Benefit Corporation Cases
Benefit corporations are a promising development in social enterprise an an exciting way to rethink conventional business models. However, the form is in its early stages and its unique problems need to be discussed and studied. Below are several miniature hypothetical cases studies created by the Institute for Business and Professional Ethics that seek to foster discussion about benefit corporations with respect to both their advantages and shortcomings.
The Stakeholder Issue
Office Solutions is a Baltimore-based benefit corporation founded in 2012. The firm sells of office supplies and equipment to businesses and government entities. As a benefit corporation, Office Solutions needed to state in its charter the benefit it is committed to pursing. As a benefit corporation, the stakeholders of Office Solutions’ social mission are theoretically as important its shareholders, allowing the company to prioritize its social impact over profits. Office Solutions donates a share of its profits towards organizations that address local youth homelessness, including several shelters and counseling centers. Office Solutions’ literature and catalogs make references to its social mission, advertising the company’s contribution to potential customers.
Jill is the Gift Coordinator for one of these shelters. She was excited to partner with Office Solutions. Early in their relationship, they had a series of meetings to determine how Office Solutions’ contributions could be best put to use and to set goals for the upcoming years.
In 2012, Office Solutions contributed $6,000 to Jill’s shelter; $9,000 followed in 2013. In 2014, Office Solutions contributed $3,000, citing a competitive marketplace and the loss of several major clients. In 2015 the firm’s managers informed Jill that they would be unable to contribute any donations, and were unsure about the partnership going forward. This cutback has forced Jill to alter and abandon several of the goals created during their initial discussions.
This week Jill has visited the Office Solutions website and has looked over its catalog. Both now advertise its social mission and contributions to youth homelessness programs more frequently and more prominently than in prior years.
Jill feels that the advertisements are potentially misleading and looks into the legislation regarding benefit corporations. She learns that Office Solutions is only required to “pursue” its stated social benefit and cannot be responsible for actually accomplishing the goals the firm has set for itself.
Business Ethics questions:
- What are the ethical implications of Office Solutions’ conduct?
- Do Jill and her organization have a right to feel wronged by Office Solutions advertising a contribution it is not currently making?
- Does Office Solutions have a duty to meet with their stakeholders more regularly and keep them informed of possible adjustments in the contributions?
Business Law questions:
- Does Jill’s organization have any legal recourse?
- If Office Solutions included a more prominent disclaimer on their website about donations being tied to profits, would this satisfy legal and ethical concerns?
After weighing several opportunities, Janet has decided to invest in local fresh food grocer Farm to Store, whose owner she was introduced to through a mutual contact. Farm to Store is a benefit corporation. As such, it has a stated social mission: achieving environmental sustainability in the food supply chain and promoting education surrounding this issue. Significant portions of the store’s profits are to be diverted to waste-reducing workshops, advocacy and consumer awareness. Janet feels that Farm to Store has a solid business plan. She enjoys the idea of practicing socially responsible investing where her contribution has the potential to create both a financial and social return.
As an investor, Janet receives annual benefit reports from Farm to Store detailing the social and environmental impact of the store’s benefit. She also receives full financial reports from the company’s CEO, Mark. After receiving the first annual report, Janet is concerned. While sales were steady for much of the year, the profit margins shrank as other business costs grew. Sheila requested a brief meeting with Mark and he explained that the increased costs were the result of finding new ways to commit completely to the store’s mission of sustainability. Eco-friendly parchment paper and utensils, non-landfill waste disposal and specialty-sourced products are amongst the expenses Farm to Store has been incurring.
Janet speaks with several other investors and finds that they are in agreement — all feel that the long-term viability of the business is being jeopardized by Mark’s commitment to waste reduction, to say nothing of the sustainability workshops and other programs to which Farm to Store has not yet been able to contribute financially. Janet shares this concern with Mark. Mark responds that he appreciates the investors’ input, but that he will not be making any changes to the operations of Farm to Store.
Business Ethics Questions:
- Does Farm to Store have a responsibility to fulfill its stated benefit beyond their financial capabilities? How should their benefits and missions be prioritized?
- Are the investors being unreasonable in asking the firm to cut back on sustainability expenses?
Business Law Questions:
- In light of the model legislation (see below), has Mark been legally remiss in his “consideration” of the various competing interests and concerns?
- How should these interests and concerns be prioritized to satisfy the legal requirements of the legislation?
- What, if any, legal remedies are available to Janet and the other investors if Farm to Store continues on this path?
- Does it make a difference is Janet own 51 percent of the shares of Farm to Store?
Benefit Corporation Case: Certification Issue
Trent is the operations manager at Bristle, a Delaware-based benefit corporation that manufactures all-natural shaving products. One of his responsibilities is collaborating with the creative team to generate Bristle’s annual benefit report, a legally required document assessing the company’s social and environmental impact in accordance with the firm’s goals described in its articles of incorporation.
Although almost every state requires benefit reports to be released to the public and measured against third-party benchmarks, neither is required by Delaware legislation. For the past several years, Bristle has as a matter of “best practice” assessed themselves against rigorous third-party metrics while compiling a variety of social and environmental certifications. Bristle has also published its benefit reports on its website and distributed them to the firm’s stakeholders.
Trent is called into a meeting with Bristle’s new director, Josh. Josh explains that everyone at Bristle knows it has been a tumultuous year for the company, with a turnover in upper management, supply-side issues and the loss of some retail distribution. Josh is confident that the company will weather the transition and come out stronger than before, but he doesn’t want to suffer a loss of shareholder or stakeholder confidence in the meantime. Thus, he requests that Trent approach this year’s benefit report differently. Bristle will forego using a third-party assessment standard, opting instead to develop one internally. The firm will also not make the current report publicly available, but will leave older reports on the website. Josh hopes that changing the format of the benefit data presentation will allow the company to regroup without causing an unnecessary stir.
Business Ethics questions:
- Is Josh’s request unethical?
- Do Trent or Josh have an obligation to transparency that he is violating?
- Is there an ethical problem with issuing benefit reports that are difficult to compare across years?
- Is there an ethical concern with the firm’s performance being measured against only internal standards?
- How will Josh’s initiative affect stakeholder trust?
Business Law questions:
- Is Bristle in compliance with Delaware law?
- Could the benefit reporting flexibility of Delaware’s benefit corporation legislation lead to a “race to the bottom”?
- What issues might arise out of the laxity of Delaware’s benefit corporation legislation?
- Can shareholders sue if they notice the discrepancy in the issued reports?
- What is the difference between a shareholder and a stakeholder? What, if any, are the different legal duties owed to them by Bristle?