December, 06, 2018 | Garth Yule | B Corporation

Unintended Consequences: B Corp Legislation in British Columbia

It’s a well-intentioned move, and has vocal support from several members of the local B Corp certification community, but it has some real and negative unintended consequences.

Garth Yule
is Managing Director at Junxion Strategy, Canada,

In a few weeks, the BC government will vote on a bill tabled by the BC Green party to create a new corporate form—the Benefit Company—based on the American model of benefit corporations. It’s a well-intentioned move, and has vocal support from several members of the local B Corp certification community, but it has some real and negative unintended consequences.

The proposed ‘Benefit Company’ is weaker, in terms of real accountability to stakeholders; than what we already have on the books. It presents potential harm to the movement to entrench social responsibility into corporate case law, while offering few (if any) real improvements for business owners in terms of embedding their mission into their corporate objectives, or mitigating the risk of shareholder actions.

The B Corp certification (distinct from the legal form) is working well. It’s not just “a branding exercise” (or perhaps it is, if you don’t use “a branding exercise” as a pejorative term).

B Corp certification is more than a ‘branding exercise.’

I am very fond of Jeremy Nicholls statement that “Any approach to measuring social impact that doesn’t include a transfer of power to stakeholders is just marketing,” and I believe that a B Corp certification passes this test in that it lowers barriers to adoption for businesses who want to put a transparent, common standard to their ESG (environmental, social and governance) performance, and it lowers the barriers to comprehension for consumers who want to support ‘good corporate citizens,’ but are adrift in a sea of competing claims. B Corp certification removes some burden from consumers from having to research the information about workers, supply chain, community impacts, and business model for every company they patronize—otherwise a near-impossible task for a consumer. This matters, when the backdrop (per Edelman’s trust barometer) is record low levels of public trust in business.

However, I don’t think this is sufficient to say that we also need a distinct corporate form, any more than we need a distinct corporate form for companies with Fair Trade certified products, Certified Organic producers, or for any other certification standard.

On one hand, “B Corp,” also known as “B Corporation,” is a certification standard—like “Fair Trade” or “Certified Organic,” but applied to whole companies and not just products. The B Corp certification and scoring system is administered by B Lab, a US-based nonprofit organization, through an international network of country partners.

On the other hand, “Benefit Corporations” are an American form of legal incorporation (also strongly promoted by B Lab) that is similar to a Business Corporation, but it requires businesses to produce a public benefit, and ingrains stakeholder interests into its performance. To date, 33 US states and the District of Columbia have adopted benefit corporation legislation, and the specifics vary by state.

In addition to the proposed ‘Benefit Company’ form, BC and dozens of other jurisdictions worldwide have already introduced other new corporate forms (CICs, C3s, new kinds of Co-ops, etc.) that also successfully embed more accountability into businesses.

There are several reasons why the American ‘Benefit Corporation’ form is a poor fit alongside the existing forms we have in British Columbia (and Canada), and should be rejected.

1. We’re in Canada, and fear-mongering about “shareholder primacy” is American mythology

Have you heard that we need this Benefit Corporation legislation in BC because progressive business people are at risk of being sued by their shareholders for being too nice—because the law says you have to maximize shareholder profits? I’d be on board too if this were true, but it’s not even exactly true in the US, and it’s so untrue in Canada that I suspect anyone who says so is either ignorant of the facts, or being deliberately misleading. Even Andrew Weaver, when introducing the bill for the Greens, acknowledges this is not the law here, but it’s often been repeated in the press, so I feel the need to debunk this claim.

In the leading US cases on the matter, maximizing shareholder profits is not clearly “the law” except in really specific cases, like change of control (Revlon), and even in the most-cited case (Dodge vs. Ford) the relevant judge’s comments were obiter dicta i.e. an incidental expression of opinion, not essential to the decision and not establishing precedent. What better excuse, though, for money-hungry shareholders to insist on profit maximization than pleading “but it’s the law!” This myth has been repeated enough that people believe it’s the law, and that’s good enough to preserve the dismal status quo.

