The Failed Attempt to Enact Benefit Company Legislation in Australia and the Rise of B Corps

Abstract

Australia is an unusual case study in terms of the history of benefit company legislation. Unlike the history in some other countries, the attempt by B Lab Australia and New Zealand (‘B Lab ANZ’) to introduce benefit company legislation was unsuccessful. It failed to gain the support of the government and attracted a mixed response from Australian businesses and academics. The authors discuss why the attempt was unsuccessful. However, although benefit company legislation was not enacted in Australia, B Lab ANZ’s B Corp certification program has had significant success with 371 Australian B Corps as of January 2022. The authors argue that while B Lab ANZ’s B Corp certification requirements achieve, in some important respects, some of what was contained in the proposed benefit company legislation, had it been enacted the proposed legislation would have ensured greater transparency and accountability for those companies electing to become benefit companies than is currently the case for B Corps in Australia.

1 Introduction

A majority of United States (‘US’) states have enacted benefit corporation legislation, as have the Canadian province of British Columbia, the US territory of Puerto Rico, and Columbia, Ecuador and Italy.¹ Over 5,000 US companies have incorporated or re-incorporated as benefit corporations under the US legislation.²

Although the benefit corporation legislation is not uniform across all the US states in which it has been enacted, the ‘model’ legislation, which is the version enacted in most US states, requires benefit corporations to pursue a ‘general public benefit’ purpose, defined as ‘a material positive impact on society and the environment, taken as a whole…assessed …against a third-party standard’.³ Benefit corporations may, if they choose, also pursue a ‘specific public benefit’ purpose, which can include any of the following: providing low-income or underserved individuals or communities with beneficial products or services; promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; protecting or restoring the environment; improving human health; promoting the arts, sciences, or advancement of knowledge; increasing the flow of capital to entities with a purpose to benefit society or the environment; and conferring any other particular benefit on society or the environment.⁴

In addition, under the model legislation, the directors of a benefit corporation must consider the effects of any action or inaction on: the shareholders; the employees and workforce, its subsidiaries, and its suppliers; the interests of customers as beneficiaries of the general public benefit or specific public benefit; the community and societal factors; the local and global environment; the short-term and long-term interests of the benefit corporation; and the ability of the benefit corporation to accomplish its general public benefit purpose and any specific public benefit purpose.⁵

The directors may also consider other pertinent factors or the interests of any other group they deem appropriate.⁶ However, the directors need not give priority to a particular interest or factor unless this is stated in the corporation’s articles of incorporation.⁷

The model legislation requires benefit corporations to produce an annual benefit report that includes: (1) a description of the ways in which the benefit corporation pursued a general public benefit (and any specific public benefit if applicable) during the year and the extent to which a general public benefit (and specific public benefit if applicable) was created; and (2) an assessment of the overall social and environmental performance of the benefit corporation.⁸

Benefit corporations incorporated under the benefit corporation legislation are different to Certified B Corporations, also known as ‘B Corps’. A benefit corporation is a specific type of company whereas a B Corp is a corporation that has been certified by B Lab as achieving a minimum verified score on the B Impact Assessment – an assessment of the company’s impact on its workers, customers, community and environment. Certified B Corps amend their legal governing documents (for example, their articles of association or constitution) to require the board of directors to balance profit and purpose.⁹ There are over 4400 certified B Corps in more than 70 countries.¹⁰

Given this history, there is understandable interest in countries that are or have considered enacting benefit corporation legislation. One of these countries is Australia. However, the attempt to introduce legislation in Australia was unsuccessful. We explore the reasons for the unsuccessful attempt to introduce benefit corporation legislation. We also explore the parallel increase in the number of B Corps in Australia.

The introduction of benefit company legislation in Australia was strongly advocated by B Lab Australia and New Zealand (‘B Lab ANZ’), a subsidiary of B Lab.¹¹ B Lab ANZ’s main activities in Australia consist of the provision of the B Impact Assessment and the provision of the B Corp certification program.¹² The advocacy by B Lab ANZ extended to it establishing a working group to draft legislation to introduce benefit companies in Australia.¹³ However, B Lab ANZ ceased this advocacy in 2020.¹⁴

The benefit company legislation proposed by B Lab ANZ, if it had been enacted, would have created a new status of benefit company, rather than a new type of company.¹⁵ In this respect, the draft Australian legislation is different to the model US benefit corporation legislation. However, in other respects, there are close similarities between the draft Australian legislation and the model US legislation. A new or existing company could gain benefit company status under the draft Australian legislation if it satisfied certain requirements, the key being that its constitution contain a ‘general public benefit’ purpose.¹⁶ In addition, a benefit company could choose to enact one or more ‘specific public benefit’ purposes in its constitution.¹⁷ Once a company had gained benefit company status, its directors and other officers were required, when discharging their legal duties, to consider the interests of a broad range of stakeholders.¹⁸ The draft legislation also provided that the benefit company was required to produce an ‘annual benefit report’ outlining its success and failure in pursuing and creating public benefit.¹⁹ Finally, the draft legislation created a new type of proceeding, ‘benefit enforcement proceedings’, intended to ensure that benefit companies complied with their obligations.²⁰

This chapter proceeds as follows. Section 2 discusses the reasons it was believed that legislation to introduce a benefit company model was needed in Australia, and the arguments put forward as to why existing law was insufficient to enable for-profit companies to pursue socially beneficial outcomes. Section 3 summarises the benefit company legislation drafted by the working group convened by B Lab ANZ, and the policy reasons behind the various proposed amendments. Section 4 explores why the draft legislation was not enacted, outlining how the proposal was received by the Australian community, from the response of the government and other political parties, to the response of the business and academic communities. It also details how B Lab ANZ eventually decided to abandon the goal of law reform in favour of an alternative approach. Section 5 discusses B Corps in Australia, including the growth in B Corp certification, the types of companies that have gained certification, and the academic literature on B Corps in Australia. Section 6 concludes.

