Cross-posted at SocEntLaw.
One of my main criticisms of the Model Benefit Corporation Legislation (the “Model”) has been (and still is) the lack of guidance for directors. (See, e.g., here and here). The Model requires directors to “consider” seven different stakeholder groups (§301(a)), and directs them to pursue “general public benefit” but does not provide any priorities to guide directors. (§§102, 201(a)). The Model allows companies to choose one of more “specific public benefit purposes,” in addition to the “general public benefit purpose,” but does not require that any specific public benefit purpose be chosen. (§201(b)).
In contrast, Delaware’s proposal does require public benefit corporations (“PBCs”) to choose one or more specific public benefits (§362(a)), though the statute is not crystal clear on priorities and requires directors to “manage or direct the business and affairs of the public benefit corporation in a manner that balances  the pecuniary interests of the stockholders,  the best interests of those materially affected by the corporation’s conduct, and  the specific public benefit or public benefits identified in its certificate of incorporation.” (§365(a)) (emphasis added). (As a side note, the PBC's requirement to “balance” the stakeholder interests seems more onerous than the Model’s requirement to “consider” the interests.)
Even if directors' duties are owed to the corporation as a whole, I suggest that clear priorities are important. I attempted to explain the importance of priorities in my response to Professor Lynn Stout’s thought-provoking recent book: The Shareholder Value Myth:
- Professor Lynn Stout and others reject the need for a single metric and have argued that directors, like other human beings, balance the interest of various stakeholders. Among other examples of balancing by human beings, Professor Stout points to the ability of people to balance work and family. This article admits that directors do and should balance various stakeholder interests and does not argue for myopic focus on a single metric, but rather posits that clear corporate priorities can make that difficult balancing job easier.
- Using Professor Stout’s work/family example of balancing can help illustrate the point. Clearly defined priorities can help an individual make difficult decisions in the constant work/family balance. If an individual prioritizes family over work, that obviously does not mean that every decision leads to direct, short-term benefits for the family. For example, on occasion, that family-primacy individual will rightly choose to stay late at work and miss dinner. While that individual decision may have seemed to prioritize work over family, viewed in the long-term, the family may benefit from the resultant career security. Even if the long-term benefits do not actually come to fruition, most would agree that the individual should not be judged for her well-intentioned decision.
- The fact that humans certainly balance interests of various constituents, however, does not mean that priorities are unimportant. Priorities can help guide and can also provide weightings for the costs and benefits of any decision. Also, priorities most clearly help in critical situations. To continue with the work/family example, in a zero-sum game, how does one decide between work and family when the outcome of that decision is of critical importance to both? If an individual has clearly stated that family is a higher priority than work, this critical decision is more easily answered. Even if the priorities are not clearly stated, priorities will still drive the decision. Transparency as to the priorities makes things clearer to all involved and makes it less likely that the individual will drift from his or her true priorities. Similarly, directors would benefit from a clear corporate objective that includes specific corporate priorities.
While I would have preferred the proposed Delaware amendments to have made clear that the PBC’s top priority is its specific public benefit purpose, I think requiring PBCs to identify a specific public benefit purpose is a move in the right direction and likely to aid directors in decision making.
In my third and final post, on Delaware’s proposed amendments involving the PBC, I will talk about the social enterprise statutes and branding.
Cross-posted at SocEntLaw.
This is the first of three posts analyzing the proposed Delaware Public Benefit Corporation (“PBC”) amendments. The posts will compare the proposed PBC amendments to the Model Benefit Corporation Legislation (the “Model”).
In a few key areas, the PBC allows more private ordering that the Model. Perhaps the most striking difference is that the PBC does not require a third party standard for measuring public benefit (a cornerstone requirement of the Model) unless the requirement is included in the PBC’s certificate of incorporation or bylaws (§366(c)). In some ways, Delaware’s approach in the benefit corporation debate reminds me of how it handled the proxy access debate: expressly allow, but leave most of the details to the individual corporations.
That said, the PBC is not as flexible as the Flexible Purpose Corporation (“FPC”) (California) or the Social Purpose Corporation (“SPC”) (Washington); the PBC requires that the PBC be operated in a “responsible and sustainable manner” (§362(a)). That broad general statement in the proposed PBC amendments, which is not present in the FPC or SPC statutes, seems to be one of the main reasons B Lab, the primary force behind the benefit corporation movement, has expressed public support for the PBC. Whether B Lab is completely supportive of the PBC and all its deviations from the Model is not entirely clear.
