A public benefit corporation is a type of entity where profit is considered as important as societal, environmental, employee, and community-based impact.
Understanding public benefit corporations
Public benefit corporations are those that are required by law to balance the needs and outcomes of stakeholders with financial considerations. In the United States – where such entities have been authorized in 45 states and the District of Columbia – they are sometimes referred to as B Corporations or PBCs.
Unlike traditional corporations, public benefit corporations must positively contribute to society in some way. It may be that the company creates jobs by establishing a presence in an underprivileged area. Alternatively, some may donate money to charity or invest in sustainable business practices.
In either case, the company must strike a balance between profit maximization and social good. Indeed, some public benefit corporations may still choose to invest in a sustainability initiative even if short-term profits are sacrificed in the process.
Key components of a public benefit corporation
Five key components define a public benefit corporation and its various obligations:
- Purpose – the purpose of a PBC is to create general public benefit. This includes society and the environment, but also any stakeholder that is materially affected by the company’s decision-making.
- Accountability – in a PBC, the board of directors has extra accountability in that the financial interests of shareholders must be considered with various environmental and social factors. They are also afforded the legal production to define a mission that does not prioritize profit.
- Transparency – benefit corporations must report on how they achieve public benefit. The exact mechanism differs by state or country, but in many locations, a third-party standard must be used to measure performance or progress.
- Performance – in the United States and Canada, PBCs must be recertified every three years and achieve a minimum verified score.
- Cost – like reporting mechanisms, the cost of registering a PBC depends on location. In general terms, fees range from $70-350.
How to start or transition to a public benefit corporation
According to the U.S. Chamber of Commerce, there are four steps a new or existing company needs to complete to become a certified B Corporation.
Step 1 – Pass the test
The first step in a B Corp application is to take a test with a government body called B Lab. Known as the B Impact Assessment, the test is rigorous in that it asks over 200 questions on a company’s practices and outputs.
The questions are asked across five key categories, and we’ve taken the liberty to include a sample question for each:
- Governance – What percentage of management is evaluated (in writing) on their performance across corporate, social, and environmental targets?
- Workers – What percentage of the company is owned by full-time employees? (This excludes the company’s executives and its founders).
- Community – What percentage of the company’s management is comprised of individuals from underrepresented populations? This may include women, the disabled, minority-excluded populations, and those from low-income areas.
- The environment – Does the company monitor and record its level of waste production?
- Customers – What procedures are in place to verify whether a product or service improves the impact of customers or client organizations?
Once the test is completed, the business will receive a score on its existing processes and procedures. The business in question needs a score of at least 80 to pass the test and it can also compare its results to industry peers for clarity.
Fifty Eight co-founder Quintin Lake, whose sustainable value chain company scored an impressive 156.6, noted that the rigorousness of the test “made us more aware of what we were actually doing and affirmed to us actually, that the stuff that we’re already doing was having the kind of impact we wanted it to.”
Step 2 – Telephone interview
If the company has achieved a score of at least 80 out of 200, a B Lab staff member will then conduct a telephone interview to discuss the results and verify their accuracy.
To that end, the company will be asked to provide supporting documentation for around 8 to 10 randomly selected questions.
Then, the business has the opportunity to identify, track, and learn about best practices and other opportunities. Also available are customized improvement reports, case studies, and assistance with goal setting to improve the company’s impact.
Step 3 – Adopt the framework
In step three, the business starts the internal process of adopting the B Corporation legal framework. This involves amending its articles of incorporation with language that reflects cognizance of B Corp principles as well as instituting a mission-driven commitment.
The framework ensures that the newly formed B Corp is accountable (from a legal perspective) to all its stakeholders – whether that be customers, suppliers, communities, workers, and the environment.
The framework also guarantees the company will continue to exhibit stakeholder governance principles even after leadership changes or capital raises. What’s more, the framework provides increased flexibility when the company evaluates potential sale and liquidity-related options.
Step 4 – Make the certification official
To make the certification official, the business must complete and sign a three-page pro forma document that consists of a Term Sheet and a Declaration of Independence. In general, the document details the conditions and expectations of certification.
Once certified, the company must pay an annual certification fee (based on revenue) and, as we noted earlier, renew that certification biannually.
Examples of public benefit corporations
With public benefit corporations now authorized in the majority of U.S. states, there are thousands of them in existence. Two examples are listed below.
Green Mountain Power
Green Mountain Power (GMP) is a Vermont-based company that provides cost-effective, clean, reliable electricity that is close to the source. When GMP was recertified for a third time in 2021, the company remained the first and only electricity provider to meet B Corp’s strict social, environmental, and transparency standards.
Creative project crowdfunding platform Kickstarter is also a public benefit corporation. When the company became known as Kickstarter PBC in 2015, it outlined a new charter to explain how the mission would look beyond profit potential.
Some of the key points of this charter include:
- The donation of 5% of after-tax profit toward music and art education and also to other organizations tackling systemic inequality.
- Extra paid leave for employees to mentor and train underrepresented groups in art, business, and technology, and
- Investment in green infrastructure, support of sustainable modes of transportation, and the use of key environmental criteria when selecting vendors.
- A public benefit corporation is a type of entity where profit is considered as important as societal, environmental, employee, and community impact.
- Five key components define a public benefit corporation and its various obligations. These include purpose, accountability, transparency, performance, and cost.
- Two examples of public benefit corporations include sustainable utility company Green Mountain Power and the creative crowdfunding platform Kickstarter.