The Rise of Stakeholder Governance: An Introduction to the Benefit Corporation

Background

In response to a growing concern for social and environmental issues throughout the world, the Business Roundtable, a lobbying group consisting of CEOs from America’s leading companies, recently issued a statement declaring a shift in corporate purpose.[1] Since 1997, the group has endorsed the shareholder primacy norm of corporate governance—that corporations exist principally to serve their shareholders.[2] While this issue has been widely and extensively debated for decades, this marks the first time in recent history that the concept of shareholder primacy has been renounced by a coalition of leaders of diverse companies that represent nearly one-third of U.S. market capitalization.[3]

Contrary to the prevailing norm of shareholder primacy, the Business Roundtable’s statement aims to redefine success in business, whereby corporations generate value for society and not just for shareholders. The ubiquity of corporate scandals, human rights violations, and environmental degradation has resulted in a deep-seated mistrust of large corporations that are seemingly willing to do whatever it takes for the promise of increased profits. The traditional view of business as a purely economic entity has increased the gap between business and society, where business is solely responsible for generating profits, while government and civil society are left to address a growing number of social and environmental issues. Recognizing corporate contributions to the global challenges faced today, the Business Roundtable’s statement aims to bridge the gap between business and society.

The past two decades have seen an increase in research centered on business and social responsibility, highlighting the importance of reintegrating ethics and values into the world of business. Scholars have explored corporate social responsibility initiatives and hybrid business models that employ market tactics to address social and environmental issues, recognizing that society may be better served by an alternative corporate form. Advocates of the stakeholder theory of corporate governance have long argued that the purpose of the firm is to create and distribute value to a plurality of stakeholders. The stakeholder verses shareholder corporate governance debate is nothing new, but has taken a different form over the past decade with the emergence of the benefit corporation—a new legal entity that requires officers and directors to consider the interests of a variety of stakeholders in pursuance of the corporation’s stated public purpose.

Overview of Benefit Corporations and Key Characteristics

Benefit corporations operate much like traditional corporations but with elevated standards of corporate purpose, accountability, and transparency.[4] B Lab, the nonprofit advocating for this new governance structure, touts the benefit corporation as “[a] new legal tool to create a solid foundation for long term mission alignment and value creation.”[5] As of October 2020, thirty-seven states have passed legislation that allows companies to incorporate as a benefit corporation and an additional four states have benefit corporation legislation under consideration.[6] An organization may incorporate as a benefit corporation under a state statute and upon so doing is “legally obligated to pursue a general public benefit in addition to its responsibility to return profits to its shareholders.”[7]

Among states, benefit corporations are created with the same major characteristics included in the Model Benefit Corporation Legislation (“MBCL”), although the specific statutory provisions may vary slightly. These characteristics include: (1) a specific corporate purpose contained in its articles of incorporation that creates a “material positive impact on society and the environment;” (2) broader fiduciary duties of directors that include a range of stakeholders in addition to shareholders; and (3) annual reporting requirements on overall social and environmental performance.[8] The MBCL contains no naming requirements for benefit corporations, only requiring that benefit corporation status be denoted in a corporation’s articles of incorporation.

Purpose

A key distinction from the traditional corporation is the benefit corporation’s required general public benefit purpose. A general public benefit is defined in the MBCL as “[a] material positive impact on society and the environment, taken as a whole, from the business and operations of a benefit corporation assessed taking into account the impacts of the benefit corporation as reported against a third-party standard.”[9] By requiring that the business’s impact be looked at as a whole, the general public benefit requires consideration of all of the effects of the business on society and the environment. This general public benefit is in addition to the “any lawful purpose” required under the MBCA.

Additionally, benefit corporations have the option of committing to a specific public benefit purpose by including this purpose in the corporation’s articles of incorporation. Examples of specific public benefits include providing low-income or underserved individuals or communities with beneficial products or services, protecting or restoring the environment, improving human health, and investing in entities with a purpose to benefit society.[10] This allows social enterprises to commit publicly to their specific missions, but the narrowness of the specific public benefit purpose requires amendment of the articles of incorporation when a company wishes to alter their mission or completes their mission. By not adopting a specific public benefit purpose, directors can maintain more flexibility and pursue the creation of the company’s material positive impact on society and the environment in a variety of ways.[11]

Governance

The MBCL explicitly identifies the stakeholder interests that directors must consider when discharging their duties and determining the best interests of the benefit corporation.[12] These include: (1) the shareholders; (2) the employees and work force of the benefit corporation, its subsidiaries, and its suppliers; (3) the interests of customers as beneficiaries of the general public benefit or a specific public benefit; (4) community and societal factors, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries, or its suppliers are located; (5) the local and global environment; (6) the short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans; and (7) the ability of the benefit corporation to accomplish its general public benefit purpose and any specific public benefit purpose. In addition to the interests listed above, the board of directors of a benefit corporation may consider any additional interests referred to in the constituency statutes of the state corporate code and “other pertinent factors or the interests of any other group that they deem appropriate.”[13]

