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Examining the “Independent” Benefits Director requirement for New Jersey and Vermont Benefit Corporations? Could it be a Deterrent?

As most people following the social enterprise world are aware, legislation has made its way through several states allowing for the formation of a hybrid business structure called the Benefit Corporation. A Benefit Corporation is a unique entity structure as it represents an attempt to bridge the gap between the for-profit and non-profit worlds. Benefit Corporations can exist to serve a general, or specifically designated social purpose, in addition to their day-to-day for profit activities.

So far, Maryland, Hawaii, Vermont, California, New York and New Jersey have passed statutes authorizing Benefit Corporations. While most of the legislation surrounding Benefit Corporations is similar (and some if it is identical), there is one significant area where states’ seem to be diverging – the structure of the Board of Directors. Specifically, in Vermont and New Jersey, where a Benefits Corporation must have a specially designated “Benefit Director,” who is independent from the Corporation[1].

The power and duties of the Benefit Director are to (i) prepare the Company’s annual Benefit Report; (ii) have the Annual Benefit Report audited, if necessary; (iii) providing an opinion with the annual report as whether or not the corporation is acting in accordance with its general or specific benefit purposes in all “material” respects; (iv) providing an opinion as to whether or not the Officers and Directors acted in accordance with their duties; and (v) if the Benefit Director does not believe that (iii) or (iv) were accomplished – to provide a statement detailing the failures or omissions of the company and/or officers and directors.

So as you can see – this is not a ceremonial appointment. A Benefit Director to a Benefit Corporation in Vermont or New Jersey must maintain independence while at the same time being intimately involved in the activities of the Corporation, to the extent that the Benefit Director will be able to properly author the annual benefits report along with a written opinion as to whether or not the Corporation and its Officers and Directors are appropriately carrying out the Corporation’s mission.

The interesting question that the independent Benefit Director requirement raises is – will this be a deterrent for business seeking to incorporate, or reincorporate, as Benefit Corporations in Vermont and New Jersey?

Any business that is considering the move to a Benefit Corporation in any state must weigh the outcome of such an undertaking. The rewards for an expansion of the Officers and Directors duties’, to include a general or specific social purpose are obviously high – as Benefit Corporation status should[2] enable a Board to look past sheer profit maximization and utilize the company’s resources and profits to do social good. Further, the requirement on a Benefit Corporation that they compile an annual Benefit Report to record its progress in furthering its social purpose is also a positive, as it will eliminate those company’s who would seek Benefit Corporation status simply for marketing or public relations’ purposes, leaving those who are serious about their social mission to take advantage of their Benefit Corporation status.

However, when it comes to the requirement of an independent Benefit Director, the potential outlays seem high. Specifically the additional cost and time it will take to identify a Benefit Director who must simultaneously be independent from the business, while maintaining a level of involvement sufficient to compile an annual report, could be a challenge. Beyond that, the independent benefit director requirement seems somewhat duplicitous, given the requirements set forth for the “Annual Benefit Report,” which include, “as assessment of the social and environmental performance of the benefit corporation prepared in accordance with a third party standard that has been applied consistently with prior benefit reports or accompanied by an explanation of the reason for any inconsistent application.[3]

Thus, in Vermont and New Jersey, Benefit Corporations are required to maintain an independent Benefit Director to compile the annual benefit report, which in turn is mandated to be put together using an acceptable “third party standard.” It is difficult to say with certainty, but it does seem possible that any small socially minded business considering becoming a Benefit Corporation, would have a difficult time identifying an individual willing to serve as the independent Benefit Director, and would also struggle to include that individual on a regular basis such that they would be able to compile an annual benefit report.

Further, many socially minded enterprises that would be drawn to becoming a Benefit Corporation are comprised of a tightly knit group of founders who all share similar social values and have similar goals and missions when it comes to implementing social change. That these closely held groups would accept an independent third party as a board member, who is largely undertaking the role of oversight in the business, is a lot to ask.  In contrast to the Benefit Corporation, the possibility that the Director’s vision of the social enterprise would differ from the other Board Members, thus creating a rift in terms of accounting and reporting the progress made towards accomplishing a social purpose, is a concern that must be considered.

Ultimately, the Benefit Corporation is a business entity structure that is in its infancy. The parameters and framework for the duties of Officers and Directors of a Benefit Corporation remain unclear. Further, the legislation surrounding Benefit Corporations is evolving and as more states adopt Benefit Corporation legislation I would expect that the statutes would become more streamlined and cohesive. In the meantime, however, in looking at those state statutes that are currently on the books, I have started to focus more on those states that have not required an independent Benefit Director for every Benefit Corporation (Maryland, Virginia, Hawaii, New York, and California). Benefit Corporations in those states will be able to have their Officers and Board Members collectively focus on their general or specific social purpose, and will be able to work together as a group when compiling the Annual Benefit Report. The accepted “third party standard,” which must be used when compiling the Annual Benefit Report supplies the needed structure and accountability for these Benefit Corporations, and the risk of divisions in opinions between board members is lowered when there is not a single individual, independent from the company, who is solely in charge of reporting social purpose compliance.

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[1] In Hawaii, a company must have a Benefit Director, but the statute does not require independence. In the remaining states the legislation does not require a specifically designated “Benefit Director.”

[2] I say “should” because to date there is no case law interpreting this issue. While it seems clear that the statutes authorizing Benefit Corporations envision this expansion of the duties and responsibilities of Board Members, the parameters of this expansion have not fully been developed.

[3] Section 21.14(a)(2) of the Vermont Benefit Corporations Act.

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