Below, I compare and contrast some of the key provisions of the Delaware’s PBC and the Model.
- Benefit Director. PBC – not mentioned. Model – required for public companies. (§302(a)).
- Benefit Officer. PBC – not mentioned. Model – optional (§304(a)).
- Benefit Report (Preparing). PBC – no less than biennially (§366(b) & (c)). Model – annually (§401(c)).
- Benefit Report (Public Posting). PBC - optional (§366(c)). Model - required to post benefit report on company website; if no website must provide the benefit report for free to anyone who asks for a copy (§402).
- Identification of Specific Public Benefit Purpose(s). PBC – required (§362(a)). Model – optional (§201(b)).
- Minimum Ownership for Shareholder Standing in Derivative Lawsuits. PBC – 2%; or if the PBC is publicly traded then the lesser of 2% and $2 million in market value (§367). Model – 2% (§305(b)(2)(i)).
- Third Party Standard. PBC – optional (§366(c)). Model – mandatory (§§102 & 402).
- Third Party Certification. PBC – optional (§366(c)). Model – optional (§401(c)).
The only area above where the PBC is less flexible than the Model is in requiring the identification of specific public benefit purpose(s), which will be discussed in the next post on director guidance.
Thanks to Usha for asking me to guest blog about the proposed Public Benefit Corporation amendments to Delaware’s General Corporation Law. This summer one of my planned projects is writing an article tentatively entitled Governing Public Benefit Corporations, and I will be floating some of my early ideas here. Comments will be appreciated.
On March 20, I mentioned the proposed Delaware Public Benefit Corporation (“PBC”) amendments on the Social Enterprise Law Blog (“SocEntLaw”)* shortly after I received word from Professor Brian Quinn and some of my friends in Delaware. Last week, both Usha and Stephen Bainbridge added thoughtful posts about the PBC.
For this guest blogging stint, I plan on authoring three additional posts, starting next week. Each post will compare and contrast the proposed PBC amendments with the model benefit corporation legislation. The twelve states that currently have benefit corporation statutes follow the structure and main provisions of the model legislation without too much variation. (The variations can be seen in my chart that Usha mentioned). Delaware, however, cuts its own path. In the three posts, I will focus on private ordering, director guidance, and brand strength.
* I will cross-post my guest posts on the Conglomerate at my permanent blogging home over at SocEntLaw. Last year, Cass Brewer (Georgia State), Deborah Burand (Michigan), Alicia Plerhoples (Georgetown), Dana Brakman Reiser (Brooklyn), a handful of practicing attorneys, and I (Regent) joined social enterprise lawyer Kyle Westaway (who is a Regent Law alum and a Lecturer on Law at Harvard Law School) at his blog. We welcome any and all readers.
From the Harvard Law School Forum on Corporate Governance and Financial Regulation, via Allen M. Terrell, Jr. of Richards, Layton & Finger, comes a summary of proposed amendments to the Delaware General Corporation Law. I had heard about the elimination of the vote in second-step mergers, but the public benefit corporation was news to me.
It sounds a lot like the benefit corporation legislation that's been spreading across the country (see this chart by Haskell Murray. At first blush I was surprised to see Delaware contemplating this kind of social enterprise legislation, since it's not really a stakeholders' rights kinda state. But on further reflection I guess a "let a thousand flowers bloom" attitude makes sense for Delaware's let-the-market-decide, opt-in attitude. Here's the description:
In general, under the proposed legislation, a public benefit corporation would be a corporation managed in a manner that balances the stockholders’ pecuniary interests, the interests of those materially affected by the corporation’s conduct, and one or more public benefits identified in its certificate of incorporation. To this last point, each public benefit corporation would be required, in its certificate of incorporation, to identify itself as a public benefit corporation and to state the public benefits it intends to promote. The proposed legislation generally defines “public benefits” as positive effects (or minimization of negative effects) on persons, entities, communities or interests, including those of an artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific or technological nature.
Central to the proposed new subchapter’s operation is the statutory mandate that would be imposed on directors. The new subchapter would provide that directors, in managing the business and affairs of the public benefit corporation, shall balance the pecuniary interests of the stockholders, the interests of those materially affected by the corporation’s conduct, and the identified public benefits. The new subchapter also would provide that directors shall not have any duty to any person solely on account of any interest in the public benefit and would provide that, where directors perform the balancing of interests described above, they will be deemed to have satisfied their fiduciary duties to stockholders and the corporation if their decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.
