BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
AB 361 (Huffman) Hearing Date: June 29,
2011
As Amended: May 19, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would authorize the creation of a new corporate form
called a benefit corporation, and would provide for the rules
that must be followed by these types of entities, and by other
types of entities wishing to become benefit corporations.
DESCRIPTION
1. Would establish a new corporate form called a benefit
corporation, and would provide that one or more natural
persons, partnerships, associations, benefit corporations,
or corporations, domestic or foreign, may form a benefit
corporation under the California Corporations Code, by
executing and filing articles of incorporation with the
California Secretary of State. Would state that the
provisions of the General Corporation Law (Division 1,
commencing with Section 100), apply to benefit corporations,
except where those provisions are in conflict with or
inconsistent with the benefit corporation provisions added
by the bill.
2. Each benefit corporation would be required to have the
purpose of creating a general public benefit. "General
public benefit" would be defined as a material positive
impact on society and the environment, taken as a whole, as
assessed against a third-party standard (see Number 4
below), from the business and operations of a benefit
corporation.
3. In addition, in its articles of incorporation, each benefit
corporation could, but would not be required to, list one or
more specific public benefits, which would be additional
purposes of the corporation. Specific public benefits are
defined in the bill as all of the following: providing
low-income or underserved individuals or communities with
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beneficial products or services; promoting economic
opportunity for individuals or communities beyond the
creation of jobs in the ordinary course of business;
preserving the environment; improving public health;
promoting the arts, sciences, or advancement of knowledge;
increasing the flow of capital to entities with a public
benefit purpose; or the accomplishment of any other
particular benefit for society or the environment.
4. Would define a third-party standard, for purposes of the
bill, as a standard for defining, reporting, and assessing
overall corporate social and environmental performance,
which meets all of the following criteria:
a. The standard would have to provide a comprehensive
assessment of the impact of the business and the
business' operations on employees of the benefit
corporation and its subsidiaries and suppliers, customers
of the benefit corporation, the communities in which the
benefit corporation and its subsidiaries and suppliers
are located, society, and the local and global
environments. The impact of the business and the
business' operations on shareholders would not have to be
assessed by the third-party entity.
b. The standard would have to be developed by an entity
that has no material financial relationship with the
benefit corporation or any of its subsidiaries, and that
satisfies both of the following requirements: i) No more
than one-third of the members of the governing body of
the organization could be representatives of associations
of businesses whose members' performance is measured
against the standard, of businesses operating in a
specific industry, or of businesses whose performance is
measured against the standard; and ii) the entity could
not be materially financed by representatives of
associations of businesses whose members' performance is
measured against the standard, of businesses operating in
a specific industry, or of businesses whose performance
is measured against the standard.
c. The standard would have to be developed by an entity
that accesses necessary and appropriate expertise to
assess overall corporate social and environmental
performance, and that uses a balanced, multi-stakeholder
approach, including a public comment period of at least
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30 days to develop the standard.
d. All of the following information about the standard
would have to be made publicly available:
i. The criteria considered when measuring the
overall social and environmental performance of a
business, and the relative weightings assigned to
each criterion;
ii. The identity of the directors, officers, any
material owners, and the governing body of the entity
that developed and controls revisions to the
standard;
iii. The process by which revisions to the
standard and changes to the membership of the
governing body are made;
iv. An accounting of the sources of financial
support for the entity, with sufficient detail to
disclose any relationships that could reasonably be
considered to present a potential conflict of
interest.
5. Each corporate entity wishing to become a benefit
corporation through conversion or reorganization would
require an affirmative vote of at least two-thirds of each
of its classes of shareholders, or a higher vote threshold,
if required in its articles of incorporation. The same vote
threshold would be required to amend a benefit corporation's
articles of incorporation, or to create or dissolve a
benefit corporation through merger or acquisition.
6. Shareholders of an existing corporation that decided to
convert to a benefit corporation would be entitled to
dissenter's rights, which are spelled out in existing law
(Corporations Code Section 1300). Dissenters' rights
generally entitle dissenting shareholders to be cashed out
for their shares at the shares' fair market value, as of the
day before the first announcement of the terms of the
proposed reorganization or merger, adjusted for any stock
split, reverse stock split, or share dividend which becomes
effective after that date.
