How Corporate and Securities Laws Affect Social Responsibility and Corporate Purpose

For nearly 90 years, scholars have debated whether the sole purpose of the business corporation is to maximize profits.  This debate has been reframed over the past 50 years and now seems to have settled on a middle ground: Corporate social responsibility (CSR) and profitability can coexist as corporate goals.  The question, though, is what is the appropriate balance between the two?

In a new article, available here, I explore the role of state corporate law and federal securities law in answering that question. So far, the Securities and Exchange Commission and the courts have made only limited progress in embracing corporate social responsibility’s role in securities law compliance.  The time has come for the SEC to take a more meaningful role in promoting CSR and environmental social governance  (ESG) disclosures.

Some high-profile developments in 2019 have put corporate responsibility issues into the spotlight.  They include the Business Roundtable’s statement on corporate purpose[1] and BlackRock’s letter to CEOs[2] calling for increased ESG attention.  This spotlight offers the opportunity to examine how the law has responded to date and also what to expect in the future.

My article starts with an overview of the long-time debate over the role of social responsibility in setting corporate goals.  As a matter of state corporate law, the traditional shareholder primacy model, focusing solely on shareholder profits and value, has given way to widespread acceptance that  CSR does have a role in corporate governance.  The article analyzes how over the past 50 years the SEC has been more receptive to the idea that investor interest is not limited to profit maximization. While the SEC has become more receptive to CSR issues in its disclosure requirements, it has not mandated CSR disclosures.  CSR and ESG advocates call for increased SEC support for these disclosures.

The article then traces the importance of a stated corporate purpose in the corporate charter.  Over time, the requirement of a specific corporate purpose gave way to increased use of an all-purpose clause.  The article suggests that in drafting corporate charters, lawyers would be well advised to consider purpose clauses that set specific parameters for taking CSR into account.    The article then focuses on the hybrid form of doing business known as the benefit corporation and questions whether benefit corporation statutes provide the ultimate solution for companies wanting a social responsibility agenda.

The stated corporate purpose and its companion ultra vires doctrine play a significant role in this shift towards increasing corporate responsibility.  The ultra vires doctrine allows shareholders and the state attorney general to challenge corporate conduct that  exceeds the specified corporate purpose.   Starting in the 1980s, most states adopted constituency statutes that allow directors to depart from traditional notions of shareholder primacy and consider other constituencies such as consumers, employees, and the local community when making corporate decisions.

Another development in many states is the adoption of statutes recognizing a new category of for-profit corporation – the benefit corporation.  As is the case with constituency statutes, incorporation as a benefit corporation allows the goal of profitability to be tempered by furthering sustainability and other socially desirable conduct.  My article suggests an alternative and superior way to accomplish the same result.  A well-drafted corporate purpose clause can accomplish the same type of balance without opting to qualify as a statutory benefit corporation.

My article does not recommend requiring corporations to be socially responsible.  Rather, it advocates for ways in which the law can better accommodate the increasing number of observers and investors who want to promote CSR  With respect to the securities laws, this means enhancing disclosures to enable investors who care about social responsibility to make more informed investment choices.  CSR and ESG disclosures are not currently mandated – though  some observers have suggested that the SEC make them so.  A more modest and, perhaps, reasonable suggestion is for the SEC to adopt a safe harbor rule to encourage but not require CSR and ESG disclosures.

My article also explores ways in which corporate planners and their lawyers can invoke corporate law to establish corporate responsibility as part of their company’s mission.  In particular, as noted above, the article suggests increased use of purpose clauses to highlight the CSR aspect of the corporate mission.  The article also points out that, with a well-drafted purpose clause, incorporation under a dedicated benefit corporation statute is not necessary.

With the growing significance of the CSR and ESG movements, corporations may want to consider whether a well-drawn purpose clause could help establish the parameters of this balance.  This is something to consider even for those companies that opt into a benefit corporation statute.  Also, corporations wanting to single out particular ESG goals as their focus, for branding purposes or otherwise, should consider a well-drawn-purpose clause to serve that function.  In addition, closely-held corporations may want to consider specific purpose clauses that limit the scope of the corporation’s business.  For those smaller businesses established as partnerships or limited liability companies, purpose clauses in the partnership or operating agreement can similarly incorporate corporate social responsibility or limit the scope of permissible business activity.

With respect to the securities laws, enhancing CSR and ESG disclosures would enable investors focusing on social responsibility to make more informed investment decisions, which, after all, is the purpose of the federal securities laws.  There is much disagreement about whether the securities laws should require social responsibility and ESG disclosures.  Although not going so far as requiring ESG disclosures, a safe harbor rule should be adopted to encourage these disclosures.

ENDNOTES

[1] Business Roundtable, Statement on the Purpose of a Corporation, https://opportunity.businessroundtable.org/wp-content/uploads/2020/02/BRT-Statement-on-the-Purpose-of-a-Corporation-with-Signatures-Feb2020.pdf (August 19, 2019).

[2] https://www.blackrock.com/us/financial-professionals/larry-fink-ceo-letter.

This post comes to us from Thomas Lee Hazen, the Cary C. Boshamer Distinguished Professor at the University of North Carolina School of Law. It is based on his recent article, “Corporate and Securities Law Impact on Social Responsibility and Corporate Purpose,” forthcoming in the Boston College Law Review and available here.