2 Why It Was Thought That Benefit Company Legislation Was Needed in Australia

B Lab ANZ began advocating for the introduction of benefit company legislation in Australia in 2013.²¹ It had earlier obtained legal advice that an amendment to the Corporations Act 2001 (Cth) (‘Corporations Act’) would be the best way to achieve B Lab ANZ’s desired outcomes as this would provide most certainty to directors and clarify the applicable law. In early 2015, B Lab ANZ convened a working group of academics, lawyers, business leaders and governance experts to draft an amendment to the Corporations Act to introduce a benefit company model.²²

B Lab ANZ lobbied for the introduction of this amendment on several grounds. The primary argument it put forward was legal need: B Lab ANZ contended that the Australian legal system created uncertainty for the directors of for-profit companies who wished to favour the interests of non-shareholder stakeholders.²³ B Lab ANZ argued that the Australian duty of directors to act in the best interests of the company had been interpreted to mean the financial well-being of shareholders as a general body (with the exception that in the case of a company that is insolvent or near insolvency, directors are also obliged to consider the financial interests of creditors).²⁴ B Lab ANZ noted that there was no obligation imposed by corporate law on directors to consider the interests of non-shareholder stakeholders, such as employees, customers, contractors and the community, when making decisions for the company.²⁵ B Lab ANZ argued that if directors chose to do so, they faced legal uncertainty as to whether they were properly discharging their duties.²⁶ B Lab ANZ acknowledged that it was possible under the existing law for an Australian company to modify its constitution and include, for example, a general or specific public benefit purpose, but noted there was little guidance in statute or at common law for directors who wished to do so, and argued that in practice directors would not stray far from the norm of shareholder primacy.²⁷ B Lab ANZ also argued that were directors to incorporate such a purpose in the company’s constitution, they faced the risk of claims by non-shareholder stakeholders under Sec. 1324 of the Corporations Act for failing to pursue or create a general or specific public benefit purpose.²⁸

A report prepared for B Lab ANZ by the Social Impact Hub made similar points in relation to the legal need for benefit company legislation.²⁹ As the report was prepared in 2014, it is a useful reference for some of the arguments made in support of law reform in the early years of B Lab ANZ’s campaign. The report specifically noted that there was no legal protection for directors seeking to create public benefit, and that such directors were therefore vulnerable to personal liability and accusations of breach of duty by regulators.³⁰ It argued that directors only considered public benefit to the extent needed to operate in the market whilst remaining competitive, and that this was due to the level of scrutiny placed by shareholders and the media on companies.³¹ It emphasised the lack of any case law that might ‘reassure’ directors who wished to consider public benefit, arguing that without law reform it was unlikely directors would consider public benefit as part of their core business.³² The report warned that, given the risk of litigation, legal advisers would be unlikely to endorse decisions of directors that considered stakeholder interests.³³ Finally, the report expressed scepticism that the ability of companies to modify their constitutions to permit directors to consider stakeholder interests could be an adequate solution, pointing to the lack of any case law on the interpretation of such clauses in constitutions.³⁴

One scenario that B Lab ANZ pointed to in order to illustrate the legal need for law reform was the case of a change of control or other major corporate transaction, such as a capital raising, substantial divestment, merger or acquisition.³⁵ B Lab ANZ noted that in such transactions the interests of shareholders are customarily the sole concern of directors, even where the transaction can negatively impact other stakeholders.³⁶ B Lab ANZ used the example that in the case of an acquisition, there would be no protection for a founder director who wished to reject the offer of a higher price per share from a buyer who would break up the company and move its operations offshore, in favour of the offer of a lower price from a buyer who would keep the company entire, retain all employees and stay ‘on mission’.³⁷ B Lab ANZ maintained that such protection was desirable and necessary.³⁸

B Lab ANZ contended that the introduction of its proposed benefit company legislation would not only create legal certainty for directors, in that it would protect directors who wished to favour non-shareholder stakeholders, but have a number of additional benefits.³⁹ The first of these was ‘mission alignment’: that the legislation would enable a company’s mission to be incorporated in its constitution, and create a framework giving directors legal protection to stay on mission through corporate succession, capital raising and changes in ownership.⁴⁰ The second was that the benefit company legislation would help grow the movement of business people striving for business to create social and environmental benefits.⁴¹ The third was to attract ‘impact investment’, impact investing being the growing field of investment that aims to achieve positive social and environmental impact alongside financial returns.⁴² Benefit company status, B Lab ANZ reasoned, would make a company more attractive to impact investors, as impact investors would have the assurance that the company would remain accountable to its mission in the future before committing funds to it, as well as the additional comfort provided by the requirement that benefit companies produce an annual benefit report outlining their success or failure in creating public benefit.⁴³ B Lab ANZ cited evidence from the United States that the benefit corporation structure offered discounted capital and a ‘home’ for the growing pool of ethical investment funds, as well as marketing and goodwill advantages.⁴⁴ The fourth benefit B Lab ANZ identified was that the introduction of benefit companies would help to build an ‘engaged workforce for the future’, drawing on a 2015 study that found half of millennials surveyed wanted to work for businesses with ethical practices.⁴⁵ The fifth benefit identified was that the proposed legislation created minimal additional regulatory burden, as compliance requirements would be assumed by companies choosing benefit company status.⁴⁶ Finally, B Lab ANZ argued that the benefit company model could assist to shift some of the growing burden of externalities from the public to the private sector.⁴⁷

3 Summary of the Draft Legislation

This section summarises B Lab ANZ’s draft legislation and the policy reasons behind the draft legislation. The draft legislation, together with an explanatory memorandum and an introductory briefing paper outlining the need for the draft legislation, formed part of a ‘briefing pack’ of documents that B Lab ANZ circulated to a wide group of organisations and individuals as part of its lobbying campaign to have the draft legislation enacted.⁴⁸ The draft legislation proposed a series of amendments to the Corporations Act, which is the Act that provides for the incorporation and dissolution of companies, imposes a series of duties on company directors, provides for shareholder remedies, and also regulates certain activities of companies including the raising of capital and takeovers. The B Lab ANZ amendments can be categorised as follows: requirements a company must satisfy to gain benefit company status; the obligation on directors and other officers of benefit companies to consider non-shareholder stakeholder interests; the introduction of a new type of proceeding to enforce compliance by benefit companies; the requirement for a benefit company to produce an annual benefit report; and the development of third party benefit standards. The draft legislation is based on the US model benefit corporation legislation,⁴⁹ but with some distinguishing characteristics.

