesses to take specific actions to that end.

"The way to control market failures is to regulate so as to internalize, for example, the price of your effect on the environment, not to monkey around with the fundamental profit motive," Kleinberger said.

Better regulations would be nice, said Heather Van Dusen, who works on community development for B Lab. But writing new rules takes "a really long time," she said, "and there's no guarantee it'll be effective, because there's always going to be bad actors."

With the number of benefit corporations growing nationwide -- up to 503 in 2011 -- they will start to set an enticing example for others, Van Dusen suggested. Benefit corporation legislation is designed to allow companies to grow, not just to serve as a quirky alternative for smaller businesses. Patagonia, for instance, will likely have more than $500 million in sales this year.

Success stories like that "can actually create pressure on the other folks within the economy," Van Dusen said, so that doing good while making profits becomes "the norm."