Haskell Murray is an Assistant Professor of ADR and Business Law at Belmont University, College of Business Administration in Nashville, Tennessee.
Social enterprises use commercial activity to drive revenue and seek the common good. The benefit corporation is the most popular social enterprise entity form in the United States with statutes passing in 19 states and Washington D.C. over the last three years. Benefit corporations operate much like traditional for-profit corporations, but have an explicit social focus, and benefit corporation directors are required to consider a wide range of stakeholders in each decision. On August 1, 2013, Delaware’s version of the benefit corporation law will become effective. Benefit corporations formed in Delaware will be called “public benefit corporations” (“PBCs”), and Delaware’s law differs significantly from the Model Benefit Corporation Legislation (the “Model”). This post will explore some of the major differences between the two statutes, and will make suggestions for improving both variations of the benefit corporation law.
Before Delaware’s emergence in the social enterprise space, benefit corporation laws largely followed the Model. The relatively minor variations between those earlier benefit corporation laws and the Model are shown in this comparison chart. Colorado, however, amended its bill to track large portions of Delaware’s proposed law before the Delaware PBC law even passed. Given Delaware’s preeminence in corporate law, other states can be expected to follow, or at least seriously consider, Delaware’s new framework.
In the linked posts at The Conglomerate, I grouped the major differences between the Delaware PBC and the Model into three categories: (1) Private Ordering; (2) Director Guidance; and (3) Branding. Delaware allows more private ordering than the Model by leaving to the individual companies whether to adopt the Model’s requirements of annual public reporting. Delaware only requires biennial reporting and does not require that the reports be made available to the public. Further, unlike the Model, Delaware does not require companies to use a third party standard to measure general public benefit, unless the PBC places that requirement in its certificate of incorporation or bylaws. Delaware does, however, provide more director guidance than the Model by requiring the identification of the PBCs specific public benefit purposes; the Model makes such identification optional. Finally, due to Delaware’s focus on private ordering, Delaware may have a difficult time competing on the branding front given the likely variation among the PBCs. Also, social enterprise powerhouse B Lab seems to be continuing its support for the Model’s version of the benefit corporation law. I suggest, however, that serious branding efforts in social enterprise may be better handled by the private market than by statutes. A rough draft of my law review article that will discuss the Delaware PBC in more depth should be available on SSRN this fall. Professor Cass Brewer of Georgia State University College of Law has a helpful post that adds additional thoughts about the Delaware PBC.
While Delaware has certainly contributed to the conversation, each of the existing benefit corporation statutes, including Delaware’s, could be improved. First, while Delaware provides additional guidance to directors by requiring the identification of a specific public benefit, it muddies the water with the statute’s tripartite balancing test. Delaware’s test requires directors to struggle with the “ the pecuniary interests of the stockholders,  the best interests of those materially affected by the corporation’s conduct, and  the specific public benefit or public benefits identified in its certificate of incorporation.” Requiring consideration of all three may be wise, but Delaware’s PBC law could be improved by stating that the specific public benefit is the entity’s top priority. There will be zero sum situations, in which directors and courts will need guidance in making difficult decisions. I elaborate on this point in my 2012 American University Business Law Review article.
Second, neither the Model nor Delaware’s PBC provide much in the way of accountability. Proponents of the Model may point to benefit enforcement proceedings and the annual benefit reports as powerful antidotes to greenwashing and faux CSR, but a closer examination reveals weakness. The benefit enforcement proceedings can only be brought by shareholders and directors, and not by any of the other stakeholders (unless given standing in the company’s governing documents, which is unlikely to happen in most cases.) Moreover, monetary damages are not available in benefit enforcement proceedings for failure to pursue public benefit under the Model, which will make use of the proceedings relatively rare, even if the shareholders care about the plight of other stakeholders. With the Delaware PBCs, directors will not be liable if they are “informed and disinterested” and only shareholders have standing to bring derivative lawsuits.
The Model and most of the enacted benefit corporation statutes have no apparent enforcement mechanism to ensure publication of the annual benefit reports. Currently, many benefit corporations that are required by statute to have their benefit reports publicly posted on their website do not have the reports available, and most of the companies that have posted annual benefit reports have tended to fill the reports with unhelpful puffery. The Delaware PBCs do not even have to publicly post their benefit reports. Benefit corporation law could be improved by more carefully addressing accountability. Too much accountability could suffocate growth, but too little accountability could render this new entity type meaningless to investors, governments, and customers. Professor Deborah Burand of the University of Michigan Law School has spoken about the possibility of creating a self-regulatory organization for the industry, Alicia Plerhoples of Georgetown Law Center has noted some discussion about involving state attorney generals, and I have suggested setting partial asset locks and charitable giving floors for benefit corporations. More thoughts along these lines could be helpful.
While it remains to be seen whether Delaware’s foray into benefit corporation law represents a “tipping point in the evolution of capitalism” (especially considering that only a few hundred benefit corporations have been formed over the past three years), it is encouraging to see the individual state laboratories at work, and I am interested in seeing where this pluralism in the corporate form leads.