by Ernie C. Jolly
At a shareholders’ meeting for the fictional corporation Teldar Paper, Wall Street (20th Century Fox, Dec. 11, 1987) antagonist Gordon Gekko argued that “greed, for a lack of a better word, is good” and that “greed, in all its forms, greed for life, for money, for love, [for] knowledge, has marked the upward surge of mankind.” Although a fictional tale, the blockbuster hit may have foreshadowed what became the dominant culture among private corporations prior to the 2008 financial meltdown. Since the crisis, financial analysts have identified greed as the impetus that encouraged Wall Street executives to amass unsustainable amounts of financial risks. Notwithstanding its negative impact, the crisis sparked a movement that has the potential of changing corporate culture for better. Through “benefit corporation” statutes, lawmakers in several states have modified their laws to encourage more altruistic behavior among entities. This movement may have been futile if the crisis had not challenged the notion that greed is essentially good. In that vein, the time may be ripe for federal policymakers to consider ways to encourage other states to enact similar legislation.
Corporations are creatures of state statutes that define the standards for incorporation. Despite differences among the states’ corporate codes, these laws are rather consistent in compelling corporate directors and managers to pursue the single goal of increasing profits for the benefit of shareholders. Accordingly, among many corporations, profit maximization usually trumps any desire to serve a public purpose.
In April of 2010, Maryland became the first state to enact a benefit corporation statute. Currently, Maryland has been followed by 11 other states. These statutes legally allow entities to pursue interests beyond simply increasing profits for investors. According to B Lab, a nonprofit whose mission is to use the power of business to solve social problems, benefit corporations: “(1) have a corporate purpose to create a material positive impact on society and the environment; (2) are required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment; and (3) are required to make available to the public an annual benefit report that assesses their overall social and environmental performance against a third party standard.” After electing to become a benefit corporation, corporate directors and officers are legally protected if they consider the non-financial interests of their workforce, local communities, and the environment while making decisions, even if the decisions do not yield the most profit.
Despite the flexibility afforded to them on the state level, benefit corporations are treated by the Internal Revenue Service as any other for-profit entity, and donations to them are not deductible as they would be if given to a charity. Therefore, a benefit corporation’s income is fully taxable, and their investors and donors are not provided the same tax incentives as traditional charitable donors. As the House Committee on Ways and Means considers comprehensive tax reform, the Committee should also consider organizing hearings on benefit corporations. If this current tax treatment is eventually changed, there may be both more incentive for entities to adopt the new corporate form, and more pressure on state legislatures to jump on the bandwagon.