Corporate law requires the directors of ordinary, for-profit corporations to manage firms in the best interests of shareholders, forbidding directors from sacrificing corporate profits in service of other goals. There has been longstanding debate, even amid proponents of this rule, about the appropriate balance of power among directors, management, and shareholders in the management of the corporation as it pursues shareholder value. In the United States today, this debate has been resolved in favor of the board of directors, which enjoys nearly all formal power in corporate operations.
In a new essay, I argue that while the public benefit corporation (PBC) is often regarded as a stakeholder-centric alternative to the shareholder primacy firm, it in fact entrenches and extends board discretion beyond anything seen in ordinary corporate law. PBC statutes deepen the structure of director primacy even as they reconfigure corporate purpose, giving boards not just wide latitude over means, but expansive – and largely unreviewable – authority over corporate ends.
The theory of “director primacy” has been prominently associated with Professor Stephen Bainbridge, who insists that it is a more efficient, effective approach to corporate governance than alternative models, including giving more power to executives or shareholders. Managers have non-diversified personal and professional investments in the firms that employ them. They may be more interested in status and making money in the course of one career rather than in maximizing value over appropriate time horizons for diversified shareholders. Shareholders themselves are too disparate, ignorant, and cacophonous to articulate or pursue coherent corporate strategies. Director primacy cuts through these difficulties by endowing nearly all corporate authority in the board of directors, gaining clarity of authority and efficiency in decision-making.
Director primacy is designed to make corporations powerful and effective, and it has succeeded. But it is precisely this success that has made corporations suspect to critics. Powerful corporations, their undeniable social contributions notwithstanding, have also clearly been agents of destruction – from tobacco-related carnage, to climate change, to cultural and political corrosion. The success of director primacy gives rise to suspicion about the social value of the corporation, and this suspicion has inspired the “public benefit corporation” (PBC) innovation. The idea of the PBC is that individual firms should actively pursue multiple stakeholder interests, including profits and benefits to other interests and society generally. The success of director primacy has not, however, produced only a perceived need for the PBC. It has also provided a blueprint for how a public benefit corporation could be plausibly designed. Indeed, the PBC takes the idea of director primacy to the hilt, expanding it beyond what is seen in ordinary corporate governance. The power of director primacy thus both exposes the contradictions of the ordinary corporate form and paves the way, conceptually and practically, to the elaboration of a plausible alternative.
Advanced Director Primacy
Delaware’s PBC statute specifies that the public benefit corporation “shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit … identified in its certificate of incorporation.”[1] Specifically, directors are charged with “balancing”[2] those interests in corporate governance.
Even as it establishes this stakeholder-oriented governance, however, the PBC statute follows immediately with a specification that non-shareholders with a stake in these corporate purposes will have no power to challenge the directors’ management of the firm: “A director of a public benefit corporation shall not . . . have any duty to any person on account of any interest of such person in the public benefit or public benefits identified in the certificate of incorporation or on account of any interest materially affected by the corporation’s conduct.”[3] People who are meant to benefit from a PBC’s operations thus have even less ability to enforce directors’ duties than do shareholders in an ordinary corporation. The legal and conceptual result is to broaden the goal of corporate activity from that which is seen in ordinary corporations while expanding to a maximum degree the latitude of directors to pursue that goal without interference.
Although the statute requires the PBC charter to specify a particular benefit to be served by the firm, the “balancing” instruction deepens the directors’ discretion to determine the substance of a PBC’s purpose. The balancing requirement has still not been interpreted by any court. But it would be a mistake to read the term “balance” as imposing on directors a mechanical obligation to set all stakeholder interests out evenly, as if they were instructed to do math. In fact, they are instructed to do ethics.
The Oxford English Dictionary emphasizes that the verb “balance” is “chiefly figurative” and references most crucially the act of weighing things to evaluate their relative merit and importance. The PBC statute does not pretend that there exists a single concept of “the public good” or “social responsibility,” and it does not pretend that all stakeholder interests are or can be aligned. Instead, the statute recognizes that there are distinct interests: shareholder interests, the interests of those materially affected by corporate operations, and the specific interest identified in the charter. Higher wages for workers at some point mean higher prices for consumers; greater environmental protections sometimes mean both lower wages and higher prices. Directors are instructed to use their own judgment in determining the relative weight to give to these interests. This deepens director primacy beyond the realm of discretion as to means and gives directors expansive discretion even as to purpose.
The PBC statute does give shareholders some power to enforce the board’s governance obligations, but this power is significantly more restricted than what they enjoy under ordinary corporate law. In the standard corporation, any shareholder can bring a derivative suit for a fiduciary breach as to the alleged directorial misconduct. No minimum stock ownership is necessary. Under Delaware’s PBC statute, a shareholder must hold 2 percent of the firm’s outstanding equity, or $2 million worth of stock, to bring suit.[4] That is a lot of money, and a significant restriction on shareholder prerogatives. This is precisely the kind of restriction that director-primacists, or anti-shareholder activists, have sought but failed to achieve in the ordinary corporate context.
Practical and Theoretical Implications
The advanced director primacy that we see in the public benefit corporation should shape our expectations of what kind of governance will emerge in PBCs. The PBC statute charges the board with formulating and pursuing broad and varied corporate purposes, and then insulates the board to pursue its vision without interference from corporate stakeholders who have a different view. A consequence of this expansive discretion and insulation may be to encourage bold, creative, risk-taking that might defy the common sense of stakeholders materially affected by the firm or otherwise interested in the public benefit set out in the charter. Encouraging bold risk-taking is, in fact, one of the intended results of director primacy in ordinary corporate operations, and it is a feature of corporate governance that can be expected to deepen under the advanced director primacy of the PBC.
To illustrate, the board of a PBC engaged in the development of artificial intelligence, and formed in part to advance environmental protection, might decide that the speedy development of AI, and its consequent positive impact on environmental issues, is worth the sudden, rapacious, even calamitous local environmental devastation that will be necessary to produce the enormous up-front energy needed to train the AI. Stakeholders might challenge, stall, or at least embarrass the board to impede or delay such corporate policy, especially if it was hastily undertaken. Not so under the full-bore director primacy of the PBC.
Director primacy enables the robust, bold exercise of power. Advanced director primacy does so to the hilt. We must, therefore, resist the tendency to anticipate that the public benefit corporation will evince a kinder, gentler, more tempered form of corporate power. It might, in fact, be more extreme. Properly understood, the public benefit corporation should be regarded as an institution that promotes pluralism, creativity, and dynamism in the conception and pursuit of social benefit. There is no single political, ideological, or cultural orientation to the public benefit corporation design.
But the PBC does institutionalize moral agency, if we regard morality as the establishment of hierarchy among independently estimable, but ultimately irreconcilable, values. The essence of the public benefit corporation is its empowering of the board to decide what is socially desirable and how to pursue it. Director primacy in the ordinary corporation catalyzes production and consumption. Advanced director primacy in the public benefit corporation catalyzes morally inflected action.
ENDNOTES
[1] Del. Code Ann. tit. 8, § 362(a) (2020).
[2] Id.
[3] Del. Code Ann. tit. 8, § 365(b) (2020).
[4] Del. Code Ann. tit. 8, § 367 (2020).
This post comes to us from Professor David Yosifon at Santa Clara University School of Law. It is based on his recent essay, “Director Primacy to the Hilt in the Public Benefit Corporation,” available here.