Joining Trend, WI Creates New Business Entity: Benefit Corporations
On Monday, Wisconsin enacted legislation allowing companies to incorporate as benefit corporations. Although this may sound like routine, small-time legislative business, it is just as significant as major policy initiatives being debated in the halls of Congress. On issues from net neutrality to workers’ rights, corporations are perceived to—and often do—engage in practices that maximize profits at the expense of their workers and the general public. Benefit corporations are trying to change that.
In passing benefit corporation legislation, Wisconsin businesses will have the opportunity to ensure that their companies’ decisions provide returns for shareholders, employees, and society at large. In a nutshell, this legislation could revolutionize the way the private sector works.
In 2010, Maryland became the first state to pass benefit corporation legislation. That has led to a wave of states following suit. Wisconsin is the 34th state to pass benefit corporation legislation.
If you haven’t heard of benefit corporations, you’re not alone. However, you may have heard of Patagonia, Kickstarter, or King Arthur Flour, all of which are benefit corporations. A benefit corporation is a for-profit legal entity, like a C corporation or S corporation. But unlike these entities, a benefit corporation’s organizing documents—its charter and articles of incorporation—require the business to give equal weight to all stakeholders (shareholders, employees, community, and the environment) when making decisions. In other words, corporate social responsibility is woven into the company’s DNA. You may have heard of triple bottom line companies—same thing.
This may not sound like an earth-shattering development, but in fact, these entities challenge the shareholder-centric philosophy that has prevailed within the American business community for the past half-century. That philosophy is perhaps best reflected in the words of Nobel Prize-winning free market economist Milton Friedman, who famously stated: “There is one and only one social responsibility of business[:] … to increase its profits.” In other words, companies must value profits above all else and are not bound by a commitment to the people and communities they employ and serve. This ideology came to be known as the doctrine of shareholder primacy, and over the past fifty years, corporate America has shifted toward a more shareholder-centric model of capitalism.
But attitudes among consumers, workers, and even business executives are now changing. Approximately 70 percent of millennials—who hold an estimated $600 billion in annual spending power—say they’re willing to pay more for products sold by socially responsible brands.
Mission-driven companies are also attracting and retaining talent in greater numbers, and boosting productivity. According to a recent Harvard Business Review study, employees that derive a sense of purpose and inspiration from their work are three times more productive than their counterparts. When you consider that disengaged employees cost companies $450 billion to $550 billion annually in lost productivity, it’s apparent there’s a vast supply of unlocked potential in our nation’s workforce.
Business leaders, including executives at Fortune 500 companies, likewise see flaws in the current model of capitalism. Some are now calling for changes in business practices that are consistent with what one might expect from a benefit corporation.
For example, Aetna CEO Mark Bertolini recently told Fortune that “doing nothing, in the current model around capitalism, will destroy capitalism.” In 2015, Aetna took the unusual step of substantially raising the minimum wage for its employees, and created programs to offset worker healthcare costs.
Likewise, Virgin Group founder Richard Branson opposes the notion that shareholders’ interests should always come first. He believes that the key to growing a successful business is putting employees first, customers second, and shareholders third—the logic being that all parties will benefit under this model.
Apple CEO Tim Cook is also calling on businesses to become better stewards of society and the environment. In a recent interview with The New York Times, he expressed frustration with government gridlock and suggested that businesses need to be more proactive in areas where the government has stalled. “I think we have a moral responsibility to help grow the economy, to help grow jobs, to contribute to this country, and to contribute to the other countries that we do business in,” Cook said.
Whether they realize it or not, Bertolini, Branson, and Cook are all calling for business practices that reflect a benefit corporation business model. These new entities stand for the idea that businesses, in the long run, are only as strong as the people and communities they serve and on which they depend. Our current model of capitalism has denied too many Americans a fair share of the nation’s wealth creation and economic prosperity. Benefit corporations seek to bridge the gap.