For-profit corporations in the United States are required as part of their fiduciary duties to act in the best interests of their shareholders. Conventional wisdom translates this fiduciary duty into an obligation to maximize shareholder value. This does not mean that companies cannot consider certain social or environmental missions, but generally these types of activities should be justified as creating long-term shareholder value.
Not-for-profit organizations, on the other hand, cannot have the best interests of shareholders as their goal, but rather must be organized to contribute to the greater good. Under IRC section 501(c)(3), not-for-profit organizations must operate exclusively to further their charitable missions, which may include religion, education, literacy, and public safety.
Benefit corporations and B corporations bridge the gap between “regular” corporations and not-for-profit organizations by requiring directors to act in the interest of shareholders, as well as to consider society and the environment. In other words, a benefit corporation or B corporation’s goal is to create a product or provide a service and positively contribute to society and the environment while still making a profit and increasing shareholder value.
History of Benefit and B Corporations
In July 2006, the newly formed B Lab envisioned and created a new type of company, called a B corporation, designed to create benefits for all stake-holders, not just the company’s owners. To become a certified B corporation, a company must—
- be accountable to and consider its impact on all stakeholders;
- publish a public report of overall social and environmental performance assessed against a third-party standard;
- achieve a verified passing score on the B Impact Assessment, an assessment of the company’s impact on its workers, society, and the environment (and become recertified every two years); and
- pay B Lab certification fees (between $500–$50,000 per year, depending upon revenues).
The first B corporations were certified in June 2007, and as of November 2015, there are over 1,400 certified B corporations in 42 countries.
While the introduction of the B corporation provided a mechanism for companies to communicate their commitment to multiple stakeholders, including society and the environment, it did not create a new legal form to differentiate these benefit-driven corporations from regular corporations. Therefore, between 2006 and 2010, B Lab drafted model legislation and pushed state legislatures to legally create a new corporate form, the benefit corporation. Many benefit corporations are also certified B corporations. Following B Lab’s model legislation, most states’ benefit corporation laws require that—
- the company have a public benefit purpose;
- officers and directors are held accountable to consider the effect of their decisions on various stakeholders;
- the company publish an annual benefit report based on third-party standards, available to all stakeholders on a public forum (such as a website);
- only shareholders and directors have the right of action, which can be for violation or failure to pursue the stated public benefit; and
- a change of the company’s public mission can only take effect after a 2/3 (or larger) majority vote of all shareholders.
Directors and officers are required to consider the best interest of workers, the community, and the environment in addition to the best interests of shareholders.
In April 2010, Maryland became the first state to legally recognize benefit corporations as a distinct corporate form. Since then, 30 other states and Washington, D.C., have adopted similar statutes, and six other states are considering them. Under these laws, directors and officers of the company are required to consider the best interest of workers, the community, and the environment in addition to the best interests of shareholders, and are legally protected for doing so. A full list of the current status of benefit corporations and B corporations in the United States is available from http://www.cpaj.com with the online version of this article.
Opportunities for CPAs
As stated above, in order to become a B corporation or a benefit corporation, companies must publish an annual benefit report prepared according to third-party standards. (Currently, Delaware does not require benefit corporations to report publicly.) Companies may choose any third-party standards that are considered comprehensive, independent, credible, and transparent; the Exhibit gives examples of such standards.
Examples of Acceptable Third-Party Standards for Public Benefit Reports
As experts in the preparation of financial reports according to GAAP, CPAs are well suited to help B corporations and benefit corporations prepare benefit reports according to appropriate third-party standards. Many CPAs already work within their own companies or as external advisors reporting on nonfinancial sustainability information. According to the AICPA, accountants within companies and public accountants serving as external advisors are well suited to link business strategy to social and environmental strategy, evaluate risks and opportunities, and measure and report social and environmental information (The State of Sustainability Assurance and Related Advisory Services in the U.S.: Two Market Assessments, June 2015, http://bit.ly/1NuilkB). Based on their current and emerging roles in regular corporations’ financial and sustainability reporting, CPAs should take the opportunity to work with B corporations and benefit corporations to fulfill third-party benefit reporting requirements.
Benefit corporations are allowed to self-report how well they perform with regard to their stated social and environmental missions, but stakeholders may be more likely to do business with companies whose report contents are certified by a third party. While B Lab provides this service for B corporations, benefit corporations that choose to obtain certification of their benefit reports may choose from any number of assurance providers, including CPAs.
Although CPAs’ central responsibility is to provide assurance that companies’ financial statements are fairly stated in accordance with GAAP, their role has been broadened in the last few decades. For example, CPAs are often asked to serve as experts in business valuation cases, and the AICPA provides a business valuation certification, the ABV credential. The AICPA also recently announced a new not-for-profit certification for accountants who work with not-for-profit organizations. Furthermore, accountants are more frequently being engaged to provide assurance on their clients’ social and environmental performance. According to a study by Verdantix [Green Quadrant Sustainability Assurance (Global) 2013], each of the Big Four offers sustainability assurance services, and they are among the leaders in the sustainability assurance market (http://bit.ly/23WvWZq). Because CPAs already have the skill set required to provide assurance on sustainability information, the authors believe that more accountants can and should help their benefit corporation clients increase the credibility of their benefit reports by providing external assurance.
CPAs are well suited to help B corporations and benefit corporations prepare benefit reports according to appropriate third-party standards.
Though many CPAs currently offer environmental and social consulting, reporting, and assurance services, there is a lack of awareness among companies of their availability. Another Verdantix study [Green Quadrant Sustainability Consulting (U.S.) 2013] reported that only 24%–30% of “sustainability leaders” are aware that public accounting firms offer environmental and social reporting consulting services (http://bit.ly/1XSP6Z6). CPAs should therefore increase awareness of their unique capabilities so that they can take advantage of this growing opportunity.
CPAs and the Future of Benefit and B Corporations
Although benefit corporations and B corporations were first introduced nearly a decade ago, many are still unaware of their existence. In order for them to succeed and become legally recognized in more states, decision makers, as well as the general public, must become aware of their existence. Most states’ benefit corporation laws, as well as B Lab certification requirements, require public disclosure of benefit performance according to third-party standards, and certification of those benefit reports is essential to increase their credibility among investors and the business community. Whether within companies or as external advisors, CPAs know not only a corporation’s financial situation, but also many non-financial aspects of its operations, and are therefore uniquely suited to provide benefit reporting consulting and assurance services. Because many companies, including those considered “sustainability leaders,” are unaware that public accountants perform these services, CPAs should market their unique skills to benefit corporation and B corporation clients.