Benefit Corporations (and Social Enterprise) are going strong in Massachusetts!

Benefit Corporations (and Social Enterprise) are going strong in Massachusetts!

As of December 1, 2012, Benefit Corporations (“B corps”) became an available entity type in Massachusetts (MGL 156e click for text).  If you haven’t been following the movement B corps “are a new type of corporation which uses the power of business to solve social and environmental problems.”  http://www.bcorporation.net/about

When I wrote my first blog on the subject “To Be or Not to B Corp” in 2010 (exploring pros and cons), the Benefit Corporation designation was only a third party designation granted by B Lab, a non-profit group.  Since that time B Lab has been busy working with states to create an actual benefit corporation structure that includes state mandated transparency and accountability.  Now B corps have been approved in 14 states. (I have heard through the grapevine that Delaware may be throwing its hat in the ring soon which would be HUGE. Shhh to be continued)

What does it mean to be a B corp in Massachusetts?

A B corp isn’t getting any breaks.  It is treated exactly like any other corporation, including taxation and corporate governance requirements.  Where it mainly differs is:

  1. In the articles of organization the company must state that it will provide a general benefit to the public. If the company wants, it can state a specific benefit that it will be providing, but the company is still required to provide a general benefit as well as the specific one you have in your charter.

 

  1. The company must have an independent director known as the Benefits Director and they are responsible for monitoring the company’s beneficial activities and preparing the yearly Benefit Report.  Benefit Directors cannot own more than 5% of the equity of the company and they cannot have been employed by the company for at least one year prior to their being a director.  (if you are a professional corporation this requirements is waived).

 

  1. The Benefit Report is due with the company’s annual statement each year. It is supposed to be a narrative description of the activities and progress the company has made towards their public benefit initiatives and an accounting of their overall social and environmental performance measured against a third party standard.

 

What companies are good candidates to be a B corp?

Every Company!  Ideally B corps will become the norm and every company will be a good corporate citizen.  Any business has the ability to provide a benefit through charitable activities; employee benefit plans and perks, sustainable operations practices, etc.  At the moment social enterprises are set up to be the most successful as B corps due to the cultural and economic alignment.  As examples, South Mountain Company (pictured above) and Zero Energy Design showed up at the Secretary of State’s office to convert to B corps on the first day allowable.  Both of these companies are involved in sustainable design and architecture.   South Mountain Company is also an employee owned Co-Op and both companies are engaged in community activities that go beyond their revenue producing activities.  Dancing Deer Baking Company, has a philanthropic focus and also converted.

How do you form a B Corp?

If your company is brand new, you can form directly as a B corp with the Secretary of State.  If the company already exists, then you can convert.  Converting requires filing Articles of Amendment for your Articles of Organization and of course, the requisite shareholder votes.  The filing fees are low for amendments, making it relatively easy to get started on your CSR.

Downsides of the Massachusetts B Corp

  1. There is no modifier to your name. You don’t get to call yourself “XYZ, B Corp” or “ XYZ BINC.” (which I would sooo call my company! Ha, BINC.) This means that you don’t have anything readily alerting consumers about your B corp status, so you still have to do the marketing and education for it, so that people know you are an option if they prefer to support benefit creating businesses.

 

  1. The Benefit report is a little nebulous. What is really supposed to go into that report and the third party standard required for comparison is still undefined.  The minimum requirements for complying with the statute are also unknown.  Exactly how much of a benefit must a company provide in order to satisfy the state and what are the repercussions if they don’t?

 

  1. The independent director can be a tricky one as well. You are most likely bringing in someone that has either never been a part of your company or hasn’t been involved for at least a year.  What is this director responsible for?  Do they get to vote in on every vote as a normal director would? (so far it looks like yes).  What exactly are their duties and can you modify/expand upon those in the by-laws?

 

  1. What about buyer’s remorse? Once you are a B corp, you can’t just back out easily.  You have made a commitment to the state, to your shareholders, and to your community.  It isn’t impossible; you can amend your articles again to remove the pertinent language and resulting responsibilities, but it takes a super majority vote of your shareholders to approve it.

