When Governor Chris Gregoire signed HB 2239 on March 31, she effectively created the first alternative for-profit corporate form in Washington state’s history: the social purpose corporation (SPC), a for-profit entity that can be chartered to create social and environmental good. It was the culmination of two years of concentrated deliberation and effort by the Corporate Act Revision Committee, a 13-person group of corporate attorneys.
Traditional corporations are expected to prioritize the creation of shareholder profits above other considerations, such as employee benefits, environmental care or community impact. By establishing social purpose corporations, Washington state is signaling that companies should have the flexibility to make decisions based on the effects the company has on all stakeholders, that is, any person or entity affected by the corporation’s decisions. Because the legislation is permissive, not proscriptive, SPCs are required to create general social benefit but are not told what that has to be or how to achieve it. This designation distinguishes the SPC from a similar for-good/for-profit structure called the benefit corporation—a popular structure that has been adopted or is pending in 15 states.
In addition to being required to create general public benefit as a result of their corporate actions, SPCs have the flexibility to name a second specific benefit, should the founders or initial shareholders desire to hold themselves to a higher standard. Articulating a specific social purpose in conjunction with a general social purpose enables founders to ensure that future decisions of the corporation are in line with the founders’ specific vision and not merely in line with the broad strokes of the general purpose requirement. For instance, founders of a local restaurant could conceivably structure as a social purpose corporation by naming the general purpose of promoting the long-term welfare of their employees and the specific purpose of employing homeless and disadvantaged persons.
A third important aspect of the SPC, in addition to the general social purpose requirement and specific purpose option, is that, once established in the articles of incorporation, social purposes of the SPC may only be altered, amended or eliminated by a two-thirds majority of the shareholders. This requirement is intended to anchor the social purpose through sale, merger or incorporation of the SPC, making it more difficult for investors to shift companies away from the original beneficial goals of the founders.
There are certainly Milton Friedman adherents likely to be critical of the SPC, but the most vocal critique has come from within. Supporters of the benefit corporation (the alternative “blended value” legal structure) view the SPC as lacking teeth. Although an SPC is required to publish a report on its efforts to promote a social or environmental purpose or purposes, the report is not required to meet third-party standards unless the company opts into that requirement. This differs from a benefit corporation, where outside review and approval is necessary to maintain its special designation. Further, under the SPC statute, directors and officers of a company are permitted—but not required—to consider one or more social purposes in making decisions. This is unlike benefit corporations, which are mandated to consider the impact of their decisions on stakeholders. Finally, while benefit corporation legislation lets shareholders sue a company for failing to achieve a material positive impact on society and the environment (called a benefit enforcement proceeding), the SPC legislation makes clear that directors are not liable for any “action taken as a director, or any failure to take any action” to achieve social purposes.
The state began officially recognizing SPCs on June 7. A few companies have initiated the conversion process and others are likely to follow soon. As the economy rebounds and we look for ways to promote companies that value long-term growth, sustainability and positive value for all stakeholders, the social purpose corporation could be a powerful vehicle. The shift toward what former Starbucks President Howard Behar calls “capitalism with a conscience” has to start with executives, shareholders and customers discovering internal motivation to do the right thing; legal structure only codifies and protects relationships.
BRIAN HOWE is the founder of Vox Legal in Seattle. Reach him at email@example.com or 206.659.6491.