Building Companies With a Social Purpose

March wasnt the month for broken windows or occupied waterfronts. The anti-Wall Street action that took place on March 31, 2012, took only a few seconds but it was the culmination of two years of concentrated deliberation and effort by a thirteen-person group of corporate attorneys named the Corporate Act Revision Committee.[1] When Governor Gregoire signed HB 2239 on that last day of March, she effectively created[2] the first alternative for-profit corporate form in Washington States historythe Social Purpose Corporation, a for-profit that can be chartered to create social and environmental good.

Traditional corporations are expected to prioritize the creation of shareholder profits above other considerations, such as employee benefits, environmental care, or community impact. By establishing Social Purpose Corporations, Washington State is signaling that companies should have the flexibility to make decisions based on the effects the company has on all stakeholdersthat is, any person or entity affected by the corporations decisions. Because the legislation is permissive not proscriptive, SPCs are required to create general social benefit but are not told what that has to be or how to achieve it. [3] [4] This distinguishes it from a similar blended for-good/for-profit structure called the Benefit Corporationa popular structure that has been adopted or is pending in 15 states.

In addition to being required to create general public benefit as a result of their corporate actions, SPCs have the flexibility to name a second specific benefit, should the founders or initial shareholders desire to hold themselves to a higher standard.[5] Articulating a specific social purpose in conjunction with a general social purpose enables founders to ensure that future decisions of the corporation are in line with the founders’ specific vision and not merely in line with the broad strokes of the general purpose requirement. For instance, founders of a local restaurant could conceivably structure as a social purpose corporation by naming the general purpose of promoting the long-term welfare of their employees and the specific purpose of only employing homeless and disadvantaged persons.

A third important aspect of the SPC, in addition to the general social purpose requirement and specific purpose option, is that, once established in the articles of incorporation, social purposes of the SPC may only be altered, amended or eliminated by a 2/3rds majority of the shareholders.[6] This requirement is intended to anchor the social purpose through sale, merger or incorporation of the SPC. This will make it more difficult for investors to shift companies away from the original beneficial goals of the founders.

There are certainly Milton Friedman adherents likely to be critical of the SPC, but the most vocal critique has come from within. Supporters of the Benefit Corporation (the alternative blended value legal structure) view the SPC as lacking teeth. Although an SPC is required to publish a report on its efforts to promote a social or environmental purpose or purposes,[7] the report is not required to meet third party standards unless the company opts into that requirement. This differs from a Benefit Corporation, where outside review and approval is necessary to maintain its special designation. Further, under the proposed SPC statutes, directors and officers of a company are permittedbut not requiredto consider one or more social purposes in making decisions.[8] This is unlike Benefit Corporations, who are mandated to consider the impact of their decisions on stakeholders. Finally, while Benefit Corporation legislation allows shareholders to sue a company for failing to achieve a material positive impact on society and the environment (called a benefit enforcement proceeding), the proposed SPC legislation makes clear that directors are not liable for any action taken as a director, or any failure to take any action regarding achieving social purposes.[9]

The state will officially begin to recognize SPCs on June 7^th of this year, a few companies have initiated the conversion process already and others are likely to follow soon. As our economy rebounds and we look for ways to promote companies that value long-term growth, sustainability, and positive value for all stakeholders, the Social Purpose Corporation could be a powerful vehicle for Washington based companies but the Benefit Corporation should not be overlooked as an additional vehicle for the common good. The shift toward what Howard Behar calls capitalism with a conscience has to start with executives, shareholders, and customers discovering internal motivation to do the right thing; legal structure only codifies and protects relationships.

BRIAN HOWE is the founder of the law firm Vox Legal, PLLC, of counsel with Apex Law Group, an adjunct professor at Seattle University School of Law, and the Managing Partner of Hub Seattle. Vox Legal, PLLC is the only certified B Corp law firm in Washington State and limits its practice to providing outside general counsel to other social enterprises. Reach Brian at [email protected] or 206.659.6491.

[1] The Corporate Act Revision Committee (CARC) is chaired by John Reed, of Davis Wright Tremaine, and is a committee of the Washington State Bar Association. CARC developed the proposed legislation which became the Social Purpose Corporation (HB 2239).

[2] Washington State Governor Christine Gregoire signed HB 2239 into existence on March 30, 2012, but the State will not begin to officially recognize SPCs until June 7, 2012.

[3]House Bill 2239, 62^nd Legis. 3, (proposed January 10, 2012) (to amend RCW 23B.01.400 and 23B.04.010).

[4] Note that Californias Flexible Purpose Corporation legislation requires a corporation either be (1) dedicated to charitable activities such as would qualify a nonprofit public benefit corporation or (2) be dedicated to the purpose of considering: (a) employees, suppliers, customers, and creditors; (b) community and society; or (c) the environment. This second option is largely similar to the SPCs General Purpose requirement except that: the FPC includes creditors as a stakeholder group that may be considered, and the FPC permits community and societal considerations whereas the SPC would specify that such community/society considerations may be local, state, national or global in scale.

[5]House Bill 2239, 4, (proposed January 10, 2012).

[6] Id. at 10.

[7] Id. at 16.

[8] Id. at 6(2).

[9] Id. at 6(4).