A New Look at Benefit Corporations: Game Theory and Game Changer

• Published date: 01 September 2015
• Date: 01 September 2015
• Author: Regina Robson
• DOI: http://doi.org/10.1111/ablj.12051

A New Look at Benefit

Corporations: Game Theory and

Game Changer

Regina Robson

INTRODUCTION

For most of the twentieth century, for-profit corporations have been

regarded as a type of legal monolith—solid, unchanging fabrications of

the law, supported by a well-developed body of jurisprudence. Like the

emblematic monolith of the classic film, 2001: A Space Odyssey,

1

for-profit

corporations were simply “there”—markers on the legal landscape that

stood in sharp contrast to their equally monolithic antithesis, the non-

profit corporation.

Recently, however, the bright line distinctions between for-profits

2

and nonprofits have begun to blur.

3

For-profit firms now operate along

a continuum of behaviors in which they ignore, adopt, or embrace social

welfare goals.

4

A similar phenomenon has also occurred with nonprofits

Associate Professor, Ervin K. Haub School of Business, St. Joseph’s University. I would like

to thank the Pedro Arrupe Center for Business Ethics for its encouragement during the

preparation of this article.

1

(MGM 1968).

2

Unless the context requires otherwise, as used in this article the phrases “for-profit” or

“traditional for-profit” refers to any form of organization that is not a benefit corporation,

or any other form of hybrid organization, which is engaged in the pursuit of profit for its

owners and investors.

3

Julie Battilana et al., In Search of the Hybrid Ideal,10STAN.SOC.INNOVATION REV. 51, 55

(2012) (stating that hybrids are a “reconfiguration of the social and commercial sectors,

from completely separate fields to a common space”).

4

See infra notes 97-114 and accompanying text.

V

C2015 The Author

American Business Law Journal V

C2015 Academy of Legal Studies in Business

501

American Business Law Journal

Volume 52, Issue 3, 501–555, Fall 2015

bs_bs_banner

that have adopted the tools of traditional for-profits in support of their

social missions.

5

New “hybrid” forms of business organizations have

emerged that further blur the lines between private enterprise and

public mission. The most prominent of the hybrid entities are benefit

corporations (hereinafter used interchangeably with “B-corporations”

and “B-entities”)

6

whose pursuit of profit is subordinate to, or coexten-

sive with, their mission to create a public benefit.

7

The existence of such organizational diversity suggests that forms of

business organization should be viewed—not as mere “receptacles” of

assets—but as legally constructed “signals” that drive the strategic

behavior of market participants and act as potential catalysts in the crea-

tion or destruction of operational norms.

This article uses a new approach to understanding hybrid entities by

analyzing benefit corporations in terms of their distinct roles as a focal

point in game theory and as a “game changer,” that is, as a catalyst for

normative behavioral change. Part I traces the role of business organiza-

tions both in facilitating investment and impacting behavior. It describes

the predominance of a shareholder-centric model of jurisprudence and

examines the evolution of that model to accommodate stakeholder

interests. It also traces the emergence of some hybrid entities, which are

organizations animated as much by the goal of creating a public benefit

as by pursuit of profit.

Part II describes the general principles of game theory and the role

of law as a “focal point” in a coordination game. Game theory uses a

series of “games” or hypothetical situations to model how rational actors

should make decisions when the consequences of such decisions depend

5

See Thomas Kelley, Rediscovering Vulgar Charity: A Historical Analysis of America’s Tangled

Nonprofit Law,73F

ORDHAM L. REV. 2437, 2463 (2005) (observing a “‘headlong rush’ by

American charities toward ‘commercialization’ and ‘marketization’”).

6

B-corporations are not to be confused with “B-Certified” companies. “B-Certified” com-

panies refer to entities that have been subject to review and certification by “B Lab,” a pri-

vate, third-party certifier. B-Certified companies may be benefit corporations or traditional

for-profits. For a further description of the activities of B Lab, see About B Lab,B

ENEFIT

CORP INFO.CTR., http://benefitcorp.net/about-b-lab (last visited Mar. 1, 2014).

7

See HEERAD SABETI,THE EMERGING FOURTH SECTOR 1, 5, available at http://www.aspeninstitu-

te.org/sites/default/files/content/docs/pubs/4th%20sector%20paper%20-%20exec%20summary

%20FINAL.pdf (defining “for-benefit” entities as “organizations that pursue social purposes

while engaging in business activities”).

502 Vol. 52 / American Business Law Journal

on the actions of other participants.

8

Among the most useful of such

constructs are “coordination games” that model situations in which the

parties have an interest in aligning their behavior.

9

Participants in coor-

dination games are aided in aligning their strategies by the use of “focal

points”

10

—prominent markers that make a particular strategy salient.

11

Law frequently functions as an effective focal point.

12

Law can cause

the behavior of market participants to coalesce around a particular strat-

egy and provide affirmation that other participants are acting in a simi-

lar manner.

13

Because they mutually recognize such focal points,

participants are able to coordinate their strategies with reduced transac-

tion costs.

Part III analyzes benefit corporations as a focal point in a coordina-

tion game. It argues that the benefit form of organization has several

attributes that make it an effective “focal point.” Encouraged by the

familiar infrastructure of corporate law,

14

adoption of benefit corpora-

tion legislation has been rapid and widespread.

15

Benefit corporations

have gone “mainstream” and have been the subject of discussion both

8

Randal C. Picker, Law and Economics: Intellectual Arbitrage,27LOY. L.A. L. REV. 127, 130

(1993).

9

See Richard H. McAdams, Beyond the Prisoners’ Dilemma: Coordination, Game Theory, and

Law,82S.C

AL.L.REV. 209, 219 (2009).

10

See THOMAS C. SCHELLING,THE STRATEGY OF CONFLICT 57–58 (1980) (describing the use of

focal points in situations in which participants have common interests).

11

Id. (concluding that a focal point gives players a clue to the expected behavior of other

players).

12

Richard H. McAdams, A Focal Point Theory of Expressive Law,86VA.L.REV. 1649, 1728

(2000) (concluding that even without sanctioning, the expressive power of law can make a

particular course of action “focal”).

13

McAdams, supra note 9, at 234 (suggesting that legal rules and judicial decisions can act

as a focal point to encourage alignment of behaviors).

14

See infra note 257 and accompanying text.

15

The first statute authorizing the creation of benefit corporations was passed in 2010. See

MD.CODE ANN., CORPS.&ASS’NS § 5-6c-01 (West 2010). Since then, similar legislation has

been adopted in twenty-six states and the District of Columbia. State by State Legislative Sta-

tus,B

ENEFIT CORP INFO.CTR., http://www.benefitcorp.net/state-by-state-legislative-status (last

visited Mar. 1, 2015).

2015 / A New Look at Benefit Corporations 503