Having your cake and eating it, too: making the benefit corporation work in Massachusetts.

Author:Acello, Kathryn
 
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"[I]n the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful." (1)

  1. INTRODUCTION

    Recent sentiments toward businesses, particularly in response to the 2008 crash of the U.S. housing market, have dramatically changed consumer attitudes about primarily profit-driven business practices, and steered sales toward more socially minded companies. (2) Revolt against corporate greed coupled with the widening gap between the financially elite and the middle class further emphasizes the need for businesses to focus more on the evolving desires of their consumers. (3) While some economists theorize that corporations are able to produce the most social benefit by adopting purely profit-maximizing business practices, businesses must still address consumer needs and desires in order to earn those profits, effectively forcing businesses to adopt (for philanthropic purposes or not) practices that more closely align with the personal philosophies of their consumers. (4)

    Regardless of their motivations, corporations began independently seeking mechanisms to achieve their socially beneficial goals. (5) Social enterprise, entrepreneurship, and sustainable investment are all trends among the business savvy to support businesses that seek to improve the quality of life in some capacity, such as investment in low-income housing or manufacturing healthy, low-cost food for underprivileged communities. (6) Most notably, B Lab developed a set of principles by which they can designate corporations that meet objective, socially focused goals, enabling investors to easily identify companies with missions they support; indeed, these voluntary business designations would be the antecedent for benefit corporation legislation, and were promulgated by the same company. (7) Designation as a "B Corp" imposes on corporations the voluntary restriction of pursuing the general public benefit, even at the expense of maximizing profits, as well as the added requirement of preparing annual reports verifying that they are actively pursuing their socially minded goals. (8)

    To meet the evolving needs of for-profit businesses with concerns beyond profit maximization, legislatures enacted a series of safeguards to protect directorial decisions that do not specifically underscore their shareholders' profit-maximizing prerogatives. (9) Constituency statutes, presently enacted in thirty-three states, empower directors to consider interests beyond simply earning profits. (10) Further, directors' reasonable business decisions are otherwise protected by the business judgment rule, even if not specifically profit driven. (11) other states recognize low-profit limited liability companies (LLCs), flexible-purpose corporations, and benefit LLCs, which are amalgamations of nonprofit purposes and for-profit practices. (12) Internal devices, such as directives, by-laws, and strategic shareholder voting, also may effectively focus corporate action on social endeavors. (13) In order to bolster the efficacy of these mechanisms, several states (one of the most recent of which is Massachusetts) enacted benefit corporation statutes to recognize a wholly separate legal entity that requires both the declaration of a social mission to pursue the general public benefit and objective third-party evaluations to enhance transparency, consequently implying a heightened fiduciary duty on directors. (14)

    This first section of this Note chronicles the competing shareholder and stakeholder theories of corporate purpose, which establishes a philosophical foundation helping to explain the shift in corporate behavior. Based upon this foundation, the Note evaluates trends in both the business sector and legislative innovations, culminating with a discussion of the adoption of benefit corporation legislation in Massachusetts. The following section analyzes how that legislation diverges from other enacted benefit corporation statutes, as well as how it complements existing Massachusetts law. This Note will then postulate that while benefit corporation legislation may capture many aspects of existing law, it stands to serve a unique and legitimate purpose in the evolution of corporate philosophy. In closing, this Note anticipates the challenges benefit corporations will face based upon the statute's existing framework, and makes recommendations for its improvement.

  2. History

    1. A Corporate Identity Crisis

      Traditional theorists, one of the earliest being A. A. Berle, Jr., contend that the sole purpose of a corporation is to maximize profits. (15) often known as shareholder theory and encapsulated in the concept of shareholder primacy (which places shareholder interest above nonshareholder interests), the concept is derived from the agency and contractual relationships that exist between shareholders and directors, and suggests that because directors are vested with the authority to use shareholders' capital, their authority must be used strictly for profit generation. (16) Rebutting Berle's theory at the time, E. Merrick Dodd, Jr. instead contended that business directors should consider interests beyond profit maximization, which is often referred to as stakeholder theory. (17) While later case law and significant legal scholarship ultimately undermined Berle's profit-maximization theory, shareholder primacy remained the norm in the United States through the 1950s and saw a later resurgence in the 1980s. (18)

      Many scholars have been unable to reconcile these competing views because they appear mutually exclusive: a director can either take the action that benefits the firm's shareholders vis-a-vis shareholder theory, or take the action that benefits those impacted by the firm (but not directly owning an interest in it) vis-a-vis stakeholder theory, but not both. (19) Some scholars simply categorize corporate law insofar as it relates to the "what" and "why" of a corporation as "schizophrenic," while others question the utility of engaging in the debate at all. (20) Rather than disregarding the compartmentalization of these theories, some scholars urge that existing flexibility within corporate structure belies the assumptions that shareholder theory relies upon, such as the notion that shareholders invest only to further personal profit-generation goals. (21) Others still urge that evaluation of stakeholder interests has a place in corporate decision-making, but only as an afterthought. (22)

      The movement away from shareholder primacy first gained traction in

      the 1970s in response to the domestic concerns of the 1960s and in part as a result of the Vietnam War, when Americans shared widespread sentiment that businesses owed something to their communities. (23) This movement would bear a laundry list of names throughout the past several decades and is most commonly referred to as corporate social responsibility (CSR). (24) CSR generally refers to the promotion or advancement of stakeholder--or those affected by but not necessarily owning a portion of the corporation--consideration in corporate decision-making, rather than acting only in the best interest of the shareholders. (25)

    2. To Market, to Market

      As corporate purpose became increasingly obscured, a movement began to take hold among businesses that would further obfuscate the neat labels legal scholars attempted to place on them: green, not greed, was "in," and corporate decision-making no longer aligned entirely with either profit maximizing or philanthropic goals. (26) The housing market collapse and increased focus on climate change created new markets for businesses and entrepreneurs where other markets were shrinking. (27) Entrepreneurs had a myriad of reasons for entering these emerging markets: some were purely monetary, others to secure the favor of discretionary decision-making entities (e.g., zoning boards), while still others were in response to changing client demand or for truly benevolent purposes. (28) Regardless of the reason for the inclusion of nonshareholder interests when developing corporate goals, businesses felt increasingly constricted by the polarization of nonprofit and for-profit business models, neither of which seemed to adequately define or encourage their hybrid goals. (29)

      While the idea that corporations were considering factors beyond finances appealed to many investors and consumers in theory, in practice, it amounted to little more than a "do no harm" attitude without meaningful legal safeguards. (30)

      Corporations reaching this conclusion then attempted to impose a variety of restrictions in order to demonstrate their commitment to CSR. (31) Many shareholders first began utilizing SEC Rule 14a-8, which allowed directors to include socially conscious proposals in proxy mailings if certain conditions were met. (32) Other corporations sought to amend their corporate charters or bylaws--the documents that establish how their business is run both publicly and internally--to reflect their commitment to pursuing socially conscious goals. (33) Even absent these controls, the business judgment rule protects managerial decision-making so long as decisions were made in good faith and without self-interest, which would effectively enable a director to place stakeholder interest above shareholder interest without risking personal liability. (34)

    3. The B Corp Advantage

      Many socially conscious corporate directors that found these devices anemic sought to place further restrictions on their directors by applying for certification as a B Corp. (35) Pioneered by B Lab, a nonprofit organization founded by Jay Coen Gilbert, B (short for benefit or beneficial) Corps are businesses that meet objective criteria...

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