The Legacy of B Lab: Italy’s Società Benefit

This blog entry is written by Joseph Liptrap, LLM by Research student at University of Edinburgh. It is the first post in a series of guest contributions from our postgraduate students and alumni, researching in different areas of commercial and corporate law and governance.

In a 2010 TEDx Talk, Jay Coen Gilbert, a co-founder of B Lab, spoke about the range of businesses which B Lab certifies – called Certified B-Corps – and admonished the existing US corporate law for not prioritising social and ecological sustainability.[1] Since the 2010 TEDx Talk, B Lab has been hard at work on two fronts.

First, the organisation has privately certified over 2,000 businesses in fifty countries.[2] The businesses are assessed against a set of social and ecological benchmarks to determine if their social responsibility claims are, in both form and substance, truthful.[3] Second, B Lab has also managed to convince the legislatures of thirty US states and the District of Columbia[4] to pass benefit corporation statutes, which, in the words of Jay Gilbert, are meant to “change the rules of the game.”[5] The benefit corporation statutes are modelled on the Model Benefit Corporation Legislation (MBCL), a model statute drafted by Bill Clark, a Drinker, Biddle & Reath LLP attorney, who worked in conjunction with B Lab on the project.[6] The statutes create a distinct corporate form, different from both the label B Lab offers to businesses and the traditional for-profit corporation. Benefit corporation statutes expressly mandate directors to balance the interests of both shareholders and other relevant non-shareholder constituencies in setting the corporate agenda.

The benefit corporation movement has recently extended into Europe. On 15 December 2015, the Italian Parliament, through a diverse coalition, created its own version of the US benefit corporation, known as Società Benefit. Italy thus became the first country outside the US to provide a statutory form of benefit corporation. Much like the efforts of B Lab, Nativa, a B Lab country partner for Italy, began the lobbying process for the bill which later became the Legge di Stabilita 2016 (hereafter Stability Law 2016). Eric Ezechieli, a co-founder of Nativa, noted that “[w]e are sure this event will accelerate the adoption of similar, much needed legislation in Europe and worldwide.”[7]

This post analyses the new Società Benefit statute through a comparison with the US approach. It highlights the common aspects and where the two jurisdictions diverge.

The US Approach

The MBCL defines a benefit corporation as a distinct corporate form available to for-profit corporations. It has three fundamental characteristics: purpose, accountability and transparency.

A benefit corporation must have purposes which go beyond simply maximising the wealth of shareholders. A benefit corporation must blend the pursuit of profit with a general public benefit and at least one specific public benefit. Regarding the general public benefit, a benefit corporation must create an overall material and positive social and ecological impact.[8] In addition, a benefit corporation may choose one or more specific public benefit purposes which are laid down in the MBCL. They include, for example: providing financially at risk individuals or communities with products and services; promoting economic opportunity for individuals or communities beyond job-creation in the course of business; and protecting or restoring the environment.[9] However, this is not a closed list and a benefit corporation may elect to choose a specific public benefit that is not explicitly itemised in the MBCL.

A benefit corporation’s social and ecological performance in pursuing the stated purposes must be assessed against a third-party standard. The organisation which develops and administers the assessment must be independent of a benefit corporation. It must also enjoy the requisite level of expertise necessary to assess a benefit corporation’s alleged social and ecological impact. The third-party standard must satisfy the legal requirements: it should be comprehensive, independently developed and administered, allow for a benefit corporation’s non-shareholder constituencies to have input and be transparent.[10] This third-party standard is only a modest infringement on the authority of shareholders, since, to become a benefit corporation, a business’ shareholders must vote in favour of the change, and alter the articles of incorporation so that the pursuit of a general public benefit and one or more specific public benefits becomes compulsory.[11]