 

This is a new entity type, so there is always a level of first mover disadvantage, but the state and public are supporting this movement.  Companies can make a profit and be a productive, not destructive, force in their communities, so the upside of being a trail blazer should as usual, more than make up for these initial risks.

What’s next?

For years, I have been rooting for an LLC counterpart to be added to the Benefit Corporation movement.  The L3C is picking up steam and currently being considered by Massachusetts, but it has a different aim than the B corp.  B Lab has stayed away from the LLC because of the flexibility inherent in its structure.  Corporations are a “creature of statute”, meaning that longstanding law dictates how a corporation operates, which is what makes the legislative implementation of the B corp so important.  An LLC on the other hand is a “creature of contract”, meaning that you can write whatever you want into your articles and operating agreement about your mission or agenda without potentially violating your owner’s rights under corporate law.  That being said, there is no public transparency or state accountability with a private contract between the LLC’s owners.  So an LLC could say it will provide a benefit, but not have to file a report or face consequences from the state if they don’t.   Illinois recently passed the Benefit Corporation legislation and has new legislation pending for the first Benefit LLC.   Come on Massachusetts! Are you going to let Illinois be more progressive than you?

In the meantime, keep an eye out for local B corps!

/by

Green Marketing or Green Washing? (Part Deux)

Green Marketing or Green Washing?  (Part Deux)

We left off in my last blog post  at Enforcement.  The best part!  So if the green guides when applied can be pretty stringent and since we can probably agree that most companies, whether or not unwittingly, violate the standards, then why don’t we have FTC actions coming out our ears?!

The Green Guides were implemented in 1992, but only 45 complaints have been brought under the guides since their inception.  During the Bush Administration, not a single environmental marketing complaint was brought.  Since Obama took office, seven complaints as of February 2010 had been brought and FTC Director, David Vladeck has said that tougher enforcement and guidelines are a major part of the Commission’s agenda.  Additionally, the FTC is revamping the rules to be more representative of the current green market and the language that producers, retailers, and consumers are using.  A new set of guidelines has been released that preliminarily include further definitions and we should be seeing an official draft soon.

Ok, seven cases, how is the FTC enforcing these guidelines?  The catalyst case thus far has been the Kmart Corporation case (07/15/2009).  In this instance, Kmart engaged in the following:

  • Marketed “American Fare” plates as “biodegradable”.
    • Biodegradable on its own implies a complete breakdown and return to nature within a reasonably short period of time.
    • 91% of solid waste in the US is disposed of in landfills, incinerators, or recycling facilities, in ways not amenable to the conditions required for American Fare to decompose.

As a fun little exercise, how could K-Mart have avoided this action? Certain disclosures perhaps?  Nothing like 100 words worth of fine print to accompany your branding.

So Kmart screwed up and they were called on it.  To solve this little matter, Kmart signed a “Consent Agreement” which is an admission of guilt for settlement purposes.  Companies that willingly sign these can expect to see some leniency from the Court and the order against Kmart is considered to be light.

    1. Court required that no claims be made of degradability, biodegradability, or photodegradability unless they are true, not misleading, and based on reliable evidence.
    2. That there can be no other representations of environmental benefit unless those representations are true and backed up by evidence.
    3. For 5 years after any representation is made, Kmart has to make available to the FTC for review at any time all advertising and marketing materials and all evidence that would either support, qualify, or call into question their representation in the company’s possession.  All complaints and communications with consumers or any governmental or consumer protection organization.
    4. A copy of the order had to be delivered to all current offices, directors, and principals and each of them were required to sign saying they have received and understand the order.  Additionally they have to provide a copy of the order to all current personnel and future personnel.
    5. The FTC has to be notified within 30 days of any changes in ownership, control, bankruptcy, or any change that may affect compliance.
    6. Kmart had to submit documentation of their compliance with the order within 60 days.
    7. The order is in effect for the next 20 years.

That is lenient and light?!

Dyna-E International, Inc.  and George Wheeler (President of Dyna-E) individually were cited for their biodegradability claims as well, when it came to their “Lightload” paper towels (12/15/2009).  Whereas there was no personal liability brought in the Kmart case, in this instance the FTC went after Wheeler as the President, and therefore controller, of the company.  Watch out for those fiduciary responsibilities!

