by rickbcorp

New Technology for 2018

Corporation as Technology

One of the most important technologies that moved society from the pre-industrial era, through the industrial era, and on to the post-industrial eras, was the corporate form.

This artificial entity provides limited liability for investors, and the ability to enter into perpetual contracts that extended beyond the life of any human participant in the enterprise; these features allow investors to pool vast sums of wealth in order to create the infrastructure necessary for a post-agricultural society, and to diversify their investments sufficiently to invest in the type of risky enterprise required to find new ways to create societal value.  It is a critical technology still in use today, from the Silicon Valley venture community to developing markets in the Global South.

Old Ideas in a New Era

The corporate form as we know it evolved through changing times.  And like many products of evolution, it has features that can be destructive in a new environment.
Today’s commercial corporations have such a pernicious feature: shareholder primacy, the idea that corporate directors should focus primarily on creating financial return for their equity investors.  This idea drives corporate policies that favor stock buybacks over reinvestment, drug pricing that maximizes profit rather than health, and pay inequality that maximizes social tension and instability.

New Twist on an Old Friend: The Benefit Corporation

In a prior era, where shareholders were disaggregated and unable to protect their investments, shareholder primacy was a necessary tool to protect against managerial defection.  But today’s shareholders are quite organized, and able to fend for themselves.  On the other hand, in our increasingly interdependent world, the doctrine of shareholder primacy is encouraging corporations to create negative externalities in the form of social instability and environmental degradation.

There is a new corporate technology available to investors and companies that want to address this danger: the benefit corporation.  This new corporate form was invented in 2010, and has now been adopted in 35 states, and by over 5,000 corporations.  It eliminates shareholder primacy and creates corporations accountable for all of their effects on stakeholders. Benefit corporations have raised more than $1.5 billion in capital to date.

In 2018, expect to see more and more innovative companies use the benefit corporation form in order to raise capital without becoming prey to the value maximization credo. In the final weeks of 2017, Lemonade, an innovative insurer organized as a Delaware benefit corporation, announced a $120M Series C round led by SoftBank, while Luna DNA, a Delaware benefit corporation focused on blockchain technology for DNA announced a seed round from the founders of Illumina and Prelude capital.

The corporation has been around for a long time.  Let’s make sure we are using the 21st century version.

 

Frederick Alexander is B Lab Legal Policy Head; Counsel at @MorrisNichols, Author, “Benefit Corporation Law and Governance: Pursuing Profit with Purpose,” available at http://amzn.to/2hYDTJp

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