NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, April 17, 2013

Blake Jones of Boulder, Colo., is one of the many modern entrepreneurs who say their goals extend beyond increasing the bottom line to such pursuits as reducing child poverty or protecting the environment. But he worries that embracing a mission other than maximizing profits could open the door to shareholder lawsuits because of decades-old corporate governance laws.

A co-founder and chief executive of Namaste Solar, Mr. Jones says his eight-year-old company gives 20% of its annual after-tax profits to local projects, such as a nearby children’s museum and a bicycle-recycling program. It also offers up to $30,000 in solar-system installation grants to schools and other nonprofits. But “according to state law,” he says, “we don’t have any legal protection for doing business the way we do” even though such practices attract customers who also “want to do good.”

A dozen states in the past three years, including New York and California, have adjusted their incorporation laws—the same laws that set the “Inc.” or the “Co.” after a company name—to create a new corporate structure known as a benefit corporation. These structures seek to provide some legal cover for entrepreneurs such as Mr. Jones to consider the local community or the environment in corporate decisions, rather than just their shareholders.

Opponents of benefit-corporation laws say they’re unnecessary because investors can already spend their earnings on good causes, and they will have more of those earnings if the company sticks to maximizing profits. Others worry that the laws strip away corporate accountability to investors. “It’s politically correct to suggest that a company benefit the public rather than its investors. But investors are the public,” says Charles Elson, who teaches corporate governance at the University of Delaware.