7. The board of directors, committees of the board, and the
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individual directors of a benefit corporation would be
required to consider the impacts of any action or proposed
action upon all of the following: the shareholders of the
benefit corporation; the employees and workforce of the
benefit corporation and its subsidiaries and suppliers; the
interests of customers of the benefit corporation as
beneficiaries of the general or specific public benefit
purposes of the benefit corporation; community and societal
considerations, as specified; the local and global
environment; the short- and long-term interest of the
benefit corporation, including benefits that could accrue to
the corporation from its long-term plans, and the
possibility that those interests could best be served by
retaining control of the corporation rather than selling or
transferring control to another entity; and the ability of
the benefit corporation to accomplish its general, and any
specific, public benefit purpose.
8. Would provide that a director of a benefit corporation is
not liable for monetary damages for any failure of the
benefit corporation to create a general or specific public
benefit. Would further provide that a person who performs
the duties of a director in accordance with the provisions
of the bill is not liable for monetary damages for any
alleged failure to discharge the person's obligations as a
director.
9. Would provide that a director of a benefit corporation does
not have a fiduciary duty to a person that is a beneficiary
of the general or specific public benefit purposes of a
benefit corporation. Would further provide that a benefit
corporation is not liable for monetary damages for any
failure to create a general or specific public benefit.
10. Would prohibit any person from bringing an action or
asserting a claim against a benefit corporation or its
directors, except in a benefit enforcement proceeding, and
would provide that a benefit enforcement proceeding may only
be commenced or maintained by the corporation, a
shareholder, a director, a person or persons that hold 5% or
more of the equity interests in an entity of which the
benefit corporation is a subsidiary, or other persons
specified in the articles or bylaws of the benefit
corporation.
11. Would require each benefit corporation to prepare an annual
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benefit report, which must be sent to its shareholders no
later than 120 days after the close of the benefit
corporation's fiscal year, or at the same time it delivers
any other annual report to its shareholders, and (with the
exception of proprietary or financial information) would
have to post the benefit report on its Internet web site.
The annual benefit report would have to include a narrative
description of all of the following:
a. The process and rationale for selecting the
third-party standard used to prepare the benefit report.
b. The ways in which the benefit corporation pursued a
general public benefit and one or more specific public
benefits during the applicable year, and the extent to
which those benefits were created.
c. Any circumstances that hindered the creation of a
general or specific public benefit by the benefit
corporation.
d. An assessment of the overall social and
environmental performance of the benefit corporation,
prepared in accordance with a third-party standard
applied consistently with any application of that
standard in prior benefit reports or accompanied by an
explanation of the reasons for any inconsistent
application. The assessment would not need to be audited
or certified by a third party.
e. The name of each person or more that owns 5% or more
of the outstanding shares of the corporation.
f. A statement from the board of directors indicating
whether, in the opinion of the board of directors, the
benefit corporation failed to pursue its general, and any
specific, public benefit purpose in all material respects
during the period covered by the report. If, in the
opinion of the board of directors, the benefit
corporation failed to pursue its general, and any
specific, public benefit purpose, this statement would
have to include a description of the ways in which the
benefit corporation failed to pursue that purpose/those
purposes.
g. A statement of any connection between the entity
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that established the third-party standard, or its
directors, officers, or material owners, and the benefit
corporation, or its directors, officers, and material
owners, including any financial or governance
relationship that might materially affect the credibility
of the objective assessment of the third-party standard.
EXISTING LAW authorizes the creation of several corporate forms,
including corporations, partnerships, limited partnerships,
limited liability partnerships, and limited liability companies,
each with its own set of allowable and prohibited acts.
COMMENTS
1. Background and Discussion: This bill is sponsored by B Lab
(www.bcorporation.net), a nonprofit organization whose
stated mission involves using the power of business to solve
social and environmental problems. According to the
company, B Lab drives systemic change through three
interrelated initiatives: a) building a community of
Certified B Corporations to make it easier for people to
tell the difference between "good companies" and good
marketing; b) accelerating the growth of the impact
investing asset class through use of B Lab's GIIRS impact
rating system by institutional investors; and 3) promoting
supportive public policies, including creation of a new
corporate form and tax, procurement, and investment
incentives for sustainable business. B Lab has successfully
sponsored benefit corporation legislation in four other
states (Maryland, Vermont, Virginia, and New Jersey).
