Bipartisan Support for Benefit Corp Law in Arizona

state-seal

The Arizona legislature is currently considering a bill that would block any Presidential executive order it deems unconstitutional. A few years ago, they passed a law allowing police to question anyone suspected of being an illegal immigrant. The Republican Party has controlled the governor’s office and both legislative chambers since 2009, and conspiracy theories are popular discussion topics in the State Capitol.

Yet in 2015, the Arizona Legislature also enacted a law allowing companies to organize as benefit corporations, which are required to pursue a social benefit and be good environmental stewards while they also make a profit. The laws passed with bipartisan support, according to Stuart Goodman, the lobbyist who led the campaign.

GoodmanR_0Seed Spot, a business incubator in Phoenix, hired Goodman to push a bill that was sponsored by a moderate Republican. “We had two messages,” he says. “One was that this law allows the private sector to provide services ordinarily provided by the public sector. Let’s say that a company wanted to provide meals to the elderly as its social benefit. That will reduce the burden on government.

“Our second argument was freedom of choice. This law protects entrepreneurs who want to pursue social and environmental benefits from shareholders who might sue them for not maximizing short-term profits.”

Support for the law was “a mixed bag,” says Goodman. “The most conservative and the most liberal legislators both opposed it.” Republican Carl Seel was against the bill because he thought it would attract liberals to Arizona, says Goodman. Democrat Debbie McCune Davis voted no because she thought it would be an excuse to further cut social services, and also because she thought corporations didn’t deserve any more legal protections than they already had.

Despite these objections, says Goodman, “A majority came together that was pragmatic and pro-business, and the governor agreed.”

The law has been in effect since January 2015. Five benefit corporations are currently active in Arizona, along with ten Certified B Corps, and more are on the way. “I just talked to a former customer who is considering changing his status,” says Adam Goodman, CEO of Goodmans Interior Structures (and Stuart’s cousin), a benefit corporation based in Phoenix. “People talk to me about it all the time.”

Benefit Vs. Social Purpose: Small Distinction, Big Difference

Corporate lawyers often react negatively to benefit corporations. “I thought the idea was kooky at the first meeting,” says William Clark, a partner at Drinker Biddle & Reath. “The law is impractical and unworkable,” says Michael Hutchings, a partner at DLA Piper in Seattle.

Clark’s first meeting happened in late 2008. His client was Jay Coen Gilbert, the co-founder of B Lab, who hired him to write model legislation for an entirely new kind of corporate form—a benefit corporation, which requires directors to pursue a social mission and minimize their environmental impact while also making a profit.

Gilbert believed in a philosophy of business known as “triple bottom line,” and he wanted a law that would protect business directors who chose to operate their firms in this way.

clark-william-hAt first, Clark was skeptical.  “Lawyers are trained to give directors as much flexibility as possible. We don’t like to restrict what directors can do,” he says. “So why would we require that directors put a triple bottom line in their charter? Why require annual reports on social performance? Why not just make it something you’re allowed to pursue if you want to, instead of requiring it?”

Benefit corporation laws make the triple bottom line into an enforceable contract. They require directors to do things, and they give shareholders enforcement power if directors fail to do them.

In legal terms, laws like these are “prescriptive.” But corporate lawyers usually prefer laws that are “permissive”—those that allow directors to take certain actions if they choose to, without giving any power away to shareholders.

Clark eventually became a convert. He wrote the model legislation Gilbert asked for, and the idea spread quickly. Today, 31 states plus the District of Columbia, Puerto Rico, and Italy allow benefit corporations. But Clark says that most corporate lawyers still prefer permissive laws, and their resistance has diluted the movement’s impact in several states.

michael_hutchingsMichael Hutchings learned about benefit corporations in 2009, when the law came up at the Washington State Bar Association’s Corporate Act Revision Committee, on which he serves. “Our debate was over whether to recommend anything at all,” he said. “We concluded that this corporate form is not necessary for a company that wants to pursue social good.”

The benefit corporation law was a non-starter, he says. “It would be impossible to consider social benefit in every corporate decision, and it would also be impossible to show shareholders that you did,” he says. The committee also thought it overly prescriptive to require considering environmental impact as well as social benefit, and to require an independent third party such as B Lab to make a social audit.

