The ABCs of PBCs: How This Relatively New Corporate Form Mandates a Broader View of Business
By: Peter Foundas and Manleen Singh
Socially beneficial causes now play a large role in consumers’ and employees’ decision-making. A recent survey from 2021 shows that 44% of millennials and 49% of Gen Zers reported making choices about the type of work they are prepared to do and the organizations for which they are willing to work based on their personal ethics.1 A 2019 survey found that 77% of U.S. consumers are motivated to purchase from companies committed to making the world better, and 49% of Americans believe it is more important for a company to “make the world a better place” than “make money for its shareholders.”2
The law has responded to this call for more socially conscious businesses with a relatively new type of corporate form called the public benefit corporation (“PBC”). At its core, a PBC allows a business to pursue socially beneficial goals while also seeking to earn a profit. As of 2021, 40 states have enacted a corporate benefit statute. As Candice Ciresi, chief legal officer of the fintech PBC Sezzle, explains, a corporate social purpose can have significant benefits for the right company: “The winds of change support corporate social responsibility. Adjusting our sails to embrace these winds of social, environmental, and governance concerns provides new opportunities and adventures. We are able to sail with confidence having a clear north star.”
Boards of directors of conventional corporations must act with one goal in mind – to maximize shareholder value. All decisions, whether the issue at stake involves key business operations or selling the company, must be made in an effort to obtain the highest price per share of stock. Failure to do so risks litigation from shareholders. PBCs, on the other hand, add more considerations to boardroom decisions, such as stakeholders and the public benefit identified in the charter documents. A PBC’s board must consider, as part of its fiduciary duty to the PBC, whether the stated public benefit is advanced with the board’s decision-making. For instance, Delaware requires directors to manage the PBC’s business affairs in such a way “that balances the pecuniary interests of stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or benefits identified in its certificate of incorporation.”3 Some jurisdictions, such as California, expand the groups whose interests directors must consider: employees, customers, the community, and even the “local and global environment.” Most states allow for a shareholder or director to bring a derivative suit to enforce the balancing test or to require the PBC to follow its stated public benefit, but such suits are typically limited to injunctive relief, and Delaware enacted a minimum 2% ownership requirement to bring such a suit.4
There are also additional reporting requirements for PBCs to ensure they stay focused on their public benefit. A Delaware PBC must provide biennial statements to its shareholders describing how the company promoted its public benefit. Some jurisdictions (not Delaware) require the appointment of a benefits director to ensure the PBC is pursuing its stated benefit and to report to the shareholders whether the PBC’s directors and officers are actually pursing that goal.
It is also worth discussing the difference between a PBC and a certified “B Corp.” A registered PBC is simply the corporate form a company elects to take when incorporating with the state. A “B Corp” certification, however, is a certification provided by the nonprofit organization B Lab. It certifies that a company “demonstrate[s] high social and environmental performance,” legally obligates itself to be held accountable not just to shareholders, and is transparent about its performance. Companies seek out the B Lab certification as a marketing tool and to show the marketplace that the business is seriously committed to conducting its operations in a socially conscious manner. Certification can take a long time and even before B Lab will consider a candidate, the company must take a self-assessment and obtain a certain threshold score. As Ciresi further explains, the B Lab certification process is not an easy process: “The questionnaire is a sizeable analysis with significant breadth; it is not for the faint of heart, but the analysis can propel a PBC toward B Corp certification, and even if certification is not desired, the process can still offer meaningful options for directing the focus of the company.”
Business owners and directors should consider whether the PBC corporate form is right for their business and consult with a professional to evaluate the following questions:
- Does the company want to articulate a specific public benefit in its charter, or does it want to incorporate only with a general benefit?
- What jurisdiction is the best place to incorporate, given the different reporting requirements, potential need for a benefit director, and varying fiduciary standards?
- Should the company appoint a dedicated benefit officer to oversee the benefits reporting requirements?
- How can the company clearly articulate criteria to measure progress toward its general and/or specific public benefit?
- Should the company pursue B Corp certification, and, if so, what steps can it take at the outset of incorporation to increase its chances of obtaining certification?
PBCs are likely to grow in frequency and popularity. The trend lines and attitudes point toward an increased focus on corporate social responsibility in the coming years, and more investor money is likely to flow in that direction.
3 Del. Code tit. 8, § 365.
4 Del. Code tit. 8, § 367.
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