Greater numbers of consumers and business leaders alike are seeking to achieve a deeper success from the companies they support or manage. Surprisingly, until recently, the legal structures in place limited the ability of corporations to choose to prioritize the environment or social good over the bottom line. Unless a company has incorporated under the relatively new benefit corporation governance model, stockholder monetary returns are the sole mandate and responsibility given to the director of a company or investment fund. Let’s use a quick example: A clothing retailer could have a hard time convincing investors that choosing a Fair Trade-certified supplier with Fair Trade certification over a cheaper, unverified supplier would be best for the company’s bottom line, despite it likely being much better for the world.
Learn more about benefit corporations and their impact on the world in our FREE Special Report, Why Is Corporate Social Responsibility Important? CSR Advantages, from Profit to Longevity.
Without getting too deep into the jargon, most corporations have a legal governance structure based on the pursuit of immediate increases to share value. This focus of maximizing stockholder value limits the ability of an organization to consider any other stakeholders affected by their decisions. These obligations are supported by a combination of laws, regulations and customs that were originally designed to limit corporate directors from making decisions solely based on personal interest or gain; the stockholders needed a legal protection to ensure their investment was being managed with their best interests in mind. Today, these duties are strictly interpreted to require the corporation to consider only the interest of the investor, and has seemingly placed monetary gains in opposition and competition with environmental and social gains and protections. Prevailing U.S. corporate law dictates that corporate directors’ mandates do not include benefits to workers, communities or even customers. Under this traditional, “stockholder primacy” model, even if the director of a corporation would choose to reject the short-term profit structure and opt to create longer term value instead, those benefits must be for stockholders only.
This is not to say that value to stockholders cannot be derived from corporate social responsibility. doing good in the world through the business. But, consider when a company is to be sold: The highest bidder, under common U.S. corporate law, would end up buying the company, no matter if the buyers’ values aligned with the values of the companies’ director or employees. After all, the stockholders would no longer have any long-term gains to be considered.
Enter the benefit corporation governance structure. Benefit corporation legislation, with slight variations, has now been adopted in 32 states, and, as of spring 2016, about 3,000 benefit such corporations exist. The model benefit corporation statute has the following requirements:
- A stated corporate purpose to create a material positive impact on society and the environment.
- The creation of an explicit duty to pursue that stated public benefit and treating that public benefit as in the best interests of the corporation.
- An accountability system that gives shareholders the ability to hold directors responsible for pursuing the public purpose even when it may involve an explicit trade off with financial value.
- A transparent reporting of overall social and environmental performance against a credible, independent third-party standards.
These benefit corporation laws are voluntary, so they don’t impose any new regulatory restrictions on businesses that choose to operate under traditional corporate law. Shareholders of benefit corporations retain all of their governance rights, and the directors of benefit corporations have the same duties to their shareholders as they do in corporations with a traditional governance model. The directors are expected to be held accountable for their public benefit commitments as seriously as they would be for monetary returns.
Let’s consider the example of the clothing retailer again. If the retailer were legally a benefit corporation, choosing the Fair-Trade certified supplier may be demanded as part of fulfilling the stated public benefit the company is legally committed to make. The cheaper, unverified supplier, if it didn’t also meet these public good standards, would not have to be chosen solely because it cost less. The benefit corporation legal structure aims to give directors and companies the ability to value and manage investments in the betterment of society and the environment as seriously as corporations currently value and manage stockholders’ monetary returns.