3.1 Eligibility Requirements

The draft legislation prescribes the actions a company must take to gain benefit company status, whether the company is new or existing.⁵⁰ It does not create a separate category of company. The draft explanatory memorandum explains that creating an additional type of company would require significant amendments to the Corporations Act and could reduce the appeal of the benefit company structure for Australian businesses.⁵¹

The draft legislation provides that a company is a benefit company if it satisfies all of the following four criteria.⁵² First, it must be a proprietary company limited by shares, or a public company limited by shares, or a public company limited by guarantee that is not registered with the Australian Charities and Not-For-Profits Commission.⁵³ The types of companies that may elect to gain benefit company status is limited in this way because of a fundamental characteristic of the benefit company, namely, it exists to make a profit.⁵⁴ Second, the company cannot be a deductible gift recipient,⁵⁵ as such entities are usually charitable institutions rather than entities seeking to make a profit.⁵⁶ Third, the company must have a constitution.⁵⁷ This means a proprietary company cannot choose to rely on the replaceable rules in the Corporations Act rather than implement its own constitution.⁵⁸ The explanatory memorandum justifies this requirement by citing the importance of the constitution to a benefit company.⁵⁹ The fourth and final criterion is that the company’s constitution contain a general public benefit purpose.⁶⁰ This last criterion is one of the core features of the model introduced in the draft legislation.⁶¹

The draft legislation defines ‘general public benefit’ as a material positive impact on society and the environment, taken as a whole, assessed against a third party benefit standard, resulting from the business affairs of the company.⁶² ‘Third party benefit standard’ is in turn defined as a standard for defining, reporting and assessing a benefit company’s social and environmental performance that is developed by an entity prescribed by the Corporations Regulations 2001 (Cth) (‘Corporations Regulations’).⁶³

A benefit company may also choose to have a purpose of creating one or more specific public benefits in its constitution.⁶⁴ However, this is not mandated, in contrast to the requirement to have a general public benefit purpose in the constitution. ‘Specific public benefit’ is defined as the conferring of a particular benefit on society or the environment but excludes general public benefit.⁶⁵ The draft explanatory memorandum provides some examples of specific public benefit purposes, including: providing low-income earners or disadvantaged communities with beneficial services; conserving or restoring the environment; improving the health or wellbeing of individuals or communities; and promoting the arts or sciences.⁶⁶

The draft legislation clarifies that a benefit company has all the rights and obligations of companies under the Corporations Act, except so far as a contrary intention appears.⁶⁷ The draft legislation also provides that an act of a benefit company is not invalid merely because it is contrary to or beyond the general public benefit purpose or a specific public benefit purpose in the constitution.⁶⁸

A company that becomes a benefit company following registration (i.e., incorporation) or is a benefit company upon registration must notify the Australian Securities and Investments Commission (‘ASIC’) that it is a benefit company.⁶⁹

3.2 Directors’ Consideration of Stakeholder Interests

Under the draft legislation, directors and other officers of a benefit company remain subject to all the duties imposed on them by statute and general law. The change introduced by the draft legislation is that in discharging their duties, the directors and other officers of a benefit company must consider the matters listed in Sec. 190C(1)(a) of the draft legislation. These matters are: the likely consequences of any decision or act in the long term;⁷⁰ the interests of the company’s employees;⁷¹ the need to foster the company’s business relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; the interests of the members of the company; and the ability of the company to create its general public benefit and any specific public benefit purpose in its constitution.⁷² However, the directors and other officers need not give priority to any one of these matters unless the benefit company’s constitution states that they must prioritise certain matters related to the accomplishment of the general public benefit purpose or any specific public benefit purpose in the constitution.⁷³ The explanatory memorandum states that the list of matters is not exhaustive and directors and other officers may properly consider other matters in discharging their duties.⁷⁴

The explanatory memorandum states that Sec. 190C protects directors and other officers who make a decision that fails to maximise shareholder returns but results in benefits to non-shareholder stakeholders.⁷⁵ The explanatory memorandum notes that Sec. 190C is deliberately similar to Sec. 172 of the Companies Act 2006 (UK);⁷⁶ the intention is to provide benefit companies with greater certainty when applying and interpreting Sec. 190C.⁷⁷

The explanatory memorandum states that the draft legislation is not intended to expand the scope of existing shareholders’ rights and remedies under the Corporations Act.⁷⁸ Accordingly, the consideration by directors and other officers of the matters in Sec. 190C(1) does not of itself constitute a breach of the duties contained in Secs. 180-184 of the Corporations Act,⁷⁹ or prevent directors and other officers from relying on Sec. 180(2) (the business judgment rule);⁸⁰ nor does it authorise a person to do an act which would be inconsistent with any law requiring them to act in the interests of the company’s creditors, entitle a person other than ASIC to seek an injunction under Sec. 1324 of the Corporations Act,⁸¹ entitle a Court to make an order under Part 2F.1 of the Corporations Act,⁸² or entitle a person to bring or intervene in proceedings under Part 2F.1A of the Corporations Act.⁸³ The intention is that compliance with Sec. 190C(1) be enforced indirectly via the new benefit enforcement proceeding.⁸⁴

The draft legislation further provides that a director or other officer of a benefit company cannot be made liable under the Corporations Act or general law for the failure of a benefit company to pursue or create general public benefit or any specific public benefit.⁸⁵ As long as the directors have complied with their directors’ duties, a remedy can only be sought against the benefit company itself under a benefit enforcement proceeding.