In background material provided to the Committee, the bill's
author states, "California leads the nation in innovation
and sustainability, but it does not have the statutory
framework to provide California businesses with the ability
to do both simultaneously. There is tremendous demand from
the business community in California and nationally for
states to create this new kind of corporation. These
visionary entrepreneurs and investors want to build
businesses with an eye toward the triple bottom line of
people, planet, and profit. AB 361 creates a new corporate
form, which allows businesses to voluntarily elect an
alternative corporate structure with higher standards of
corporate purpose, accountability, and transparency."
2. How Does AB 361 Differ from SB 201? In April 2011, this
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Committee heard and unanimously passed SB 201 (DeSaulnier),
a bill which would authorize the creation of a new, blended
corporate form called a flexible purpose corporation. To
those who are not experts in corporate law or corporate
governance, AB 361 appears extremely similar to SB 201.
Both bills would allow for the creation of for-profit
companies with dual for-profit/social-environmental missions
written into their articles of incorporation. Thus, both
types of corporations (flexible purpose and benefit) could
simultaneously pursue missions of public good and private
wealth, with the knowledge and support of their
shareholders.
Both bills require supermajority votes of the shareholders of
existing companies to enable the companies' transformation
into benefit/flexible purpose corporations, and both provide
dissenters' rights to shareholders of existing companies,
who decide they do not wish to own a part of the newly
formed benefit/flexible purpose corporation. Both bills
also require the publication of annual reports, in which the
corporations' success in meeting their public benefits is
discussed.
Yet, the supporters of both bills and many experienced corporate
attorneys assert that the two bills are very different.
Some interested parties assert that SB 201 and AB 361 can
both become law, that they are not duplicative or
overlapping, and that the intended users of the two
corporate models, and the needs of these users, are very
different. Other interested parties have chosen sides, and
strongly prefer one bill to the other.
The following are some of the key differences between the two
bills. This analysis does not attempt to provide a detailed
comparison and contrast between the measures; such a
comparison is left to the corporate experts who will be
addressing the Committee during testimony on the measure.
a. SB 201 requires each flexible purpose corporation to
identify one or more specific public benefits in its
bylaws or articles of incorporation, but does not require
the use of any specific metric to evaluate the ability of
that corporation to achieve its benefit(s), and does not
require review of the corporation's actions by a third
party. Instead, it provides a safe harbor for
corporations that utilize best practices to report on
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their progress toward achieving their special purpose
benefit(s). SB 201 also requires a very comprehensive
annual report, in which the flexible purpose corporation
is required to list material actions it took during the
fiscal year to achieve its special purpose objectives,
and the impact of those actions; and in which the
corporation is required to cite which metrics it used to
evaluate its performance, and why those metrics were
selected. Furthermore, any flexible purpose corporation
that incurs an expense related to the achievement of its
special purpose, which is expected to have a material
adverse impact on its shareholders, is required to
prepare a special report describing that expenditure, for
submission to its shareholders, within 45 days of the
expenditure.
b. AB 361 requires each benefit corporation to create a
general public benefit; the identification and
achievement of specific benefits is optional. The board
of directors of a benefit corporation is responsible for
considering the impact of its actions and proposed
actions on seven different entities (shareholders,
employees, customers, the community and society, the
environment, the interests of the corporation, and the
ability of the corporation to accomplish its general and
any specific public purpose). The directors of a benefit
corporation are not required to give priority to any
particular factor or group among the seven listed above.
The creation of general and specific public benefits is
deemed to be in the best interests of the benefit
corporation.
Annually, each benefit corporation is supposed to assess
its own corporate social and environmental performance,
using a third party standard selected by the corporation,
and include a discussion of its performance in an annual
report. An external audit or certification of the
corporation's findings is not required.
