A Good Summary of Delaware Chief Justice Strine's Harvard Law Review Article about benefit corporations.
John Montgomery
Chairman, One Global
Top Contributor
This is a succinct summary of Leo Strine's excellent Harvard Law Review Article about Delaware public benefit corporations.
One of the Delaware lawyers who worked on the law told me that Delaware is working on several amendments that will make it easier for hot companies such as Etsy to convert into the Delaware benefit corporation form as pubic companies. Such amendments may become law as soon as late summer......
Chief Justice Strine: in praise of benefit corporations cooleypubco.com
by Cydney Posner In an interesting article In the Harvard Business Law Review, Chief Justice Strine of the Delaware Supreme Court makes clear his view that the concept promoted by some academics an...
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Filip Gregor
Filip
Filip Gregor
Head of the Responsible Companies Section at Frank Bold
Thanks John. I was not aware of this article. Recently, Leo Strine published another article, which also touches on (and praises) benefit corporations, albeit rather tangentially. It is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2576389
He says that corporation law should develop, giving the benefit corporation as an modest but genuine example. He also says that we need to realign incentives for institutional investors and that we should revive effective externality regulation to provide protection to those interests that are not represented in corporate governance.
His point again is that it is misguiding to deny legal foundations of shareholder primacy. This point aside, I don't think that those aharguing against legal foundation of the maximisation of shareholder value would disagree with his conclusions, which I summarized above.
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Peter Tunjic
Peter
Peter Tunjic
Lawyer/ Business Writer
Thanks John,
Whilst I'm sympathetic to the view expressed by the Chief Justice that 'the concept promoted by some academics and other commentators that corporate directors are entitled to take into consideration the interests of constituencies other than shareholders is naïve, tiresome and misguided.'
I'd argue the idea promoted by the Chief Justice that corporate directors must, in the absence of a benefit corporation, act in the sole interests of stockholder is equally naïve, tiresome and misguided.
To quote the Chief Justice from the article quoted by Filip:
'Under the current legal rules and power structures within corporate law, it is naïve
to expect that corporations will not externalize costs when they can. It is naïve to think
that they will treat workers the way we would want to be treated. It is naïve to think that
corporations will not be tempted to sacrifice long-term value maximizing investments
when powerful institutional investors prefer short-term corporate finance gimmicks. It is
naïve to think that, over time, corporations will not tend to push against the boundaries of
whatever limits the law sets, when mobilized capital focused on short-term returns is the
only constituency with real power over who manages the corporations. And it is naïve to
think that institutional investors themselves will behave differently if action is not taken
to address the incentives that cause their interests to diverge from those people whose
funds they invest.'
Only a lawyer or an economist would see the wisdom or acumen in operating on an artificial cost base, or mistreating the employees upon whom everything depends, or creating short term profits at the expense of viability the corporation.
But more importantly, as a lawyer it saddens me profoundly when a Chief Justice describes as naive, the standard of commercial acumen to which all directors should be held and seems to gives up on all but benefit corporations.
Benefit corporations are not the exception that proves the 'rule' that directors must make stockholder welfare their sole end. To my mind, the rule is that corporations are sovereign legal persons and both 'benefit corporations' and 'stockholder' corporations are the exceptions.
In that sense, rather that parse a handful of cases to draw a conclusion in favor of shareholder primacy, those who want a corporation runs solely for shareholders can follow the lead of the benefit corporation. Make their purpose express and unambiguous. Perhaps then we can then let time and the market decide which is the best of the three models - duty, responsibility or self interest properly understood.
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Miguel
Miguel Padro
Senior Program Manager at Aspen Institute Business and Society Program
Top Contributor
Thanks, John. Strine's position of power and his intellect are certainly great assets to the B Corp movement. As part of the larger responsible business movement, it's fantastic that the B Corp option is available to entrepreneurs and companies.
