Legislation amendments explained
The model legislation provides that benefit companies must include a "general public benefit" object in their Constitutions.
1.1 Why is this a positive thing? The proposed amendments will allow the option to intentionally and formally expand a company’s purpose, allowing a general public benefit to be considered - enshrining the triple bottom-line of ‘profit, people and planet.' Enshrining this as a constitutional object allows for 'purpose lock' also known as 'mission lock'.
1.2 Can't companies do this already?
(a) Yes, but by doing this under the current law, directors expose themselves to risk from action for breaching directors’ duties because they failed to pursue or create the "general public benefit" included in their Constitution. The model legislation clarifies that directors of benefit companies cannot be liable for a failure to pursue or create a general public benefit.
(b) Directors of benefit companies have a 'roadmap' of specific factors they must consider to fulfill their statutory duties. Directors can be subject to orders that they take into account these specific factors if the company fails to pursue or create a general public benefit purpose in its Constitution – but as mentioned above directors cannot be held liable for failure to pursue or create the benefit.
2. The model legislation provides that directors of benefit companies must take into account specific factors in discharging their statutory duties – the duties of care and diligence (s. 180), good faith and proper purpose (s. 181), to avoid improper use of position (s. 182) and to avoid improper use of information (s. 183).
2.1 Why is this a positive thing? Directors of benefit companies have a clear 'roadmap' that informs them as to what specific factors they must consider to fulfil their statutory duties. These factors include long-term consequences of decisions; employee interests; relationships with suppliers, customers and other third parties; community and environmental impact; reputation; members' interests; and the creation of benefit as set out in the Constitution.
2.2 Can't directors do this already? Directors who take into account these broader factors within the benefit company framework are protected under the model legislation – they cannot be sued for a breach of directors’ duties simply by considering these factors. [As highlighted by recent discussions, we need to consider amendments to the model legislation to clarify that directors are protected from both actions alleging breach of statutory duties and common law duties.]
3. Model legislation introduces annual reporting requirements.
3.1 Why is this a positive thing? By reporting on social and environmental performance as well as the traditional financial indicators, companies give shareholders new information to better monitor not only their profitability but also their culture and ethical stance: as evidenced in their mission and actions.
3.2 Can't companies do this already? Yes, but there are currently no mandatory reporting rules which require companies to report on the social or environmental impact of their activities. The model legislation introduces a standard for reporting, and it can be expected that this will allow for 'like-for-like' comparability, trend analysis and emergence of a 'market practice'. Directors will also have the assurance that the company's performance will be measured against an objective third party standard, thus promoting accountability and transparency.