Benefit Corporations and the Public Interest
By Julia D. Mahoney
In the past five years, more than half the states have passed laws that allow firms to elect to be “benefit” or “public benefit” corporations. While the precise terms of these statutes vary, the basic vision is the same. The benefit corporation is to be a new kind of “for profit” entity, one charged with benefitting society as well as making money for shareholders. To help achieve this goal, benefit corporations agree to meet enhanced standards of accountability and transparency. Benefit corporationsare taxed precisely the same as C corporations. status carries no tax consequences.
The chief impetus for benefit corporations is the concern that “shareholder primacy”—the notion that corporate fiduciaries must put the interests of equity owners ahead of those of other firm constituencies and the public at large—constrains corporations from pursuing worthy missions. Whether this is in fact true is a matter of debate. Corporations have long donated to charities, sponsored community activities and underwritten cultural events. And some firms, such as ice cream maker “Ben & Jerry’s” and natural cosmetics purveyor The Body Shop, make social responsibility a key part of their “brand.”
At the same time, the law has never been clear with respect to how far corporations can go when it comes to doing good. Cases that address the limits of fiduciary power to give away corporate property are few and far between, in large part because corporate giving tends to be both small in relation to firm size and consonant with the pursuit of shareholder value. This ambiguity fuels the perceived need for statutes that permit corporations to opt to be governed by a specific mandate directing those in charge to balance the pecuniary needs of shareholders with the well-being of corporate stakeholders (including employees and community members) and benefit to the public.
But will these efforts to combine in a single entity the pursuit of profits with other aims succeed? Or is it inviting trouble to ask a single firm to deliver the sorts of services traditionally entrusted to government and nonprofit organizations while making shareholders richer? After all, one might argue, it is hard enough to monitor an entity that is supposed to be doing just one thing. Keeping track of success on multiple fronts looks like a daunting task.
Right now, benefit corporations have so little in the way of a track record that it is not yet possible to assess their impact. A careful reading of the relevant laws, however, suggests that the differences between public benefit corporations and ordinary ones are likely to turn out to be mostly cosmetic. While in concept benefit corporations have obligations that go beyond getting financial returns for their shareholders, in practice shareholders retain a form of primacy. No other groups—not even the putative beneficiaries of whatever “public purpose” a benefit corporation chooses to further—have any rights to compel the firm to pursue its social mission. Nor can anyone other than shareholders oblige those who run benefit corporations to comply with transparency and accountability requirements. The most important departure from standard corporate law is a provision in Delaware’s public benefit corporation law that in a change in control situation directors are not bound to prioritize shareholder financial interests, thus allowing the consideration of the interests of the public and other corporate constituencies. But even the effect of this provision is likely to be a limited one, given the continued dominance of shareholders.
Billed as a great investment opportunity for—in the words of Governor Jack Martell of Delaware around the time he signed Delaware’s public benefit law —“the growing number of investors who increasingly want to make money and make a difference,” benefit corporations have stirred excitement as a promising institutional innovation with “millennial” appeal. But to date all that can be said for sure about their practical effect is that their directors and officers may have more leeway than other corporate fiduciaries to allocate firm resources to non-shareholders. Exactly how courts will respond to shareholder suits seeking to force benefit corporations to take specific actions to “balance” shareholder financial interests with social missions must for now remain a matter of conjecture. That said, it is hard to imagine courts departing in any significant way from standard corporate governance principles, which allot the power to make ordinary business decisions to boards of directors.
In the final analysis, public benefit corporations may do no more than apply a sheen of coolness and social responsibility to the pursuit of profit. That raises the troubling possibility that shareholders of benefit corporations may feel they have done their part for society merely by investing their money and thus neglect charitable activities and political participation. Also worrisome is the prospect that the opacity that results from empowering fiduciaries to pursue multiple goals may make it harder to detect serious abuses that divert or destroy shareholder wealth. Only time will tell if benefit corporations will succeed in fulfilling their promise.
Julia D. Mahoney is the John S. Battle Professor of Law at the University of Virginia. Among the courses she teaches are Corporations, Nonprofit Institutions, Property and the Monetary Constitution.