Given the lack of previous enforcement in this area, the FTC is still feeling things out.  Each complaint/order is a little different.  Dyna-E and George signed a Consent Agreement.  Dyna-E suffered the same fate as Kmart.  George’s liability is that he must inform the FTC whenever he changes any contact information for the next 10 years, including if his position changes and what his new duties and responsibilities are. (This also applies if he leaves Dyna-E and goes to work with another company, bringing the new company under scrutiny. Good luck getting another job).

The Bamboo Cases have added some interesting consequences to the mix as well.  There have been a number of recent cases against Bamboo sellers for textile purposes:

  • In re The M Group, Inc.
  • In re Pure Bamboo, LLC
  • In re Sami Designs, LLC
  • In re CSE, Inc.

In these cases, producers were selling their product at a premium price due to the following claims:

  • Their textile fiber products are bamboo fiber;
  • Their textile fiber products are manufactured using an environmentally friendly process;
  • Their textile fiber products retain anti-microbial properties of the bamboo plant; and
  • Their textile fiber products will completely break down and return to nature, e., decompose into elements found in nature, within a reasonably short period of time after customary disposal.

In actuality, these products are not Bamboo, but rather are rayon, a regenerated cellulose fiber; nor are these textiles manufactured using an environmentally friendly process but rather a process that involves the use of toxic chemicals and results in the emission of hazardous air pollutants.  Additionally, the textiles do not retain anti-microbial properties of the bamboo plant; and products will not completely break down and return to nature, i.e., decompose into elements found in nature, within a reasonably short period of time after customary disposal because a substantial majority of total household waste is disposed of by methods that do not present conditions that would allow for this decomposition.[i]

The truly interesting part here is that in February 2010, The FTC sent a letter to 78 businesses warning them that they may be violating the rules by selling bamboo products where those products have non-compliant packaging/advertising.  Companies receiving the letter included Wal-Mart, Kmart, and Target.  So now it isn’t just the marketer/supplier that is on the hook.  It is the retailer.  They are on notice.

Doing business internationally? What’s happening there?

The UK (ASA, Advertising Standards Authority) implemented their environmental claims enforcement in 1995 and since 1998 they have very aggressively enforced it.  In 2003 they revamped their codes to close loopholes.  Some examples:

  • The ASA banned a Finnair add campaign because it led consumers to think flying was eco-smart. (2010)
    • Finnair had to pull all of its posters, adds, and digital versions of a campaign showing one of their planes flying over the Finnish coast with the tag line “Be Eco-Smart, choose Finnair’s new fleet.” Complainants challenged whether the claim “Be eco-smart” misleadingly implied that flying was environmentally friendly, and whether the advertiser could substantiate that the new fleet was “eco-smart” in comparison with older planes, says the ASA.
  • ASA pulled a British Gas “Zero Carbon” TV commercial because it implied that their fuel was carbon neutral. (2008)
  • ASA banned advertising for Cotton USA. “Soft, sensual and sustainable, it’s Cotton USA!” “Pure, sensual and renewable, it’s Cotton USA!” Cotton is a “pesticide- and insecticide-intensive crop” that could “seriously deplete” groundwater in the U.S. (therefore not sustainable or renewable) (2008)
  • The ASA banned a Lexus add that claimed “High Performance, Low Emissions, Zero Guilt” because it implies that the car causes little or no harm to the environment. (2007)

In 2008, Australia and France implemented environmental marketing guidelines and Norway followed.  These countries as well have been laying the smack down on green washing.

  • Norway banned “green words” from any car adds within their country on the grounds that cars are never good for the environment. They can only be less harmful than other cars in the marketplace.
  • France issued regulations saying that cars can no longer be portrayed in nature, as is a common practice in auto advertising. Instead, they must only be shown on roads and other routes open to traffic, where they are typically used. (showing the car in nature suggests an environmentally friendliness to the car)
  • Monsanto was fined by France for false advertising after claiming that their Roundup product, the world’s most popular pesticide, was “biodegradable.”

