Ten or so years ago, the founders of B Lab, a tiny new non-profit, had an audacious idea. They wanted to create a system that would allow for-profit businesses to account for their impact on all of their stakeholders.
B Lab joined with pro bono counsel to create model legislation that would allow corporations to become “benefit corporations.” These statutory provisions would allow a corporation to reject shareholder primacy and make directors accountable for all of a corporation’s impacts, and not just the financial return provided to shareholders. Finally, benefit corporation law mandated that a corporation disclose its impact performance.
The first benefit corporation statute was adopted in Maryland in 2010, and legislation has since been adopted in more than 30 states, including Delaware. Legislation has also been adopted in Italy, and in 2017 was introduced in the legislature in Argentina, Chile and Columbia. It is being considered in Australia, the United Kingdom, Canada and several other countries.
There are also more than 5,000 benefit companies, and most of them are not certified by B lab—the movement toward stakeholder governance has taken on a life of its own. In 2017, Delaware alone passed the 1,000 mark. While it is hard to gather statistics for private companies, I have been able to track 39 benefit corporations in the US that have raised outside capital—over $1,400,000,000. Many of these companies have raised capital from well-known venture capitalists, including Benchmark Capital, Founders Fund, Andreesen Horowitz, Shasta Ventures, Sequoia and Union Square Ventures. In 2017, for the first time, a benefit corporation went public: Laureate Education closed its initial public offering in February, raising $490,000,000.
For investors who are in it for the long run, and particularly for those who are diversified across the market (so-called “universal owners,” like pension funds and insurance companies), broad adoption of the benefit corporation model is likely to yield better returns. First, empirical work is beginning to show that companies that pay attention to environmental, social and governances issue are likely to perform better. In addition, a company that makes enforceable commitments to treat its workers, customers and other stakeholders as equal in importance to shareholders is likely to engender a measure of trust not available to conventional entities, and this trust is critical to creating shared and durable value over the long term.
These latter two ideas are powerful, and suggest that a responsible corporate citizen can in many circumstances generate a better return for shareholders over the long run than can an irresponsible one. But it is naïve to suppose that there will not be instances where a corporation could earn a return superior to its peers (even adjusted for reputational risks and other downsides) by creating the type of negative externalities that that create social and environmental costs in order to increase the individual corporate bottom line. It is in response to this problem that the benefit corporation structure has the greatest potential to engender real change.
That temptation—to earn a profit by creating harm that others absorb—might create financial value for a single company, but it actually hurts universal owners, who rely on overall market performance over the long term. Thus, enlightened diversified shareholders should prefer that companies in their portfolios forgo such ill-gotten profits, since they will pay for them in the rest of their portfolios.
What the Future May Hold
Benefit corporation governance is a new player on the scene, but it has established a track record and is becoming more popular, even beginning to enter the public markets. An increasing recognition by institutional shareholders of the need to think broadly about their investment mandate, along with corporate recognition of the value of using benefit corporation governance to enhance commitments, may lead to more adoption a this form of governance, which is likely to be a good thing for all of us.
For more information about benefit corporations, see my recent article published in the Westlaw Journal of Corporate Officers and Directors liability.