In his book, Benefit Corporation Law and Governance: Pursuing Profit with Purpose (Berrett-Koehler Publishers, 2018), Frederick H. Alexander has provided valuable insight into one of the most important developments in corporate law — the advent and development of the benefit corporation.
Benefit corporations create a legal commitment for board members to consider the interests of “stakeholders” beyond just shareholders and may provide a right to seek injunctive (but not monetary) relief for a failure to balance stakeholder interests or to disclose the broader impact of company actions, Benefit corporation status also may provide a “safe harbor” for boards if they accept a lower share value for the sake of such broader impacts, even in the context of a sale of the company.
Alexander is an appropriate guide to explain this new form of entity. A longtime prominent corporate attorney in Delaware, he was directly involved in formulating that state's benefit corporation statute, which has influenced the statutes in some of the 40 states and five countries that have adopted similar legislation. Seeing corporate law as an ideology that could change with the times rather than as a fixed set of rules, Alexander believes that the benefit corporation provides a potentially better model for businesses, especially as investors begin to recognize that their interests may not be best served by requiring each company in a portfolio to maximize its own return to shareholders. After 26 years of practicing law, he joined B-Lab, “a nonprofit organization that serves a global movement of people using business as a force for good,” as its head of legal policy and subsequently founded The Shareholder Commons, a nonprofit “committed to change in the capital markets.”
Board members are increasingly being called upon by their own shareholders, as well as other stakeholders, to look beyond “shareholder primacy,” i.e., considering only the maximization of shareholder value, and they often struggle with how to navigate potential tradeoffs between financial return and accommodation of the broader objectives of investors. The implicit question faced is often, “If we consider purposes other than profit maximization, doesn't that imply reduced financial return?” as well as “How will we be judged as board members, including legally?”
It is noteworthy that the foreword to Alexander's book is written by Leo E. Strine, Jr., former chief justice of the Delaware Supreme Court, who suggests that benefit corporation governance provides a way to address this tension in corporate law. Under current law, directors may be in a difficult position when shareholders express as much concern about systemic issues as they do about individual company “alpha.” More specifically, benefit corporation status broadens the aperture of fiduciary duty while emphasizing that the corporation is still run for the benefit and under the control of shareholders. The key element of benefit corporation governance is the recognition that shareholders themselves may have important interests in the treatment of other stakeholders.
Benefit corporation statutes provide a trust-enhancing operating system that recognizes the importance of all stakeholders. They create a new model of governance that rejects the idea that business must always put profit over people and purpose; they allow corporations to assure the public that the pursuit of profits need not overcome a corporation's obligations as a citizen.
As the author explains, most investors have diversified portfolios and rely on common resources that are threatened when corporations externalize costs in order to juice their own financial returns. Benefit corporation law recognizes this fundamental economic fact. The governance of benefit corporations should be just as rigorous as for ordinary corporations, requiring active board oversight of strategy, risk and management performance, including in pursuit of the purposes beyond financial returns.
As board members, we find that financial return optimization is “in the DNA” of the corporations we serve. Forming a benefit corporation or switching to benefit corporation status via a corporate charter amendment (which may require shareholder approval) may feel disorienting, as we can no longer rely on enterprise value alone as a “North Star.” The book provides practical advice for navigating this new geography and shows why it is ultimately better for directors to have discretion to bypass the most remunerative choice, if they determine that such a choice excessively or unfairly burdens the systems that all companies and investors rely upon in common.
Benefit corporations should not be confused with “B Corps,” companies that have been certified as socially and environmentally responsible by the nonprofit B Lab. The B Lab itself instigated the concept of benefit corporations over a decade ago in order to ensure that companies it certified could choose a mode of governance that did not automatically prioritize financial return over broader responsibility. The designation, however, is not legally binding.
Though there was just one publicly held benefit corporation as 2020 began, there are now 11, including several IPOs, with more to come. Amalgamated Financial (Nasdaq: AMAL), a NYC-based bank, converted to a public benefit corporation following a shareholder vote. Veeva Systems (NYSE: VEEV), a cloud-based software company for the life sciences industry with market capitalization over $40 billion, recently converted to a public benefit corporation. And Novus Capital, a publicly traded SPAC, converted to a public benefit corporation after acquisition of an operating company.
There are now more than 10,000 benefit corporations and over 4,000 certified B Corps worldwide. The news is filled with calls for companies to be better “corporate citizens,” and laws and regulations are increasingly requiring companies to pursue ESG goals and to report on their progress. Benefit corporations facilitate a firmer commitment to stakeholder interests than the aspirational ESG pronouncements by companies, which are nonbinding and lack any structure for ensuring their realization and do not legally protect directors who choose sustainability over the highest return available.
Benefit corporations have clearly arrived, providing businesses an opportunity to authentically incorporate the interests of all stakeholders into their stated mission in a manner that resonates with more and more investors. Directors would therefore do well to read Alexander's book, as it will help improve the quality of boardroom discussions about corporate purpose. The lens of benefit corporation governance, whether or not the form is immediately adopted, will help board members think about shareholder interests more holistically and lead to more thoughtful and value-enhancing decision making.
Howard Brod Brownstein is president of The Brownstein Corporation and regularly serves as an independent board member for publicly held and privately owned companies and large nonprofits.