The directors of a benefit corporation, relative to their counterparts in a traditional for-profit corporation, have increased responsibilities and added protection when they take decisions which aim to safeguard or further the interests of non-shareholder constituencies. Directors must consider how a benefit corporation’s behaviour will affect the entire range of corporate stakeholders, not just shareholders. The list of stakeholders is quite broad. To illustrate, the MBCL requires directors to consider the interests of seven non-shareholder constituencies: (i) employees of a benefit corporation, its subsidiaries and its suppliers; (ii) consumers; (iii) the communities in which a benefit corporation, its subsidiaries and its suppliers are located; (iv) the local and global environment; (v) the short-term and long-term interests of a benefit corporation; and (vii) the ability of a benefit corporation to fulfil its general public benefit purpose and any specific public benefit purpose it identifies as relevant in the articles of incorporation.[12] Therefore it follows that shareholders cannot lodge a derivative suit against a director of a benefit corporation for balancing profit maximisation with the pursuit of non-financial objectives. However, the MBCL also shields directors from personal liability against third-party suits. Section 301(c) provides that “a director is not personally liable for monetary damages for: (1) any action or inaction in the course of performing the duties of a director [of a benefit corporation]…or (2) failure of the benefit corporation to pursue or create general public benefit or specific public benefit.”[13] Shareholders can only instigate a benefit enforcement proceeding in the event that a director of a benefit corporation fails to either publish an annual benefit report on its website or otherwise provide copies upon demand.[14]

Aside from Delaware, a benefit corporation in any other US state jurisdiction has an obligation to publish an annual benefit report. The report articulates the actions taken to pursue a general public benefit and one or more specific public benefits. The report must clearly show the extent to which public benefit was created and how overall social and ecological performance are measured.

The Italian Approach

The approach taken in Italy is not a carbon copy of the US benefit corporation. The Società Benefit is the product of a different legal, social and historical background. For example, in Italy, and most other civil law jurisdictions, directors are not as hamstringed in considering the interests of non-shareholder constituencies. This means that shareholder primacy is not as pronounced relative to the US position. As such, the creation of the Società Benefit was not underpinned primarily by a motivation to give directors more flexibility to look after the interests of non-shareholder constituencies.[15] Rather, the advent of the Società Benefit is treated as an innovation which was necessary to bring Italian conceptions of corporate law into the twenty-first century: “[t]he aim of the new legislation is to promote a new business model in Italy to achieve an effective and innovative way to achieve the dual goal of profit and not-for-profit entrepreneurship, drawing strength from the benefits that characterise both types of business. Within this paradigm, the social dimension is no longer marginal, but a key component of the value chain. The concept of value production is extended to pursue long-term sustainability with every tool, including collaboration, sharing and relationship with the community. This process can open new opportunities in terms of the corporation’s ability to renew both itself and the social and economic fabric.”[16]

But there are similarities between the two approaches. In a general way, the Italian law has implemented the three fundamental characteristics. The Stability Law 2016 describes a Società Benefit as available to for-profit and low-profit businesses.[17] Registering as a Società Benefit entails the pursuit of economic activity through a blending of profit maximisation with the realisation of one or more common benefits.[18] A common benefit is a positive effect or the reduction of a negative effect on one or more of the following categories: people, communities, territories, the environment, cultural heritage, social activities, public or private organisations or associations and other stakeholders.[19] In this way, the list seems to be non-exhaustive through the wording of “and other stakeholders.” A Società Benefit must also overall operate in a responsible, sustainable and transparent way.[20] Additionally, a Società Benefit must alter the corporate purpose provision(s) of its constitution to specifically include a list of the common benefits which will be pursued.[21] Equally, the directors of a Società Benefit have an obligation to consider non-shareholder constituencies’ interests. The Stability Law 2016 identifies relevant non-shareholder constituencies as: employees, customers, suppliers, lenders, creditors, government and society.[22] Like the requirements of the MBCL, a Società Benefit must draft an annual benefit report.[23]

Significant Differences between Approaches

 The US and Italian approaches diverge in three main areas.

