Benefit Corporations and Public Markets

Benefit corporations are a new legal form of business association created to support social enterprises. Over half of U.S. states have adopted a benefit corporation statute, and over 2,000 companies have chosen the form. So far, almost all of these are closely held corporations. However, if this innovation really takes off, publicly traded companies may choose to become benefit corporations. It is instructive to consider the problems such companies may face, and what corporate governance mechanisms might help address those problems. In a recent paper I explore these questions, with a particular focus on the structure of early experiments in public markets for the shares of social enterprises and the role that such markets could play in the future.

Although going public would bring advantages for benefit corporations, it would also create or exacerbate problems. The core challenge comes from the need to balance profit with social mission, and to credibly commit to shareholders and others that the enterprise will pursue that balance. Going public may create pressure to realize short-term profits in order to maintain the company’s stock price, causing the business to drift from its social mission. How might publicly traded benefit corporations respond to this challenge?

I start exploring that question by considering some relevant developments:

Based on those developments, as well as more general corporate governance theory and practice, I consider a variety of corporate governance mechanisms that may help benefit corporations address the challenge of balancing profit and social mission:

  • Disclosure. Companies can disclose what they are doing to pursue their social missions. Disclosure has been a major element of corporate governance for a very long time, as particularly embodied in securities law. Benefit reports are also a central part of benefit corporation statutes. Major questions remain as various actors struggle to develop reporting standards that accurately and credibly help investors determine how well companies are achieving their stated ideals.
  • Fiduciary duty. Duty is another core corporate governance mechanism, and also a central part of benefit corporation statutes. The directors and officers of benefit corporations have a duty to consider the effects of corporate decisions on their social missions. Going public will expose directors to potential lawsuits from a wider range of shareholders—for better and for worse.
  • Representation. Constituents other than shareholders could be given the ability to choose representatives involved in decision making. This could occur at the board level or below. For instance, employees could be represented on committees addressing employment issues, or environmental groups could be represented on committees addressing environmental issues. These representatives could be either advisory or have more formal authority.
  • Shareholder voting. Variations from the standard one share/one vote rule may help lessen the pressure to maximize short term share value. Dual-class share structures are one (controversial) way of doing this. Time-phased or tenure voting is another potential mechanism. In that scheme, shareholders receive more voting rights the longer they hold their shares. Screening of who becomes shareholders is another possibility.
  • Gatekeepers. Outside professionals help monitor directors and officers, and they may also help address the unique governance challenges of benefit corporations. The most important example to date is B Lab, which created the benefit corporation concept and which certifies the social responsibility of client companies according to an elaborate measurement system. Other significant potential gatekeepers include lawyers and investment professionals, such as investment bankers, broker-dealers, and the sponsors of investment funds.

These different corporate governance mechanisms can, and should, be experimented with at both the individual company level and at the statutory level. An intermediate level of implementation and experimentation is the securities exchanges. These provide a potential way of coordinating the involvement of managers, investors, and various gatekeepers. Exchanges have traditionally played a major role in shaping disclosure by listed companies. In setting listing requirements, they can help shape practices for representation and voting. They can serve as a locus for coordinating the involvement of various gatekeepers, such as lawyers and investment professionals. Even some traditional exchanges are working to create spaces for socially responsible companies, including by developing sustainability indices.

Social enterprise is a new concept, and the benefit corporation statutes are an attempt to support it. Many questions surround these new projects, and many experiments are underway to explore answers to those questions. We are learning what does and doesn’t work. Stock exchanges and similar trading platforms are playing a role in this process, and could play an even bigger role should we ever see a large number of publicly traded benefit corporations. Promoters of exchanges for social enterprises in general, and benefit corporations specifically, should consider how they can help adapt the various mechanisms of corporate governance to the specific needs of these new kinds of organizations.

This post comes to us from Professor Brett McDonnell at the University of Minnesota Law School. It is based on his recent article, “Benefit Corporations and Public Markets: First Experiments and Next Steps,” available here.

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