The original purpose of corporations had little to do with profits or even business. Originally, corporations were (take a deep breath and slowly exhale as you read) mainly for regulatory purposes. The original corporations were things like municipalities and guilds and were chartered by the Crown. Around the time of this nation’s founding, State’s chartered corporations for specific purposes like building bridges and later on, railroads. Quite specifically, corporations were chartered for a purpose that served the public interest. Oh my, Dorothy, can you imagine such a thing???
Of course these things were riddled with corruption, graft and all those other lovely things that seem to come about when money is involved (most notable would be the railroads and the land grants they received). Such being the case, in the mid-nineteenth century there was an outcry against these special charters that only a few could obtain. Like all things political, instead of fixing the problem they decided to just create a new one, presto-chango, State’s began enacting legislation that allowed for anyone to create a corporation. It’s probably shocking to read this and learn that the modern corporation was born out of a liberal desire to level the playing field. So all you conservatives reading this, be sure and thank a liberal next time you see one. No, you don’t have to shake their hand or actually touch them, though a little high-five might be a nice gesture.
Now the problem with corporations is the single-minded pursuit of the greatest profit possible and permitted by law (or not if you think you can get away with it). In fact, in all fifty states the primary purpose of a corporation is maximize the profits for shareholders to the exclusion of all else and this is, in fact, settled law. Dodge v Ford (204 Mich. 459, 507, 170 N.W. 668, 684 (1919)) is the best example of this where the Michigan Supreme Court wrote:
“A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.”
In simple terms what this means is that while directors are free to use their discretion regarding the method of maximizing profits they are not free to disregard this obligation regardless of the reason for doing so.
In all states shareholders have a right of action against directors who fail to do exactly that and can force directors (through injunctive relief and/or damage awards) to pursue the path that garners the greatest profit for them. One of the most famous instances of this is Ben & Jerry’s. While the company was privately held by Ben Cohen and Jerry Greenfield they were free to do whatever they wished which included a corporate policy of donating a portion of their pre-tax profits to charity, vigorously striving for equitable compensation schemes and being a generally socially conscious bunch of folks. That changed in 1995 when they went public and accepted investment from outside individuals. These people became shareholders and had a legal right to require the company to do everything it legally could to maximize it’s profits. When their stock underperformed the shareholders were not pleased. When Unilever tendered an offer to buy the company the choices were basically to either accept the offer or to face a series of lawsuits from investors as to why they didn’t. That the socially conscious nature of Ben & Jerry’s would not be a good fit within a multi-national conglomerate meant absolutely nothing. Actually, less than that since taking this into consideration would be a violation of their fiduciary responsibility to their shareholders. These kinds of cases happen and not infrequently. Just last month a class action was filed against Illuma Inc for rejecting a takeover bid by Roche.
The critical point here is that whether or not a company or it’s director’s want to do something which benefits society only matters if it enhances their profits. If it doesn’t they are legally restricted from pursuing such a path. Since I want to try and keep this simple I won’t get into states that have Constituency statutes which emerged in the eighties. For those that know what they are and would argue that they protect corporations from hostile takeovers I would respond that they are completely wrong. Constituency statutes are permissive, they allow for directors to consider other factors, however, they neither require them to do so nor do other factors trump the directors’ fiduciary responsibility. Courts have clearly shown discomfort with these statutes and inevitably return to the principle of the primacy of the shareholder.
[I also want to note that the question of corporate ‘personhood’ is a separate issue and not germane to this particular post. I promise to get to it sometime in the future.]
So given all this about corporate structure, legal obligations and fiduciary responsibility it all seems pretty bleak, eh? Well, maybe not.
Something interesting happened in Maryland a couple of years ago. Something right out of the Goldman Sachs version of Alice in Wonderland. The State of Maryland created a entirely new kind of corporation, a “B” Corp, or Benefit Corporation. What the hell is a B Corp? Well, you’re not going to believe it when I tell you so first go grab a drink and be sure to be sitting down.
Benefit corporations have something that makes them distinctly different from their traditional corporate cousins. Actually, it’s three special provisions:
- A corporate purpose to create a material positive impact on society and the environment;
- Expanded fiduciary duties of directors which require consideration of non-financial interests;
- An obligation to report on its overall social and environmental performance as assessed against a comprehensive, credible, independent and transparent third-party standard.
Whatchu talkin’ ‘bout Willis?
Benefit corporations (or B Corp) are for-profit businesses, they want to make money like every other business. The difference is the acknowledgment that what they do doesn’t just effect their shareholders, it also affects others (known as stakeholders). When a company elects to be a B corp they’re effectively saying that they recognize they exist within a greater context, basically, they accept that the decisions they make impact those around them who are not financially invested. This is not just a big deal, it’s HUGE!
Let’s take a quick look at what these provisions mean. First up, public benefit.
Benefit corporations MUST have a purpose of creating a “general public benefit”. They’re allowed to to be specific but not required to do so. For example, they could, in their articles of incorporation state that their mission is to donate a set percentage of their income to a specific charity. But they aren’t required to be that precise or specific. The simple act of electing B corp status REQUIRES them to create a public benefit by the very nature of their existence.
The model legislation which was created by B Labs and is used as the template for states interested in creating these types of corporations defines “general public benefit” as
“[A] 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.”
It also lists some possible examples:
- Providing low-income or underserved individuals or communities with 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 human health;
- Promoting the arts, sciences, or advancement of knowledge;
- Increasing the flow of capital to entities with a public benefit purpose;
- The accomplishment of any other particular benefit for society or the environment.