First, the constitution of a Società Benefit must specify the chosen common benefit(s) and how the directors aim to achieve them.[24] The MBCL does not require a benefit corporation to explicitly list a specific public benefit purpose in the articles of association.[25] It is submitted that this might better combat corporate greenwashing, since a Società Benefit must both overall operate in a responsible, sustainable and transparent way and pursue one or more explicit common benefits. A Società Benefit which does not pursue the stated common benefit(s) is subject to the Italian Consumer Code rules on misleading advertising which are policed by the Competition Authority.[26] The MBCL does not include any such enforcement mechanism, aside for shareholders’ power to bring a benefit enforcement proceeding.[27] The available reporting data is clear that US benefit corporations’ pursuit of a specific public benefit purpose has thus far been unsatisfactory,[28] and shareholders remain the only constituency with a right of action against the directors of a benefit corporation if they fail to do so.[29] This might suggest that, in the US, the social purpose aspect of a benefit corporation is still only secondary to profit maximisation.

Second, directors’ responsibilities are, at least prima facie, considerably more onerous in a Società Benefit. The MBCL frees directors from personal liability for an act or a failure to act as it relates to the creation and realisation of a general public benefit or specific public benefit.[30] In a Società Benefit, directors must actively protect non-shareholder constituencies’ interests. A Società Benefit’s constitution must also identify an “impact director” responsible for the pursuit and realisation of the common benefits. In the annual report, the impact director responsible must describe the specific objectives, methods and actions taken to pursue the common benefits, as well as any circumstances which might have prevented completion.[31] The annual report also requires the impact director responsible to identify how the specific objectives will be pursued in the following year.[32] A contravention of any of these requirements would constitute a breach of fiduciary duty under the existing corporate law which otherwise governs traditional for-profit businesses in Italy; but it would also make a director personally liable under the already discussed Italian Consumer Code penalties provided for misleading commercial advertising.[33]

Third, it was stated above that the Stability Law 2016 allows for-profit and low-profit businesses to become a Società Benefit. Low-Profit businesses, which include, for example, cooperatives, limited companies and mutual companies, have boundaries on profit distribution to shareholders. In the US, only traditional for-profit corporations can register as a benefit corporation. Consequently, the US approach excludes hybrids and quasi-charitable businesses from becoming a benefit corporation. By virtue of this distinction, the required “SB” or “Società Benefit” designation next to a business’ name might better be understood as a species of legal status, rather than an entirely different corporate form like its US counterpart.[34]

Final Thoughts

This post analysed the new Società Benefit statute through a comparison of the US and Italian approaches, and underscored the common aspects and where the two jurisdictions diverge. Italy’s benefit corporation experience is still very much in a period of infancy. At the time of writing this post, there is no empirical data to examine with regard to its market reception, and it would make more sense to return to an in-depth analysis after a suitable period of continuing development. Said another way, an attempt could be made to make a few informed estimates in relation to the potential successes or problems associated with the Società Benefit, but they would remain only that, informed estimates.

In this respect, two points should be noted. First, the Società Benefit statute does not overtly recognise a difference between the annual report external evaluation standard found in the legislative provisions and the benchmarks utilised by B Lab to measure social and ecological impact in the creation of certified B-Corps.[35] A Società Benefit must report annually, but must also, and perhaps more importantly, measure the impact generated by its activities using an external evaluation standard which is independent, credible and transparent.[36] The external evaluation standard must take into account specific “evaluation areas” which include corporate governance, the treatment of workers, the treatment of all other stakeholders and the environment.[37] Even though the B Lab Impact Assessment is thought to be independent, credible and transparent, it remains to be seen whether the Italian Parliament will establish a Società Benefit regulator to administer the impact evaluation, or otherwise create its own detailed criteria to be used in measuring a Società Benefit’s social and ecological impact. This could lead to a reduction of B Lab’s market reach in Italy, and potentially in other European jurisdictions if and when the MBCL is exported elsewhere. Moreover, it seems to be the case that the Global Reporting Initiative Sustainability Reporting Guidelines are also widely recognised as an international standard for sustainable reporting. Failing formal regulation, it will be interesting to see whether one reporting standard is favoured over the other, or what the effects will be within and across jurisdictions vis-à-vis mixed usage of both standards concurrently.