3.3 Benefit Enforcement Proceedings

The draft legislation creates a new category of proceeding called benefit enforcement proceedings. These are any proceedings for the failure of a benefit company to pursue or create the general public benefit purpose or any specific public benefit purpose in its constitution, or to comply with the requirement to produce an annual benefit report under draft Sec. 300C.⁸⁶ Benefit enforcement proceedings that are brought on behalf of a benefit company must be brought in the benefit company’s name.⁸⁷

Standing to bring enforcement proceedings on behalf of a benefit company is granted to an officer of the benefit company (officer is defined in the Corporations Act to include a director or company secretary),⁸⁸ and to a shareholder or group of shareholders with at least 5% of the votes that may be cast at a general meeting of the benefit company.⁸⁹ The threshold is capped at 5% because this is consistent with the threshold for shareholders seeking to call a general meeting of the company.⁹⁰ Such persons may also intervene in any benefit enforcement proceedings to which the benefit company is a party for the purpose of taking responsibility on behalf of the benefit company for those proceedings or a step in them, e.g. compromise or settlement.⁹¹ In addition, ASIC may bring benefit enforcement proceedings on behalf of a benefit company.⁹²

Section 237 of the Corporations Act, which addresses when a person may apply for leave to bring proceedings on behalf of a company, or intervene in proceedings to which the company is a party, and when a court may grant that leave, applies to benefit enforcement proceedings.⁹³ This means that a person wanting to bring benefit enforcement proceedings must satisfy the court of the matters in Sec. 237(2), including that they are acting in good faith, it is in the best interests of the company that leave be granted, and it is probable that the company will not itself bring the proceedings, or properly take responsibility for them.

The court has the power to make the following orders in relation to benefit enforcement proceedings: an order that the company’s constitution be modified or repealed, including to remove the general public benefit purpose and any specific public benefit purpose (the removal of the former would strip the company of its benefit company status); an order requiring the company to comply with draft Sec. 300C (the requirement to produce the annual benefit report); an order that an officer of the benefit company do an act specified in draft Sec. 190C(1)(a), which provides for the mandatory consideration of stakeholder interests; and an order requiring the company to notify ASIC that it is no longer a benefit company.⁹⁴

If the court makes an order repealing or modifying a benefit company’s constitution, or requiring the benefit company to adopt a constitution, the company does not have the power to change or repeal the constitution inconsistently with that order, unless the order states the company does have the power to make such a change or repeal, or the company first obtains the leave of the court.⁹⁵

3.4 Annual Benefit Report

Section 300C of the draft legislation provides that a benefit company is required to publish an annual benefit report on its website, or, if it does not have a website, to send a physical copy of its annual benefit report to its members.⁹⁶

The annual benefit report for a financial year must contain two components. First, it must contain a narrative description of the following matters: the ways in which the benefit company pursued its general public benefit during the year and the extent to which the general public benefit was created; the ways in which the benefit company pursued each specific public benefit in its constitution during the year and the extent to which a specific public benefit was created; details of any matter that significantly affected the creation by the benefit company of the general and each specific public benefit in its constitution; and likely developments in the benefit company’s operations in the future and the expected impact of those developments on the general and each specific public benefit purpose in the constitution.⁹⁷

Second, the annual benefit report must contain an assessment of the overall social and environmental performance of the benefit company against a third party benefit standard,⁹⁸ defined as a standard for defining, reporting and assessing the social and environmental performance of a benefit company that assesses the effects of the business affairs of the company upon the matters listed in draft Sec. 190C(1), and is developed by an entity that is not a related entity of the benefit company and is prescribed by the Corporations Regulations.⁹⁹ This requirement allows stakeholders to judge whether the benefit company is creating public benefit, and to ensure independence and objectivity in the application of the standard.¹⁰⁰ The standard must be applied consistently with any application in a prior annual benefit report, or be accompanied by an explanation of the reasons for inconsistency between the application of that standard compared with the immediately prior annual benefit report.¹⁰¹ The requirement ensures that stakeholders are not misled about the changes in the creation of public benefit from year to year.¹⁰²

The annual benefit report of a public or large proprietary company¹⁰³ must be published within four months after the end of the company’s financial year.¹⁰⁴ This is consistent with the existing deadline for lodgement of financial statements.¹⁰⁵ If the benefit company is a small proprietary company,¹⁰⁶ it must be published within six months after the anniversary of the company’s registration.¹⁰⁷ This is to alleviate the compliance burden on small proprietary companies, which are not required to lodge financial statements with ASIC or their members.¹⁰⁸ A benefit company is not required to publish an annual benefit report until the end of the second full financial year or second full calendar year after its registration.¹⁰⁹ This is to alleviate the compliance burden on start-up companies.¹¹⁰

3.5 Development of Third Party Benefit Standards

The proposed amendments to the Corporations Act also contain an amendment to the Corporations Regulations. This proposed amendment relates to third party benefit standards. The draft regulation provides that an entity which develops a third party benefit standard must meet certain requirements and also be prescribed in the regulation.¹¹¹

There are three requirements, apart from the requirement to be prescribed. First, the entity is required to have access to the necessary expertise to assess the overall social and environmental performance of a business.¹¹² Second, the entity is required to make the following information publicly available on its website: the criteria considered when measuring the overall social and environmental performance of a business; the relative weightings, if any, of those criteria; the identity of the officers and members of the entity that developed and control revisions to the third party benefit standard; the process by which revisions to the third party benefit standard are made; and the revenue and sources of funding for the entity, with sufficient detail to disclose any relationships that could reasonably be considered to present a potential conflict of interest.¹¹³ Third, not more than one-third of the officers and members of the governing body of the entity can be officers, members or employees of any of the following: an association of businesses operating in a specific industry, the performance of whose members is assessed against the standard; businesses from a specific industry or an association of businesses in that industry; or a business whose performance is assessed against the standard.¹¹⁴

The list of prescribed entities was not drafted, but was to be inserted following public consultation.¹¹⁵

4 Why the Draft Legislation Has Not Been Enacted

B Lab ANZ began advocating for the introduction of the benefit company model in Australia in 2013,¹¹⁶ and by 2016, the working group convened by B Lab ANZ in 2015 to draft the legislation had completed this work. However, by 2020 B Lab ANZ had discontinued this advocacy.¹¹⁷ The draft legislation was not enacted, nor indeed introduced into Parliament as a bill because of B Lab ANZ’s lack of success in convincing the government to enact the model,¹¹⁸ and the opposing views on the merits of the model in the Australian community, particularly some influential parts of the business community.

