By Francesca Rheannon
[Part One of a Two Part Series. Posted originally on CSRwire.]
The 2003 documentary, The Corporation, characterizes the modern corporation as suffering from psychopathic personality disorder. From “callous unconcern for the feelings of others” to “failure to conform to social norms with respect to lawful behaviors,” the film lists the features of the disorder and applies them to the typical behavior of large corporations.
Fiduciary Duty to Shareholders: The Perverse Incentive
But the law itself is one major reason why corporations so often flout “social norms with respect to lawful behaviors” – as long as the penalty for getting caught is less than the cost of complying with it. That’s because the fiduciary duty of the corporation is solely to maximize the return to its shareholders. (In fact, the personal assets of CEO’s can be forfeit if shareholders successfully sue for breach of this duty.)
It wasn’t always this way. When the American colonies won their independence from colonial rule, “the privilege of incorporation was granted selectively to enable activities that benefited the public, such as construction of roads or canals. Enabling shareholders to profit was seen as a means to that end,” according to the website, Reclaim Democracy.org.
But over time, the means -- maximizing shareholder profit (or share price upon sale) – became the end. The public benefit has all too often been subverted as a result. Those corporations that sincerely wanted to operate according to the Triple Bottom Line (variously characterized, but traditionally defined, as “People, Profits, Planet”) have had to privilege profit over the other two goals, or risk shareholders’ wrath if pursuing environmental or social goals lessened potential financial returns.
The Benefit Corporation: Enabling a True Triple Bottom Line
On February 10, New York joined a growing list of states (including Maryland, California, and New Jersey) that have passed legislation allowing a new form of corporation, called a “benefit corporation,” that for the first time makes it possible for businesses to privilege social and environmental benefits, while still making a profit.
“Having a corporate purpose to create a material positive impact on society and the environment” and is “required to consider [emphasis added] the impact of their decisions not only on shareholders but also on workers, community, and the environment.”
It’s Spreading “Like Wildfire”
In the mere 18 months since the birth of the benefit corporation, seven states have passed legislation making it available and nine more (including the District of Columbia) are on track to follow them.
“It’s taking off like wildfire,” Andrew Greenblatt told CSRwire. A lawyer turned social entrepreneur, Greenblatt was a prime mover behind getting the legislation adopted in New York State. Nationally, there have been 850 legislators voting in support with only 50 voting no, he said.
I asked Greenblatt why interest in benefit corporations has been so intense. “It appeals to [the] left and [the] right,” he answered. “The Left says, ‘Let’s get corporations to do more to make the world a better place,’ while the Right likes that it gets government out of way of investors and entrepreneurs who want to do this.”
Social Investors Stand to Gain
Greenblatt thinks that one of the most interesting aspects of the new benefit corporation is how it will make investing much easier for those who want to their money to be put to doing good in the world.
“Social investing is the fastest growing segment in the investing world and it has been held back by not having this legal infrastructure,” Greenblatt said. That’s because companies that may have started out committed to social and environmentally responsible goals can change over time.
“Let’s say you are a social investor that cares about making world a better place. If the officers and directors move away from the mission, you have no recourse because they are fulfilling their fiduciary duty."
But now, the benefit corporation changes the definition of fiduciary duty and protects the mission. A company with the benefit corporation structure cannot be sold to a non-benefit corporation without approval by a supermajority of shareholders (2/3 in most states.)
That also means companies can’t be forced to sell – hostile takeovers that would change the company’s mission would be illegal. “That’s a huge protection for investors who want their money to be used to make the world better,” Greenblatt told CSRwire.
Benefit Corporation Opens Up Access to Capital
The benefit corporation solves this problem – and thereby smoothens the path for social investing on a big scale. In fact, Greenblatt thinks it will “grow by leaps and bounds.”
So does Senator Daniel Squadron (D, NY.).
He was out knocking on constituents’ doors one day when Andrew Greenblatt responded to one of his knocks. When Greenblatt bent the Senator’s ear about making the benefit corporation available in New York, Squadron’s interest was piqued. He said he saw it as a way to attract more investment to the state.
“New York is a great magnet for folks who want to do well and do good,” he told CSRwire.
“It’s the center of capital and investment, with billions of dollars of socially responsible investment capital. The benefit corporation here can join social entrepreneurs with social investors in a way that only New York can.”
Squadron says that by making the benefit corporation available, New York is “sending a strong message to the entire business community that this sort of 21st century for-profit business” is possible.
Companies are already taking note.
Coming up: In part two, we’ll take a look at some firms that have decided to take the plunge and become benefit corporations and further explore its transformational promise.