The evolution of benefit company reform in Australia
In 2013 we started advocating for the benefit company model to be introduced into Australian law. The aim was to enable companies to commit to pursue both profit and positive impact, for directors to consider the company’s impact on stakeholders in their decision-making, and to report on these considerations.
In Australia, company directors have a duty to act in the best interests of the company (among other duties, including a requirement to act in good faith and for a proper purpose). Prioritising shareholders is not an express requirement, and it is not written into the Corporations Act 2001 itself. Yet the idea of shareholder primacy is widespread in the culture and practice of business.
Benefit company reform was solving two problems in the Australian context:
(i) Meeting the Legal Requirement component of B Corp Certification (which differs depending on the legal system); and
(ii) Moving corporate culture from shareholder primacy to stakeholder governance.
A core element of the benefit company model was for a company to amend its governing document, usually its constitution. Two amendments were contemplated: first, a commitment to deliver an overall public benefit, and second, to consider stakeholders (not only shareholders) in decision-making.
The benefit company model also provided a framework for ensuring this practice did not lead to claims against companies for failing to live it up to their commitments, and required them to issue an annual report on their impact. The intention was for any company to have the option to govern and operate its business in this way, not only Certified B Corporations.
Our goal was to enable B Corps to lock mission into a governance framework so that B Corps could remain true to that purpose over time, through changes in management and ownership.
It is important to remember that any mechanism put in place by a shareholder resolution can later be changed by shareholders, and the benefit company model was no different.
A new way forward
We can now achieve the goals of benefit company reform without legislative change. The benefit company framework was needed in 2012 when the prevailing view of the law was that acting in the best interests of a company meant pursuing shareholder profits at the expense of other stakeholders. Since then, the intention to commit to purpose and consider stakeholders has moved from the minds of a few leaders to the hands of many. This way of doing business is increasingly considered good governance.
How did we get here?
In 2019 we conducted more than 100 consultations with MPs, lawyers, business leaders, academics, governance experts and public servants to build support for benefit company legislation in Australia. These consultations were invaluable, as we gained feedback and insight. We heard two common reasons why people thought that the benefit company reform was unnecessary in Australia, and potentially unhelpful:
Existing law was sufficiently flexible to allow companies to adopt the elements of the model; and
Directors already believed there was an expectation that they would consider non-shareholder stakeholders in decision-making.
We were struck by how common this opinion was, and how different it was since we started actively pursuing benefit company reform in 2013. It was encouraging to hear, as advocates of people using business as a force for good.
We also heard concerns that introducing new legislation may create two classes of companies and give “traditional” companies license to operate poorly. All of this feedback caused us to reflect on where we were going.
We always knew that a company could legally adopt any of the benefit company model’s elements but in 2012 it was felt that doing so may increase risks of legal action against the company’s directors. Our goal then was to highlight leaders, not generate lawsuits.
We have now found that there has been a shift in focus towards non-financial risk, making it far less likely a company would be seen to be causing harm to shareholders. For example, in recent years we (and many others) have observed:
An increased focus on non-financial risk in the regulatory environment
An uptake of sustainability reporting frameworks
Investor and community pressures concerning non-financial risk, and
Increased risk of litigation against companies for failing to address non-financial risk, in particular, failure to take into account the impact of climate change.
These developments show progress towards the goals we had been pursuing through the benefit company reform. Most importantly, these developments represent a shift in the expectations of practice and culture for all companies.
The rise in Certified B Corporations both globally and locally has undoubtedly contributed to this evolution in culture and practice.
With that in mind, we are changing our approach to build on the progress that is being made. At B Lab ANZ our strategy is focused on improving the culture and practice of business in Australia and Aotearoa New Zealand. Instead of working towards benefit company legislation, our new B Corp legal requirement aims to scale the number of companies legally committing to create an impact and consider their stakeholders, alongside generating profit.
Eight years since we started this work, we can now achieve the goals of benefit company reform even without legislative change. Through working with a range of regulators, academics and lawyers, we have determined that B Corps can amend their Constitutions to bring the same stakeholder governance to life. By sharing what B Corps do, together we will lead the way for businesses in Australia. Embedding purpose into a company’s key governing document was always the bedrock of the legal requirement. Amending a company constitution allows the company to lock in its mission and ensures accountability to current and future shareholders and stakeholders.
We believe that as the bar for corporate behaviour has generally increased, the risk directors face for acting in accordance with self-imposed, express, and higher standards has decreased. Good governance practices by directors will ensure that duties are met, and the more directors who take this approach, the more standards will continue to evolve.
Of course, you should explore what works for you and your business, and seek legal advice where needed.
For more information about where we are going next, read about our plans for building the evidence base on stakeholder governance here. To find out how Certified B Corporations can meet the new legal requirement, head here.