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California bank takes up 'dual fiduciary duties' with benefit corp status

One Oakland, Calif. bank wants customers to see it as a force for good in its community, and it is turning to an uncommon legal structure to do it.

Beneficial State Bancorp Inc. reincorporated under a Delaware public benefit corporation, or PBC, status on Oct. 23, a designation that allows for-profit companies to have a duty to an ethical mission, in addition to its obligations to shareholders. Beneficial's mission includes community development and environmental stewardship.

As one of the first banks to get this legal status, Beneficial State hopes to set a precedent other banks can follow. "Our mission is to change the banking system for good," Kathryn Taylor, Beneficial State's CEO, said in an interview.

Beneficial State Bank has a unique structure in which the shareholders are nonprofit trusts. At least 75% of its lending activity supports its community and environmental goals, while about 25% supports neutral projects. The bank pays 150% of a living wage in all markets to its employees, and is green certified "everywhere it's possible," according to Taylor.

Being a PBC helps the bank and its board adhere to the mission they set out with even as they grow and take on new investors, said Susan Mac Cormac, a lawyer at Morrison Foerster who works with Beneficial State. But while some investors think the status adds value, many are wary of what they see as a trade-off between mission and profitability, she said.

If a bank is considering a similar move, its board "really needs to consider the impact of this change on the valuation of the company and the business of the company," said Mac Cormac.

Certified PBC banks show mixed financial performance, according to S&P Global Market Intelligence data. New York-based Amalgamated Bank, the largest certified bank at nearly $4.64 billion, reported an efficiency ratio of 71.55% for the third quarter of 2018, higher than the industry median for banks with $1 billion to $5 billion in assets at 60.51%. Beneficial State's efficiency ratio was 80.89% for the third quarter. Beneficial State also had the lowest return on average assets of the group, at only 0.18%. The industry median for banks with $1 billion to $5 billion in asset was 108 basis points higher.

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"Traditional corporate law would say the purpose of a company is to make profits, and everything else is just sort of a means to do that," said Frederick Alexander, head of legal policy at B Lab, a nonprofit that certifies and assists PBCs. "With the benefit [corporation] you get to have a more balanced viewpoint."

Mac Cormac, the lawyer who works with Beneficial, described PBCs as having "dual fiduciary duties" that are weighted equally. In Delaware, if a PBC is not meeting its mission, shareholders have the same tools they would for a breach of fiduciary duty. They could sue or remove board members for breaches of mission.

In the banking industry, another designation exists for companies with the same kinds of mission. Community Development Financial Institutions focus on low-income and distressed communities and has the advantage of a development fund. Banks have the option of getting both CDFI and benefit certifications.

Douglas Faucette, a banking lawyer at Locke Lord LLP, thinks that as a practical matter, the PBC status might not make much difference. He said that if the shareholders disagree with a board action, they would simply vote in a new board. He pointed to a mutual holding company as a structure that would allow a company to act as a PBC with no shareholders. "Can you totally ignore the shareholder interest? That's doubtful," he said.

At its core, though, Faucette said banks are already serving their communities. "In its very form, the chartering of a bank is a public mission," he said.

There are also some additional costs to the PBC structure, including measuring and reporting to shareholders and becoming recognized by B Lab, which requires an assessment every two years. There is also a cost to reincorporating, said Taylor.

"But it was worth it to us because we want to see B corporations become the normal in the economy," she said.