Embedding Purpose: The Case for an Independent Impact Director in Social Enterprises
Is there value for a purpose-driven for-profit company — which I’ll refer to as a social enterprise — to have an independent director responsible for overseeing the company’s social and environmental impacts? I believe the answer is a resounding yes.
Background
One common corporate structure for social enterprises is a benefit corporation. Unlike a traditional corporation, a benefit corporation has dual purposes: to generate profit for its shareholders and to provide a public benefit. In many states, “public benefit” is defined as having a material positive impact on society and the environment. Some benefit corporations identify specific benefit purposes as well. To be certified as a B Corporation, companies organized in states with benefit corporation statutes are required to be benefit corporations.
A number of the early benefit corporation statutes—for example, New Jersey’s 2011 law—require that the board of directors include an independent “benefit director.” Independent generally means that the director doesn’t have a material relationship with the company, such as being an employee or owning 5% or more of its stock.
The primary role of the benefit director is to prepare a statement for the company’s annual report to shareholders. The statement has two parts: (1) whether the corporation acted in accordance with its public benefit purposes, and (2) whether the directors and officers complied with the statutory requirement to consider the effect of their decisions on the company’s stakeholders—its shareholders, workforce, suppliers and customers, the community, the environment, and its public benefit purposes. If the directors and officers did not, the benefit director must explain how they failed to comply. Because of these requirements, many questioned why anyone would even want to be a benefit director and instead opted to incorporate their companies in states which did not have a benefit director requirement.
The Present
Fast forward to today. B Lab, the organization which certifies companies as B Corporations, recently issued new standards for becoming certified. The new governance standards require that a Certified B Corporation actively consider its impacts on stakeholders in its decision-making. The company must implement mechanisms to consider or involve its stakeholders and to represent their interests in its decision-making. It must also regularly assess its impact on the economy, the environment, and people—and engage its stakeholders in that assessment process.
One effective way to meet these requirements is to have an independent director whose role is to represent stakeholders and oversee the company’s social and environmental impact. Sound familiar? It’s essentially a modernized version of the benefit director — “benefit director 2.0,” if you will.
The Case for an Independent Impact Director
Beyond statutory requirements and B Lab standards, many social enterprises, including Certified B Corporations, can benefit from adding an independent impact director to their boards. That director would serve as a dedicated, independent voice for the company’s social and environmental impacts. Having a director in that role can only enhance the company’s commitment to and achievement of those impacts. That director could be a strong voice for impact, especially when the company is facing economic challenges. He or she could also help the company shape, define and expand its impacts.
In addition, an impact director could act as an independent advocate for the company’s stakeholders generally, especially in companies without formal stakeholder representation on the board. Moreover, with a privately owned social enterprise, particularly a family-owned company, that director could be a guiding force in helping to assure the perpetuation of the company’s mission and impacts for future generations.
I suggest that when selecting an impact director, a company should look for someone with substantial legal and business experience, a deep understanding of impact and social enterprise, and, in the case of family-owned businesses, someone who understands techniques for the perpetuation of a company’s values and estate planning strategies generally.
For limited liability companies, the independent impact director role can be easily adapted to fit the LLC structure.
Conclusion
Unlike the narrowly defined benefit director under statutory law, the impact director role can be tailored to the unique needs of each company. Including an independent impact director on a social enterprise board offers a meaningful way to strengthen accountability, embed purpose, and support the company’s long-term social and environmental mission.
DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.