3. What Third Party Standards Exist, and How Will They Be Used
by Benefit Corporations? B Lab, the sponsor of this bill,
has developed a third party standard that could be used by
benefit corporations to assess their social and
environmental performance. They assert that their standard
is one of many available to companies that might become
benefit corporations. Other third party standards cited by
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B Lab include Green Seal ( www.greenseal.org ), the Global
Rating Initiative ( www.globalreporrting.org ), the Global
Impact Investment Rating System (GIIRS), the International
Standards Organization
( www.iso.org/iso/social_responsibility ), and Underwriters
Laboratories ( www.ul.com/global/eng/pages/ ). Some
developers of third party standards charge for the use of
these standards; others offer their standards free of
charge. Some standards return a numerical grade; others
return a letter grade; others return different types of
assessments, such as gold/silver/bronze or pass/fail; still
others return more qualitative assessments.
Proponents of this bill argue that the market will allow the
best standards and systems for measuring benefits to rise to
the top. Opponents argue that companies can cherry-pick the
standard that will allow them to report on their performance
in the best possible light.
4. Summary of Arguments in Support:
a. The American Sustainable Business Council (of which
B Lab is a member) describes itself as a growing
coalition of business networks and businesses committed
to advancing a new vision, framework, and policies that
support a vibrant, equitable, and sustainable economy.
To date, the organizations that have joined the Council
represent over 65,000 businesses, many of which are in
California. The Council believes that businesses need to
have missions that are broader than simply maximizing
profit, and that business leaders and investors need to
be able to run their businesses in ways that focus on
more stakeholders. They observe that traditional
corporate law defines the fiduciary duty of corporate
officers and directors narrowly, making it difficult for
businesses with a social mission to make the kinds of
complicated decisions they face every day. AB 361
provides the business model needed by these entities.
b. The Social Venture Network includes over 500
members, including many of the pioneers of socially
responsible business. Social Venture Network observes
that in a traditional corporation, fiduciary duty focuses
on increasing shareholder profits. In the case of
benefit corporations, fiduciary duty is redefined by
stating that the creation of public benefit is in the
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best interests of the benefit corporation. This allows
corporate officers to define other goals beyond making a
profit alone, and gives investors the power to require
those officers to make decisions that reflect those
goals.
c. Green Seal identifies itself as the oldest
environmental standard-setting and certification
organization in the United States. Its certification
process requires on-site audits of manufacturing and
service facilities. There are currently over 3,500
products and services certified to Green Seal standards.
Green Seal supports the bill for all of the reasons
identified by the Social Venture Network and American
Sustainable Business Council. "Increasingly, smart
corporations are realizing that operations and practices
that consider corporate social responsibility and
sustainability are the way of the future and represent
best business practices...but current law and corporate
statutes constrain consideration of other than the narrow
goal of maximizing profit."
d. The law firm of Wendel Rosen Black & Dean writes in
support of the bill, and disputes the assertion (see
opposition arguments below) that the bill diminishes
shareholder rights. The bill's requirement that a
decision to become a benefit corporation be supported by
at least a 2/3rds vote among shareholders is among its
shareholder protections, as is its provision granting
dissenter's rights to shareholders. The bill also
increases transparency by requiring benefit corporations
to provide shareholders with an annual benefit report.
If the benefit corporation fails to make good on its
commitments, shareholders can file suit to compel
compliance. Shareholders of traditional corporations
have no right to receive information about the company's
social or environmental performance, and they have no
right to sue the company for behaving irresponsibly on
such matters. AB 361 provides shareholders control of
the company's decision to become a benefit corporation,
together with the tools to evaluate and enforce the
company's corporate social and environmental
responsibility.
e. The United States Green Building Council California
Advocacy Committee believes that AB 361 contains the
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general public benefit provisions which ensure that
consumers, investors, and policymakers can clearly
distinguish these companies from those that are doing
something for short-term marketing purposes. The Green
Building Council supports the provision of AB 361 that
redefines the fiduciary duty of directors, requiring them
to consider the impact of their decisions on the
long-term interests of society, not just the short-term
interests of shareholders, even when considering a sale
of the business. Benefit corporations are also required
to assess their overall social and environmental
performance against an independent, credible,
transparent, and comparable third party standard.
