Submitted by EveTahmincioglu on Fri, 08/17/2018 - 09:52

Proposed legislation from Elizabeth Warren, and new laws backed by Republicans, look to reform corporate governance and bolster movement to support the environment, social issues.

This week, U.S. Senator Elizabeth Warren dropped a bombshell piece of legislation that would require every company with more than $1 billion in revenue or 5,000 employees to become a “benefit corporation.” Some called the legislation brilliant; others labeled it Marxist.

It is remarkable how closely the benefit corporation idea in her bill tracks legislation supported by Republicans around the country. Thirty of the 34 legislatures that adopted a benefit corporation option did so unanimously. The laws were signed by 16 Republican governors including Mike Pence, Nikki Haley, Sam Brownback, Scott Walker and Jan Brewer. Libertarian Senator Rand Paul endorsed the benefit corporation in 2014.

Why has corporate law reform become a bipartisan issue? The answer lies in the importance of the corporate firm to a successful capitalist society; and as that society evolves, corporate laws must adapt.

Our material success depends on capitalism, a self-organizing, bottom-up system, not a controlled top-down one (those tend to fail). But this success has created an increasingly interdependent globe, and critical social and environmental systems are at risk as the world’s carrying capacity for social instability, environmental pollutants and economic risk are approached.

B Corp and benefit corporation are often used interchangeably but they are very different.

•        The term “B Corp” refers to the B Corp certification.  Similar to “fair trade” for coffee or “LEED” for green buildings, but instead of measuring one aspect of a product or business, the B Corp designation is a certification for the whole company.  To get certified, companies must meet high standards of social and environmental impact, evidenced by obtaining a threshold score on the “B Impact Assessment,” which is both verified and audited, as well as pay certification fees.  Certification is for 3 years.  You can identify certified “B Corps” by looking for the certification symbol: a capital “B” inside of a circle (image attached).  Certified B Corps are required to make legal changes to their organizational documents that reject shareholder primacy, so many certified B Corps are also benefit corporations. 

•        The term “benefit corporation” refers to a new legal framework to incorporate a for-profit business with a broader purpose to benefit society and the environment.  New corporate statutes authorizing benefit corporations have been passed in over 30 states since 2009 (also called “public benefit corporations” or “PBCs” in some jurisdictions, including Delaware).  A company does not need to be a certified B Corp to incorporate as a benefit corporation.)

Complicated, self-organizing systems (like modern capitalism) rely on feedback, but we have de-emphasized all non-financial feedback in corporate law by operating under shareholder primacy: the assumption that corporations operate primarily for the benefit of shareholders.

In order to save capitalism, we need to upgrade its feedback mechanisms. Warren’s bill and the state legislation authorizing benefit corporations, do just that. (Warren would impose a mandatory, federal system on all corporations, while the state law statues allow a market decision as to adoption, which is a critical distinction.)

As another example of a new feedback mechanism, Delaware’s Certification of Adoption of Sustainability and Transparency Standards Act (CASTS), will go into effect in the fall. It’s a first of its kind legislation that provides a rubric and public platform for any Delaware entity to measure and report its sustainability.

A host of organizations address the need for business to widen its aperture: B Lab, the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), International Integrated Reporting Council (IRRC), CERES, JUST Capital, Conscious Capitalism. Many of these initiatives establish reporting standards, and they all seek to realign business models that focus solely on shareholder return, and to create a business climate where all stakeholders matter.

The new law will allow any Delaware entity to use the standards promulgated by GRI, SASB, IIRC, B Lab, or any other organization to report their performance.

Directors have a key role. The pure pursuit of profits is weakening the systems upon which we all depend and the public is noticing. BlackRock, the world’s largest asset manager, recognized this in its recent call on corporations to weave purpose into their pursuits:

Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.

New Laws Provide New Opportunities

But organizations are not the only change agents — new laws are accommodating this new way of business.

For example, benefit corporation statutes have been adopted in 35 states in the US, as well as Italy and Colombia, and are being pursued in South America, Europe, Canada, the United Kingdom, Australia and elsewhere. These laws allow companies to give directors and managers greater discretion to create long-term, durable value for all stakeholders, and not just shareholders. Benefit corporations account for all of their impact, not just their financial return.

There are now more than 7,000 benefit corporations in the U.S., and last year saw the first IPO of a benefit corporation, Laureate. In March of 2018, the Gap announced that its subsidiary, Athleta, had become a benefit corporation, following other public companies like Campbell’s, Procter & Gamble and United Therapeutics in forming benefit corporation subsidiaries. Danone created the world’s largest benefit corporation when it put all of its North American operations into a Delaware benefit corporation.

And there’s the new Delaware law, CASTS.

Unlike benefit corporations, companies that opt into CASTS do not change their underlying purpose: they retain a sole purpose of providing financial returns, even though they report on a broader set of impacts. Nevertheless, the new feedback opportunity may provide an important on-ramp to truly sustainable corporate governance.

A Stewardship Opportunity

What unites all of these standards and new laws is their voluntary nature and their opening of additional feedback mechanisms to corporations.

Directors and management now have the opportunity to choose from a broad menu of options to manage, measure and report their impact on society and the environment. If they do not choose wisely (or do not choose at all), they will miss information critical to business in the 21st Century.

This isn’t a matter of being forced to choose from a list of poor compliance options.

Joining the “B Economy” is better for the world, and it can be plain good business as well. The millennial workforce (with Generation Z following fast) cares about more than paychecks — they are looking to be engaged by meaningful careers.

Consumers, too, care about whether their products were made in a manner that is kind to the environment, and to all the people who participate in the supply chain. As BlackRock pointed out on behalf of the $6 trillion it has under management, license to operate is becoming critical — communities and regulators will not continue to tolerate corporations who are not good citizens.

Companies, managers and directors need to up their citizenship game.

Directors, as trustees of the institutions most critical to preserving social and environmental systems, should ask which tools are right for their corporations, and whether a legal option like benefit governance can provide a better platform for the future growth of their enterprise.

Rick Alexander is head of legal policy for B Lab and an attorney with Morris, Nichols, Arsht & Tunnell LLP. He is a member of the Delaware Access to Justice Commission, Chair of the Content Committee of the American College of Governance Counsel, a member of the Commonwealth Climate and Law Initiative Advisory Board, a Research Fellow of British Academy Future of the Corporation Program, and a member of the Advisory Council of the Program on Purposeful Ownership at the Said Business School, Oxford. He is also Secretary of the Transgender Legal Defense and Education Fund.