Ever since the Dodge Brothers sued Henry Ford, a traditional for-profit corporation was required to be operated primarily to enhance shareholder value. Sure, every once in awhile companies could do nice things for their employees or the cities where they operated, but the penultimate goal of the corporation had to be profitability for its owners.
Recently, however, a new type of corporation has been recognized around the country: the public benefit corporation (“PBC”). This past year, the Montana Legislature recognized it as well.
What sets the PBC apart from other for-profit corporations is that it must be created for a “general public benefit” and the articles of incorporation of a PBC may identify one or more specific public benefits as the purpose or purposes of the PBC. “General public benefit” in this context means a material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a PBC. For example, a PBC may be set up to specifically benefit the environment even though it generally derives its profits as an energy company.
It is the for-profit nature of the PBC that sets it apart from a non-profit entity that might otherwise be interested in social issues like the environment. Whereas a nonprofit corporation does not allow an individual to profit legally from its business, a PBC does allow an individual to reap the benefits from its activities. Also, a PBC can declare that total shareholder profit is not its primary goal; it can declare certain profit sacrifices in order to benefit the society in some way.
While a PBC sounds like a good compromise between an entity created solely for profit and an entity created solely for charity, it does create some problems for the investor who is looking for profitability from the entity. Unlike the typical standard for determining performance of corporations, as determined in the Dodge versus Ford case, the PBC uses a “third-party standard,” which assesses overall corporate and societal performance. This standard is supposed to be developed by a third party that has no material financial relationship with the PBC. This third party is supposed to use a balanced multi-stakeholder approach, including a public comment period of at least 30 days, to develop the standard for the PBC.
If all of this sounds complex and rather difficult for you to imagine in practice, you are not alone. Yet, there is one high-profile company that has decided to make the leap to PBC status: Kickstarter. It will apparently commit a certain percentage of its after-tax profit toward arts and music education, and to organizations fighting to end systemic inequality, including arts and music programs for children and young adults, with a primary focus on underserved communities in New York City, as well as organizations fighting to end prejudices against and increase opportunities for people of color, women, and LGBTQ individuals.
Time will tell whether PBCs are a flash in the pan or a new paradigm for business in America. In the meantime, investors in PBCs should research their investment carefully to determine how “success” will be measured.