The new subchapter would impose special notice requirements on public benefit corporations, mandating periodic statements to stockholders regarding the corporation’s promotion and attainment of its public benefits. The new subchapter also would provide a means of enforcing the promotion of the public benefits. By statute, stockholders holding at least 2% of the corporation’s outstanding shares (or, in the case of listed companies, the lesser 2% of the outstanding shares or shares having at least $2 million in market value) would be able to maintain a derivative lawsuit to enforce specified requirements in the subchapter.
Update: Steve Bainbridge makes a good point: Delaware is moving to protect its market share.
A couple of years ago, I was fascinated to learn the behind-the-scenes story of Veggie Tales, as recounted in Me, Myself & Bob by Phil Fischer. Fischer started Veggie Tales with funds from friends and family, then eventually took on funding partners, creditors and a leadership team that pushed Veggie Tales away from its original Christian-based mission to one that became more secular but no more financially stable. Vischer eventually lost Veggie Tales in bankruptcy court, when it was purchased by a secular bidder. In my microfinance class, we talk a lot about the differences in for-profits and nonprofits, if there is any, and mission drift. I received an email today from Family Christian Stores, the world's largest Christian retailer, that seemed to suggest that management at FCS was fighting against mission drift, at least from now.
FCS' press release is here. FCS is a privately owned (private equity-backed) company that has stores nationwide that sell Christian bibles, books, decorations, jewelry, DVDs and music (including Veggie Tales). Now, FCS' management and three outside purchasers have joined together to buy back FCS from its private equity owners. In doing so, the new owners have pledged to recommit to their mission and give 100% of the profits to charity (instead of the 10% it was earlier). From a law professor's perspective, however, I'm interested to know whether (and why) it is maintaining its for-profit status. At first glance, it seems like being a nonprofit would serve the same purpose as giving away all profits. The nonprofit could either funnel surplus to charitable uses or reduce the cost of its religious wares (which would probably be tricky with vendors). Here, the charitable purpose is outsourced to a number of external ministries.
This article from Christianity Today links to earlier articles chronicling the mission drift of Christian bookstores and FCS in particular. This link is to an article debunking FCS's rationalization of its move to open on Sundays (presenting religious reading material as necessary in spiritual crises that may arise any day of the week).
The latest edition of The Economist has a fascinating article on “Chilecon Valley” that discusses the emergence of a startup community in Chile. The article focuses on a unique program of Startup Chile (a new Chilean governmental body) that gives grants to entrepreneurs in the United States and elsewhere to move to Chile for several months as they work on building their company and developing their technology. The grant recipients are then expected to network with, speak to, and mentor Chilean entrepreneurs.
The article touches on how law can foster or hinder the growth of a startup community, including by liberalizing immigration laws and allowing failed ventures to get a fresh start in bankruptcy.
Chile is making considerable efforts to diversify its economy beyond extractive industries like mining and agriculture. My spouse is co-organizing a fantastic three-day conference in Santiago from November 28 to December 1st that will focus on social entrepreneurship, sustainability, and innovation. The conference includes a fantastic line-up of speakers, including a keynote address by Al Gore, a pitch competition for social entrepreneurship startup companies, and some awesome music, including Devendra Banhart and Denver’s own Devotchka. Several panels will analyze the contribution of law to developing a entrepreneurial ecosystem in Chile.
You can check out my wife’s newly launched blog and website on the Chilean startup community here.
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Thank you Erik for allowing me to write a follow-on post to the Chick-fil-A/Corporate Social Responsibility Masters Forum.
As a native Georgian, I have followed the Chick-fil-A controversy closely. My former roommate works in Chick-fil-A’s tax department and Chick-fil-A has been my favorite fast food restaurant for many years. The food is incredibly good (KFC does not even come close) and Chick-fil-A is one of the few companies that still cares about providing excellent customer service. As Usha noted, Chick-fil-A has a history of giving back to the community. In addition to her list, Chick-fil-A tends to treat its retail and corporate employees very well, sponsors numerous community activities like local 5Ks, sponsors a values-based education curriculum for grades K-5 (that my wife used this year in her classrooms), and contributes to its WinShape Foundation, which does much more than donate to the organizations at the center of the controversy
The questions I want to raise in this post are: (1) could Chick-fil-A become a social enterprise after the controversy?; and (2) if Chick-fil-A were already a social enterprise, how would the controversy have impacted the company differently? These questions are tangentially related to the Masters Forum because some, including Professors Katz and Page (Indiana Law), have asked if social enterprise is the new CSR.
