A Governance Compromise?

As reported in the Activist Daily, Chief Justice Leo Strine of the Delaware Supreme Court recently suggested that public companies should become benefit corporations, and that institutional investors should support the switch:

“This is a promising alternative and what I’d love to see is CalSTRS and BlackRock adopt this model because it puts some breaking mechanism in and reconciles a lot of these interests,” Strine said at the 15th Annual Deal Economy conference on Thursday. “The stockholders still have power but can commit to certain social policy objectives. When you go public as a B[enefit] Corp. in Delaware it says the company is committed not simply to profitability but to being socially responsible, and it can commit to other objectives in the context of a merger or sale but those interests have to still be kept into account.”

The comments highlight the important role that benefit corporation status can have in the current debate about the problems in our current capital markets, where immediate stock price gains are often sought at the expense of both current stakeholders and future shareholders.  As I have suggested elsewhere, benefit corporations have great potential to address some of these market dynamics.  Broadly diversified, long term investors (“universal owners”) should actually be encouraging companies in their portfolios to adopt this model.  In the long run, companies that make money for shareholders by building real, long-term value will have the effect of mitigating systemic risk, and contributing to a vibrant and healthy economy.  This dynamic will benefit universal owners and their beneficiaries in the long run.

In the discussion, Aeisha Mastagni of CalSTRs (a $220M pension fund) and Michelle Edkins of BlackRock (the world’s largest asset manager) spoke out against the trend of IPOs where founders retain perpetually high voting stock.  While such shares are often portrayed as a way of fighting the short term orientation of the public markets, investors worry about a perpetual lack of accountability.  The Chief Justice suggested a compromise position: high vote shares that convert down after a fixed period, combined with benefit corporation status: “Go public as a Benefit Corp. with some extra voting power for yourself that falls away in five years.”

Many have noted the trend toward fewer IPOs and the decreasing number of public companies. As workers, customers and other stakeholders increasingly insist that the corporations they partner with act responsibly, corporations will need to find ways to access the public markets while maintaining the ability to promote the long-term interests of all stakeholders.  At the same time, investors who value the liquidity and diversification provided by public equity markets must find solutions that allow entrepreneurs to enter those markets. Benefit corporations IPOs (with or without some form of modified voting rights) might be just the solution investors and corporations are searching for.

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