State regulators need to have more oversight of new types of companies that claim to have a social or environmental mission, legal experts say.
About 75 companies have registered as "benefit" or "flexible purpose" corporations since Gov. Jerry Brown signed two bills into law a year ago that created the new entities.
The law is intended to shield businesses from lawsuits as they pursue social objectives, such as preserving the environment, in addition to making a profit. Traditional for-profit companies, proponents argue, could face shareholder lawsuits if they prioritize social goals at the expense of profits.
The companies that have taken advantage of the new law range from large businesses like Patagonia, which has a long-standing history of supporting environmental causes, to startups like Powerhive in Oakland, which is working to provide clean energy to households without electricity.
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But private attorneys at a National Association of State Charity Officials conference recently told an audience of state nonprofit regulators that they had concerns.
These new classifications of companies are not monitored by government agencies to ensure compliance with statutory requirements, said Robert Keatinge, an attorney with Holland & Hart, and Victoria Bjorklund, an attorney at Simpson Thacher & Bartlett who specializes in tax-exempt organizations. Without independent monitoring, there’s greater risk of abuse and the potential for investors to be misled, they said.
Of the 75 companies that have registered since the law went into effect in January, 60 firms have opted to become benefit corporations, which are required to meet third-party social, environmental, accountability and transparency standards. The other 15 are flexible-purpose corporations. As the name suggests, those corporations have greater flexibility and fewer requirements that ensure they are dedicated to a social or environmental mission.
Some critics have suggested that flexibility could enable bad actors to mislead the public into thinking they’re supporting a company oriented toward social and environmental goals.
“I think there are going to be bad actors in both camps," said Erik Trojian, director of policy at B Lab, a nonprofit that certifies benefit corporations and has advocated for legislation similar to California's across the country. "I think there’s greater protection in the benefit corporation model."
Keatinge thinks the benefit corporation model could give investors a false sense of security.
"My concern is that it seems to have the stamp of approval of the state," he said in an interview. "If somebody is going to make an investment based on state law, the state should do something to make sure they’re in conformity with it."
But Trojian thinks concerns about a lack of state regulation are misplaced. Just like traditional corporations, he said, these new kinds of companies are regulated by shareholders.
“That is a private matter between the shareholders and the directors. This has nothing to do with the public. Not a dollar of public money goes into this,” he said.
About 17 states have passed laws that enable corporations to pursue social goals, but most do not have specific regulatory requirements. Illinois is the only state that requires these companies to register with the attorney general's office, according to Keatinge and Bjorklund.
Angie Needels registered her personal chef business as a benefit corporation in June.
Her business, MamaKai, is based in Berkeley and provides meals and educational services for families who are preparing for or recently had a baby. Needels said she originally wanted to start her business as a nonprofit, but found the upfront requirements were harder than becoming a benefit corporation.
“I have a lot of clients that come to me and say having a baby is really expensive," she said. She's looking into whether she could access grants that would enable her to serve low-income families in addition to her regular clients.
In addition, although her business is small now, she wants to ensure that if she brings in shareholders, she will be protected from lawsuits that argue that she has put the public benefit ahead of profits. “As my business grows, I didn’t want someone else to be able to come in and change my policy,” she said.
She’s now in the process of getting certified by B Lab.