Preview Thursday: Benefit Corporation Law and Governance: Pursuing Profit with Purpose

The following excerpt is from Benefit Corporation Law and Governance: Pursuing Profit with Purpose by Rick Alexander.

It has gone largely unremarked that 35 states introduced a new corporate governance model in the past decade.  Yet the introduction of the “benefit corporation” gives leaders an opportunity to remake our business culture, and perhaps save the planet from our very human short-term bias. My recently published book, Benefit Corporation Law and Governance: Pursuing Profit with Purpose, is intended to explain the “why” of benefit corporation law as much as the “how.”  My own story is an interesting backdrop.

I spent almost 30 years as a lawyer in private practice, advising business leaders on Delaware corporate law issues – addressing matters like preferred stock financings, IPOs, mergers, hostile takeovers, proxy contests, corporate governance and fiduciary issues. My advice was based on two simple principles:

  1. Directors are elected by shareholders, and, once elected, have the full authority to manage the corporation.
  2. Directors must prudently and unselfishly manage the corporation to create the maximum financial return for shareholders.

In other words, shareholder-elected directors manage the corporation but must do so carefully and loyally for the financial benefit of the shareholders. This paradigm is often called the “shareholder primacy” model, and it underlies our capital markets and business models.

But then something happened to change my view of the shareholder primacy model.

A few years ago, when I was chairing the bar committee that oversees modifications to the Delaware General Corporation Law, we were approached by B Lab, a nonprofit organization that seeks to enable entrepreneurs and business leaders to exercise greater social and environmental responsibility.

B Lab wanted states to adopt benefit corporation law. The new version of corporate law would allow corporations to choose a governance model with responsibility for all stakeholders, and not just shareholders.

In Delaware, our immediate reaction was negative.  We believed that it was the responsibility of government to regulate environmental and social issues, but that business should maximize profits within the law. We thought that shareholder primacy allowed financial capital to find its best use, and was thus socially optimal.

But as I studied the issue, I came to believe that an honest assessment of the effects of business on our environment and on society belied the assumptions that underlie shareholder primacy. When business leaders are focused solely on profit, they impose costs and risks on the rest of society.  A short-term focus on profits led to the 2008 financial crisis and is creating worsening climate risk on a daily basis.  Personally, I came to believe that shareholder primacy represented a catastrophic market failure, creating inequality, social instability, and environmental degradation.

In short, I realized that corporations were the most powerful institutions in society, and we were programming them to act amorally.  How could we expect that to turn out well?

Based on this thinking, I worked to help Delaware, the nation’s leading corporate law jurisdiction, authorize benefit corporations in 2013. There are now more than 5,000 benefit entities in the United States, and 2017 witnessed the first IPO of a Delaware benefit corporation.

My book is intended to be read by investors, lawyers, business leaders and others who want to be part of a 21st-century capitalism that advances the interests of all stakeholders—workers, customers, communities, and others.