4.1 Political Response to Draft Legislation

B Lab ANZ engaged in lengthy consultations as part of its advocacy for the introduction of the draft benefit company legislation. This included consultations with the Department of the Treasury and some politicians and their advisors. However, support from the government and the Department of the Treasury was not forthcoming.

Although B Lab ANZ was unable to persuade the Coalition government, in power between 2013 and 2022, to enact benefit company legislation, both the Australian Labor Party (‘ALP’) and Greens indicated either support for the purposes behind the draft legislation or specific support for this type of legislation. In its 2018 policy platform, the ALP promised to re-establish the Corporations and Markets Advisory Committee¹¹⁹ and task it with considering and reporting on whether the Corporations Act required amendment to clarify the extent to which directors could consider the interests of non-shareholder stakeholders or the broader community when making corporate decisions, and whether companies should be required to report on the social and environmental impact of their activities.¹²⁰ The Greens expressed even clearer support for the type of amendment proposed by B Lab ANZ in a 2016 policy document, which promised to amend the Corporations Act to create the category of ‘Benefit Corporations’. The policy stated this would give company directors legal protection when considering the social and environmental impact of their decisions, and that companies would be required to report on their social and environmental performance using an independent third party standard.¹²¹

4.2 Business Community Response to Draft Legislation

Despite garnering support from the ALP and Greens, the model failed to win widespread support in the Australian business community. Strong support came from the Responsible Investment Association of Australasia and Impact Investing Australia.¹²² In addition, some companies that had already gained B Corp certification also expressed support for the law reform.¹²³ Governance Institute, an association of governance and risk management professionals,¹²⁴ was more cautious, expressing ‘in principle’ support to the benefit company amendment on the basis that it would not interfere with other provisions of the Corporations Act or the ability of directors and officers to rely on the business judgment rule.¹²⁵ On the other hand, the view of the Australian Institute of Company Directors was that the objects of the benefit company amendment were able to be achieved under existing law and that changes were therefore unnecessary.¹²⁶

4.3 Academic Community Response to Draft Legislation

The academic community also expressed different views on the merits of the proposal. Some academics, when discussing the possible introduction of the benefit company model into Australian law, expressed the view that law reform was unnecessary, or at least not essential, as existing Australian corporate law allowed companies to adopt purposes other than profit. For instance, Baumfield noted there was no case law explicitly requiring directors to maximise shareholder wealth to the exclusion of other corporate objectives,¹²⁷ and that two government reviews had found that directors could legitimately consider social factors in their decision-making without the need for express statutory or shareholder authorisation.¹²⁸ Klettner, while supportive of law reform, accepted that existing legal structures were well suited to achieving the aims of social enterprises.¹²⁹ Klettner was of the view that Australia was still at the stage where it was best to wait and see how the social enterprise sector developed before deciding whether new legal structures were necessary. Langford also considered that existing Australian law allows companies to adopt purposes in addition to or other than shareholder profit in their constitutions,¹³⁰ and argued that directors would not be exposed to liability for breach of duty if they did not achieve those purposes.¹³¹ However, Langford added that, given the uncertainty around the issue, it could be worthwhile to introduce a provision similar to Sec. 172(2) of the Companies Act 2006 (UK) to signal the permissibility of incorporation for purposes other than profit.¹³² Morrissy, a member of the B Lab ANZ working group that drafted the proposed amendments to the Corporations Act, and a practising lawyer rather than an academic, described the objective of maximising shareholder profit to be a ‘practical’ duty of directors that was ‘arguably more perception than legal obligation in Australia’.¹³³

One Australian academic argued that the introduction of the proposed reforms could be regressive by giving non-benefit companies licence to operate poorly. Baumfield argued that such reform could inadvertently ‘ghettoise’ expectations for sustainable corporate behaviour, by reducing pressure on ‘traditional’ corporations to operate in a socially beneficial manner.¹³⁴ However, Morgan countered that while the legitimacy endowed via a specific model could be ‘double-edged’ in this respect, in that it could entrench social enterprise in the fringe or alternative economy, such a possibility was inevitable for all ‘oppositional’ social movements that gain partial acceptance.¹³⁵ Morgan argued that, furthermore, the introduction of a new legal model would likely have the important benefit of encouraging the creation of a professional community to support the new model, comprising, for example, lawyers, accountants, business planners, and tax agents.¹³⁶

Some contributors to the academic literature proposed that the main advantage of the benefit company model related to signalling, branding and marketing. Morgan, for example, described the existence of the model as providing companies with a particularly efficient signalling mechanism when compared to governance design. She cited qualitative survey data that companies relying on customised legal models to signal commitments beyond profit were frustrated with the time it took to explain these customised models to stakeholders, especially potential financiers.¹³⁷ Indeed, Morgan viewed the benefits of a specific legal model as going beyond ‘mere’ branding and marketing, arguing a distinctive legal model served to ‘legitimise’ a socially oriented new economy.¹³⁸ Even Baumfield, otherwise sceptical of the proposed reform, accepted that the introduction of the benefit company model could be useful from a branding perspective and potentially facilitate better reporting about social impact.¹³⁹ However, Klettner did not see a pressing need to introduce the model for its signalling benefits despite being supportive of law reform, viewing existing certification schemes (such as B Corp certification) as helpful enablers.¹⁴⁰ Langford expressed support for this view.¹⁴¹ Morrissy, on the other hand, disagreed, arguing that the uptake in B Corp certification in Australia did not overcome the legal and practical difficulties for companies that wanted to pursue both profit and social good.¹⁴² Klettner suggested an alternative: that certification schemes be encouraged by Australian authorities, and given some legal backing to provide remedies for failure to adhere to certification requirements, for example through consumer or competition law.¹⁴³

