Entity Choice and Anti-Corruption Compliance

Entrepreneurs are sometimes guilty of letting compliance slip down their list of priorities. They prefer to “move fast and break things”—an ethos that doesn’t always find time for bureaucratic niceties like employee handbooks and contracting guidelines.[1]

This dynamic raises issues on numerous fronts, but of particular concern to me is what it means for anti-corruption compliance. As American entrepreneurial activity continues to permeate developing economies, many of the most promising markets in Europe, South America, and Asia feature widespread corruption. Actions as simple as subscribing to Internet service or receiving goods through customs often come part and parcel with demands for bribes. Corruption gets seen as just another cost of doing business. Young firms caught unprepared for this reality face a stark wake-up call. The most palpable risk is scrutiny under an expanding array of anti-corruption laws. But bribery also poses safety threats, increases the risk of reputational damage, decreases employee morale, hinders the quality of production, and elevates the risk of financial misreporting. Any of these consequences can raise the cost of capital or frustrate hopes for an eventual IPO or buyout.

In my new paper, “Using Form to Counter Corruption: The Promise of the Public Benefit Corporation”, I seek to complement the entrepreneur’s spirit of innovation while simultaneously simplifying her path to compliance. My proposal centers on choice of form. Specifically, I urge founders to consider the potential compliance benefits of a new breed of business association: the public benefit corporation (PBC).

Thirty states have adopted PBC statutes within the past six years. A PBC acts like a traditional corporation in almost every way but adds an extra dimension of distinct service to the public good. Controllers must pursue both financial and social goals. For example, in Delaware PBCs must identify at least one “public benefit” purpose in their articles of incorporation.[2] Permissible purposes are ones that positively affect persons, entities, communities, or interests, including those of a cultural, charitable, religious, educational, or technological nature. Delaware PBCs must also operate in a “responsible and sustainable manner,” and their directors are duty-bound to balance (1) the financial interests of shareholders; (2) the public benefit(s) set forth in their articles; and (3) the best interests of anyone materially affected by the firm.[3] Unique reporting obligations and shareholder derivative remedies add extra layers of accountability to deter mission drift. Though their numbers still pale in comparison to traditional corporations, a growing number of companies are organized as PBCs, including prominent names like Kickstarter, Patagonia, and Plum Organics.

For the purposes of my paper, several developments in compliance theory suggest a powerful point of convergence between the PBC form and its ability to counter corrupt practices. One is the shift away from traditional command-and-control compliance models toward strategies meant to instill corporate cultures driven by ethics and moral values. The goal of values-based compliance is internalization. Agents are encouraged to identify and internalize a desired set of values, ideals, and practices to guide their behavior. The hope is that agents will come to see compliance as consistent with their own beliefs—choosing to behave responsibly because they want to, not because they are afraid of being penalized. Another benefit is that agents learn to adapt instinctively and proactively to changing conditions since their drive comes from something deeper than a laundry list of unbending policies and procedures.

The PBC maps nicely onto values-based compliance because choice of form sends an important message about the values that founders expect to prioritize. For instance, the norms that animate standard-form corporations suggest that many see them chiefly as profit-maximizers. Their default accountability structures reinforce this belief by leaning heavily toward promoting profits for shareholders.[4] It is only natural for organizational values and behaviors to reflect this viewpoint. The danger, however, is that making profits the top priority will tempt agents to skirt ethical lines to hit financial targets, trigger bonuses, or keep pace with competitors—especially where detection risks are low and potential short-term gains from acts like bribery are high.

One attraction of the PBC is that its dual-mission offers an antidote to the attendant pressures of traditional corporate norms. The form encourages firms to filter decisions through a larger social purpose—providing a clear focal point to build out values-based compliance.

Indeed, the social enterprise paradigm that inspired the PBC is defined by an objective to positively influence society, the environment, the market, and industry. The PBC’s governance architecture gives life to this goal by integrating it throughout every aspect of corporate operations. Thus, in the context of corruption, the PBC’s statutory mission ought to nudge agents toward assessing how bribery will contradict that mission. It will prompt them to consider such wider issues as sustainability, security, and safety when faced with temptations to bribe. Their expanded frame of reference will hopefully prevent financial pressures or self-interest from crowding out these other concerns. People also tend to adjust their behavior to reflect the beliefs of those around them. Employees, suppliers, and investors looking for cues about what a firm values will see in a PBC that social and financial interests stand in a mutually reinforcing relationship. This signaling effect should help to attract people who share the same values, thereby minimizing resistance to socially motivated decisions whenever they seem in tension with profitmaking objectives.

These ideas remind me of a theme in one of my favorite books, H is for Hawk. The author, Helen Macdonald, vividly recounts her turn to falconry as a means of coping with the loss of her father. For weeks, she lives alone with just her goshawk to keep her company, teaching her bird to trust her as it matures into one of nature’s most precise killing instruments. Importantly, despite living, eating, and walking the streets of Cambridge with her hawk by her side, Macdonald never seeks to domesticate it. Falconry is not about changing or suppressing an animal’s natural instincts; rather, it is about harnessing them to fulfill their God-given purpose: the hunt.

I see similar possibilities for the PBC (though in a far less visceral setting!). Rather than swimming against the current of profit-centric corporate pressures, the PBC offers entrepreneurs a readymade foundation for harnessing broader values that inspire ethical and socially driven behavior. The form’s primacy of mission sets the stage for a culture capable of resisting corruption, and it does so without detracting from speed, invention or other startup priorities.

Compliance will stop looking like a chore or a distraction—it will become only natural.

ENDNOTES

[1] Claire Cain Miller, Yes, Silicon Valley, Sometimes You Need More Bureaucracy, N.Y. Times (Apr. 30, 2014), http://www.nytimes.com/2014/05/01/upshot/yes-silicon-valley-there-is-such-a-thing-as-not-enough-bureaucracy.html.

[2] Del. Code Ann. tit. 8, § 362(a) (2015).

[3] Id.

[4] Leo E. Strine, Jr., Making It Easier for Directors to “Do the Right Thing”?, 4 Harv. Bus. L. Rev. 235, 238-39 (2014).

The preceding post comes to us from Joseph W. Yockey, Professor and Michael and Brenda Sandler Faculty Fellow in Corporate Law at Iowa Law School. The post is based on his article, which is entitled “Using Form to Counter Corruption: The Promise of the Public Benefit Corporation” and available here.