April 21, 2011

Defining Social Good: Nonprofits Worry About Calif. Bill

CaliforniaAre states moving too quickly to approve new corporate structures for businesses that blend profits with social and environmental goals?

Two bills that would establish such structures in California are gaining momentum, and the California Association of Nonprofits is asking the state legislature to slow down and consider how any changes to corporate forms might affect charities.

Some proponents of the bills say passage would enable California to become a leader in experimenting with new for-profit structures and could bring billions of dollars of new capital to bear on social and environmental problems.

But Kenneth M. Larsen, director of public policy at the California Association of Nonprofits, says that the legislature should proceed with the same cautions required of scientists.

“If you go into an experiment, you have to take a look at the risks to the subjects, and in this case, the nonprofits are some of the subjects,” Mr. Larsen says. “You want to make sure that you do no harm.”

One bill, first introduced a year ago by state Sen. Mark DeSaulnier, would allow the creation of “flexible purpose corporations” that seek both profits and at least one broader social or environmental goal.

The structure would shield board members from claims that they have violated their fiduciary duties by pursing the social or environmental goal and is expected to appeal to companies with large numbers of shareholders, including publicly traded companies.

The second bill, introduced in February by Jared Huffman, a state assembly member, would allow the creation of benefit or B corporations. This structure would go even further than the flexible-purpose legislation and require corporate directors to pursue a broad set of social and environmental objectives in addition to profits.

The B corporation appeals to social entrepreneurs and privately held companies that would like to be held to a higher standard, at a time when it has become trendy for corporations to boast about their socially conscious activities.

Already, four other states—Maryland, New Jersey, Vermont, and Virginia—have passed laws creating B corporations.

R. Todd Johnson, a lawyer in Silicon Valley who worked on the language for the flexible-purpose legislation, thinks the legislature should pass both bills and let the market sort out which approach is best.

“We are in this very rare moment where we have this opportunity for experimentation,” Mr. Johnson says. “I think no one should be holding too tightly to one particular form because we’re not going to know for two to four years which one is best.”

Neither California bill would provide any tax advantages to corporations that also pursue social or environmental goals, but some charity leaders are concerned that such tax advantages may be sought eventually, Mr.  Larsen says.

Philadelphia, for example, has already passed modest tax breaks for B corporations.

The fear is that some wealthy Americans would take money they would otherwise have given to charity and invest it in for-profit corporations pursuing social goals.

“How can we be sure that investments in flexible-purpose corporations are not being made in lieu of charitable contributions?” Mr. Larsen wrote, in a letter this month to Christine Kehoe, chair of the state’s Senate Appropriations Committee.

Advocates for the new corporate structures argue that charitable donations might in fact rise, since companies that explicitly pursue social or environmental goals also tend to be generous with their corporate philanthropy.

“Both pieces of legislation are creating more choice for investors in how they invest their dollars and have nothing to do with how they allocate their philanthropy,” says Jay Coen Gilbert, a co-founder of B Lab, a nonprofit group based outside Philadelphia that is pushing the B-corporation legislation in California and other states.

Mr. Larsen says his association’s main goal is simply to slow down the process and encourage legislative leaders to hear from a broader swath of nonprofit leaders.

“We’re not against change, but we think it needs to be change for the good and that more voices need to be heard,” he says.