This is just a handful.  There have been many more.  Obviously these countries have been more stringent in their concept of green washing; they also have more bite to their bark.  While the U.S. has kept everything on an internal basis, unknown to consumers, unless they are nerds like me, the UK and France have pulled products off shelves and advertisements off of walls.  That is a big financial and good will loss for those companies.  It is retroactive, not just a going forward…

The Future

So what have we learned?

  1. The FTC is ramping up enforcement and retooling the guidelines.
  2. If you are a retailer, vet the products you sell.
  3. If you are doing business in Europe, BEWARE.

Also in the works are increased SEC regulations.  The SEC voted in January to require publicly-traded companies to disclose to investors the potential economic impact of new greenhouse gas regulations. The SEC has previously existing rules about climate change reporting, but they were vague and fairly ignored.  The SEC revised interpretations make reference to the fact that the EPA, our Federal Government, and State government are making fast strides to implementing new legislation, as well as international legal structures and norms that are taking place.  Therefore the SEC plans to reissue new regulations after public hearings that were held in the spring and will implement tougher and more comprehensive requirements.

Added to this plethora of regulations, states are getting involved to protect their residents.  California and Indiana have individually incorporated the Green Guides into their own environmental marketing laws.  So producers and retailers alike (especially online retailers) need to be paying attention to state consumer protection and advertising regulations, as well as federal, and foreign if you are that lucky.

Once again, a very wordy blog from my desk…sorry about that.  This is exciting stuff though and I hope I was able to break it down and bring out the fun stuff.  Bottom line, if you are in a “sustainable” business, no matter what the industry, be prepared to learn your green guides and start eradicating green washing from your system.  The Sherriff is on his way and you want to be a step ahead when he gets here.

 

[i] These actions also violated the Textile Act.  You cannot mis-label or mislead consumers about what the “ingredients” are.  You have to disclose the type and percentage of fibers.

/by

Green Marketing or Green Washing?

Green Marketing or Green Washing?

We have all seen a lot of green claims out there.  Greener! Sustainable! Recyclable! Post-Consumer Waste! Biodegradable! It seems that companies everywhere are grabbing onto a buzz word and plastering it on their packaging, websites, and commercials.  How can we as consumers be sure of the accuracy of these statements and how can companies be sure they aren’t violating the Truth in Advertising regulations?

Enter the FTC and its guidelines that aim to prevent green washing in marketing under the banner of Truth in Advertising. Unfortunately most businesses have very little knowledge of these guidelines, due to their lack of enforcement, and therefore even the most sustainably-minded companies are often guilty of green washing.  But the Obama administration has stated that enforcement of these guidelines is a priority going forward, so consumers are about to get some clarity!

To check out the green guides for yourself you can read them at the FTC website: http://www.ftc.gov/bcp/grnrule/guides980427.htm.  Or you can keep reading for a snarky summary. J

The Green guides apply to all environmental claims that are included in any kind of marketing, whether directly or by implication.  So a company needs to take the guidelines into account for every aspect of their marketing including labeling, advertising, promotional materials and any marketing through words, symbols, emblems, logos, depictions, product brand names, digital advertising, attributes of the products themselves, as well as the packaging, or services (if you are a services company).  The rules are actually pretty expansive.  If you even so much as place a leaf in your logo (see mine) , you better know the implications.

These guidelines are not definitive rules on how to do things.  Other approaches are permissible, but the guides are meant to be a safe-harbor for businesses/marketers.  If you followed them and your marketing was still green washing, then no harm no foul, just change your marketing to correct the error.

So the basic requirements are these:

  1. You have to be clear.
  2. Draw a distinction between the benefits of the product, package or service
  3. No exaggerations about environmental benefits.
  4. Explain comparisons, don’t leave us hanging (20% more than what?)

If you are making qualifications or disclaimers, they need to be understandable.  The customer needs to know what you are qualifying or disclaiming.  What is more relevant however, is knowing when you need a qualifier or disclaimer.  You need to be clear about what the claim is referring too.  Is it the product, the product’s packaging, a service, or just a portion or component of the product or service?  If you market something as recyclable, is every part of it including the packaging recyclable?