At the same time, this particular argument is concerning. It seems to me that Strine bifurcates companies that can do good in the world (B Corps) and companies that, if they are “rational,” will not (C Corps). This bifurcation has potentially very serious consequences. 1) It can undermine the advancement of responsible practices and wise long-term investments at many C Corps- companies that, contrary to Strine's cartoon, DO actually make substantial investments and efforts to do the right thing. It would be a terrible mistake to erect an additional roadblock for these kinds of companies to make wise and responsible long-term choices. 2) It undermines the current responsible leaders of C Corps. Some C corp CEOs do in fact treat workers the way we would like to be treated. Some take sustainability as seriously as we do. Are those CEOs naïve? Are they somehow less serious about their role as a business leader? If it’s naïve for some of us to think CEOs can or will do these things, then what do we call the CEOs who actually DO do the right thing? 3) It will embolden value extractors to press C Corps to do more stupid things like share buybacks. The growing threat of emboldened value extractors will be another barrier to C Corp directors and leaders doing the right thing for their company and for those stakeholders closely affiliated with it.
There’s something unsaid in this piece that I think is a key to understanding where he is coming from. Strine is a strong advocate for dramatically increasing the regulation of corporations. Any suggestion that C Corps can do the right thing if their leaders simply chose to weakens the urgency for regulation as we hold out hope for more enlightened CEOs. In my opinion, this last concern of his is very fair and important to consider. But overall, I worry that his line of reasoning advocating for B Corps is a double edged sword. There are better arguments to be made supporting B Corps. that don't undermine other important elements of the responsible business movement. I tend to agree with Peter that we lose something if we eliminate the possibility of 'self-interest rightly understood.'
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John Montgomery
John
John Montgomery
Chairman, One Global
Top Contributor
Thank you Filip for sharing Strine's latest article with the group. Both of Stine's articles have profound implications for our work and this one has had a profound effect on my thinking. I'm stunned.
Miguel is right: Chief Justice Strine bifurcates the corporate world into two camps: traditional corporations, which exist solely to maximize profit for stockholders, and benefit corporations, which exist to optimize profit and provide a material positive impact on stockholders, society and the environment. We the People will soon have a clear choice as to what kind of corporation we would like to do business with and in: one that maximizes profit for stockholders and externalizes as many of the negative consequences of its behavior on society and the environment as possible, or one that optimizes profit for stockholders while operating in a responsible and sustainable manner for stockholders, society and the environment.
It's stunning how forcefully the Chief Justice eviscerates all the leading arguments that the current DGCL and Delaware case law do not limit corporations to the sole purpose of promoting stockholder welfare by maximizing profit for stockholders. 'If we wish to make the corporation more socially responsible, therefore, we must do it the proper way' by changing the law, as Delaware has done with is benefit corporation law. 'If we believe that other constituencies should be given more protection within corporation law itself, then statutes should be adopted giving them enforceable rights that they can wield. The benefit corporation is a modest, but genuine, example of that kind of step forward.'
There is still a third camp as Miguel and Peter point out: existing general corporations who work do the right thing for society and the environment. The Conscious Capitalism movement in the US, for example, is led by responsible leaders of C Corps who aspire to live their corporations' heroic purpose, build values based cultures and respect the needs of all of their corporation's stakeholders. Under the CC philosophy, doing good is a means to the legitimate end of maximizing profit for stockholders - it's self interest rightly understood as Peter put it. Unfortunately, according to Strine, doing the right thing is only permissible under the current DGCL if it is a means to the only legitimate end of corporations to promote stockholder welfare by maximizing profit for stockholders. There is no room in this latest article for denial; Strine makes it clear that we're delusional if we think otherwise.
I'm grateful to all the 'naive' leaders who endeavor to do the right thing within the current framework of the DGCL. Their work remains extremely important for the cause of responsible and sustainable business. What Strine suggests, however, is that the benefit corporation gives such responsible CEOs and directors an even safer harbor for doing good.
By asserting that Delaware is 'the most important American jurisdiction' for corporate law, Chief Justice Strine's two articles effectively establish the Delaware public benefit corporation as the de facto global standard for for-profit corporations wishing to be a force for good. Hopefully, the Chief Justice of America's, if not the world's, leading corporate jurisdiction will inspire Europe to similarly rewrite its corporate laws to make the corporation even more socially and environmentally responsible.
