In a previous article, we discussed the concept of ethical awareness and the opportunity to consider a new business model whose core purpose would be the promotion of social values.
In particular, we highlighted certain legislative efforts to allow for the creation of companies that blend financial objectives with societal benefits. This type of corporate structure, combining profitability with the promotion of social values, takes various forms depending on the jurisdiction.
In our opinion, an analysis of the various types of socalled "hybrid" companies is essential to pave the way for a Quebec model for businesses with a strong social conscience. With this in mind, we will present some of the European, American and Canadian initiatives associated with the development of this new corporate model.
2. Various models of socially responsible companies
A. United States
In the United States, the Benefit Corporation model was introduced in 2010. Since then, 36 states have adopted legislation allowing companies to benefit from this certification.1 The model was put forward to expand the role of for-profit corporations by allowing them to include social or environmental values in their decision-making processes. These are hybrid companies that aim to make a profit while at the same time advancing non-financial interests.2 In order to adopt the legal form of the Benefit Corporation, American companies must meet the following three conditions:3
In order to adopt the legal form of the Benefit Corporation, American companies must meet the following three conditions:3
- Create a "general public benefit," which is defined as a material positive impact on society and the environment, taken as a whole, from the business and operations of a benefit corporation assessed taking into account the impacts of the benefit corporation as reported against a third-party standard;4
- Take into account the impact of decisions made by the company's governing bodies on stakeholders;5
- Publish an annual report on its social and environmental performance.
With respect to creating a general public benefit, the possibilities are manifold and differ somewhat from one state to another. Examples include providing products or services to low-income people, fighting poverty, protecting the environment, improving human health, and promoting the arts or sciences.6
Furthermore, the need to take into account the interests of various stakeholders in the decision-making process relieves the directors of a Benefit Corporation from liability for financial damages resulting from decisions made in good faith in these stakeholders' interests.7 However, we must keep in mind that shareholders remain stakeholders, and their interests should be considered by management in a balanced decision-making process.
Finally, the production and publication of an annual report outlining performance in relation to the company's social or environmental goals are fundamental obligations of the directors of Benefit Corporations. Indeed, in this way, a certain amount of control is exercised over these companies to ensure that they honour their commitment to creating a general public benefit. To this end, most laws require that the report be evaluated by an independent third-party organization to provide shareholders and the public with reliable information on the company's compliance with its chosen non-financial objectives.8 The choice of this independent evaluator is up to the Benefit Corporation, which may use entities such as B Lab, Global Reporting Initiative, Green Seal, Underwriters Laboratories, Green America or any other entity responsible for developing standards and certifications related to corporate social responsibility.9
In addition, the Model Benefit Corporation Legislation (hereafter "MBCL"), which serves as a guide for states in the development of various legislative tools to govern Benefit Corporations, suggests that an annual report be published.10 Several states have incorporated this suggestion, more or less explicitly, into their legislation.11 This is a fundamental pillar in enforcing sanctions when a company fails to comply with its stated social objectives. Since the primary penalty for non-compliance with reporting requirements is a claim for damages by shareholders,12 the importance of publishing an annual report becomes all the more clear.
In addition to these penalties, a Benefit Corporation's failure to fulfil its social obligations may result in significant collateral damage to the company. Indeed, such failure could lead to a loss of interest by consumers and investors, as well as a deterioration of relations with certain suppliers or other business partners.13 Likewise, if news of such failure is shared on social media, the resulting damage to a company's reputation would not be insignificant.