Currently, I am most interested in the benefit corporation form of social enterprise and the certified B corporation. I explained the differences between the two here and I have posted a draft of my symposium article on benefit corporations here.
Under the law of the 11 states that have passed a benefit corporation statute, I see no serious obstacle to Chick-fil-A converting to a benefit corporation post-controversy. Chick-fil-A would, in most states, simply need the vote of at least 2/3rds of its shareholders and an amendment to its articles of incorporation stating that the company is a benefit corporation. (For the record, I do not have any information to suggest Chick-fil-A is considering such a conversion).
Once a benefit corporation, however, Chick-fil-A would be required to pursue a “general public benefit” purpose, which is defined as:
- “[a] material positive impact on society and the environment, taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation.”
Shareholders may bring a “benefit enforcement proceeding” for failure to pursue a “general public benefit.” You can read more about the proceeding in the model legislation, which has a number of very recent changes, some of which respond to issues raised in my draft article. I need to update my draft accordingly.
Also, the benefit corporation statutes require that the “general public benefit” be accessed against a “third party standard.” While there are various third-party standard providers, B Lab, which provides the "certified B corporation" label, is the most well known. I asked Jay Coen Gilbert, B Lab’s co-founder, my questions and he provided some interesting information:
- (1) any company that meets B Lab’s standards can become a certified B corporation; (2) B Lab’s independent Standards Advisory Council reserves the right to not certify or de-certify any company that acts inconsistently with the values of the B Corp community as expressed in their Declaration of Interdependence; (3) to date, that right has never been exercised; and (4) there are a number of faith-based companies among the 574 certified B corps.
I, for one, would be very interested to see B Lab’s reaction if Chick-fil-A actually applied to be a certified B corp. I also wonder whether being formed as a benefit corporation would make Chick-fil-A more (or less) vulnerable to shareholder lawsuits stemming from the controversy (if the company stock were more widely held).
We at Regent University School of Law, along with a distinguished list of participants that include Glom Master Joan Heminway, will be exploring emerging issues in social enterprise on October 6. Please join us at this symposium if you can make it to Virginia Beach.
We have decided to convene a late summer forum of the Conglomerate Masters -- our roster of distinguished corporate and financial law professors -- to discuss the current state of corporate social responsibility. In particular, we wanted to address the controversy over Chick-fil-A's corporate stance against same sex marriage and to use this Economist blog post as a jumping off-point.
The Economist blogger contends that Chick-fil-A's culture is in fact a prime example of a firm embracing corporate social responsibility (or "CSR") - albeit not with the politics that one traditionally associates with that movement. The blogger concludes that the Chick-fil-A example demonstrates that matters of social policy should best be left to democratic institutions. He or she writes:
Matters of moral truth aside, what's the difference between buying a little social justice with your coffee and buying a little Christian traditionalism with your chicken? There is no difference. Which speaks to my proposition that CSR, when married to norms of ethical consumption, will inevitably incite bouts of culture-war strife. CSR with honest moral content, as opposed to anodyne public-relations campaigns about "values", is a recipe for the politicisation of production and sales. But if we also promote politicised consumption, we're asking consumers to punish companies whose ideas about social responsibility clash with our own. Or, to put it another way, CSR that takes moral disagreement and diversity seriously—that really isn't a way of using corporations as instruments for the enactment of progressive social change that voters can't be convinced to support—asks companies with controversial ideas about social responsibility to screw over their owners and creditors and employees for...what?
It is a provocative argument. Although one wonders if the author would have made this same series of arguments in the 1960s: would the author have encouraged civil rights protesters to abandon lunch-counter sit-ins and lobby state legislators instead?
Still, the Chick-fil-A example raises some disquieting questions for CSR, which our Masters may address. These include:
Is corporate law the most effective or legitimate tool for social change? If we are worried about environmental degradation, is the solution to broaden the stakeholders to whom a corporation must answer? Or shouldn't we look instead to environmental law?
