Perks of Being Good: Benefit Corporations & ESG

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In 2016, confectionery giant Mondelez (a spin-out of Kraft Heinz) attempted a hostile take-over of The Hershey Company, offering $23 billion for the company. What ultimately stopped the acquisition was the Hershey Trust, a trust started in 1905 by Milton Hershey and his wife that was created to operate a school that would provide high-quality schooling to orphans located around the general Hershey, Pennsylvania area. The trust, as a controlling shareholder, was worried a takeover of Hershey could threaten the existence of it and the school, which still in existence today, provides education to children of lesser means in Hershey’s community and across the country.

Over the last decade, a new crop of corporations like Hershey has emerged with a focus on intertwining public benefit and financial success in their business decisions, countering the prevailing view that the purpose of a corporation is solely to maximize the financial returns of its shareholders. When shoe company TOMS launched in 2006, they started the initiative to donate one pair of shoes for every pair purchased. Outdoor apparel company Patagonia donated the $10 million they saved from a lower corporate tax rate to environmental groups after the Tax Cuts and Jobs Act was introduced in 2017. When startup Allbirds found out that Amazon was selling shoes on their marketplace that looked similar to Allbirds’ signature shoe design, they asked Amazon to also “borrow” their environmentally sustainable shoe sole formula to help fight climate change.

This view on the importance of corporations benefiting the public has already percolated to the largest business leaders. More recently, the Business Roundtable, an association of the Chief Executive Officers of the leading American companies representing over $7 trillion in annual revenues released a statement that they believed that purpose of a Corporation was to benefit all stakeholders- customers, employees, suppliers and communities, not just shareholders. What all of this means is that this is a movement that is only going to get bigger.

What is a Benefit Corporation?

A Benefit Corporation is a type of for-profit corporation in the United States that is managed for its shareholders and for the benefit of other persons, entities, communities or interests. Directors are required to balance public benefits in their decisions and the corporations themselves are required to identify in their corporate documents the specific public benefits they intend to promote. While Canada does not have similar legislation, the requirement of balancing the public benefit in decisions is implied in our laws. In the seminal corporate law BCE case, the Supreme Court of Canada found that directors had to “act in the best interests of the corporation viewed as a good corporate citizen” and that this duty “was affected by the various interests at stake.” British Columbia is currently set to introduce legislation formalizing Benefit Corporations.

What is ESG?

Benefit Corporations are just one of the many representations of the overarching Environment, Social and Governance (ESG) movement currently sweeping the corporate world. ESG draws its roots from the investment industry. When it was conceived, it was believed that by having the financial community evaluating companies on their social impact, in addition to their financial performance, it would encourage companies to make more sustainable business decisions and allow market forces to direct capital to more responsible companies. So far that has been the result. Many leading corporations like Unilever, PepsiCo and Adobe have become champions for the movement and its effect on creating healthier societies. In recent years there has been a shift to the belief that ESG measures are no longer just beneficial but also necessary for the long-term success of businesses. Popular ways companies are evaluated on their ESG efforts relate to how the companies treat their employees, address climate change, and ensure their supply chains are conducted ethically.

Why Should You Care?

Investments in ESG companies have reached a tipping point. According to the Global Sustainable Investment Alliance, over $30 trillion is currently invested in ESG companies. S&P Global, a business and financial information giant and owner of one the largest credit rating agencies globally, recently acquired an ESG Ratings Business, publicly stating ESG will be a major growth area for them. In addition, Moody’s threatened to strip the sterling triple-A credit rating of a major oil producer based partially on the ESG factor of a projected lower-carbon emission world in the future. The impact that a focus on ESG factors have on businesses will become more prevalent for all companies, which is why it is important to proactively embrace this relatively new business dynamic early.

What Can You Do?

While there are no current legal classifications for Benefit Corporations in Canada, there are different ways your corporation’s rules can be drafted or amended to comply with any eventual Benefit Corporation legislation. This can include what interests the leaders of your corporation must take into account when making decisions, what businesses your corporation is allowed to engage in and what social causes your corporation intends to promote. In the meantime, you may become “B Corp Certified” by the internationally recognized non-profit B Lab. You can also be mindful of your corporation’s ability to positively impact your community and make the appropriate changes to boost employee morale and strengthen your community. We are currently in a business environment that is starting to expect corporations to promote social values, their employees’ well-being and operating sustainably. Embracing a Benefit Corporation structure early on can be a competitive advantage for a business in retaining employees, winning customers and positively impacting society.