Again, let’s remember that while they’re socially conscious they’re also out to make a profit. This isn’t aimed at a bunch of Birkenstock clad hippies out to form a commune, it’s intended for businesses that want to make money but also want to be able to do good things without getting sued by their investors. If you invest in a B corp you know that the rules are different. Interestingly, with the advent of these new corporate entities there’s also been a new type of investor making their way onto the scene, folks who want to put their money into these kinds of companies not just because it makes them feel good but because they believe in the long run they make money. JP Morgan/Chase considers this to be a hugely lucrative investment market that will ultimately be worth trillions.
The second provision allows directors to make business decisions that aren’t necessarily the most profitable path but instead fulfill their corporate mission. They’re insulated against the lawsuits traditional corporations face when they fail to maximize profits. In fact, with a B corp the shareholders can sue, not because they aren’t making enough money but because they don’t think the director’s are maximizing their ability to provide either a stated public purpose or a general public benefit. How’s that for turning things upside down?
It also requires that director’s
shall consider the effects of any action or inaction upon: (i) the shareholders of the benefit corporation, (ii) the employees and workforce of the benefit corporation, its subsidiaries and its suppliers, (iii) the interests of customers as beneficiaries of the general public benefit or specific public benefit purposes of the benefit corporation, (iv) community and societal factors, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries and its suppliers are located, (v) the local and global environment, (vi) the short-term and long-term interests of the benefit corporation, including any benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation and (vii) the ability of the benefit corporation to accomplish its general benefit purpose and any specific public benefit purpose.
This means that when making business decisions the directors must consider not only the needs of the shareholders but also those of the stakeholders. They must consider the impact of their decision on their employees, the employees of their suppliers, their customers, the local community and the greater community at large and both the local and global environment. The most important word in this is “shall”. It doesn’t say that they can or that they may if they feel so inclined, it says, in legal parlance, that they MUST.
Can you imagine investing in a company and then suing them because while clubbing baby seals to death has been very profitable you believe it violates the general public benefit? Oh, by the way, if you do sue them don’t think of stuffing your pockets with money if you win. Shareholders have a right of action but only for injunctive relief, monetary awards are specifically excluded! This insulates the directors if they happen to screw up and disincentivizes spurious lawsuits.
In fairness it needs to be noted that stakeholders do not have a right of action, only shareholders. That problem, however, is addressed in the third provision.
The third provision requires a B corp to annually report it’s performance (compliance) against a transparent, third-party standard. Part of this includes the requirement for having a Benefit Director who’s task it is to monitor the company’s activities for compliance with it’s stated mission. It’s required to provide this report not just to it’s shareholders but to also post the report on-line.
Now the third-party standard is complicated and since I’ve already bored most of you (congrats if you’re still reading!) I’m not going to delve into it too deeply. Basically it’s a standard set by an impartial third-party that does not have any overriding interest in the company. Any connection between the third-party and the company or even the third-parties involvement in a specific industry must be disclosed. Great care has been taken to preserve absolute transparency.
What the third-party standard ensures is that you will finally be able to distinguish between really good companies that have a social and environmental awareness and companies that are really good at marketing. And isn’t that really the crux of the matter for us as consumers? Big companies have deep war chests and are extraordinarily adept at spinning events to make them look great even when they’re doing terrible things. Hell, I’m one of the biggest cynics on the planet but after months of those BP commercials I’m nearly convinced they did us all a favor by creating the biggest oil spill in history. The third-party standard makes it very difficult to spin things in such a way as to pervert the truth of events the company has been a part of. It’s forced full-disclosure. Isn’t that all we’ve ever asked? Be honest, tell us what you did and don’t try to tell us it was a good thing when you know damn well it was horrible. If you’re producing your ready-to-wear in sweat shops in Southeast Asia paying people less than a living wage you’re not likely to want to become a B corp. But if instead, you monitor your suppliers and make sure they treat all their workers humanely and can demonstrate that you do, well, tell us that in a way we can believe what you say is true. If you do we will very likely be willing to pay the extra few cents to know that we, as consumers, are also doing the right thing. Transparency is an incredibly valuable tool for everyone involved.
So what should you be doing to help promote this? First is to write your state officials if you live in a state that has yet to pass Benefit Corporation legislation. As of this writing it exists in Maryland, Vermont, New York, New Jersey, California, Virginia and Hawaii and it’s pending in Michigan, Pennsylvania, Washington D.C. and North Carolina. Second, start paying attention! Ask if the company you’re doing business with is a B Corp. There are lists on-line, however, most states don’t track this information so the best way to know is to ask. If they say no then plan on asking them “Why not? What are you afraid of?” Third, give preference to B Corps when choosing someone to do business with. In the end, it’s better and makes economic sense even if they don’t have the lowest price. Remember, they’re doing business ethically which is like trying to fight traditional corporations with their hands tied.
If you happen to be an investor, then look into B corporations. Their independence and long term sustainability make them very worth your while. Remember, had this form existed and had Ben & Jerry’s been one, they could have simply said no to Unilever since it takes a supermajority of shareholders (two thirds or greater) to accept a takeover that would result in the loss of B corp status. B corp investments just make good sense for people interested in long-term financial planning.
The bottom line is pretty simple. Everyone sits and shakes their heads when they watch the news and learn that Apple is letting their Chinese suppliers treat their workers in ways that would be illegal in the U.S. and are unethical, immoral and just plain wrong. Now there’s a mechanism for you to prevent this kind of thing, insist that the people you do business with are B corporations and operate not just to make a buck but also to make the world better. You’ll feel really good about yourself, I promise!
[By the way, there's no additional cost to becoming a B corp nor are they treated any differently by the government. They pay taxes at rates identical to all other for-profit companies and have no special privileges.]