Corporations with benefits

When looking for good in the world, corporate governance law is not the most obvious place to train your eye. Yet there is a sizeable band of corporations – thousands, in fact – who have opted to start just there, using corporate governance as a springboard to the greater good.

Shareholder primacy, often cast as the villain in corporate scandals or blinkered business decisions, operates on the theory that the job of directors and management is to maximise returns to investors. In turn, corporate law is traditionally viewed as a contract between corporations and investors that the company will, in the balance of law, deliver the highest return.

‘But that is really an assumption and not a fact of life,’ says Rick Alexander, corporate governance expert and former corporate attorney in the US corporate mecca, Delaware.

A benefit corporation is a corporate entity that includes certain positive impact requirements among its legally-defined goals, allowing corporates to reject shareholder primacy in favour of a governance model that permits balancing the interests of other stakeholders like workers, customers and communities. Maryland became the first state to specifically legislate for these kinds of corporations in 2010, and 30 others have since followed suit.

In the early 2010s, Alexander had been practising transactional law for 25 years and was responsible for maintaining Delaware’s corporate statute when he was approached by B Lab, a non-profit that operates a certification scheme for companies based on environmental and social responsibility.

‘They wanted us to adopt a benefit corporation statute in Delaware. And, to be honest, we thought it was kind of cute, but not really serious. I was the chair of the council that worked on those issues and so our first reaction was pretty negative,’ he recalls. ‘But they pushed pretty hard and I ended up taking it on as a project to look more seriously at what they were talking about. As I looked into it, I became persuaded that traditional corporate law had a lot of assumptions built in that were not necessarily supported by any rational economic theory.’

Alexander’s change of heart and subsequent work was instrumental in Delaware’s introduction of public benefit corporation (PBC) law in 2013. He even left the practice of law to become B Lab’s head of legal policy, promoting the concept of benefit corporations around the world.

As I looked into it, corporate law had a lot of assumptions built in that were not supported by any economic theory.
Rick Alexander, B Lab

Nowadays, B Lab and benefit corporations are still linked – to retain B Corp status (B Lab’s certification), companies must have a corporate structure that rejects shareholder primacy which, in the US, will often mean incorporating as a PBC. You do not need to be a B Corp to be a PBC, although the two frequently go hand-in-hand – and are often confused.

Keeping your commitments

Among the roster of companies opting to incorporate as PBCs, there are some big names. Global creative crowdfunding platform Kickstarter is one. ‘For Kickstarter, this was always the founders’ ethos,’ notes general counsel (GC) Christopher Mitchell. ‘They were not about, “Hey, let’s make our money on an IPO or sale of the company.” I like the fact that we are a very socially and politically-active organisation. That goes hand-in-hand with being a PBC – being very aware of what is going on in the world, how it affects our community, how it affects your business and then what are the appropriate steps to get involved.’

When the legislation came along, the company felt it was the perfect vehicle to crystallise Kickstarter’s commitments. PBCs must lock in a stated public benefit (or benefits) in their charter.

‘We are a for-profit entity, we operate like any normal business. However, it is like having a double bottom line. What are you focused on, what does good look like, what does success look like, what are you working towards? As you’re making decisions as an organisation, what behaviour do you take, what actions do you take, what areas do you support? If you think about a lot of other organisations, their main focus is making money. Well, what if it was not just that?’ says Mitchell.

‘What about if you said: “Well these other two or three things are important to us, and this is how we measure success.” Commitment to the environment and bringing creative projects to life are all part of that mandate. A lot of non-PBC organisations aspire to those things, but a lot of times those other goals become secondary to profit maximisation.’

Kickstarter’s shareholders unanimously backed the conversion to become a PBC. It could be that some investors believe they are looking at a generational shift of corporate values, and the PBC sits at a unique nexus.

‘It is a paradox, but it can generate more value for your investors – your corporate structure communicates that you are a responsible partner and not bound by law to take advantage of every situation. Right now we’re at a stage where individual companies are looking at adopting a benefit corporation structure as a competitive advantage, especially among the Millennial workforce, or even the generation coming up behind the Millennials, who are extremely interested in that sort of concept,’ says Alexander.

The North Star

If PBCs are aiming to inject virtue into corporate life, could this also trickle down into a better life for their in-house counsel? Kickstarter’s Mitchell thinks so.

‘I love it because it gives me another reference point. As counsel, you’re considering the law and the objectives of the business and you’re trying to organise those, but when you have these very clear stated commitments and rules, it just provides another reference point to help with the decision-making process. It prevents singular deviation on a project where someone might say: “Hey, that is fine but for this one we will just try this.” No, these are commitments, they are set in stone,’ he says.