Is CSR viewpoint neutral? When covering CSR in a Corporations course, I ask students whether social activists who are lobbying a corporation to change what they see as immoral employment practices, should be able to put their views to a shareholder vote? Then I ask whether the answer would or should change based on whether the activists are looking to end racial or gender discrimination or whether they are lobbying a company to stop offering benefits to partners in same sex couples.
At the same time, the current state of legal affairs raises some disquieting questions for opponents of CSR too. The conclusion in the Economist blog -- leave social policy to democratic institutions and public law -- has a long lineage. It harkens back to Milton Friedman's arguments that corporations and the states do and should exist in separate spheres; if citizens want to change corporate policy, the argument goes, they should act through the political process and push through public regulation.
But, the separate spheres argument looks more and more outdated, as corporations influence and permeate the sphere of government. Do arguments to leave regulating the public dimension of corporate behavior out of corporate law and governance -- and leave it to traditional legislative and regulatory bodies -- appear naive in a post-Citizens United (and post-public choice)world?
Also, do these same questions for proponents and critics of CSR apply in equal measure to the growing field of social entrepreneurship? Can entrepreneurs do well while doing good? Should we expect them too? Is social entrepreneurship a workable, stable, and viewpoint neutral concept? If so, what does it entail? Does/should CSR apply equally to small businesses and startups as to global corporations?
We look forward to hearing from our Masters...
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There is still so much about benefit corporations (and social enterprise in general) that could be written about. I was only able to scratch the surface during my short guest blogging stint, but I will continue to explore the issues in an article I am currently writing for American University’s Business Law Review. I will provide the Glom with an SSRN-link when I post the article.
Also, on Saturday, October 6, 2012, our main law review here at Regent University School of Law is hosting a symposium on social enterprise. The symposium will be held on our beautiful campus in Virginia Beach, VA (pictured below). We already have an impressive group confirmed (listed below) and plan to add one or two additional speakers.
- Cass Brewer (Georgia State Law)
- Bill Callison (partner, Faegre Baker Daniels)
- Joan Heminway (Tennessee Law)
- Lyman Johnson (Washington & Lee Law)
- Michael Pirron (CEO of Impact Makers, a founding certified B Corporation in Virginia)
- Dana Brakman Reiser (Brooklyn Law)
- Kyle Westaway (founder of Westaway Law and co-founder of social enterprise Biographe)
Each of our guests brings a unique perspective and an incredible amount of knowledge to the symposium. I linked to their profiles because I would have to do 7 separate posts to even touch on all of their many accomplishments. Two or three Regent law professors (including me) will moderate and contribute.
We at Regent University School of Law are incredibly excited about the upcoming symposium (even if it is still months away) and hope some of the readers will join us. I will provide more information about the symposium to the permanent Glom bloggers when we get closer to the date.
Feel free to e-mail our excellent symposium editor Rachel Bauer at symposium[at]regent.edu if you would like more information.
A benefit corporation must "have a purpose of creating general public benefit” and must "pursue or create" a "general public benefit." The model benefit corporation legislation defines "general public benefit" as:
- "material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation."
Some states use that exact wording; some have relatively minor variations. Each benefit corporation may adopt one or more "specific public benefit purposes" by amending its articles, but "[t]he identification of a specific public benefit does not limit the obligation to create a general public benefit."
Should the "general public benefit" be mandatory or would it be better to simply expressly allow more flexibility in corporate purpose? California evidently could not agree on the answer, as it passed both a benefit corporation statute and a "flexible purpose corporation" statute.
I understand the argument of the proponents of the benefit corporation statutes and its "general public purpose" mandate to be roughly:
- We want companies that are pursuing "good" in all areas (or that are at least "good" companies if taken as a whole). For example, we don’t want companies that are treating their employees well, but trashing the environment.
I am sympathetic to that argument as it applies to certifications, but not as it applies to corporate statutes. If B Lab only wants to certify “good” companies, fine: create your criteria, evaluate the companies and don’t certify any companies that aren’t "good" - taken as a whole.
But what if a corporation’s focus is narrower? What if the managers and shareholders of the corporation care about shareholder wealth and the homeless, but not the environment? Personally, I would prefer a corporation that thinks seriously about shareholder wealth and [insert social or environmental benefit], to the corporation that focuses only on shareholder wealth.
