Bill Creating New Socially Responsible Corporation Passed by the Assembly

California would allow a new type of corporation in which part of its mission is to improve society and the environment under legislation approved May 26 by the state Assembly.

The measure, AB 361 by Assemblyman Jared Huffman, a San Rafael Democrat, creates “benefit corporations,” which would add social responsibility to shareholder interests and fiduciary decision-making.

“This is the start of something potentially transformational,” Huffman said in introducing the bill on the floor. “It enhances the ability of the private sector to do social good. “

The charter of benefit corporations would state its values. The company would report each year on how well it did advancing those values and benefiting the public good. Finally, it would be audited by an outside entity to determine how well it is meeting its goals.

B Lab, a nonprofit that conducts such audits, is the sponsor of Huffman’s measure which is also supported by the Silicon Valley Leadership Group along with 100 California companies, Huffman says.

Four states – Maryland, New Jersey, Vermont and Virginia, — have approved laws allowing creation of benefit corporations.

Part of the motivation for creating the new type of companies is the growing interest by investors and entrepreneurs in socially responsible companies.

“If California doesn’t allow (these corporations) and other state do, venture capital goes elsewhere,” said Assemblyman Nathan Fletcher, a San Diego Republican, in support of the measure.

In opposition, Assemblywoman Diane Harkey, a Laguna Niguel Republican, said benefit corporations could receive more favorable treatment than traditional companies.

“It’s important to understand we could be opening the door here to more preferential treatment in state contracts, preferential treatment in subsidies,” said Harkey before urging her colleagues to view Atlas Shrugged, which, she said, is now in theaters.

The protagonist of Ayn Rand’s voluminous 1957 novel, among other things, frets that increased control by government of private industry is destroying society.

Huffman’s bill says a benefit corporation must create a “general public benefit” which is defined as a “material positive impact on society and the environment.”

The corporation can also pick at least one specific public benefit it hopes to achieve.

Among the bill’s suggestions are improving human health, helping low-income persons, improving the economy beyond simply hiring more workers and promoting the arts and sciences.

If an existing company wants to become a benefit corporation it requires a two-thirds vote of shareholders. Same if a company wants to dissolve the benefit corporation.

Huffman’s bill and a similar measure pending in the Senate – SB 201 by Sen. Mark DeSaulnier, a Concord Democrat – are opposed by the California Association of Nonprofits which sees the new form of company cutting into their action.

Benefit corporations may “siphon off much-needed resources from e4ffective existing nonprofits by redirecting donor dollars from charitable contributions to benefit corporation investments,” the association wrote in opposition.

The Corporations Committee of the Business Law Section of the State Bar opposes Huffman’s bill.

It argues that the inclusion of social goals in the decision-making of corporation directors changes the traditional aspect of fiduciary responsibility to shareholders.

And, the State Bar says, the measure does not establish the interest of shareholders as the directors’ highest priority.

Huffman and other backers of the bill counter that the measure still requires directors to act in the best interest of the corporation and its shareholders. Non-financial issues, like improving the public good are simply added to list of factors to be considered.

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