The Guides give more specific examples of how these principles are implemented, especially when it comes to the use of certain words. General claims whether intentional or not can be deceptive and misleading, including the company name.  If your name is “Green Fuel” and you own some oil platforms……… (doesn’t matter that your last name is Green).  I wonder if French’s mustard is misleading.  It certainly isn’t French.  Perhaps the apostrophe solves that problem.

  • Degradability, biodegradability, or photodegradability should be qualified (explained) in two ways: 1. the product or packages ability to degrade in the environment where it is customarily disposed and 2. the rate and extent of degradation.
  • Two things to consider: 1. can the package or product be safely composted in a home compost pile or device; 2. does the claim mislead consumers about the environmental benefit provided when the product is disposed of in a landfill.  If it is only compostable at the local municipality composter, then say that.  You also have to include a disclaimer that municipal facilities may not exist.  Also, how safe is the resulting compost? If it decomposes but leaves behind toxic chemicals, you have violated the rules because composting (in the mind of the consumer) is usually an environmental benefit and can be used for other purposes.
  • Pretty much the same as above.  It has to be recyclable, and accepted by recycling programs.  If because of size, shape, or any other reason, centers won’t take it, then you have misled the consumer, despite the fact that you did not technically lie. You also need a disclaimer about the limited access to recycling facilities. You have to tell people that they may not have recycling available in their area.  When was the last time you saw that on packaging? Hmmm……
  • Recycled content. Is it pre or post consumer (you don’t have to disclose that) but if it is pre, the marketer has to have solid evidence that the content would have otherwise entered the solid waste stream. The material has to have been recovered; it cannot be recycled raw materials.
  • Source reduction claims should be qualified. If weight, volume, or toxicity have been reduced, by how much and compared to what?
  • Need to have a collection or refill program set up.  If it is up to the consumer to be creative, get rid of the claim.
  • Ozone Safe and Ozone Friendly. Good Luck!

Obviously some big ticket items are missing, like carbon neutral, carbon recapture, carbon credits, etc.  The Ozone layer was the big concern/buzz words when these guides were initially drafted.  We now use a very different language to describe eco-benefits.   The FTC is currently reviewing these standards and will be issuing further guidance.  So stay tuned on the language we are actually using.

Main thing to remember:

When making any express or implied assertion or claim about the environmental attribute of a product or service, at the time the assertion was made, the marketer must have possessed and relied upon a reasonable basis (competent and reliable evidence) substantiating that assertion.

The “reasonable basis” is generally held to mean that there is reliable scientific evidence in the form of tests, analyses, research, studies, or other evidence based on the expertise of objective professionals in the relevant area.

The Green Guides are not actually enforceable regulations.  Compliance is completely voluntary.  These guides are an administrative interpretation of the laws administered by the FTC.  The real teeth are with Section 5 of the FTC Act.  Section 5 prohibits deceptive acts and practices in or affecting commerce.  So the only way the guides are enforced is that non-compliance may mean that you are failing to satisfy the rules in Section 5 of the FTC Act and the FTC can take corrective action there.

“Deceptive” is determined by three factors:

  • There must be a representation, omission or practice that is likely to mislead the consumer
  • Likelihood of misleading based on Reasonable person standard/Reasonable Group Standard.
  • The misleading representation, omission or practice was material

The reasonable person standard/group standard looks at who the marketing is intended for, whether that is an individual, a sub-culture, or a definable group and determines how they would reasonably interpret the representation.  Materiality is present if the misleading claim is likely to affect the consumer’s conduct or decision regarding the product or service.  Omissions are included.  If you neglect to say something material, it is deceptive.

So having read all that (sure you did), what do you think?  Green Marketing or Green Washing?

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* Picture taken from the “Greenwash Guide” by Futerra Sustainability Communications.

Tune in for my next blog.  I will go over the current cases brought by the FTC and how companies have gotten into trouble.  I will also let you know how international transactions are being effected (Europe way harsher than the US thank god) and I’ll give you a heads up on what is heading our way.

/by