The good news is that what Canadian law actually says is that directors have to make decisions “in the best interest of the corporation,” and we have really strong case law (BCE Inc. v. 1976 Debentureholders) saying that “the best interest of the corporation” includes fair consideration of the interests of many stakeholders—including shareholders, but among others, employees, suppliers, creditors, consumers, and the environment. Through a series of cases related to corporate actions on climate change, fair labour practices, community interests, and more, we have established a way to enforce in law the principle that what is “in the best interests of the corporation” is also in the best interest of stakeholders. Is this not what we mean when we talk about “doing well and doing good?”

To become a certified B Corp in Canada, a company must amend its corporate articles to include a statement about considering stakeholder interests, but this is more performative and symbolic than actually legally necessary in Canada, and I think the fact that B Lab insists on it is a vestige of the program’s origins in the US. The model language is actually not even as strong as what already exists in Canadian case law.

So there is no need to create a new corporate form on the basis that we’re forced to maximize profits under the current Business Corporation form, even if business leaders often act that way.

2. The legislation risks further splintering the progressive business lobby

In short, Canada is well ahead of the US in the quest to enshrine stakeholder rights in law, and that’s just for regular Business Corporations. Our laws are flexible and the trajectory is already pointing to good corporate citizenship. New corporate forms risk further cementing the public perception of what constitutes “responsible corporate behaviour” to the high-end organic healthy lifestyle niche; the community of certified B Corps already sees overrepresentation from luxury / premium consumer goods, and I think there is a risk of this becoming a self-reinforcing trend.

Instead of creating new niches, the progressive business community should make a ‘full court press’ that addresses all business corporations, and especially the traditionally conservative sectors of primary industry, manufacturing, and energy, where a consumer-facing certification is less of an incentive.

We should make a full court press toward responsibility in all businesses.

Dr. Carol Liao is a leading legal expert on this topic. Her work, and her recent op ed on the legislation helps put in context the otherwise paradoxical observation that the state of Delaware, the same jurisdiction in the US that was the first to pass Benefit Corporation legislation, is also the one of the most aggressive in confirming that “regular” corporations only owe fiduciary duty to shareholders.

Why, it’s almost like the big business shareholder lobby wants progressive business leaders and other stakeholders out of the picture so they can exclusively represent “legitimate business interests.” This is a political vulnerability that could marginalize the businesses that take climate change and social issues seriously, and we should be quite wary of this—and certainly not do it to ourselves.

Proponents of the Benefit Corporation legislation do us a disservice if they are not thinking this big-picture and long term about the effects in the legal landscape. I haven’t heard BC Greens address these potentially adverse consequences yet—and the apparent lack of opposition from the BC Liberals and the mainstream business lobby is deafening.

3. The legislation inappropriately favours B Lab as a third party certifier

The proposed bill requires Benefit Companies to submit to a review by an independent third party. This is fine in principle, but the way the bill is written seems to favour B Lab to be the third party certifier of choice: it requires companies to use “Benefit Company” or “B.Co.” as part of their name. “B.Co.” is very close to the name and brand of the B Corp certification standard from B Lab; close enough that I think it would cause confusion.

Several other well-established (and some more sophisticated) third party reviewers and certification standards exist (SASB, IIRC, GRI etc.) that could meet the needs for this requirement—and more are still emerging that may be better still. It will be harder for the law to support businesses in making an independent choice of the best third party standard for their needs if the law also forces them to use “B.Co.” as part of their name.