Second, the arrival of the Società Benefit should be acknowledged as a departure from the traditional European conception of social enterprise. There has historically been a stark contrast between US and European approaches to social enterprise. This has created complications for those scholars interested in finding out whether there is space for cross-border communication and learning in this thread of comparative corporate law.[38] It can be said, generally, that the US has characterised the benefit corporation as a part of the “fourth sector” of the economy.[39] The fourth sector is an area of the US economy in which profit maximisation and the pursuit of social or ecological purposes are blended together.[40] Conversely, European jurisdictions treat social enterprise as an alternative to the traditional charity.[41] The Società Benefit statute departs from the historical European narrative and converges closely with the US approach. The implications of this are still unknown, but the Società Benefit movement will have at least three questions to answer which will determine its ongoing and future market reception. First, will the Società Benefit be an attractive vehicle to social entrepreneurs who are accustomed to the European cooperative model of social enterprise? Second, will more socially-minded investors, not so worried about profit maximisation, be interested in a blended value business model which does not feature a profit distribution restriction? Third, a notable aspect of the EU’s “Europe 2020” strategy involves an increased focus on social entrepreneurship to further Single Market integration.[42] Particularly, the European Commission (EC) has focused on the conceivable potential of social cooperatives to create more jobs.[43] To this end, the EC has proposed the creation of both a harmonised regulatory regime[44] and a network of regional investment funds to broaden the use of social cooperatives from the national level to the regional level.[45] If these policy suggestions are implemented, will the Italian experience and the MBCL proliferate among other EU jurisdictions, and if so, will the EU respond positively to this development by expanding the Europe 2020 strategy to account for benefit corporations? If all three questions are not answered in the positive, it might be the case that the benefit corporation could be relegated to an inconsequential area of the economy.

Joseph Liptrap

LLM by Research, Edinburgh Law School

 

[1] TEDx Talk, “TEDx Philly – Jay Coen Gilbert – On Better Businesses” YouTube, at 9:40-10:20 (1 December 2010), https://www.youtube.com/watch?v=mGnz-w9p5FU [hereafter TEDx Philly].

[2] B Lab, Benefit Corporation, https://www.bcorporation.net.

[3] J. Haskall Murray, “Choose Your Own Master: Social Enterprise, Certifications, and Benefit Corporation Statutes” American University Business Law Review (2012), 21.

[4] B Lab, “State by State Status of Legislation” Benefit Corporation, http://benefitcorp.net/policymakers/state-by-state-status.

[5] TEDx Philly, at 10:17-10:18.

[6] B Lab, “Model Benefit Corporation Legislation” Benefit Corporation (16 September 2016), http://benefitcorp.net/sites/default/files/Model%20Benefit%20Corp%20Legislation_9_16.pdf [hereafter MBCL].

[7] The B Corporation Blog, “Italian Parliament approves Benefit Corporation legal status” Benefit Corporation (22 December 2015), http://bcorporation.eu/blog/italian-parliament-approves-benefit-corporation-legal-status.

[8] MBCL, §102.

[9] Ibid.

[10] B Lab has created a non-exhaustive list of third-party standards that, at least prima facie, meet the legal requirements for use by a statutory benefit corporation. See B Lab, “Third Party Standards for Benefit Corporations” Benefit Corporation (6 March 2012), https://www.bcorporation.net/news-media/articles/third-party-standards-benefit-corporations.

[11] MBCL, §201.

[12] Ibid, §301(a)(1)(i)-(vii).

[13] Ibid, §301(c).

[14] Ibid, §305.