Markets thrive on clarity and transparency, and these
third party standards create a level playing field,
encourage a more efficient and effective marketplace, and
build public trust.
f. Myriad other organizations, all listed below, sent
letters echoing the sentiments expressed above.
5. Summary of Arguments in Opposition:
a. The Corporations Committee of the Business Law
Section of the California State Bar (Corporations
Committee) is concerned that AB 361 will enact a
fundamental change to the fiduciary duties of corporate
directors and will pose a consequent risk to shareholder
protections. The Corporations Committee is concerned
that the bill will create a framework in which directors
are no longer accountable to their shareholders.
Under the bill, directors are wholly in control of the
nature of their fiduciary duties, because they have the
ability to select the third party standard by which their
conduct will be measured, with no input from
shareholders, and because there are only vague
substantive requirements in the bill regarding the third
party standard. This presents the possibility that
directors will be able to shop for third party standards
that suit their purposes to the detriment of
shareholders. The Corporations Committee is concerned
that, over time, varying third party standards will
develop, which will allow directors great discretion to
choose not just how stringent or lenient their duties
will be, but also the very substance of the duties
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themselves.
The Corporations Committee also asserts that the bill
provides almost no protection to shareholders. Section
14620(a) (the portion of the bill which spells out the
fiduciary duties of the directors of benefit
corporations) tracks the traditional fiduciary duties
found in Section 309 of the General Corporations Code,
but eliminates any references to shareholders,
essentially eliminating any duty of care or loyalty to
shareholders. Furthermore, because the bill lists so
many topics that directors are allowed to consider when
making actions, the bill will allow them to briefly
consider, and then dismiss, shareholder interests.
b. The Nonprofit and Unincorporated Organizations
Committee of the Business Law Section of the State Bar
(the Nonprofit Committee) opposes AB 361, for somewhat
different reasons. The Nonprofit Committee asserts that
the bill introduces a corporate form with purposes
similar to those of nonprofit corporations, but does not
enact oversight and accountability provisions similar to
those applicable to nonprofit corporations. The
Nonprofit Committee is also concerned that the entity
behind the bill (B Lab) has sought tax preferences for
benefit corporations in other states, and could do so
here, if AB 361 is enacted. Enacting tax preferences for
benefit corporations could incentivize the creation of
benefit corporations over nonprofit corporations.
The Nonprofit Committee is also concerned that the bill
limits the liability of benefit corporations and their
directors, through express limitations on liability and
through the mechanism of the benefit enforcement hearing.
The bill expressly disclaims any director fiduciary duty
to the beneficiaries of the very public benefits for
which the corporation is supposedly formed.
Finally, the Nonprofit Committee expresses concerns about
the general public benefit definition in the bill.
Introducing concepts of general public and specific
public benefit into the Corporations Code creates a
potential for confusion with the already existing public
benefit corporation statute, which allows a nonprofit
corporation to be formed for any public or charitable
purpose. Finally, the Nonprofit Committee notes,
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virtually all corporations provide some kind of general
public benefit, if one measures them against the vague
standard contained in the bill.
c. Two experienced corporate lawyers, Steven Hazen and
Keith Bishop, wrote individual letters of opposition, in
which they supported the arguments made by the
Corporations Committee and the Nonprofit Committee.
In addition to supporting the comments of the two State Bar
committees, Mr. Bishop asserted that AB 361 is being
promoted by an out-of-state entity, which would directly
benefit through enactment of the bill.
Mr. Hazen enumerated three key points of opposition: 1)
The modified fiduciary duty standard provided in the bill
comes at the expense of reduced protections for
shareholders; 2) The increased breadth of matters that a
board of directors may consider when making decisions
about the best interests of the corporation increases the
opportunity for entrenchment by directors, at the expense
of shareholders; 3) The purported social benefits which
are asserted to have been achieved by benefit
corporations will not be open to verification, because
the bill rejects public reporting procedures that would
enable doing so.
