Benefit corporations, described in more detail here, are a legal entity type that allow businesses to make a profit while pursuing a public benefit. There are certain responsibilities you will have if you decide to become a benefit corporation. One of these responsibilities is creating a benefit report. In this article, we will describe everything you need to know about developing a benefit report.
The purpose of the report is to show your company’s progress in pursuing and fulfilling its benefit purposes. [See the examples below and here.]
What to Know About Benefit Reports
Though benefit report requirements differ by state, most states have similar legislation (with only a few states that differ more dramatically). To show each side of the spectrum, this article will look at California’s requirements, which are similar to most other states’ requirements, and Delaware’s requirements, which differ more drastically. Both California and Delaware have three fundamental issues pertaining to benefit reports: (1) who, (2) what, and (3) when.
Before starting the benefit report, it is important to understand who the benefit report is meant for, or at least who the report must be given to.
California requires the benefit report be given to shareholders, and also made available to the public. The company is required to send the benefit report to each shareholder within 120 days following the end of the fiscal year. Alternatively, the company can send the report at the same time it sends any other annual reports to its shareholders (this option may be easiest for most companies). The company must also post the benefit report on the public portion of its website for the public to be able to access it. However, any portions of the report that have financial or proprietary information may be omitted from the report when it is posted.
Delaware requires the benefit report be given only to shareholders and does not have specific requirements concerning when or how to give it to the shareholders. Unlike California, Delaware does not require companies to make their benefit reports available to the public. However, if a company would like to ensure that its benefit report is made available to the public, it may require such disclosure in its governing documents.
As mentioned above, the benefit report is supposed to show your company’s progress in pursuing its stated benefit purposes.
California’s report contains a couple of different sections: (1) a narrative description and (2) an assessment of the company’s social and environmental performance.
The narrative description is supposed to detail the ways the company (1) pursued and created its general benefit purpose(s), (2) pursued and created its specific benefit purpose(s), (3) if applicable, anything that hindered the company’s pursuit of its general or specific benefit purpose(s), and (4) how it chose the third party standard used to prepare the benefit report.
General and Specific Benefit Purposes:
California defines a general purpose as “a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.” A specific purpose is more focused and could be “preserving the environment,” “improving human health,” or “the accomplishment of any other particular benefit for society or the environment.” For example, Patagonia states that one of its specific benefit purposes is to “build the best product with no unnecessary harm.”
Pursued and Created General and Specific Benefit Purposes:
This section describes how the company worked toward or pursued its benefit purposes during the period the report covers. For example, Patagonia explains that to pursue its specific benefit purpose to “build the best product with no unnecessary harm,” it designs clothes with some reused or recycled materials (specifically, 29% of its fabrics by weight are made from recycled sources).
Assessment of Company’s Social and Environmental Performance
In addition to the narrative description, the report needs to include an assessment of the company’s social and environmental performance. The company must use an independent third-party standard for this requirement, but it does not have to be certified or audited by the third-party standard. This assessment must be applied consistently in each year’s benefit report. If there are any changes in the assessment or what has been used in prior benefit reports, the company needs to note those changes in the report.
A third-party standard is a standard developed by an organization that meets a state’s requirement for independence and transparency. For example, Fireclay Tile uses B Lab’s B Corp certification standard and is actually certified by them. Note that California does not require a company to be certified or audited by the third party, but simply demands that the company just to use a third-party standard.
Examples of third-party standards include:
These two standards are free to use and would just need to be filled out by the company when putting together the benefit report. However, both may require a good amount of information and may take longer than you may think, so it is probably a good idea to get an early start on drafting the report.
Beyond the narrative description and assessment of the company’s social and environmental performance, the report must also include a statement of any connection between the company and the third-party standard in order to show the independence of the third-party standard. The report should also include the name of each person who owns 5% or more of the company. And, the board of directors must include a statement describing whether, in their opinion, the company has failed to pursue its benefit purposes. If the board of directors thinks the company has failed to pursue the benefit purposes, they must also include a statement describing how the company failed to do so. Note that some of this information may be considered confidential and removed from the report that is publicly posted.
Delaware’s reporting requirements are not as numerous as those of California.
Objectives, Standards for Measuring Objectives, and Factual Information:
Delaware requires that the company’s board of directors create objectives for promoting the company’s public benefits and standards for measuring the company’s progress in promoting the public benefits. These objectives and standards for measuring the objectives should be stated in the benefit report along with objective factual information based on each of the standards to show the company’s success in meeting the objectives. For example, one of Kickstarter’s objectives is to “help bring creative projects to life.” Kickstarter says that one standard for measuring this objective is “creat[ing] tools and resources that help people bring their creative projects to life, and that connect people around creative projects and the creative process.” Kickstarter provides factual information to show how they are succeeding at this goal, such as launching The Creative Independent, one such resource it provides to its users and creatives generally. The Creative Independent publishes an interview with one artist every weekday, showing that in 2016 “independent creators launched 57,515 new projects on Kickstarter,” and building “a directory of Resources [sic] to help creators as they bring their projects to life.”
Assessment of Company’s Success in Meeting Objectives and Promoting Public Benefits:
Unlike California, Delaware does not require a company to use a third-party standard for the assessment of a company’s success in promoting its public benefits. However, if a company chooses, it may require a third-party standard be used for the assessment of its public benefit, or may just use a third-party standard. The company Cotopaxi is an example of this.
The last issue involves when companies need to publish their benefit reports. California, like most states, requires a benefit report to be done every year. Delaware, however, requires the report to be completed every two years. Note that if a Delaware company wants to require its benefit reports be published more frequently, the company may include such requirement in its governing documents. Relatedly, it is important to note that some states may require companies to file their benefit reports with the Secretary of State and may even have a filing fee.
Summary of California and Delaware Benefit Report Requirements
See below for a chart summarizing California’s and Delaware’s benefit report requirements.
|Additional Notes||*Using a third-party standard but don’t have to be audited or certified by the third party.|
**May possibly be considered proprietary information that could be removed before posting the report publicly.
|*May require your company to also make it available to the public.|
**Not required to use a third-party standard but can require your company to use a third-party standard.
***May require your company to make the benefit report more frequently.
DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.