It should also be noted that only a minority of states provide for the revocation of Benefit Corporation status in the event of an organization's failure to publish an annual report.14 The effectiveness of the system of sanctions, put in place to encourage Benefit Corporations to fulfill their obligations concerning the publication of an annual report, is a matter of controversy; several authors have raised the need to review the way things are done in this regard.15
B. United Kingdom
On the other side of the ocean, in the United Kingdom, the British have adopted a business model called the Community Interest Company (hereafter "CIC") following the 2005 amendments to the Companies Act16 and the entry into force of the Community Interest Company Regulations 2005.17
Like the U.S. Benefit Corporation, the CIC is a hybrid company that seeks to profit from its operations while promoting non-financial community interests. To be designated as a CIC, a company must not be a corporation specifically excluded by law18 and must meet the "community interest test" described below:
A company satisfies the community interest test if a reasonable person might consider that its activities are being carried on for the benefit of the community and 'community' for these purposes includes a section of the community."19
It should be noted here that the notion of community is understood in a broad sense and includes part of the community. Therefore, the benefits do not have to accrue to the community as a whole for the company to meet the conditions of the test. Furthermore, this community may be in the United Kingdom or another country without this impacting the company's eligibility.20
However, the CIC model differs from the U.S. Benefit Corporation model in the allocation of dividends to shareholders. Although in both cases it is permissible to declare dividends,21 the amounts distributed by a CIC are limited since 65% of profits must be reinvested to benefit the community objective set out by the company.22 CICs are also subject to restrictions on the distribution of their assets following dissolution.23
In addition, CICs must publish an annual financial report filed with Companies House and sent to the CIC Regulator. Among other things, this report must explain clearly and precisely how the company's activities have benefited the community.24 The CIC Regulator's role is to determine whether a company may become or remain a CIC, investigate complaints made about a CIC and, where appropriate, take action to address such complaints.25 In this respect, if the company fails to meet the "community interest test," the CIC Regulator may investigate, order an external audit, institute civil proceedings, suspend a director or appoint a "manager" to perform management functions instead of the directors.26
2 BRANELLEC, G. and Lee, J.-Y. Benefit corporation: Faut-il introduire en France une nouvelle forme d'entreprise lucrative ayant l'obligation d'être utile socialement ou environnementalement? in "Recherches en sciences de la gestion," 2015, No. 106, p. 163.
3 Ibid, p. 167.
4 MAY, Cheryl. A new model: the role of the for-benefit corporation in Canada. Toronto, 2017, p. 29.
5 "Stakeholders" include employees, suppliers, investors, consumers and the community at large.
6 BRANELLEC, G. and Lee, J.-Y., supra note 2, p. 165.
7 Ibid, p. 170.
8 Ibid, p. 169.
10 VERHEYDEN, Maxime. Public Reporting by Benefit Corporations: Importance, Compliance and Recommendations, in Hastings Business Law Journal, Vol. 14, No. 1 (2018), p. 57.
11 Ibid, see pages 68, 69 and 71 for Colorado and Minnesota.
12 Ibid, p. 53, 55.
13 Ibid, p. 58.
14 Ibid, p. 71.
15 Ibid, pp. 61-62, see also MURRAY, J. Haskell, An Early Report on Benefit Reports, in West Virginia Law Review, Vol. 118, No. 1 (2015), p. 47.
16 UK Public General Acts, 2006 c. 46. Online: https://www.legislation.gov.uk/ukpga/2006/46/section/6.
17 United Kingdom, Companies House, (n.d.), The Community Interest Company Regulations 2005, 2005 No. 1788. Online: https://www.legislation.gov.uk/uksi/2005/1788/introduction/made.
18 Ibid, part 2, regulation 6.
19 Ibid, Explanatory Note.
20 Companies (Audit, Investigations and Community Enterprise) Act 2004, UK Public General Acts, 2004 c. 27, s. 35.
21 Subject to the restrictions applicable to CICs limited by guarantee, which may not declare dividends. On this subject, see: ESPOSITO, R. The Social Enterprise Revolution in Corporate Law: A Primer on Emerging Corporate Entities in Europe and the United States and the Case for the Benefit Corporation, in William and Mary Business Law Review, Vol. 4, No. 1, February 2013, p. 675.
22 MAY, Cheryl, supra note 5 at 27.
24 The Community Interest Company Regulations 2005, supra note 10, part 7, regulation 26.
25 Office of the Regulator of Community Interest Companies, Regulator's status, role, function and location, Department for Business, Energy & Industrial Strategy, UK, July 2017, p. 4.
26 Companies (Audit, Investigations and Community Enterprise) Act 2004, supra note 20, ss. 41-51.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.