B Corps pose new risk for directors and officers
A company’s board of directors and officers hold many distinct roles and responsibilities, from setting corporate policies to investment and asset management. Their duties to both shareholders and employees mean these individuals must continually work to balance the interests of various stakeholders, thereby increasing their exposure to liability and legal claims. Defense against these risks is a challenge in and of itself, but what happens when there is an additional social benefit cause to uphold as well? The directors and officers of benefit corporations (B Corps) must simultaneously balance profit goals alongside a specific social or environmental cause that the company seeks to support. Doing so can become problematic, especially with multiple leaders at the table vying for decision-making power.
According to B Lab, the non-profit certifying organization for benefit corporations, these businesses exist to use the power of business to solve social and environmental problems, and must meet rigorous standards of social, environmental performance, accountability and transparency. There are currently over 1,000 registered B Corps in more than 33 countries 60 industries (think Etsy or Patagonia). And while only private companies have pursued B Corp certification, experts say there’s no reason to think that a company that goes public wouldn’t maintain its social mission. However, just as the risks for traditional, for-profit corporations tend to increase following an IPO, it’s likely that a newly public B Corp could face additional liability concerns as well. Furthermore, due to the relatively new existence of B Corps, there is little to no litigation history that can provide directors and officers a full view into the spectrum of risk.
The dilemma is twofold. On one hand, adopting the B Corp legal framework to expand the definition of the ‘best interests” of the company reduces liability exposure for directors and officers, since they must consider the interests of multiple stakeholders when making decisions. At the same time, however, this also gives shareholders additional rights to hold their directors and officers accountable for taking into consideration those same interests. Legal experts point to the difficulty that ensues when trying to balance stakeholders’ interests against the social mission of the company. Furthermore, B Corps are required to measure their overall social and environmental performance against a third-party standard, and must produce an annual report that outlines the organization’s achievement in accomplishing their public benefit goals. Directors and officers may also be held liable to a “Benefit Enforcement Proceeding” which can be brought against directors and officers for failing or violating their duties regarding the B Corp’s public benefit purposes. These proceedings can be brought on by the organization itself, derivatively by a shareholder, a director or by a person or group owning five percent or more in corporate equity. The threshold is even lower in certain jurisdictions (such as Delaware), and in the case of a publicly traded B Corp, it is the lesser of 2 percent or $2 million in market value. Thus, directors and officers of B Corps face additional exposures to derivative suits compared to those of traditional corporations.
Thanks to an ever-expanding world of claims and litigation, D&O insurance continues to become more complex and industry-specific. Directors and officers of B Corps need to understand the unique risks they face, especially when it comes to balancing competing shareholder interests surrounding profit goals and the company’s social mission. Working with a trusted advisor who understands these risks can help, but given the infancy of B Corps, a lack of predictability surrounding liability issues still exists.
About the Author
Jennifer Sharkey is an Executive Vice President at WGA and Leader of the firm’s ExecutiveRisk Practice. She is responsible for the strategic and tactical leadership of this practice by providing consulting, marketing and negotiation expertise on Directors’ & Officers’ Liability, General Partnership Liability, Private Equity/VCAP, Fiduciary Liability, Fidelity, Kidnap/Ransom & Extortion, Employment Practices Liability and Professional Errors & Omissions Liability.