An important debate has emerged in the United States about how business should encapsulate more fully the sustainability-conscious management paradigm. At issue is the proper role of business in society, and the trend is to consider more than just shareholder profits. In the United States, companies like Amazon and Alphabet are incorporating sustainability practices and corporate social responsibility (CSR) into their business models. However, the traditional corporate management paradigm – shareholder primacy – requires corporate boards of directors to place shareholder interests, principally shareholder profits, above all else in corporate decision-making. This model conflicts with the increasingly common sustainability management paradigm, which reflects the view that business should also maximize value for society.
In our recent article, Re-Imagining the Business Trust as a Sustainable Business Form, we proffer the business trust as an alternative organizational form for pursuing sustainable practices while maintaining profitability. Despite states’ attempts to free corporations from the strict shareholder primacy model through constituency statutes and new corporate forms such as the benefit corporation and social-purpose corporation, corporate law has remained largely static concerning sustainability issues. In contrast, the business trust affords the structure and the flexibility necessary to advance the sustainable management model without breaching shareholder primacy’s potential profit-maximization restrictions.
The foundation of shareholder primacy is the maxim that shareholders own the corporation, but the locus of management for a corporation is its board of directors, who act on behalf of the shareholders. This gives rise to the agency-based model of the corporation, in which the manager is the agent of the individuals who own the corporation. Insofar as the manager’s socially responsible actions reduce returns to stockholders, the manager may be deemed as reducing shareholders’ profits and, therefore, breaching her fiduciary duties.
Sustainability, on the other hand, envisions business strategies that focus on the ethical, social, environmental, cultural, and economic dimensions of doing business. It envisions corporations as pursuing societal goals – such as sustainable development, environmental protection, social justice, and equality – in addition to economic development. Sustainability encompasses three organization ideologies: sustainable environmental development, CSR, and economics.
Sustainable development balances the need for economic growth with environmental protection and social equity. A hypothetical concerning the classic example of CSR – companies working to reduce their carbon footprints – is instructive: In an effort to offset some of its carbon footprint, a corporation’s board wishes to buy a plot of land to leave undeveloped. Most likely, the community would give high praise to such a corporate effort. While buying the land is commendable, though, that money could have been used to invest in better research and development, which aims to increase profits. By using the money to buy land that cannot be used to increase profits, the board may be sacrificing shareholders’ wealth. Accordingly, unless the board can prove that increased community favor is more profitable than better research and development, corporate law may subject the board to liability for violating the shareholder primacy norm.
From the above example, it is easy to see how traditional concepts of corporate law may inhibit efforts to effectuate corporate sustainability. As corporate law holds to the shareholder primacy model and wealth maximization norm, modern entrepreneurs face a challenging decision: Which organizational form is best-suited to maximize profits while still advancing sustainability-conscious goals? Enter the U.S. business trust. At their very core, business trusts have historically served as an alternative to the corporate organizational form; after all, business trusts originated and thrived in an era of burdensome incorporation laws. With the subsequent rise of antitrust laws, however, business trusts faded from popularity. Today, they most commonly function as the organizational form for mutual funds and asset securitization.
Business trusts, however, may be the answer to a socially conscious entrepreneur’s shareholder primacy woes. Business trusts are unincorporated associations carried on for profit, created at common law by a trust agreement. Business trusts are similar to corporations in that they separate assets from creditors and offer limited liability to the trust’s beneficiaries as well as to the trustee. However, trusts do not face many of the restrictions that corporations face, such as requirements for a board of directors, annual shareholder meetings, and residual claims. In particular, two characteristics of the business trust make it particularly suitable for implementing sustainability practices without breaching shareholder primacy’s profit maximization restrictions: (i) inherent flexibility through default rules that can be modified through drafting and (ii) trustees’ role as fiduciaries instead of agents of the beneficial owners.
First, trust law consists overwhelmingly of default rules that the trust creator can modify or reject when drafting the business trust agreement, which sets forth the specific details of the trust – its terms, the duties and powers of the trustee, and the precise interests of the beneficiaries, for example. This provides great flexibility for business trusts. The Delaware Statutory Trust Act of 1988 even couches the critical areas of the beneficial owners’ and trustees’ rights in the trust property and the management of the trust in permissive terms: “[e]xcept to the extent otherwise provided in the governing instrument of [the business trust].” Business trusts also provide flexibility for taxation purposes, as they are subject to the check-the-box tax regulations – allowing entrepreneurs to choose in most cases to be taxed either as a corporation or a partnership.
Second, a trustee is held to a robust concept of fiduciary duties in administering the trust rather than being deemed an agent of the beneficial owners. A fiduciary’s obligation is to exercise independent judgment on behalf of the beneficiary’s interest in light of the purpose of the trust, whereas an agent is obliged to carry out the wishes of its principal. Trustees do not need to adhere to shareholder primacy models, shareholder wealth maximization norms, or agency‑principle dynamics, nor are they restricted by strict corporate governance rules. Rather, the trustee is controlled by the governing instrument, which may require either shareholder primacy or sustainability, as the drafter of the instrument chooses. The drafter also has the freedom to tailor the liability of the trustee. This allows for the concentration of decision-making power in one person, if desired. For example, a visionary could lead the company with much more creativity and innovation within the business.
Though business trusts do have some drawbacks that we outline in our article, business trusts offer the flexibility necessary to pursue sustainability. The dual goals of seeking profits while being socially responsible can co-exist more organically within a trust structure than within a corporate structure, which is constrained with burdensome common law doctrines and potential regulatory intrusion. Unlike benefit and social-purpose corporations, a business trust has the flexibility to change its social purpose or simply have a broad provision that allows the trustee to generally participate in sustainability practices.
Business trusts have taken a back seat to other organizational forms. However, in an era of demand for corporate sustainability, traditional corporate and unincorporated laws have begun to fall behind. In contrast, business-trust law offers a unique alternative to the socially conscious entrepreneur. Therefore, business trusts should be part of the discussion concerning how to best achieve sustainability in the business world.
This post comes to us from Professor Lee-ford Tritt at the University of Florida College of Law and Ryan Scott Teschner, a PhD student at the Naveen Jindal School of Management. It is based on their recent paper, “Re-Imagining the Business Trust as a Sustainable Business Form,” available here.