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Peter Tunjic
Peter
Peter Tunjic
Lawyer/ Business Writer
Hi John,
I think I need to explain what I mean by self interest rightly understood.
The 'self' is the corporation as a separate and sovereign legal entity. To quote the Purpose of the Corporation Project, 'legal persons that exist separately and independently of their directors, officers, shareholders, or other human persons with whom the legal entity interacts.'
Self interest rightly understood refers to the corporation and not shareholders. Whilst I understand the CC movements argument that being good is good for shareholders, I don't think its persuasive.
I argue that a board must prioritize all stakeholders according to their contribution to the viability of that legal entity. Viability being a product of maintaining stocks and flows of financial capital, intellectual capital, human capital, produced capital, social capital and environmental capital etc.
Self interest rightly understood may translate into the board and management elevating social capital and environmental capital above financial capital but this has nothing to do with corporate social responsibility. To the outside world this might look like a 'do gooder' organization. But if that decision is motivated by and contributes more to the perpetual viability of the corporation than financial capital, the board has shown wise commercial acumen.
To my mind, the Chief Justice ignores the possibility that self interest rightly understood is the better ethical framework for non human legal persons such as corporations.
But what of the shareholders profit?
Under an ethical framework of self interest properly understood, the profit for shareholders is dependent upon their continuing contribution to the viability of the corporation. Which though not insubstantial may not support the levels of return that shareholders have come to expect under the current ethical framework of duty. In the end, based on the shareholders value proposition to corporations, theirs is (in the most part) a modest business model that has been artificially underwritten by a mistaken characterization of the law perpetuated by no less than a chief Justice.
All this said, I think public benefit corporations are a great idea. But I think that the original form of the corporation, properly conceived acting in its own self interest properly understood, is still the better idea and worth fighting for.
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John Montgomery
John
John Montgomery
Chairman, One Global
Top Contributor
Peter, thanks for the explanation. This is very helpful. I think I understand the ethical framework. Some of the US constituency statutes, such as Nevada's, are quite progressive in that they allow directors to consider the interests of the corporation's stakeholders in whatever priority they deem appropriate for the situation at hand. Are constituency statutes close to the the legal framework that would accompany the ethical framework?
You are absolutely right that the Chief Justice ignores self interest rightly understood as a possible better ethical framework for non-human persons such as corporations. BTW, please forgive me if you explained this before and I missed the discussion.
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Peter Tunjic
Peter
Peter Tunjic
Lawyer/ Business Writer
Hi John,
In my view, the idea that directors owe a fiduciary duty to the corporation is a restatement of the ethics of self interest properly understood.
I find the idea of considering the interests if stakeholders in whatever priority deemed fit is problematic because it doesn't provide a basis in which to prioritize interests and walks straight into the trap laid by Milton Friedman -
'the “great virtue” of the shareholder wealth maximization norm is that “it forces people to be responsible for their own actions and makes it difficult for them to ‘exploit’ other people for either selfish or unselfish purposes.”
A principle exploited in this thought experiment by Professor Bainbridge in the New York Times earlier this week:
'Suppose the board of directors of a company is considering closing an obsolete plant. The closing will harm the plant’s workers and the local community, but it will benefit shareholders, creditors and new employees (and their surrounding community) at a more modern plant to which the work is transferred. Let's further assume that the latter groups (the shareholders, creditors and new employees) cannot gain except at the former employees' expense.
By what standard should the board make the decision to close or keep the obsolete plant? Shareholder wealth maximization provides a clear answer — close the plant.
If directors were allowed to deviate from shareholder wealth maximization, they could turn to indeterminate balancing standards, which provide no accountability.
If directors were allowed to deviate from shareholder wealth maximization, they would inevitably turn to indeterminate balancing standards, which provide no accountability. As a result, directors could be tempted to pursue their own self-interest. If closing the plant would benefit directors, they could point to shareholder interests to justify their decision. But if, on the other hand, keeping it open would benefit directors, they could just as easily point to concerns for employees.'