‘It is absolutely fantastic to have this North Star and this very clear statement driving alignment internally. It is not just that you are the GC and you are an outlier. You can point to the charter and say: “This is what we committed to be.”’

‘When it comes to a situation like dealing with a supplier who may not be performing but if we were to walk away, hundreds of their employees would lose their jobs, we look much further than the financial impact of the decision and often make what might seem like an unorthodox choice because it could cost us more in the end,’ adds Hilary Dessouky, GC of outdoor apparel company Patagonia, which incorporated as a benefit corporation in California in 2012.

‘At Patagonia, people and planet come first and that is a great foundation for decision making. It adds complexity because there are so many different factors to consider and that can be hard at the beginning. But it is like a muscle that you have to exercise, and when you see the results, you want to keep working on it.’

For Laureate Education, becoming a PBC took a little heavy lifting for the incumbent GC’s predecessor. In 2015, the for-profit network of higher education institutions changed domicile from Maryland to take advantage of the new Delaware law. Maryland had a similar statute, but as the PBC structure had gained traction, model legislation was developed to address thorny issues of fiduciary duty and shareholder liability, and Delaware followed this trend – which appealed to Laureate when it decided to reincorporate.

Our values are so deeply ingrained in everything we do, for us the risk would be not being a public benefit corporation.
Hilary Dessouky, Patagonia

‘Any time you are thinking about making a change in your legal status, the GC is critical. The GC has got to understand what is required and has to be the one to take a hard look at the organisation and ask “Is it really in our best interest to do this? Can we be a PBC? What is that going to mean for us?” There are going to be legal requirements, the board of directors is going to have to understand what this means, they are going to have to feel comfortable with it, they are going to have to vote for it,’ says Victoria Silbey, chief legal officer of Laureate since 2017.

The GC also has a vital role to play in drafting the public benefit purpose that the company is nailing to its mast.

‘It needs to be both specific enough to talk about what you do but broad enough to last for a long time, as a company may change emphasis and strategy. You have to think about it as almost a legal contract, so it’s critical the GC is part of the decision-making process around that purpose,’ she says.

The Laureate team eventually settled on: ‘To produce a positive effect for society and for persons by offering diverse educational programmes, both on premises or campuses located in the communities we serve online.’

‘If we are acquiring or divesting a college or university somewhere on the globe, part of the questions we ask ourselves is whether this will be good for students. Can we offer students more – better access, better educational opportunities, better outcomes, better ability to get jobs, to get salaries that can support them, for example? We would probably do that anyway, but being a PBC gives us the context in which to put these questions and to make these decisions,’ says Silbey.

Investor reception

But is it possible to balance profitability with a commitment to the greater public good? CircleUp, a company that helps consumer product start-ups to raise equity, thinks so. It applied machine-learning software to scoring like-for-like strength, reach, growth and intensity of consumer brands in June 2018, finding that 93% of B Corps (distinct from PBCs, but connected by sustainable ethos) scored above the average. The software also reported a 49% growth in sales, three times more than the category cohort.

But not all attempts to marry a sustainability stamp and profitability have escaped a bruising, particularly in the public realm. After the board ousted the chief executive of e-commerce platform Etsy in 2017 amid reports of overspending and falling share price, the vocal champion of stakeholder culture and then B Corp released the following statement from its newly-installed chief executive, Josh Silverman: ‘Since 2012, Etsy has relied on third-party certification, known as B Corp, as one of the ways we demonstrate our public commitment to running a sustainable, socially-responsible business. We are proud of our B Corp certification, and of our track record of improving our B Corp score after each impact assessment.

‘One of the requirements of B Corp certification for corporations incorporated in Delaware is that a company must change its corporate structure from a C Corporation to a benefit corporation. As we have said publicly over the past year, Etsy will not seek conversion to a benefit corporation by the December 2017 deadline because converting is a complicated, and untested process for existing public companies.’

Etsy declined to be interviewed for this piece, but B Lab’s Alexander is reluctant to concede that its specific situation has any reflection on the reception of the PBC status among investors.

‘Part of our certification is that at the end of a grace period, if they wanted to keep the certification, they would have had to become a benefit corporation and that would have meant getting a two-thirds vote from their shareholders. At that time they were in a struggle with their shareholders, they had some not-good performance, there were hedge funds in the stock and eventually there was a whole turnover of management. That was not a company that had a problem with being a PBC. It was a company that was not in a position to get a two-thirds vote on anything, let alone PBC status,’ he comments.