[15] A principal claim made by the drafters of the Model Benefit Corporation Legislation was that, under the existing corporate law which otherwise governs traditional for-profit corporations in the US, directors do not have the flexibility to consider the interests of shareholders and non-shareholder constituencies equally. In this way, the benefit corporation was a needed innovation. See generally William W. Clark, Jr. & Larry Vranka, “White Paper: The Need and Rationale for the Benefit Corporation” (2013),10 (emphasising that the legal uncertainty surrounding directors’ ability to consider non-financial aspects under the existing corporate law has made it problematic for directors to feel legally secure).

[16] European Social Enterprise Law Association, “Benefit Corporation – the new B Corporation and “doing business” in Italy Today – February 2016” (26 February 2016), http://esela.eu/news/benefit-corporation-seminar-new-b-corp-legislation-business-italy-today/.

[17] Gazzetta Ufficiale No. 302, Suppl. Ordinario No. 70 (30 December 2015), Law No. 208, Article 1, para 377. See also Italian Civil Code, Book V, Titles V, VI.

[18] Law No. 208, Article 1, para 380.

[19] Ibid, Article 1, paras 378(a), 376.

[20] Ibid, Article 1, para 376.

[21] Ibid, Article 1, paras 377, 379.

[22] Ibid, Article 1, para 378(b).

[23] Ibid, Article 1, para 382.

[24] Ibid, Article 1, para 379.

[25] MBCL, §201(b).

[26] Law No. 208, Article 1, para 384.

[27] MBCL, §305.

[28] See, for example, J. Haskall Murray, “An Early Report on Benefit Reports” 118 West Virginia Law Review (2015-2016), 25-56.

[29] Leo J. Strine, Jr., “Making it Easier for Directors to ‘Do the Right Thing’?” 4 Harvard Business Law Review (2014), 250-251.

[30] MBCL, §301.

[31] Law No. 208, Article, para 382(a).

[32] Ibid, Article 1, para 382(c).

[33] Ibid, Article 1, para 381.

[34] Ibid, Article 1, para 379.

[35] Ibid, Article 1, para 382(b).

[36] Ibid, Article 1, Annex 4.

[37] Ibid, Article 1, Annex 5.

[38] See generally, for example, Robert T. Esposito, “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” 4 William & Mary Business Law Review (2012-2013) 639-714; Mystica M. Alexander, “A Comparative Look at International Approaches to Social Enterprise: Public Policy, Investment Structure, and Tax Incentives” 7 William & Mary Policy Review (2016) 1-34.

[39] Thomas Kelley, “Law and Choice of Entity on the Social Enterprise Frontier” 84 Tulane Law Review (2009), 358.

[40] Antony Bugg-Levine & Jed Emerson, Impact Investing: Transforming How We Make Money While Making a Difference (2011), 10-11 (the authors define blended value as “economic, social and environmental” returns that in “their natural integration, transform into a new, stronger and more nuanced organizational and capital structure.”).

[41] See generally Jacques Defourny & Marthe Nyssens, “Conceptions of Social Enterprise and Social Entrepreneurship in Europe and the United States: Converges and Divergences” 1 Journal of Social Entrepreneurship (2010) 32-53.

[42] Communication from the Commission, “Europe 2020: A Strategy for Smart, Sustainable and Inclusive Growth” COM (2010) 2020 (3 March 2010), 2, 14-15, http://ec.europa.eu/eu2020/pdf/COMPLET%20EN%20BARROSO%20%20%20007%20-%20Europe%202020%20-%20EN%20version.pdf.

[43] Ibid, 15 (see also footnote 49 of the Communication).

[44] Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and the Committee of Regions, “Social Business Initiative: Creating a Favourable Climate for Social Enterprises, Key Stakeholders in the Social Economy and Innovation” COM (2011) 682 (25 October 2011), 10, http://ec.europa.eu/internal_market/social_business/docs/COM2011_682_en.pdf.

[45] Ibid, 6-8.

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