Again, I appreciate all of the excellent comments from this post that noted that focusing beyond shareholder wealth can already (often) be done in the corporate context and in the LLC context. But in practice, I think many of our corporations myopically focus on shareholder wealth maximization.
In any event, the question from this current post is simply: Should we mandate a "general public benefit" or just expressly allow more flexibility in our statutes? Personally, I am leaning in favor of express flexibility. I would save mandates of this type for brands like B Lab’s certification. These brands might become powerful enough to shift to the new paradigm the benefit corporation legislation is driving at and that is addressed here.
Today, Etsy (a website/company my wife loves) announced that it has become a certified B corporation.
The news is here.
In the announcement, Etsy explains why they decided to become a certified B corporation:
- Why did we become B Corp certified? We believe that business has a higher social purpose beyond simply profit. The B Corp assessment gives us a framework to measure Etsy’s success against rigorous values and responsible practices as we scale as a company. Albert Wenger of Union Square Ventures, a longtime Etsy investor and advisor, puts it this way: “We believe that the best long-term stewards of Internet-based networks and marketplaces will focus on value creation for all participants instead of solely on shareholders. Benefit corporations provide a legal foundation perfectly supporting this much more comprehensive outlook.”
Notice the confusion of the terms. Certified B corporations, which are the focus of this announcement, are separate from the benefit corporation statutes that "provide a legal foundation." This is part of the confusion I address in a previous post.
In addition to redirecting the focus of directors to stakeholders other than just shareholders, marketing/branding has been discussed as a major benefit of organizing under the benefit corporation statutes. (See, e.g., Allen Bromberger, a leading attorney in the social enterprise space, who writes: “Many observers believe that the advantages benefit corporation status deliver are brand-related.”)
Personally, I don’t think marketing/branding value is a substantial benefit of merely becoming a benefit corporation. (I will leave for the comments the normative question of whether the states should be intentionally engaged in the entity branding business at all.)
The benefit corporation statutes do mandate some additional transparency through the required annual benefit report, but the statutes do little to ensure a valuable brand. If I were an investor looking for “blended value” – part monetary return, part “warm glow ” – the benefit corporation statutes alone would not convince me that I am going to get either.
For example, benefit corporations must be measured against a “third party standard,” but the statutes do not say much about the standard and how it should measure the "benefit." The model legislation states that the third party standard must be comprehensive, independent and credible (words lawyers could have fun defining). But those requirements are not in a number of the actual statutes and even if they are included, investors would still have to do due diligence on the specifics of each third party standard, which ruins most of the benefits of a brand. One third party standard could be environmentally heavy, one could tilt towards employees, one could be bent liberal, one could be bent conservative, etc. You just aren't exactly sure what you will get in a benefit corporation.
The branding value on the sales end of things is similarly low. Right now, few customers know what benefit corporations are and as they become better informed they will realize that the benefit corporation statutes do not guarantee them that much.
The B Lab certification and other similar certifications may, however, have some significant branding value. (And there may be a halo effect for non-certified benefit corporations until the ignorance addressed here disappears). If certain investors trust B Lab and agree with its standards, then those investors can rely on the certified B corp. brand. Also, as noted in an earlier post, I have heard, anecdotally, that being a part of the certified B corporation community and similar communities (like the L3C community) can be quite valuable to companies because of the networking opportunities, services, discounts and resources available to members of those communities.
In my last post I discussed the traditional corporate paradigm, which focuses on shareholder wealth maximization. Even with my caveats, I received some push-back. I encourage you to read the thoughtful comments (many arguing against the shareholder wealth maximization norm) and Professor Bainbridge’s impressive 7 responsive, detailed posts, linked to here (many defending the shareholder wealth maximization norm, at least as it applies to directors' duties).
While the distinguished commenters represented a wide range of views, they did appear to acknowledge the existence of a persistent belief that U.S. corporate law (primarily DE) directs for-profit directors to focus on shareholder wealth maximization. That persistent belief might be as powerful as any “reality.” (Bill Callison referred to it as the "conventional wisdom.") Just ask your average corporate director to explain the end to which the law says his/her powers should be employed. I would bet a pretty penny that the vast majority will mention some form of the phrase “shareholder wealth maximization.”
Benefit corporation statutes are designed to break the persistent belief that directors should primarily focus on shareholder wealth maximization in their governance of corporations.
