In my corporate governance seminar this past semester, a couple of students wrote papers on the emerging phenomenon of so-called beneficial corporations (a.k.a. for benefit corporations). As Inc explained:
Public companies are legally obligated to maximize returns to shareholders, according to a widespread interpretation of corporate law. For private firms, it's more a matter of withstanding pressure from investors. Hannigan and Marx, for example, fear their social mission could be threatened if an investor changed his mind about Give Something Back's penchant for charity. They want to avoid the fate of ice cream maker Ben & Jerry's, which received a buyout offer from the Dutch conglomerate Unilever (NYSE:UL) in 2000. Founders Ben Cohen and Jerry Greenfield didn't want to sell, so Cohen assembled a group of investors to make a counteroffer. When they couldn't offer as much as Unilever, shareholders sued, and the company, then publicly traded, was forced to relent. In April 2000, Ben & Jerry's was acquired by Unilever for $326 million.
That's exactly the situation that B Lab, a new nonprofit organization, aims to prevent. The group is creating a new kind of company--the B Corporation. (The B stands for "beneficial.") It's less a legal designation than a certification system that will allow businesses to define themselves as socially responsible to consumers and investors. To become a certified B Corporation, a company must amend its articles of incorporation to say that managers must consider the interests of employees, the community, and the environment instead of worrying solely about shareholders. Those amendments, according to B Lab, will let entrepreneurs like Hannigan take on outside investors without worrying that their values will be compromised. "For us, this is a huge step forward," says Hannigan, whose company recently became one of about two dozen certified B Corporations.
While there might be some benefit here in providing an off-the-rack form that could have been difficult to contract into otherwise (or not -- more on this in a later post), the form surely seems tailor made to deal with the CSR problem. (On which see here, here, here and here). If corporate directors want to maximize something other than shareholder interests, let them. But why not also make them (permit them to?) identify their organizations accordingly -- call it Whole Foods, CIC –- and subject them to dividend monitoring by regulators (and see how well that goes over).
Part of the stated purpose with the CIC is, in fact, branding, and this might be its real appeal: “The CIC legal form was specifically designed to provide a purpose-built legal framework and a ‘brand’ identity for social enterprises that want to adopt the limited company form.” It’s a way for “socially-conscious” corporations cheaply to identify their consciousness (and a way for the rest of us cheaply to avoid investing in them). (But I will note that some fascinating recent research by Anup Malani and Guy David has suggested that there may be less value in nonprofit branding than we might have thought, and the benefits of a CIC designation may be accordingly limited).
Larry Ribstein commented:
The CIC clarifies ... that the key csr question concerns the extent of managers’ control over the cash. In a standard publicly held corporation, managers significantly control corporate cash subject only to shareholders’ fairly weak voting, selling and fiduciary rights. In a CIC, the managers have even more control over the cash.
... the main effect of opting into the CIC form is that the governing statute would then limit the extent to which the firm's governance ever could be changed through a takeover or similar device to restrict the manager’s control over the cash.
If US corporation law codes were more clearly understood to be enabling statutes, there is nothing the CIC buys you (other than the label) that could not be done via the articles of incorporation of a standard business corporation. The articles of an aspiring US CIC would include:
- A nonshareholder constituency interest shark repellent. These provisions permit, and in some cases require, directors to consider a variety of nonprice factors in evaluating a proposed acquisition. A typical one allows directors to consider "the social, legal and economic effects of an offer upon employees, suppliers, customers and others having similar relationships with the corporation, and the communities in which the corporation conducts its business."
- Restrictions on payment of dividends.
- Strong takeover defenses. Perhaps a combination of a poison pill, a classified board, and a dual class capital structure in which management holds supervoting shares. Although changes to the articles require board approval, a belt-and-suspenders corporate social responsibility advocate would want to further protect these provisions by requiring some sort of supermajority vote to amend them.(All of these devices, by the way, are discussed at length in my book Mergers and Acquisitions.)
Unfortunately, it's not at all clear that US corporate law is sufficiently enabling to achieve this result. State law arguably does not permit corporate organic documents to redefine the directors' fiduciary duties. In general, a charter amendment may not derogate from common law rules if doing so conflicts with some settled public policy. In light of the well settled shareholder wealth maximization policy, nonmonetary factors charter amendments therefore appeared vulnerable. This problem seems especially significant for Delaware firms, as Delaware law became increasingly hostile to directorial consideration of nonshareholder interests in the takeover decisionmaking process.
The question of whether corporate law is sufficiently enabling strikes me as one of the two big issues. The other is how to give a B corp teeth.
