Benefit Corporation In California Meets Chill In San Francisco

March 23, 2012       Mark Hrywna      

Legislation that would provide incentives for Benefit Corporations pursuing city contracts in San Francisco has run into opposition from the state’s network of charities, questioning the need to provide an advantage to for-profits with a social mission.

Bill No. 120082 would amend the San Francisco Administrative Code to provide an incentive for California Benefit Corporations when it comes to bidding on city contracts. Board of Supervisors President David Chiu introduced the measure at the end of January. San Francisco currently provides contract bid preferences to local businesses, a program administrated by the Human Rights Commission, after which this legislation would be modeled, according to Chiu.

Benefit Corporations are a new legal entity created through legislation in seven states, including California. B Corporations are corporations that are certified by a third party, such as B Lab, a Berwyn, Pa.-based nonprofit. Other states that have authorized Benefit Corporations are Hawaii, Illinois, Maryland, New Jersey, New York and Vermont.

Despite some changes to the original measure, the California Association of Nonprofits (CAN) still opposes the bill.

The bid preferences would give Benefit Corporations additional points in a graded system the city uses for bidding contracts. Some groups already have managed to get the legislation changed, so that if a locally-owned small business or a local nonprofit is bumped, the discount would not apply, according to Jan Masaoka, CAN’s chief executive officer. Still, the organization opposes the bill because, she said, nonprofit privileges should not go to for-profit corporations with no meaningful oversight or reporting requirements.

“There’s no basis — of either historical disadvantage or evidence of benefit — to give these kinds of nonprofit-like privileges to for-profit companies that have virtually no regulation or restrictions,” said Masaoka. She testified on the legislation during a recent hearing by the city’s Budget and Finance Sub-Committee. “They have to promise to do good but they don’t have to do good,” she said, adding that that there’s no need for legislation to attract these organizations to San Francisco because it’s already a hotbed of social innovators of all kinds.

“We’re not against the existence of these corporations. We’re against them getting nonprofit-like preferences, without nonprofit-like restrictions and oversight,” said Masaoka. The Budget and Finance Sub-Committee is expected to have another hearing in April.

There’s some confusion about Benefit Corporations and B Corporations. Susan Mac Cormac, a partner in the Corporate Group and co-chair of the Business Department at Morrison & Foerster, one of the largest law firms in San Francisco, said the way that the legislation is written, it’s unclear whether it applies to B Corporations or Benefit Corporations — or both.

“A Benefit Corporation is not a ‘B Corp’ and unlike other states there is no requirement in California that founders of a Benefit Corporation file and pay the fee necessary to become a B Corp,” she wrote in a letter to the Board of Supervisors.

“There is no way to distinguish a Benefit Corporation from any other corporation established under the Corporation Code without a close analysis of their charter documents. However, the purpose in the charter can be changed by two-thirds shareholder vote and the City of San Francisco would never know,” Mac Cormac wrote. “It is not clear how the city will determine if an entity remains a Benefit Corporation during the course of the contract or why a city ordinance would provide benefits directly to a private, nonprofit organized and operating outside of California, she said.

Mac Cormac said that a B-corporation can only use the designation if it pays a fee to B Labs (upward of $20,000 annually) and takes a self-audit, for which there is no verification.

A bill that would allow Benefit Corporations is making its way through the Pennsylvania legislature. The City of Philadelphia already has enacted a city tax credit for companies that relocate that are certified B corporations, or third-party approved sustainable companies, said Erik Trojian, director of policy at the Berwyn, Pa.-based nonprofit, B Lab, which certifies Benefit Corporations. So in that case, a company can be certified as a B corporation without necessarily being recognized as a Benefit Corporation in by the state.

B Lab’s mission is to bring the power of business to solve social and environmental problems, said Trojian. B Lab certifies that corporations meet higher social and environmental performance. The purpose of the benefit is to give directors legal protection to consider the society and the environment, in addition to profits, said Trojian, because corporate law requires companies to maximize profits and not consider anything else.

Evidence shows that these types of companies give about 10 times the amount as market average to nonprofits, said Trojian. “It behooves nonprofits to see growth of corporations. They’re not competing in the marketplace with nonprofits,” he said. “Social benefit corporations only help nonprofits in the long run,” said Trojian, putting more money into the pockets of nonprofits.