In contrast to the shareholder primacy norm, benefit corporation statutes provide that directors need not give priority to a particular interest over any other interest or factor.[14] This gives the board the ability to consider other corporate interests that may run contrary to the pervasive norm of shareholder primacy. That being said, the MBCL does allow benefit corporations to identify specific priorities in its articles incorporation.[15] This provides notice of its intention to prioritize certain interests or factors related to the accomplishment of its general public benefit purpose or its specific public benefit purpose. Proponents of benefit corporations argue that the entity provides a legally-protected opportunity to act in socially responsible ways.[16] Specifically, the Delaware and Colorado statutes require a benefit corporation to “be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation.”[17]

Accountability and Transparency

Organizing as a benefit corporation provides “absolute legal protection to directors and officers who publicly declare that their businesses are dedicated to other issues.”[18] This essentially removes the legal uncertainty facing directors of purpose-driven companies. In terms of director liability, the legislation provides that directors and officers cannot be held personally liable for failing to meet the corporation’s social commitments.[19] Instead the MBCL provides every shareholder a right to bring a traditional action or a benefit enforcement proceeding when a director or officer fails to pursue or create a stated general or specific public benefit purpose, fails to consider the interest of the various stakeholders, or fails to meet the transparency requirements.[20] Benefit enforcement proceedings can be filed by the benefit corporation, shareholders that hold at least 2% of the corporation’s stock, a director of the corporation, an owner that holds at least 5% of the parent of a benefit corporation, or any other person listed in the corporation’s bylaws or charter.[21] These additional mechanisms to hold directors accountable to the stated purpose are unique to benefit corporations.

The annual reporting requirement requires directors to publish an annual report and requires them to use third-party standards to verify their social and environmental impact. The annual report must be sent to shareholders, posted on the company’s website, and filed with the secretary of state.[22] The selected third-party standard must have publicly available information about the “identity of the directors, officers, material owners, and the governing body of the entity that developed and controls revisions to the standard.”[23] The report must include a narrative description of the ways in which the benefit corporation pursued a general public benefit or any specific benefit, any circumstances that may have hindered creation of these benefits, and the process and any rationale if the corporation is changing the third-party standard used to prepare the benefit report.[24]

While this reporting requirement is a key differentiating factor, benefit corporation legislation was enacted before effective enforcement and compliance programs were established. As a result, these reporting requirements are criticized as lacking appropriate enforcement mechanisms and sufficient specificity.[25] Early data shows that less than 10% of benefit corporations comply with the reporting requirements.[26]

Conclusion

Despite the fact that the enforceability of benefit corporation commitments and reporting requirements remains untested, it is clear that the drafters of the MBCL sought to create an entity that requires its directors to consider and balance the impact of their decisions not only on shareholders, but also on a wide range of stakeholders and provides them the legal protection to do so. Only time can tell how this plays out in practice and in the courts.

Sources

[1] Business Roundtable. (2019, August 19). Statement on the Purpose of a Corporation. https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationOctober2020.pdf [2] Business Roundtable. (2019, August 19). Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’. https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans [3] Gartenberg, C. & Serafeim, G. (2019, August 20). 181 Top CEOs Have Realized Companies Need a Purpose Beyond Profit, Harvard Business Review. https://hbr.org/2019/08/181-top-ceos-have-realized-companies-need-a-purpose-beyond-profit [4] B Lab. About B Corps. https://bcorporation.net/about-b-corps [5] B Lab. Benefit Corporation. https://benefitcorp.net/ [6] B Lab. State by State Status of Legislation. https://benefitcorp.net/policymakers/state-by-state-status [7] Hiller, J.S. The Benefit Corporation and Corporate Social Responsibility. J Bus Ethics 118, 287-301 (2013). https://doi.org/10.1007/s10551-012-1580-3

[8] Model Benefit Corp. Legis. §§ 102, 201, 301(a), 401(a) (version as of Apr. 17, 2017), available at https://benefitcorp.net/sites/default/files/Model%20benefit%20corp%20legislation%20_4_17_17.pdf [9] Model Benefit Corp. Legis. § 102 [10] Model Benefit Corp. Legis. § 102 [11] B Lab. How do I Create General Public Benefit?. https://benefitcorp.net/how-do-i-create-general-public-benefit [12] Model Benefit Corp. Legis. § 301 [13] Model Benefit Corp. Legis. § 301(a)(2) [14] Model Benefit Corp. Legis. § 301(a)(3) [15] Model Benefit Corp. Legis. § 301(a)(3) [16] Chu, J. (2013). Filling a Nonexistent Gap: Benefit Corporations and the Myth of Shareholder Wealth Maximization. Southern California Interdisciplinary Law Journal. 22, 161. [17] Del. Code Ann. tit. 8, §362(a) (2019); Colo. Rev. Stat. § 7-101-503(1) (2019). [18] Chu, J. (2013). Filling a Nonexistent Gap: Benefit Corporations and the Myth of Shareholder Wealth Maximization. Southern California Interdisciplinary Law Journal. 22, 183. [19] Model Benefit Corp. Legis. §§ 301(c), 303(c) [20] Model Benefit Corp. Legis. §§ 102, 305(a) [21] Model Benefit Corp. Legis. § 305(c) [22] Model Benefit Corp. Legis. § 402 [23] Model Benefit Corp. Legis. § 102 [24] Model Benefit Corp. Legis. § 401 [25] Murray, J.H. (2016) Understanding and Improving Benefit Corporation Reporting. Business Law Today 2016, 1. [26] Murray, J.H. (2016) Understanding and Improving Benefit Corporation Reporting. Business Law Today 2016, 2.