Can Corporations B Beneficial?

Proponents of a new kind of business hope to change how capitalism works.

Oakland is no stranger to the harms caused by corporate greed. Exhibit A: the foreclosure crisis. In pursuit of record profits, the nation’s largest banks chased rising home values, signed low-income buyers up for questionable mortgages, packaged these risky loans into esoteric derivative products, and sold them off to the highest bidders around the world. Profits poured into Wells Fargo, Bank of America, and their peers. After the bubble burst and the economy nearly collapsed, these same banks rushed in to foreclose on homeowners. In the East Bay, some neighborhoods are sinking from the social and economic damage that foreclosures cause. The consequences of corporate behavior such as this are hard to measure, but include everything from plummeting local tax revenues to drastic cuts in social programs, rising numbers of homeless families, and increased crime.

If you think about the legal responsibilities of corporate directors and executives, this entire nightmare was seemingly waiting to happen. Most business corporations, especially the largest publicly traded companies, are disciplined by a code of conduct, and by their peer competitors, to behave in a way that all but requires them to act as sociopaths. Corporations, in short, seek profits by transferring costs to society at-large, driving down wages, and exhausting natural resources.

The so-called “benefit corporation” is designed to change this. As of January 1, businesses in California can now organize themselves under the law as benefit corporations, or B corporations, a new legal form that empowers for-profit companies to prioritize social and environmental goals alongside their financial bottom line. Proponents hope the new law will address what many see as the cancer in the modern corporation’s DNA: the legal responsibility of its directors to maximize shareholder profits.

Assemblyman Jared Huffman, author of AB 361, the bill enabling benefit corporations, wrote in a legislative summary that “a review of current case law and the code reveals that there is no way for California corporations to emphasize the environment, social welfare, and other public benefits without potentially being at risk of suit for breach of fiduciary law. That is because fiduciary duty has been interpreted narrowly to be synonymous with maximizing profits.”

The case law Huffman is referring to begins with Dodge v. Ford in 1919, and was invoked most recently in eBay v. Newmark in 2010. Both court rulings are widely believed to enforce the sociopathic mandate that corporations seek maximum profit, even if it means clear-cutting forests or foreclosing on entire communities.

In Dodge v. Ford, the Dodge brothers sued Henry Ford, forcing him to increase dividends paid to shareholders of the Ford Motor Company, rather than reinvesting the money so as to increase employment and generally benefit society through industrial growth, as Ford said he preferred.

In eBay v. Newmark, decided by Delaware’s hugely influential Court of Chancery, eBay sued the founders of Craigslist, alleging the leaders of San Francisco’s quirky classifieds website had breached their fiduciary duties to eBay, which owned a significant share of Craigslist stock. During the trial, Craigslist Chairman Craig Newmark pleaded that his company’s success was founded on a “community-service approach.”

While sympathetic, the judge ruled otherwise. “I personally appreciate and admire Jim’s and Craig’s desire to be of service to communities. The corporate form in which Craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends,” explained Chancellor William B. Chandler, III, perhaps the nation’s most influential corporate law jurist. “Having chosen a for-profit corporate form, the Craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.”

By contrast, the “benefit corporations allow directors to take social and environmental factors into account,” explained Donald Simon, an attorney with Oakland’s Wendel Rosen law firm, and one of the driving forces behind California’s benefit corporation law. Simon helped shepherd the legislation to passage, and as of earlier this month, had already incorporated eleven benefit corporations, with four more in the works.

Simon said the need for the law in California is due to more than just the existing legal imperative pressuring corporations to act as profiteers. It’s also to intervene against the pervasive greenwashing efforts of companies that do not actually care about advancing substantive environmental and social goals. “Greenwashing is a major problem,” Simon said. “You can watch TV and commercials constantly pop up with Exxon and Chevron, for example, claiming to be god’s gift to the environment.” Simon added that “the value of standing out was getting diluted by those claiming to be green, but not actually measuring up.”

Key to the new benefit corporation law, then, is the requirement that companies that opt to become benefit corporations obtain certification from a third party, and that they also file yearly reports detailing how they have advanced their social and environmental purposes. “We got to the heart of this matter by virtue of the third-party standards and assessment, so doing good is now part of the corporate DNA, versus just being a marketing ploy,” Simon explained.

Patagonia’s founder Yvon Chouinard, who also played a key role in passing the benefit corporation law, has explained that the new rules allow a company to hold onto its principles, even as it might grow and new shareholders buy into it. “Benefit Corporation legislation creates the legal framework to enable mission-driven companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, process, and high standards put in place by founding entrepreneurs,” Chouinard explained in a press release. This change would seem to address the problems that prevented Ford and Newmark from pursuing seemingly non-capitalist goals in the face of greedy shareholders. Patagonia was the first company in California to convert to a B corporation this year.

There are critics of the benefit corporation law, however. Assembly Bill 361 was opposed by the California Association of Nonprofits and two committees of the Business Law Section of the California State Bar. These parties pointed out that while the legislation requires third-party certification of benefit corporations, there are only vague substantive requirements in the law regarding the third-party standard, and that the arrangement allows corporate directors to select the third party, thereby watering down the intent of the law and undermining protections for shareholders in the process.

There’s also the question of whether benefit corporations actually address the underlying problem of harmful corporate behavior. “There’s actually nothing in US corporate law that requires business corporations to maximize shareholder profits,” Lynn Stout, the distinguished professor of Corporate and Business Law at Cornell University’s Law School, told me. According to Stout, interpretations of Dodge v. Ford claiming that corporate directors have a fiduciary duty to “maximize shareholder value” are incorrect, and that the case hinged instead on the duties of controlling shareholders (such as Ford) not to oppress minority shareholders (like the Dodge brothers).

Furthermore, as Stout explained in a widely circulated paper on corporate law, “a large majority of state codes contain so-called other-constituency provisions that explicitly authorize corporate boards to consider the interests of not just shareholders, but also employees, customers, creditors, and the community, in making business decisions.”

“I do think some of the people promoting B corporations have tried to sell their solution by creating a problem that doesn’t exist,” said Stout, who added that she doesn’t brand herself as an opponent of B corporations. She even saves some praise for them: “B corporations do solve other problems. Traditional corporate law establishes no obligations for directors to provide information to investors or consumers about social responsibility, whereas some of the new B corporation statues do have reporting requirements that are unique and important.”

Stout said the requirement to report more than just profits and losses matters. “It’s not that directors have to maximize value in for-profit corporations,” she said. “Rather, it’s just that since profits are the only info shareholders currently get, they tend to focus on that. The simple provision of social and environmental information might result in shareholders and directors running the corporations directly.”

Or it might not. It’s possible that the social and environmental harms caused by corporations emanate from a deeper source than corporate DNA. Perhaps it’s in the DNA of capitalism itself?


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