The reality is a public benefit corporation status is unlikely to appeal to a company that has not placed a socially-conscious agenda at the heart of its business.

Certainly the experience of Laureate Education, the first company already with PBC status to make an IPO, has been relatively smooth – though Silbey admits there was trepidation beforehand.

‘One of the concerns we had was that public markets would not be receptive. I do not think that that has turned out to be the case. But we really did not know at the time,’ she says.

‘We definitely had to explain it. It is not that common in general and nobody was public beforehand, so we had to very carefully explain what it means and why it ties into our overall mission. We needed to be very clear and anticipate the questions that we might have. Does that mean that there’s not going to be good shareholder return? Does that mean that you will put everybody else ahead of shareholders? We needed to think through what those questions might be and then to address them both in our written documentation and other conversations with investors.’

Because PBCs are obligated to make decisions that honour a specified social or environmental purpose, they can be held to account for not doing so. The Delaware statute has therefore built-in protection for companies so that such lawsuits can only be brought by shareholders owning more than 2% of the company, and that no monetary damages can be obtained, only assurances that the company will improve.

‘For the most part what the statute does is eliminate risk. It makes it easier to operate in a way that’s socially and environmentally conscious, so we reduce the risk that anyone would ever sue you for that,’ says Alexander.

A moment of reflection

Having PBC status has reporting requirements, although at once every two years in Delaware, these are not too onerous.

‘On one hand this is a statement to the public but also for ourselves, it is a moment of reflection. How well did we do? It is an important piece of feedback,’ says Mitchell.

Like Kickstarter, Laureate is also a B Corp, and B Lab’s granular auditing process provides a similar opportunity for introspection.

‘For the B Corp status, we were concerned that it might be too hard. To get audited on things like environmental footprint and supply chain issues was very new for us and we didn’t really know how we were going to do. We are not making sneakers, so we are not checking our supply chain more regularly,’ says Silbey.

‘So this was a brand new horizon for us, but it has been great. Because it goes all the way down to a campus level review, we get really good insight into our institutions and how things are going and it helps us then make decisions.’

The reality is that a PBC status is unlikely to appeal to a company that has not placed an environmentally or socially-conscious agenda at the heart of its business, like Kickstarter, Laureate and Patagonia have. The jury is out, however, on how an ethical agenda might be protected in the event of a takeover, especially in the case of rolling back commitments – however legally.

‘In a hostile takeover there is a limited amount that can be done, and I have not really thought through whether we should have a poison pill specifically related to PBC status,’ says Silbey.

‘But certainly with respect to a non-hostile transaction, our directors would try to weigh the different questions that we have as a PBC about commitment to students and communities and outcomes, so we would balance all of that with other fiduciary duties and shareholder considerations.’

A sustainable future

PBC status is optional. But what if it was not? Senator Elizabeth Warren, Democrat and 2020 presidential hopeful, last year announced the Accountable Capitalism Act, which strikes at the same target as the public benefit corporation: shareholder primacy.

‘In the early 1980s, America’s biggest companies dedicated less than half of their profits to shareholders and reinvested the rest in the company. But over the last decade, big American companies have dedicated 93% of earnings to shareholders – redirecting trillions of dollars that could have gone to workers or long-term investments. The result is that booming corporate profits and rising worker productivity have not led to rising wages.’

A key plank of the act calls for corporations with more than $1bn in annual revenue to obtain a federal charter as a ‘United States corporation’, obliging directors to consider the interests of all corporate stakeholders.

‘This approach is derived from the thriving benefit corporation model that 33 states and the District of Columbia have adopted and that companies like Patagonia, Danone North America, and Kickstarter have embraced with strong results,’ stated Warren.

The road to legislation, like government, is a long one, and much is in the balance with this bill. But, if a corporate governance trend is turning heads – and public opinion – there could be interesting times ahead for large companies.

All the more reason for the GC to ensure they are involved in any process of governance change or audit from an early stage.

‘Sometimes at B Lab we will be dealing with a sustainability group in a company, and they will say “Let’s do all the other stuff and then we will do the legal” – because nobody wants to call the GC!’ says Alexander. ‘We encourage people to socialise the issue early and to make sure that there are board-level discussions about certification and that the board understands the legal piece. The GC is going to be key in the boardroom’.

Alex Speirs is the editor-in-chief of GC magazine.