The other advantage of introducing a new model identified in the literature was that it could reassure risk-averse company officers who wished to consider non-shareholder stakeholders in their decision-making. While Baumfield considered any advantages of the model would not outweigh the risk of the reform reducing pressure on traditional companies to operate sustainably,¹⁴⁴ she accepted that the new model would serve to appease risk-averse directors concerned about the risk of litigation from pursuing socially responsible strategies.¹⁴⁵ In Baumfield’s view, however, this risk was low to non-existent. Klettner, too, was of the view that directors faced ‘no real fear’ of being sued if they considered social and environmental factors in their decision-making.¹⁴⁶ On the other hand, Morrissy viewed this advantage as critical to the rationale for the law reform, saying that directors were uncomfortable to stray too far from the profit-maximisation norm, and that removal of the risk of liability for considering non-shareholder interests, as well as the obligation to consider public benefit, was a ‘fundamental part’ of why the reform had potential to effect change in corporate behaviour.¹⁴⁷

4.4 B Lab ANZ’s Abandonment of the Draft Legislation and Introduction of the ‘B Corp Legal Requirement’

In September 2020, B Lab ANZ announced that it had decided to abandon its goal of legislative change. In a blog post on its website, B Lab ANZ explained that in 2019 it conducted over 100 consultations with members of Parliament, lawyers, business leaders, academics, governance experts and public servants to gain support for benefit company legislation.¹⁴⁸ B Lab ANZ stated that from these consultations, it learned two common reasons the reform was believed to be unnecessary. First, it was thought that existing law was sufficiently flexible to allow companies to adopt elements of the benefit company model. Second, directors already believed they were expected to consider non-shareholder stakeholders in their decision-making.¹⁴⁹ Furthermore, B Lab ANZ noted concerns that the reform could give traditional companies licence to operate poorly.¹⁵⁰

B Lab ANZ stated that all these opinions were very different from those expressed when it first began pursuing law reform in 2013.¹⁵¹ B Lab ANZ noted that at the time it was felt that although it was legal for a company to adopt the elements of the benefit company model, doing so would increase directors’ risk of liability.¹⁵² B Lab ANZ stated that since that time there had been a shift in expectations of corporate practice and culture.¹⁵³ Particularly, it noted that there had been an increased regulatory focus on non-financial risk; increased use of sustainability reporting frameworks; pressure from investors and the community in relation to non-financial risk; and increased risk of litigation against companies that failed to address non-financial risk, particularly the impact of climate change.¹⁵⁴

B Lab ANZ credited at least some of this evolution to the rise in B Corp certification both internationally and in Australia.¹⁵⁵ This is likely justified: during the time that B Lab ANZ lobbied for the enactment of benefit company legislation, the number of B Corps in Australia increased exponentially, from 12 in 2013¹⁵⁶ to 257 in January 2021.¹⁵⁷ It is possible that this significant increase in the number of Australian B Corps reduced the perceived need for B Lab ANZ’s proposed benefit company legislation in that some participants in the debate about the proposed legislation may have thought that the increase in the numbers of B Corps possibly showed that many of the objectives of the proposed legislation could be achieved by undertaking the B Corp certification process. As a related point, the perceived need for the proposed legislation has not dampened the uptake in B Corp certification; that is, the perceived uncertainty surrounding B Corp directors’ duties has not lessened the attractiveness of B Corp certification.

Interestingly, in 2016, one Australian social enterprise company (which does not have B Corp certification) proposed a new legal model to facilitate social enterprise: a ‘social benefit company structure’.¹⁵⁸ Essentially, the company aimed to circumvent the perceived uncertainty around directors’ duties by incorporating three clauses into its constitution: a public benefit purpose, a mandate for directors to consider the interests of a broad range of stakeholders when making decisions, and a requirement that any amendment to the first two clauses be agreed to by 100% of shareholders.¹⁵⁹ The company stated that it did not believe legislative change as proposed by B Lab ANZ was necessary, although the company did state that it thought it would be helpful, and it encouraged other social enterprises to consider adopting the model it proposed.¹⁶⁰ It is unclear whether any other companies followed suit. However, the company’s proposal is noteworthy as it shows how one company believed it was able to more or less achieve the objectives of the draft legislation by constitutional amendment only, and because it foreshadowed the approach B Lab ANZ ultimately took in 2020.

B Lab ANZ introduced its new approach, called the ‘B Corp legal requirement’, in September 2020, positioning it as a replacement for the abandoned goal of legislative reform.¹⁶¹ The ‘B Corp legal requirement’ requires B Corps to amend their constitutions to include two clauses. The first stipulates that the company’s purpose is to ‘deliver returns to shareholders whilst having an overall positive impact on society and the environment’.¹⁶² The second clause essentially implements the provision in the draft legislation that required directors and other officers to have regard to non-shareholder stakeholder interests when discharging their duties, stipulating that:

In discharging their duties under this constitution, the Corporations Act and the general law, the directors or other officers of the Company:

• (a) will include in their consideration the following factors:

  • (i) the likely consequences of any decision or act of the company in the long term; and

  • (ii) the interests of the company’s employees; and

  • (iii) the need to foster the company’s business relationships with suppliers, customers and others; and

  • (iv) the impact of the company’s operations on the community and the environment; and

  • (v) the desirability of the company maintaining a reputation for high standards of business conduct; and

  • (vi) the interests of the members of the company; and

  • (vii) the ability of the company to create an overall positive impact on society and the environment; and

• (b) Need not give priority to a particular matter referred to in paragraph (a) over any other factor (included in paragraph (a) or otherwise).¹⁶³

B Corps are not permitted to remove language from the two clauses, but are permitted to add additional language or clauses to suit their needs or mission.¹⁶⁴ This means that a B Corp can have an additional clause in its constitution that, in effect, contains a ‘specific public benefit’ as defined in B Lab ANZ’s draft benefit company legislation.

