What Are Public Benefit Corporations (PBCs)?

Astute investors tracking the initial public offerings (IPOs) of companies such as eyewear maker Warby Parker and green shoe manufacturer Allbirds might have noticed that these companies are registered as public benefit corporations (PBCs).

Until recently only private companies or subsidiaries adopted this corporate structure, and PBCs were beyond the reach of the typical individual investor.

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Public Benefit Corporations (PBCs)

The PBC corporate structure signals that a business considers a "triple bottom line" – people, planet and profit – extending benefits to stakeholders like communities and employees.

Delaware, where a majority of publicly traded companies (and virtually all new startups over the past five years) are incorporated, adopted PBC regulation in 2013. At present, 36 states and the District of Columbia have passed laws allowing for PBC charters.

An amendment to the law in 2020 has made this option more feasible and attractive for a growing number of companies. For example, directors now have greater protection if a company is accused of failing to deliver on its public benefit goals, and opting in or out of a PBC is now a matter of obtaining a majority of shareholder votes, lowered from 90%.

Before 2020, there was just one publicly traded PBC: Laureate Education (LAUR). Since then, about a dozen publicly traded companies have incorporated as PBCs, and several private PBCs have come public via IPO.

Given strong investor interest in environmental, social, and governance (ESG) issues, more companies might consider the PBC business model to set themselves apart, and possibly to prime themselves for inclusion in ESG funds.

Public benefit corporations define the particular benefit purpose aside from shareholder interest. In the case of online education company Coursera (COUR), for example, this purpose is "to provide global access to flexible and affordable high-quality education that supports personal development, career advancement, and economic opportunity." A PBC company's directors are required to balance the stated purpose with financial interests of shareholders. However, this does not mean that financial concerns are secondary to a benefit purpose, nor does it mean that directors are legally liable for failure to meet the benefit purpose.

A PBC must report every other year on its efforts and progress to attain the stated public benefit. Though this reporting may be done through a third-party certification, it is not required and may simply be self-reporting.

Also note that the nonprofit B Lab has provided "B Corp" certification to more than 4,000 companies globally, including to some PBCs. These two monikers sound similar but are not the same.

PBCs Meet Shareholder Activism

In response to rising corporate and investor interest in ESG and sustainability, the U.S. Business Roundtable (BRT) issued a splashy reframing of the Purpose of a Corporation document in 2019, signed by 181 CEOs.

No longer centered only on creating shareholder value (referred to as "shareholder primacy"), the new purpose includes creating value for customers, employees, communities and suppliers, in a nod to the concept of "stakeholder capitalism."

Yet a 2020 study of BRT letter signatories found that these companies performed no better than non-signatories when it came to responding to the workplace and societal challenges posed by the COVID-19 pandemic. Frustrated by this apparent lack of accountability, some ESG investors have pressured signatories to the BRT letter to become public benefit companies by filing shareholder proposals.

So far, those proposals largely haven't stuck.

Investor advocacy nonprofit The Shareholder Commons and others filed at least 16 shareholder proposals asking companies to convert to PBCs. Of these, all but one received very low shareholder support and cannot be refiled next year; in fact, even some of the most progressive fund managers, such as Boston Trust Walden and Calvert, voted against PBC shareholder proposals.

Yelp (YELP) – which garnered almost 12% shareholder support and is the only vote that stands a chance of moving forward to the next proxy year – will be an interesting test case.

Pros and Cons of PBCs

There are some good reasons that investors interested in ESG should consider PBCs:

• In many cases, these corporations offer innovative business models that embed public benefit by design. For example, Broadway Financial (BYFC) is the largest Black-led minority depository institution in the U.S., which in turn can help provide much-needed capital to minority-owned businesses in urban communities.
• Company directors have more freedom to adopt a long-term vision for company growth and value creation.
• Many of these companies are consumer-facing, offering sustainable branding and origin stories at a time when consumers increasingly favor sustainable brands.
• For companies that are now private and going public, the PBC IPO may offer greater transparency on ESG goals and reporting.
• The PBC corporate structure has not deterred venture capital (VC) investors, indicating a level of comfort and trust in the PBC model. A 2020 study of 295 Delaware-registered PBCs that received private funding between 2013 and 2019 showed that VC funds invested $2.5 billion in PBCs, at a rate similar to conventional companies.

Just understand there are downsides to investing in PBCs as well.

• Existing publicly traded PBCs are still a new structure, and many companies remain skeptical of the logistics and legal fees required for conversion.
• PBCs might be less attractive as takeover targets, meaning that shareholders might be less likely to benefit from an acquisition.
• Just because a company is a PBC does not mean that it has adopted other best practices for corporate governance. In the case of Allbirds, the company's IPO includes dual-class board structure, granting directors 10 times the voting power as shareholders.
• PBCs are not required to be certified by third parties, and the value of ESG reporting and performance metrics are not regulated or standardized.

Bottom Line

PBCs are likely to remain a small but growing niche of investible companies. While this business model is an intriguing way of signaling that sustainability is part of corporate DNA, there are no guarantees that this structure will avoid greenwashing, or merely be used for marketing. Investors should care about this potential shortfall.

Accurate, certified, standardized ESG reporting and performance commitments may lead to better management and in many cases, improved financial performance. A 2020 Fidelity study found that from January to September 2020, companies with top ESG ratings outperformed those with poor ratings for every month other than April, with a cumulative difference in relative returns of 17 percent. A 2020 State Street study reported similar effects.

How do individual investors get access to this valuable ESG data? Aside from a few nonprofit organizations that assemble publicly available information, mom-and-pop investors have few ways to access or untangle it. For this reason, investors should welcome sustainability information provided in a PBC IPO, where ESG disclosure is so often lacking.

For existing and larger corporations however, this type of self-reported data is simply less valuable than what the big investment firms are analyzing, and investors should tread with caution.