Reevaluating Benefit Corporations

Original post date: October 13, 2014
Article by: Dan Davy

A previous blog discussed the potential for Florida’s recently passed Benefit Corporation (B-Corp) legislation to encourage social enterprise. Some consider the B Corp movement a “seismic sea change in the world of corporations.” However, whether this legal innovation will make a significant impact on social entrepreneurs is unclear.

B-Corp laws address the problem of shareholder activists. Shareholder activists use their ownership—typically a stake of 10% or more of the total shares—to launch campaigns to change company plans. Activists can push for either financial profit maximization goals or non-financial, sometimes socially beneficial goals.

Shareholder activists often pursue short-term personal profits at the expense of product quality, labor standards, and environmental impacts. Carl Icahn used this tactic to lead the once iconic TWA into bankruptcy after selling vital assets while pursuing short-term profit maximization. The B-Corp laws protect management from such shareholder pressure to sacrifice social benefit in order to promote the corporation’s interests by stating that “the creation of general social benefit… is deemed to be in the best interest of the benefit corporation.”   For example, B-Corp management may sell company assets to someone other than the highest bidder if they demonstrate reasons of social benefit.

In contrast, some activist shareholders have made environmental sustainability a key issue in their law suits and corporate resolutions. The new B-Corp laws will empower this kind of social activism by expanding management’s responsibility beyond traditional profit seeking to consider general social benefit in each business action. Management is required to report yearly on its social impact. Meanwhile shareholders are given the right to action against management through an enforcement proceeding, which can provide injunctive relief.

Nonetheless B-Corp laws have received some negative reviews.

Adding new protection for managers could incentivize moral hazard and undermine traditional shareholders’ ability to make returns. Whole Foods CEO John Mackay points out that shareholders are actually the last people in a business to be paid, only after employees’, suppliers’, and lenders’ accounts are settled. He maintains that “such owner control makes sense because, of all the stakeholders in a business, the owners are most vulnerable to [the exploitation of] both managers and other stakeholders.”

Others, including writers at the Harvard Law Blog, question the need for protecting management since “there is no legal restriction on directors’ ability to consider the interests of other stakeholders, including the groups listed in the B-Corp statutes.” Florida law, for example, already expressly permits traditional management to consider stakeholders other than the corporation and shareholders. These laws are not empowering management to do anything they are not already allowed to do.

Undoubtedly, shareholder activism can create chaos for a company’s management, and the law provides some protection for entrepreneurs seeking growth capital. However, such disruptions do not often affect social entrepreneurs who rarely have shareholders at all, much less lead publically traded firms.

While these laws may provide an air of legitimacy to the burgeoning social enterprise movement and ensure the “social” stays in social enterprise, it fails to address the obstacles most of Florida’s entrepreneurs face on a daily basis. The B-Corp laws are a step in the right direction, but making Florida competitive for entrepreneurs will require more substantive reforms.  For instance, removing Florida’s byzantine regulatory obstacles such as occupational licensing would do more than crafting B-Corp protections to empower our state’s social entrepreneurs. Reforms like that could be good for all businesses, social or otherwise.

About DeVoe Moore Center

The DeVoe L. Moore Center is conducts economic research and policy analysis focused on state and local policy issues and is located in the College of Social Sciences and Public Policy at Florida State University in Tallahassee. As an educational institution the DMC provides professional research experience to undergraduate and master’s students through an extensive program of internships and independent study, preparing them for a future in public policy, economic development, public sector accountability and entrepreneurship.
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