Previously, B Lab ANZ did not require B Corps to amend their constitution as part of the certification process, as it was thought that law reform was required to clarify the duties of directors of Australian B Corps.¹⁶⁵ Instead, companies seeking certification were only required to sign a contract with B Lab ANZ providing that the company would, ‘to the extent permissible under Australian law, consider the impact of its decisions not only on shareholders, but also on its employees, customers, suppliers, the community, and the environment’.¹⁶⁶

B Corps that submitted their ‘B Impact Assessment’¹⁶⁷ before 1 September 2020 had until their next recertification or March 2022, whichever was the later, to amend their constitutions to satisfy the new B Corp legal requirement, while aspiring B Corps may need to do so prior to finalising certification or they may have up to 12 months from certification to make the amendment.¹⁶⁸

If the requirements of the draft benefit company legislation and B Corp certification are compared, it is evident there are clear similarities—most notably with respect to the B Corp certification process requiring that the company’s constitution be amended to stipulate that the company’s purpose is to ‘deliver returns to shareholders whilst having an overall positive impact on society and the environment’ and that the company’s directors and other officers have regard to non-shareholder stakeholder interests when discharging their duties.

However, there are some notable differences. First, the draft legislation requires a benefit company to publish an annual benefit report on its website that, among other things (1) describes the ways in which the benefit company pursued its general public benefit purpose (and any specific public benefit) and the extent to which the benefit was created, and (2) contains an assessment of the overall social and environmental performance of the benefit company measured against a third party benefit standard.¹⁶⁹ B Corps are not subject to the same level of public disclosure. B Corps must undertake the B Lab ‘B Impact Assessment’,¹⁷⁰ but what is disclosed on the B Corp directory website about each B Corp is much more limited than what is required by the draft legislation. For each B Corp, the B Corp directory discloses a brief profile of the company, an ‘Overall B Impact Score’ (which must be a score of at least 80 for the company to be certified), the individual ‘Impact Area Scores’ that make up the overall score (these are divided into the areas of governance, workers, community, environment and customer), and ‘Previous Overall B Impact Scores’ (for older B Corps that have re-certified).¹⁷¹ There is no narrative description of the type required by the draft legislation and in fact no annual reporting requirement of the type required by the draft legislation.

Second, as a means of accountability, the draft legislation contains the concept of ‘benefit company proceedings’ allowing a member or members of the benefit company with 5% of the votes, an officer of the benefit company, or ASIC, to bring proceedings for the failure of the company to (1) pursue or create a general public benefit purpose or any specific public benefit purpose in its constitution, or (2) publish an annual benefit report that complies with the requirements of the draft legislation. B Corps are not subject to ‘benefit company proceedings’.

In these two respects, benefit companies subject to the benefit company legislation would, had the legislation been enacted, have greater transparency and accountability requirements applying to them than the requirements currently applying to B Corps.

5 B-Corps in Australia

Although the draft legislation is no longer being pursued, there are a growing number of B Corps in Australia. Indeed, in 2019 B Lab ANZ reported that Australia and New Zealand was the fastest-growing region per capita for B Corps in the world, at a time when B Corps existed in 64 countries.¹⁷² The first B Corp in Australia was certified in June 2012.¹⁷³ By 2013, 12 Australian companies had gained certification;¹⁷⁴ by 2014, this had grown to 32 Australian companies,¹⁷⁵ and B Lab ANZ reported that it was speaking with 20-30 interested companies a week.¹⁷⁶ By 2015, the number of certified Australian companies had increased to 65;¹⁷⁷ by 2016, to 123;¹⁷⁸ and by 2017 to 184,¹⁷⁹ with B Lab ANZ reporting in November 2017 that nearly 2000 companies had taken the B Impact Assessment, the main tool used to screen candidates for certification, since 2014.¹⁸⁰ By 2018, 230 Australian companies had gained certification,¹⁸¹ and it was reported that B Corps in Australia and New Zealand were collectively employing over 4000 people and turning over more than AUD 1bn in revenue.¹⁸² By June 2019, the number of Australian B Corps had increased to 247.¹⁸³ By January 2021, the number of Australian B Corps had grown to 257,¹⁸⁴ and as at January 2022 there were 371.¹⁸⁵ In addition, there are a number of global B Corps that are not headquartered in Australia but operate in it.¹⁸⁶ Most B Corps in Australia are privately-held small and medium-sized companies with up to 250 employees.¹⁸⁷

In January 2021, the B Lab ANZ website contained a directory of Australian B Corps.¹⁸⁸ The directory categorised B Corps in one of two categories: business products and services, and consumer products and services. B Lab ANZ listed 186 companies under business products and services and 121 under consumer products and services. B Lab ANZ divided each category further into sub-categories according to sector. Table 1 depicts the number of companies in each sector for business products and services and Table 2 depicts the number of companies in each sector for consumer products and services. Some B Corps are counted in both Tables 1 and 2 because they operate in both two main categories.

Table 1 B Corps - Business products and services^a

Table 2 B Corps - Consumer products and services^a

Tables 1 and 2 demonstrate that the sectors with the most B Corps are: Financial Services, Marketing & Communications Services, IT Software & Services/Web Design, and Food & Beverage (in descending order).

