Across the United States, the theory that businesses exist to maximize shareholder value remains dominant, and business leaders can and have been held liable for failing to uphold that responsibility. Operating under this theory, however, is no longer the only option in many states.
Thirty-six states, Washington, D.C. and Puerto Rico have passed benefit corporation legislation. This legislation establishes a corporate form that enables directors of a business to consider stakeholders beyond shareholders, including workers, communities, supply chains and the environment. In addition, as large asset managers like BlackRock continue to push climate and social considerations onto its portfolio companies, business directors need a corporate structure in place to support stakeholder management. The model has also been adopted by other countries and regions including Italy, Colombia and Ecuador and the Canadian Province of British Columbia.
Crucially, benefit corporation legislation has been adopted by Delaware, which is recognized as the home of US Corporate law. Recently I talked to former Delaware Chief Justice Leo Strine, and he reflected to me, “What we liked about the benefit corporation, those of us who were for it, its candor and that it was a different model. And part of why we got Delaware to be able to offer it is … to give people freedom of choice.”
Why This Corporate Form Matters for Business Directors Incorporating Stakeholder Management
When asked why he supports this corporate structure, Strine points to the 1985 Delaware court case Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. In that case, the Delaware Supreme Court held that, during the selling of a company, it was the responsibility of company directors to seek the best price for the shareholders of the company and that it could not consider the effect on other stakeholders.
“When people say that Revlon doesn’t matter, that’s not historically how they felt about it,” Strine says. “And the benefit model really does temper that. The benefit model really allows people in a forthright way as a director to say, ‘We’re going to make some trade-offs,’ and it may be frankly that this isn’t the most optimal just from the standpoint of stockholders, but it’s the decent thing to do. That does not mean it’s not wealth-creating for society because … we tend to use stock market price, even though if you treat your workers well, and you pay them so they can live in dignity and send their kids to college and have health insurance, that often is the greatest contribution you can make to social wealth.”
Benefit corp legislation also includes crucial wording that enhances its effectiveness, saying company directors “shall” consider their obligations to all stakeholders not that they “may” do so. This provides the ability for shareholders, mutual fund directors, etc., to take action if stakeholders are not represented in a business’s decisions.
“What I liked when I heard about the benefit corporation model was it was ‘shall,’ not ‘may,’” Strine says. “So it wasn’t this noblesse oblige. It was the idea that you actually have an obligation. You can’t just say we can do it if we want to. Because as you know, ‘may’ also implies ‘may not.’ ‘Shall’ is you have to do it.’”
Rulings like Revlon and a growing sense that shareholder primacy limits the choices business leaders are allowed to make catalyzed the creation of benefit corporation legislation.
Businesses and Markets Supporting of Stakeholder Model
Many high profile businesses have taken advantage of this corporate structure, including Patagonia, Ben & Jerry’s, New Belgium Brewing and Danone, the world’s largest benefit corporation. These companies have chosen this structure, in part, because it allows them to operate with missions that serve various stakeholders, giving them more flexibility than traditional corporations, which often operate solely at the behest of the shareholders and stock price implications. In addition, Laureate Education, Lemonade and Vital Farms all successfully IPO’d as benefit corps, indicating public markets are increasingly open to this stakeholder mindset.
“Businesses obviously have to get a good price for their shareholders, but they can take $1.50 per share less and make sure that the workers that have helped build the company and secured the value they’re going to get still have their jobs,” Strine said. “That the plants that the local communities gave tax subsidies to build are still open. And shareholders still get to vote on that deal, but the directors can put it to them, even though it’s the lower price deal. And if they don’t want to vote for it, the directors can say, I think frankly, ‘We can’t sell to the highest bidder, consistent with our obligations to other stakeholders.’”
States as divergent as Vermont, Kansas, California, and Texas have all adopted benefit corp legislation, and political figures across party aisles – from Deval Patrick to Mike Pence and Nikki Haley – have supported the passage of benefit corporation legislation in their states, showing that the movement transcends typical partisan divisions and will likely continue to expand.