For B Lab, and every certification standard, perceived impartiality and fairness is essential to their credibility and brand value. B Lab has clearly stated that they do not wish to be the sole arbiter of measuring social responsibility, but the intentions of the parties to this draft legislation are moot: it’s the expected outcome that matters. I say this as a supporter B Lab and the certification standard: it’s in B Lab’s interest to see the “B. Co.” naming requirement removed from the draft legislation because it puts their perceived independence at risk. It could easily be construed as an aggressive “first mover” market entry tactic by an American nonprofit that sees the legislation as an opportunity to further build its brand in BC—why take on that risk if it can be avoided?

Any certification standard that wants to successfully “cross over” into the legislative arena has a high bar to clear in establishing and maintaining their independence and impartiality, and proving that the law makes good strategic sense for the purported beneficiaries. It’s important to keep B Lab kept well clear of conflicts of interest or other unintended consequences arising from the current draft.

Junxion helps companies to certify as B Corps, so under this legislation we might stand to benefit from a surge in companies seeking consulting support for new certifications. However, for us to accept clients when the legislation has inadvertently caused them to confuse the corporate form and the certification standard, or misunderstand the legal risks and case law, would be inconsistent with “acting honestly and in good faith with a view to the best interests of persons who may be materially affected,” to quote the proposed bill itself. A better, clearer version of the legislation would make it easier for companies and consultants to do good business.

4. For legislation that’s supposed to enshrine business accountability, it is embarrassingly toothless

The weak definition of “public benefit.” In the proposed bill the definition of “public benefit” is so broad that it’s hard to imagine a business that couldn’t meet the standard. If the definition were tighter, the legislation might actually present some benefit of differentiation, but as written it will almost certainly only muddy the waters around what constitutes a “public benefit.” And the real problems would arise if you tried to take action against a Benefit Company for not upholding their obligation to provide a Public Benefit.

Very limited rights for stakeholder action. The “oppression remedy” that we already have in law for our regular Business Corporations gives the opportunity for an individual to sue the corporation for unfairly prejudicial and oppressive behaviour. But you won’t be able to take action against directors of Benefit Companies for not delivering on their stated mission for public benefit… wait for it… unless you’re a shareholder with at least 2% or $2 million of shares, whichever is lower! That’s a big step backwards for accountability. This is ironic. And sad.

Limited scope for remedies. The bill also states that, “a court may not order monetary damages in relation to any breach” of the duty to uphold the mission. Compare this to the oppression remedy, which gives the court tremendous latitude to formulate an appropriate remedy. Section 241(3) of the Canada Business Corporations Act provides a non-exhaustive list of remedies: courts can set aside a transaction, make a corporation or another person buy your shares or pay you money, they can dissolve the corporation, they can remove all the directors—it’s totally open ended. BC Benefit Companies will have nothing like this level of accountability.

5. BC already did this and it’s called a Community Contribution Company (C3)

The Community Contribution Company (C3) legislation passed in BC in 2013 already filled the gap that needed filling in our array of different legal forms of incorporation. Community Contribution Companies, Co-operatives, Nonprofits, and Charities cover off pretty much every conceivable use case you might have for business operations where there is a desire to create a public benefit through business operations but a regular Business Corporation isn’t deemed to be the right vehicle.

I believe there are other ways of amending the Business Corporations Act that would provide the desirable outcome of bringing more private capital into the service of creating public benefits, but this current attempt falls short. Many jurisdictions around the world are doing creative and good work adapting and inventing corporate forms to hold businesses to a higher standard—and these efforts are most impactful when they consider the existing case histories, laws, and cultures of the places where they arise.

Garth Yule is Managing Director at Junxion Strategy, Canada, a Certified B Corporation and 2018 “Best for the World” honouree. The views expressed in this post are his own, and were informed by an interview with Dr. Carol Liao. Dr. Liao is a Distinguished Scholar of the Dhillon Centre for Business Ethics at the University of British Columbia’s Sauder School of Business and a professor at the Peter A. Allard School of Law at UBC. She authored A Critical Canadian Perspective on the Benefit Corporation, published in March, 2017, and was formerly a corporate lawyer in New York.