Benefit Corporations and Small Businesses — Part IV

[This article is written by Rep. Casey Cox (R-Fort Wayne), the author of Indiana’s new benefit corporation statute and an attorney in the Fort Wayne office of Beers Mallers Backs & Salin, LLP, where he practices in the areas of business and corporate matters, real estate, and local government law. As we developed this series, Rep. Cox was very generous with his time and his insights into the new statute.  For that and for this article, we are grateful, and we thank him. — MS]

The last few decades have seen a dramatic increase in the number of investors who not only seek a financial return but also want to invest their money is socially and economically responsible businesses, as well as an increase in the number of consumers who want to purchase goods and services from those businesses. Many of them are frustrated by the number of companies who claim to be good corporate citizens but do not provide the transparency for investors and consumers to prove it.

The Potential Drawback to Transparency

That does not necessarily mean the claims of those companies are false.  Some companies that are every bit as responsible as they say they are may be reluctant to provide transparency out of a concern of inviting shareholder lawsuits when their efforts to be socially and environmentally responsible arguably result in lower profits.  The benefit corporation statute addresses that concern in part by requiring directors to take into account the interests of constituencies other than shareholders, as well as local and global environmental impacts and the short and long term interests of the company.  Part III of this series raised the question of whether requiring (rather than just permitting) directors to consider those factors shifts the risk of lawsuits from those brought by shareholders who are disappointed with the company’s financial performance to those who are disappointed with the company’s social or environmental performance.

Encouraging, Not Punishing, Good Intentions

I discussed this point with B Lab and with the author of the Model Benefit Corporation Act. Their view was that the requirement to consider the factors listed in the code of conduct certainly does not require the board to act on the consideration. I do think it would be advisable in Board meetings to make reference to the factors to consider.  I also think the scope of which a particular Board would undertake those considerations may vary widely.  Also, while a benefit enforcement proceeding could be levied for failure to consider such factors, I think the failure would have to be pretty significant to merit bringing a benefit enforcement proceeding.  In addition, the remedy, I think, would be to simply force the Board to consider it, but not necessarily act or not act on the consideration.  I view the standard of conduct as a reminder to the Board of their purposes and the benefit report and the market itself as the prime enforcement of these standards.

In addition, a benefit enforcement proceeding brought by shareholders is also a derivative proceeding subject to the procedures of chapter 32 of the Indiana Business Corporation Law. (A derivative proceeding is one brought by a shareholder against a director or other person based on a lawsuit that the corporation could bring in its own name, but hasn’t.)  That chapter permits the board to appoint a committee of independent directors to decide whether the corporation should file its own lawsuit to pursue a claim raised in a derivative proceeding.  If the committee decides that it is not in the best interest of the corporation to do so, the derivative lawsuit will be generally be dismissed.

Finally, according to B Lab, there are about 2200 incorporated or converted benefit corporations in the country.  When I asked in January 2015 how prevalent the benefit enforcement proceeding was, they told me they were not yet aware of a single case in which it had been brought.

Casey B. Cox

[Part V concludes this series — MS]