Guest Post: Does Charles Dickens still have great expectations? The Benefit Companies and some lost opportunities

Dr Marco Cristiano Petrassi, lawyer at SZA LLP expert in the area of corporate and commercial law, contributes to today’s guest post:

“To do business by acting ethically and to be ethical without renouncing profit,” this is the oxymoron of Benefit Companies. As a result of the spreading worldwide of the American movement B-Corps, the Benefit Companies were introduced in Italy in 2015; this put Italy at the forefront, being the first European legislation on the subject. Briefly, the Benefit Companies are corporations which, in addition to the purpose of producing and sharing dividends and profits, “pursue one or more purposes of common benefit and operate in a responsible, sustainable and transparent manner vis-à-vis people, communities, territories and the environment, cultural and social assets and activities, bodies and associations and other stakeholders ”

The common benefit purposes – which must be specified and included in the By-laws – may consist of the achievement, along with the carrying out of the business activity, of one or more positive effects, or the reduction of negative effects on determined categories of stakeholders. The inclusion of the common benefit purpose in the By-laws addresses the management of the company. Thanks to the expression of the common benefit purpose in the By-Laws, the Benefit Company stands out from ordinary commercial companies both on the institutional and management perspective

Whereas the introduction of such a new type of company caused great curiosity among commercial lawyers and practitioners, there were just a few corporations which were constituted or modified themselves as Benefit Companies. Indeed, in June 2018 the Postgraduate School Business and Society (Alta Scuola Impresa e Società: ALTIS) at the Università Cattolica del Sacro Cuore (UCSC) of Milan published a survey which highlights that two years after the entry into force of the relevant legislation, the Benefit Companies are approximately 170.

Among these, the 55% operates in the provision of services and advice, the 24% in the production sector, the 12% in the social and health sectors, 9% in the banking / financial / insurance sector. Geographically, almost half of the Benefit Companies were incorporated in North Italy (more precisely in Lombardy). From a dimensional point of view, 52% have less than ten employees while 63% bill less than € 2,000,000.00 a year. It seems, therefore, that this is an opportunity which has been taken only by entrepreneurial elites.

There are various reasons for this poor spread. Certainly, it is to be taken into consideration the lack of knowledge of this new corporate model by the public; moreover, the contiguity of non-profit business models (such as social enterprises, foundations and other entities of the so-called “third sector”) well regarded by the Italian market made the Benefit Company an option uneasy to be understood or appreciated. Finally, while no regulatory or fiscal benefits are granted to such type of company attractive, being a Benefit Company lead to additional costs (e.g. deriving from the impact assessment, the hiring of consultants, etc.). The hope is that the model of the Benefit Companies will still be able to overcome these obstacles and to stand out as one of the pillars of the new Italian and European economic policy related to the Corporate Social Responsibility (CSR).

The awareness of the flexibility of their organizational structure can also contribute to a wider spread of the Benefit Companies. In this regard, it I worth noting that the inclusion of the common benefit purpose within the By-laws cause that, as expressly required by the Law, “the benefit company” must be “managed in such a way as to balance the interests of the shareholders, the pursuit of the objectives of common benefit“. Furthermore, the Benefit Company’s directors are required to identify officers or managers specifically responsible for the achievement of the common benefit purpose (hereinafter, referred to also as “BP Managers”). To such respect, the research of ALTIS shows that Benefit Companies have identified the person responsible for the common benefit in the general manager for 12.73% of the cases, in a shareholder in 9.09%, in the CEO for 1, 82%, in a member of the Board of Directors for 45.45%; approximately 30% of the companies identified it instead in the holder of a different company office.

Mostly, these are subjects connected to the board of directors and chosen by the shareholders. In this respect, however, Benefit Companies have not fully seized the opportunity offered by the law. As a matter of fact, altough such hypothesis has not been envisaged by Italian scholars yet, it seems possible to argue the appointment of the BP Manager to be made by the categories of persons “benefited” from the company’s activities or, in any case, upon their indication.

For example, the appointment of one or more of BP managers could be carried out upon indication by workers of the company or by associations of consumers or users. This would be a significant case of “stakeholder engagement”, which would allow Benefit Companies to really differentiate themselves in the market and earn, not only in reputation but also in the ability to attract talents or investors.

Indeed, a similar solution has been already adopted by Italian Law, within the third sector area, for social enterprises whose directors may be appointed directly by subjects external to the company; therefore, also taking into consideration that the law does not require that the BP Manager is a member of the board of the directors, implementing a policy of stakeholder engagement for the choice or the appointment of this manager seems compliant with Italian Company Law.

An aid to the spread of the model could come, surprisingly, also from the public administration. Although corporate social responsibility is a business archetype developed with reference to private entrepreneurship, also the action of public enterprises can be inspired by it; to such respect, it is interesting the experience of some European countries which enacted policies specifically directed to implement and develop CSR practices in state-owned enterprises (SOEs).

More recently, the Italian reform of SOEs (and enterprises controlled by other public authority) requires that such companies complete their corporate governance by way of, inter alia, i) regulations aimed at ensuring compliance with the rules of protection of competition, ii) codes of conduct towards consumers, users, employees and collaborators, or other stakeholders, iii) corporate social responsibility programs, in compliance with the recommendations of the European Union.

In this legal framework, an unexpected field of application for Benefit Companies is the area of ​​publicly controlled companies; indeed, it is precisely the constitution as a Benefit Company, which seems to be one of the most effective ways for companies with public control to implement the reform. As a matter of facts, corporate social responsibility has to operate in a transparent and responsible way “towards people, communities, territories and the environment, cultural and social assets and activities, bodies and associations and other interest.”

The Benefit Company is, therefore, an entrepreneur that, by its own natural vocation, acts in compliance with the rules of competition and operates responsibly towards consumers, users, employees and collaborators and stakeholders, conforming its action to the most national and international standards. Moreover, the assessment of the social impact required by the law requires the Benefit Company to have a degree of transparency on the policies and practices adopted by the company that is absolutely consistent with the needs of publicly owned companies.

By way of Benefit Companies, a new legal institute has been introduced in Italian legal system that gives legal status to a different way of doing business, because it is officially oriented towards combining the reasons for profit with those of responsibility towards the community of reference; with a good dose of pragmatism, this is probably not the turning point, but the diffusion of the model will contribute to the development of a more fluid, however reliable, structure of Western economies and their welfare systems. It is also certainly a good opportunity to be seized by entrepreneurs who, already careful to issues of sustainability in the medium and long term, can also use this tool to differentiate themselves on the market and be competitive.