Mr. Hazen does not believe that AB 361 and SB 201 should
both become law (he strongly prefers SB 201). He
believes that enacting both bills would pose a
significant risk of confusion among shareholders,
prospective investors, lenders, and the public. He
believes that everything the supporters of AB 361 say
they want corporations to be able to do could also be
done under SB 201.
d. The California Association of Nonprofits (CAN) and
California Society of Association Executives (CalSAE,
whose membership is comprised of nonprofit association
executives among its membership) both encourage the
author of AB 361 to make the bill a two-year bill, to
accommodate the need for additional input and
perspectives on the measure's impact.
CAN's primary argument in opposition is based upon the
concern that benefit corporations will siphon money away
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from nonprofits. Fundamentally, CAN does not believe
that new corporate forms are needed. It encourages the
Legislature to convene one or more informational hearings
to evaluate the potential impact of bills like AB 361 and
SB 201, before moving either bill to the Governor. If
the Legislature chooses to enact new corporate forms
allowing for-profit companies to specify public benefits
among their primary purposes, CAN believes that the
legislation should contain sufficient specificity and
accountability, two things CAN sees as lacking in AB 361.
CalSAE is concerned that the bill places benefit
corporations in the same arena as current non-profit
organizations, which may cause both legal and public
confusion between benefit corporations and nonprofits.
The organization is also dismayed at the lack of
oversight the bill requires and is perplexed at the lack
of outreach to the nonprofit community. CalSAE is
concerned that the limitation on the ability of
interested parties to bring benefit enforcement
proceedings limits the external accountability of benefit
corporations, and is similarly concerned that the bill
eliminates any monetary liability for directors who fail
to perform their duties, and for benefit corporations
that fail to produce a public benefit. CalSAE recommends
that benefit corporations should be encouraged to partner
with existing nonprofits to pursue public benefits as
part of the benefit corporation's mission.
6. Questions:
a. Are AB 361 and SB 201 both necessary? Would one
hybrid bill, which included the best provisions from both
individual pieces of legislation, make more sense?
b. At what point does the concept of a "general public
benefit" (such as the one promoted by AB 361) become so
vague as to become meaningless? Don't all entities
produce some public benefit?
7. Prior and Related Legislation:
a. SB 201 (DeSaulnier): Would authorize the creation
of flexible purpose corporations. Pending in the
Assembly Judiciary Committee.
AB 361 (Huffman), Page 15
b. SB 1463 (DeSaulnier), 2009-10 Legislative Session:
Substantially similar to SB 201. Never taken up by the
author.
c. AB 2944 (Leno), 2007-08 Legislative Session: Until
January 1, 2015, would have specified that, in
considering the best interests of a corporation and its
shareholders, a corporation's board of directors and
other specified individuals with responsibility for
running a corporation could, in considering the best
interests of the corporation and its shareholders,
consider the effect of the corporation's actions on the
state and national economy, and on the environment, and
could incorporate community and societal considerations,
among other factors, into its evaluation. Vetoed by the
Governor.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
B Lab (sponsor)
AGSJ
Alliance of Chief Executives
American Sustainable Business Council
Bay Area Council
Beckwith Associates
Bruce Klafter
Build It Green
California Association for Micro Enterprise Opportunity
Center for Dynamic Governance
Chris Mann
Clean Fund LLC
Direct Dental
Drummond Lawson
Friends Committee on Legislation of California
Great Place to Work Institute
green age 360
Green America
Green Business Networking
Green Chamber of Commerce
Green Seal
Hanson Bridget LLP
KINeSYS
Mark Liebowitz
AB 361 (Huffman), Page 16
Mindful Investors
Minerva Consulting
New Harvest Capital
New Voice of Business
Presidio Graduate School
Public Works, LLC
Quantum Intech
Raymond Katz
Silicon Valley Leadership Group
Small Business California
Social Venture Network
Steve Levin
The Rosebud Agency
The Vianova Group, LLC
United States Green Building Council California Advocacy
Committee
Wendel Rosen Black & Dean LLP
WorkLore
Opposition
California Association of Nonprofits
California Society of Association Management Executives
Corporations Committee of the Business Law Section of the
California State Bar
Keith Bishop
Nonprofit and Unincorporated Organizations Committee of the
Business Law Section of
the California State Bar
Steven Hazen
Consultant: Eileen Newhall (916) 651-4102