To gain B Corp certification, companies must complete B Lab’s B Impact Assessment and score a minimum of 80 points out of a possible 200.¹⁸⁹ If a company is unable to score above 80 points and wishes to seek additional help, it is able to join ‘Become a B Corp’ online workshops or book a one-on-one consultation with B Lab ANZ.¹⁹⁰ B Lab ANZ has reported that most businesses make changes to become certified.¹⁹¹ As of 2020, a key component of the certification process is that the company meet the legal requirement in its constitution.¹⁹² Once the company has completed its assessment and scored at least 80 points, it must submit it along with a submission fee of AUD 250.¹⁹³ There is now typically an eight-month wait before the application is assigned an Evaluation Analyst by the B Lab global standards team.¹⁹⁴ The evaluation and verification process also generally takes several months.¹⁹⁵ This step requires that the company verify its answers, for example, by submitting documents.¹⁹⁶ Once the score of at least 80 is verified, the company is required to sign the B Corp Agreement, pay the certification fee, and publish its profile on the B Corp directory.¹⁹⁷ Certification fees are calculated on a sliding scale depending on the company’s annual sales in AUD, starting at a fee of AUD 1000 for a company with annual sales of up to AUD 150,000, increasing to a fee of AUD 50,000 for a company with sales over AUD 1bn.¹⁹⁸ B Corps must recertify every three years.¹⁹⁹

In contrast to the mixed response to B Lab ANZ’s proposal to introduce benefit company legislation, the reception of the B Corp certification program has been very positive.²⁰⁰ One corporate lawyer predicted that consumers, where they had a choice, would choose certified B Corps over other companies, and so market forces would result in an increasing number of companies seeking B Corp (or equivalent) certification.²⁰¹ The director of one Australian B Corp predicted that B Corp certification would eventually become as recognisable as Fairtrade certification.²⁰² Several B Corps were also quoted in the media as saying that one of the key benefits of certification was that they were able to attract more engaged and talented employees.²⁰³ Another B Corp reported that certification allowed it to increase its visibility for the work it was doing to benefit indigenous communities.²⁰⁴ Observers noted the breadth of industries represented by companies seeking B Corp certification,²⁰⁵ including financial services, human resources consulting and recruitment, film and music production, consumer products and services, media and print publications, marketing and communication services, and IT software and services.²⁰⁶ There was also interest from property developers who believed that the B Corp movement could improve standards and be used in marketing to buyers and investors.²⁰⁷ There was even interest in certification from the legal industry, although it was noted that it would be important, given the professional obligations of lawyers, for law firms with B Corp certification to make it clear that there was a hierarchy of obligations to the court, clients and the pursuit of social and environmental good.²⁰⁸

The academic literature examining B Corps in Australia is limited. The literature includes three exploratory studies on the business models of B Corps conducted by Stubbs. Stubbs’ first study, published in 2017, was a qualitative exploratory study of 14 Australian B Corps that investigated how B Corps integrate social and environmental goals into the core of their business activities and goals.²⁰⁹ Stubbs conducted in-depth interviews in early 2014 with the founder or director of each participating B Corp. Stubbs’ research revealed several tentative findings. First, the research suggested that B Corps view profit not as an end in itself, but as a means to achieve social purpose ends, described as ‘profit with purpose’.²¹⁰ Second, participants’ main motivation for seeking certification was alignment of values, with the B Corp certification providing a ‘common collective identity’ for participants that validated and explained their business approach to stakeholders.²¹¹ Third, half of the participants had not made significant changes to their business practices since adopting the B Corp model, as their practices were already aligned, but all participants noted that certification had prompted them to review their policies and practices.²¹² Fourth, while all participants agreed that profits were a key measure of success of the business, none stated their aim was to maximise profit.²¹³ Some focused on breaking even, others on making small profits rather than great or super profits.²¹⁴ Participants viewed profits as allowing them to invest in the business, so the business could grow and increase its positive impact.²¹⁵ However, one B Corp that was experiencing financial trouble in an intensely price-competitive market felt it was ‘compromising the B Corp values’.²¹⁶ Finally, Stubbs found that while B Lab ANZ and B Corps had engaged in lobbying to introduce benefit company legislation, the main focus of the B Corps surveyed had been on grass roots campaigning to educate and recruit other companies to the B Corp movement.²¹⁷

Stubbs’ second paper investigated the B Corp model as a new form of sustainable business model, based on interviews with the same 14 Australian B Corps in early 2014.²¹⁸ This study revealed broadly similar findings to the first, albeit evaluated against a ‘sustainability business model’ analytical framework derived from the literature. Stubbs’ third paper investigated how a single Australian B Corp reconciled economic and social imperatives in its structure, strategy and business practices.²¹⁹ It found that the company had needed to implement several strategies to address tensions between its pursuit of profit and social impact.²²⁰

6 Conclusion

B Lab ANZ advocated for legislative reform to introduce a benefit company model in Australia until 2020. The draft legislation proposed by B Lab ANZ comprised a voluntary status of benefit company that new or existing companies could opt in to, which obliged them to amend their constitutions to introduce a public benefit purpose, and mandated that their directors and other officers consider the interests of a broad range of stakeholders when discharging their duties. Benefit companies were to be subject to an additional reporting requirement, the annual benefit report, in which they reported on their success or failure in pursuing and creating public benefit. A new type of legal proceeding was proposed, the benefit enforcement proceeding, to ensure that benefit companies complied with these new obligations.

The proposal failed to gain the support of the government, and attracted a mixed response from Australian businesses and academics. The most common reason put forward by those who did not support the B Lab ANZ proposed law reform was that they believed existing Australian law already allowed companies to pursue public benefit purposes alongside profit. They saw the main advantage of the law reform as the signalling value to companies that opted for benefit company status, but some did not view this benefit as creating any urgency for law reform, in part because of the existence of certification programs such as the B Corp certification. B Lab ANZ decided ultimately to abandon the law reform project in favour of introducing a requirement that B Corps amend their constitutions to mandate that the company’s purpose is to ‘deliver returns to shareholders whilst having an overall positive impact on society and the environment’ and that the company’s directors and other officers consider a broad range of stakeholder interests when discharging their duties.

While the law reform project did not succeed in the way it was hoped it would, B Lab ANZ’s B Corp certification program has enjoyed significant success in Australia. Australia and New Zealand are together the fastest growing region per capita worldwide for B Corp certification, and companies from a broad range of industries are represented in B Lab ANZ’s Australian B Corp directory. However, while B Lab ANZ’s B Corp legal requirement achieves, in some important respects, some of what is contained in the draft legislation, had it been enacted the draft legislation would have ensured greater transparency and accountability for those companies electing to become benefit companies than is currently the case for B Corps.