Bainbridge, who's a big fan of the Chief Justice fall for the same false dichotomy.
From the perspective, of the corporation's self interest properly understood there are whole different set of considerations:
On what basis is the plant obsolete (on financial metrics/temporal metrics)
Does the plant create non financial value that contributes to the viability of the corporation
Should the plant be banked as an asset for the future
Is the price of closing the plant (measured in all forms of capital over the long term) less than the cost of maintaining the plant over the same period
If the company required cash from shareholders would it be more likely if they closed the plant
If having considered the company's self interest properly understood, the plant is closed and shareholders benefit it's because they are the beneficiaries of the corporations self interest properly understood. Likewise, if the plant stays open and employees benefit they are the beneficiaries of the corporations self interest properly understood.
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Miguel
Miguel Padro
Senior Program Manager at Aspen Institute Business and Society Program
Top Contributor
Thanks for this enlightening exchange, John and Peter. The Chief Justice is an advisor to my organization so I've had the privilege of a few direct exchanges with him over the last 4 years. One thing he has made clear to me is that the letter of the law doesn't answer the questions of corporate purpose. Nor does the DE case law. For every eBay vs Craigslist, there's Time Inc vs Paramount. This is why he looks to the power structure of C corps for answers. In his view, this is really a question of political power inside corporations, not the letter of corporate law.
The Chief Justice is fond of comparing corporations to civic republics. In his view, the fact that shareholders have the right to vote proves that corporate leaders are obligated to serve shareholder interests exclusively. Unfortunately, I think his political theory is a bit narrow. We would never assume that since children don't vote in our civic republic, our elected officials have no obligations to them. The oath of US elected officials is not to do the bidding of the electorate but to defend the Constitution of the Nation.
Republics only endure to the extent that they produce wise leaders who exercise sound independent judgment. Great leaders in our civic republics are those who rise above the demands of the electorate and set the nation on a wiser path than the electorate would choose on their own. The same can be said of business corporations- I think the proper understanding of duties for corporate leaders is not just to the electorate but to the corporate institution itself.
All of this suggests a very different set of questions for corporate governance experts. Primary among them are 1) Why is our current C Corp governance system failing to produce the kinds of leaders it needs to secure the long-term health of companies? 2) What reforms can help the C Corp governance system produce the kinds of leaders it needs?
Can the B Corp model, which is now being framed as a wholly distinct model from C Corps, help answer these questions? I'm not sure. More will certainly be revealed.
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Andrea McLachlan
Andrea
Andrea McLachlan
Lecturer in Commercial Law at University of Waikato
A most interesting post Miguel. This discussion is perfectly suited to my Phd topic which looks at the role of law in changing the way companies behave (s172 UK Companies Act 2006) so any discussion around the purpose of companies in society challenges me. It seems to me that people with power and influence are driving new ways to look at that issue, taking it away from the 'old' Friedman approach to how and where companies sit in society, and the Chief Justice may well be finding his own views challenged as well, with the rise of B corporations.
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Peter Burgess
Peter Burgess
Founder/CEO at TrueValueMetrics developing Multi Dimension Impact Accounting
Excellent discussion ... but in the end I am confused and frustrated. The corporate form of organization has proved to be a very efficient vehicle for getting things done, much more efficient and cost effective than most other forms of organization (government agencies, state owned enterprises, philanthropic organizations, etc).
As a CFO type more than a lawyer, I believe strongly in the idea expressed by Peter Drucker that you manage what you measure, and in the main the only thing that gets measured very rigorously is the profit which closely links to stock value. Important benefits for society, the employees, the environment, the future, etc. are not measured and accordingly are not managed.
I argue that as soon as metrics are introduced that measure impact on people and planet as rigorously as we measure profit, then everything will be managed rather than simply what is needed to achieve maximum profit.
When you change the way the game is scored, you change the way the game is played!
Peter B
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