NY Gets Friendlier to Socially Responsible Business

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Govenor Andrew Cuomo signed a law creating a new legal category of company in New York late Monday night: a Benefit Corporation. The companies that incorporate under the new law must prove they have social and environmental impact.

These companies, usually referred to as social enterprises, include clean technology companies that fight global warming with each solar panel sold, or a Fair Trade coffee company that fights poverty by buying directly from poor farmers, for example. 

Or maybe an online shop that has sustainable business practices like paying a living wage to workers, giving to charity and using recycled office supplies, like UnCommon Goods, which is run by David Bolotsky out of Brooklyn. However, Bolotsky filed his official incorporation registration in Delaware. It's something he plans to change.

"As a result of this law passing we're planning to move our incorporation from Delaware to New York," Bolotsky said. "We want to show our support for the fact that socially responsible businesses now have a legal framework." He plans to do that on the first day the law takes effect, which is in two months. 

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Legislators are hoping he's not the only one. The bill, sponsored by Assembly speaker Sheldon Silver and state Senator Daniel Squadron, passed with rare unanimous bipartisan support.

Squadron argues the law will enable for profit companies to have more social impact. "Right now companies are handcuffed because they need to return the highest profit for investors and can't also return social benefit for society" he said. "Under Benefit Corporations they will be able to...pursue a double bottom line of financial and social benefit." 

Benefit Corporations have a few key differences from traditional corporate forms, like the C Corp or S Corp, which require a company to maximize return to shareholders over any other goal, including environmental concerns.

Instead, Benefit Corporations will be required to consider in management decisions the impact on the environment, community and employees along with profit to shareholders. That gives a founder or CEO a legal defense against investor claims. 

Andrew Greenblatt, a volunteer with B Lab a nonprofit that helped draft the new law, teaches about social enterprise at NYU. He explained the difference between traditional corporations and the new benefit corporations using ice cream company Ben and Jerry's as an example.

"We've seen problems like when Ben and Jerry's was being taken over in a hostile takeover. In the end Ben and Jerry had to sell the company because what was maximizing shareholder value was the higher offer from Unilever," Greenblatt said, even though the founders wanted to keep ownership and maintain many socially responsible promises to employees and customers.

Benefit Corporations in New York will have to submit to third party monitoring on at least one kind of non-financial benefit they provide to society. The law does not mandate which cause or which third party certification organization, something that the New York City Bar association has raised concerns about because it could put corporate boards of directors in difficult positions.