The benefit corporation is a new corporate form that offers a vehicle for for-profit companies to embed a social mission into their legal structure. Prior to the creation of this structure, for-profit companies were obligated to act in the best interests of their shareholders. Typically, this meant companies had to maximize profits, and in turn, work toward growing shareholder wealth. However, this left socially-minded companies, like Patagonia and Kickstarter, unable to sacrifice profit-making to focus on changing the world.
B Lab, a nonprofit accrediting organization, recognized this gap and sought to help for-profit companies pursue a social mission alongside profit maximization. The organization advocated for states to enact benefit corporation legislation and created model legislation to help them do so. Maryland was the first state to take on the new corporate form, enacting benefit corporation legislation in 2010. In the 14 years since, over 40 states saw the legislation’s ability to change people, communities, and the environment, and decided to adopt the law themselves.
Though 14 years may seem like a long time, it is a relatively short period when considered against the 213-year history of corporate law. Thus, little is known about how varied benefit corporation legislation is in each state. Today, we know that state law is widely varied in many areas including abortion law, minimum wage law, tax law, and so much more. I wanted to know if this variation existed for benefit corporation law as well. Moreover, a prior study found that differences in corporate law often stem from partisan influences (Eldar and Rauterberg 2022). Is the same true for benefit corporation law specifically?
There is also not much known about what impact the legislation has on the for-profit and nonprofit sectors. Are benefit corporations merely an addition to the for-profit space? Or, are they encroaching on the nonprofit space where leaders are already engaging in social mission work? Previous research found that a higher density of active nonprofits in a state resulted in a decreased likelihood of passing benefit corporation legislation due to non-profit leaders’ fear of competition from the new corporate form (Rawhouser et al. 2015). How does this fear play out after benefit corporation legislation is enacted?
With these two factors — relatively little research on the differences in benefit corporation state laws and the fear of competition in the nonprofit sector — and previous research in mind, I formed two overarching research questions and hypothesized answers for each:
- How do differing state laws surrounding benefit corporations affect their presence within each state and what industries they operate under?
- Hypothesis: More restrictive laws (those with more requirements) will steer benefit corporations toward operation in traditionally nonprofit industries, such as healthcare, education, or community services, while more permissive laws will steer benefit corporations toward operation in industries dominated by for-profits such as finance, wholesale trade, and construction (U.S. Bureau of Labor Statistics 2024).
- How does political partisanship affect the creation of benefit corporation law?
- Hypothesis: The political orientation of a state relates to the restrictiveness benefit corporation legislation. More specifically, Democratic states will have more restrictive laws – and thus, more benefit corporations in traditionally non-profit sectors – while Republican states are anticipated to adopt more permissive legislation.
I studied differences in the law by parsing through legislation in the 41 states with benefit corporation legislation and coding six requirements of the law to determine restrictiveness scores. The law was allocated one point for each requirement, with states having the potential to earn two points in the frequency of benefit report category (one point for biennial reporting requirements and two points for annual reporting requirements), resulting in a total of seven possible points. The table below shows a simplified version of the coding process:
I found that benefit corporation law was largely varied in each state with the law (Figure 1). Not every state opted to incorporate every component. Instead, legislators selectively chose elements of the law that aligned with their priorities, resulting in a significant disparity in restrictiveness scores.
Figure 1: Distribution of Restrictiveness Scores
Additionally, I studied the industry composition of benefit corporations in the six states (Alabama, Arkansas, Indiana, West Virginia, Virginia, and Vermont) with free and accessible data on incorporated benefit corporations (Figure 2). In these six states, I found that benefit corporations chose to operate in traditionally for-profit industries. Furthermore, the industry composition of benefit corporations in the two states with more restrictive laws, Indiana and Vermont, was not vastly different than in states with more permissive laws.
Figure 2: Industry Composition of Benefit Corporations
Moreover, Democratic states tended to be slightly more restrictive than their Republican counterparts (Figure 3). In fact, they were significantly more likely to include a third-party assessment than Republican states.
Figure 3: Percentage of Democratic and Republican statutes with each legal component
Despite variations in the law, my findings point to the fact that the threat to the nonprofit sector may not be as dire as leaders may have once thought. Benefit corporations, more often than not, are choosing to operate in traditionally for-profit industries, rather than encroaching on the nonprofit space. My research also cemented the existence of some partisan influence in benefit corporation law.
The law as a whole allows for-profit companies to pursue social missions alongside profit maximization. This was, and continues to be, a meaningful addition to corporate law and deserves to be studied. However, my research was largely limited by the lack of available data on benefit corporations. I hope future researchers can add to my findings and expand upon them to understand how the legislation is impacting benefit corporations nationally. Furthermore, the external factors, such as existing industry networks or the presence of industry composition, that may influence industries of operation outside of the law are beyond the scope of this research. In this vein, it is difficult to draw causal conclusions between the two components of this study. The external factors at play could serve as the foundation for future research to understand how networks or competition influence benefit corporations.
Created By: Lalita Durbha, BSPA ’24
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