Outside of breaking this persistent belief, I agree with my commenters that social enterprise statutes, including the benefit corporation statutes, may not be necessary. As Professor Manesh correctly noted in the comments, the Delaware LLC is flexible enough to meet many, if not all, of a social entrepreneurs’ needs. (See, e.g., Professor Cass Brewer's Using LLCs for Quasi-Charitable Endeavors (a/k/a "Social Enterprise")). In some states, with more flexible notions as to the beneficiaries of director fiduciary duties, the corporate form might also be an appropriate vehicle for social entrepreneurs.
The designers of the benefit corporation statutes leave the old corporate paradigm behind and make crystal clear the importance of non-shareholder stakeholders The benefit corporation statutes mandate the consideration of various corporate stakeholders in directorial decisions. I will save addressing the question of whether the mandate is wise or realistic for another time. Also, I leave open the possibility that there are more elegant solutions to the persistent belief problem than the current benefit corporation statutes.
Volumes have been written on corporate purpose governance. A blog post cannot do justice to even a fraction of the writing in this space. However, I hope we can agree, as a matter of positive Delaware corporate law (and the law of states that follow Delaware’s lead), that the primary purpose of the traditional corporation is to maximize shareholder wealth. Some would argue that the guiding principle of corporate governance is shareholder wealth maximization.
In a relatively recent Delaware Court of Chancery case, involving craigslist and its minority shareholder eBay, (cited ad nauseam in social enterprise circles: eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010)) former-Chancellor Chandler ordered rescission of certain of craiglist’s takeover defenses and stated:
- Promoting, protecting, or pursuing nonstockholder considerations must lead at some point to value for stockholders. When director decisions are reviewed under the business judgment rule, this Court will not question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value. Under the Unocal standard, however, the directors must act within the range of reasonableness.
- Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
- Directors of a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistently with the directors' fiduciary duties under Delaware law.
Too many promoters of benefit corporations gloss over (or ignore) the fact that the eBay case was decided in the narrow takeover defense context and evaluated under the enhanced scrutiny of Unocal. With most day-to-day decisions, the business judgment rule obviously provides significant cover for directors who wish to do social good in the corporate context. Under the facts of eBay, however, the benefit corporation could have been useful to the founders of craigslist and could have altered the outcome of the case (if Delaware had a benefit corporation statute).
To me, the eBay case is Bainbridgian. (And as a new academic, I find myself becoming more and more Bainbridgian as well). The case spells out what I am calling the "traditional paradigm" of corporate law. In eBay, former-Chancellor Chandler appears to recognize the shareholder wealth maximization norm, but also recognizes the strength of the abstention version of the business judgment rule.
Social entrepreneurs do not want to live under the rule of shareholder wealth maximization, even if they will be left alone by courts, in most situations, due to the business judgment rule.
In my next post, I will discuss the new paradigm created by the benefit corporation statutes.
Before jumping into the “corporate governance” section of my benefit corporation posts, I want to make clear something that most of the readers probably already know, but that some in the popular media consistently fail to articulate. There is a difference between “certified B corporations” and “benefit corporations,” even though both are sometimes referred to as “B Corps.”
Certified B corporations are certified by the nonprofit organization B Lab. B Lab likens its certification of companies to the certification of coffee as “Fair Trade” or the certification of buildings as “LEED certified." A company can take the initial B Impact Assessment for free. Becoming a certified B corporation, however, is not free (though I have heard anecdotally that the benefits of being part of the certified B corporation community can exceed the cost of the certification fees because B Lab has negotiated significant discounts with various vendors). Interested readers can find details about the process of becoming a certified B corporation here.
Benefit corporations are formed under the state law of one of the seven states that have passed benefit corporation statutes (California, Hawaii, Maryland, New Jersey, New York, Vermont and my state of residence - Virginia.) (See my chart comparing the benefit corporation state statutes here.) Benefit corporations must be measured against a “third party standard” but the standard does not have to be B Lab’s standard.
A company can be both a certified B corporation and a benefit corporation, but there are plenty of examples of companies that are one but not the other. Currently, there are 521 certified B corporations with total revenue of about $2.9 billion. I am trying to track down the exact number of benefit corporations, but everyone’s best estimate seems to between 50 and 100 total benefit corporations. Remember, however, that all of the statutes are relatively new and that both the California and New York statutes just became effective a few months ago.
Unless otherwise noted, my posts will focus on "benefit corporations."
Bonus tip: It is "B Lab" not "B Labs"