“Legally, it’s unworkable,” he says. “And we didn’t want to pass a law because it’s a piece of someone’s marketing plan.”

The permissive alternative to a benefit corporation law is called a “flexible purpose” or “social purpose” corporation (SPC). This kind of charter allows corporations to designate one or more social purposes. Although it requires their directors to consider these social purposes when making management decisions and to issue an annual social report, it does not require them to consider their environmental impacts, hire an auditor, or release the report to the public.

Washington passed a SPC law in 2012, says Hutchings, because “there was a growing demand for it, and the state bar association thought it might help entrepreneurs who want to work in this way. But we didn’t want to legislate an appropriate level of goodness.”

Laws allowing SPCs have passed in California, Florida, Washington, and Texas. California and Florida have also passed laws allowing benefit corporations; Washington and Texas have not. Legislators in Ohio, Georgia, and several other states are considering both alternatives now.

Clark says that passing both laws is fine, but he predicts that the SPC laws won’t accomplish much. “The problem is that a social purpose corporation doesn’t require its directors to commit to the triple bottom line,” he says. “The directors of social purpose corporations might not even be aware of the distinction.”

About 156 social purpose corporations are active in Washington. Fred Whittlesey, founder and owner of the Compensation Venture Group SPC in Seattle, eagerly publishes his report. He’s also a Certified B Corp.

Becoming an SPC and getting audited by B Lab “is a way of branding the business,” he says. “It lets people know my values.” The distinction between SPCs and benefit corporations, he says, “is highly technical and not very meaningful.”

For-profit businesses that also have a social mission are still mostly small and managed by their founders, who almost always belong to the social movement B Lab is leading. So the corporate distinction isn’t well known, and to a non-lawyer it might not seem important—yet. But Steve Piersanti, president of the publishing firm Berrett-Koehler, sees a big difference.

Berrett-Koehler is a California benefit corporation whose social mission has been audited and certified by B Lab. “A social purpose corporation could devote itself to anything,” says Piersanti. “It could be a factory that dumps toxic waste while serving society by giving away free handguns. That would be a perfectly legal SPC. The movement we’re part of is about something much bigger.” –Brad Edmondson

Hundreds Of B Corps Are Sitting Ducks. Here’s Why.

wall-street-douglasMichael Douglas as the financier Gordon Gekko in Wall Street (1987).

Entrepreneurs who are growing the Certified B Corps movement need to learn from their elders’ mistakes. But B Corps in 18 states have no defense against corporate predators. And in 11 of these states, they’re fooling themselves.

At the end of 2015, 31 states have passed laws establishing benefit corporations. These are different than B Corps, which subscribe to a voluntary certification program maintained by a not-for-profit group called B Lab.

Benefit corporations have taken the next step by writing their double bottom line into their articles of incorporation. They exist to make a profit for their shareholders, but also to benefit their stakeholders—employees, suppliers, customers, and neighbors. In most states, benefit corporations are also required to prove their social impact in public reports.

The first law establishing benefit corporations was passed by Maryland in 2010. While the movement is spreading rapidly, 19 states have not yet passed a version of this law. But Georgia, Iowa, Kentucky, Maine, Missouri, New Mexico, North Dakota, Ohio, South Dakota, Wisconsin, and Wyoming have an older law on the books that some view as a substitute. It’s known as a non-shareholder constituency statute, and it explicitly permits corporate directors to consider the effects of their decisions on stakeholders as well as shareholders.

Constituency statutes might sound good, but they don’t protect mission-driven businesses. “They haven’t been cited in many court decisions,” says William Clark, an attorney who helped draft the original legislation for benefit corporations. “When push comes to shove, the shareholders always win. So there’s a real question at this point about what constituency statutes mean.” And thereby hangs a tale.

The current crop of community-minded business people emerged when baby boomers started opening shops in the 1970s. The founders of Ben & Jerry’s, The Body Shop, Tom’s of Maine, Stonyfield Yogurt, and others succeeded by positioning their products as healthy, values-led alternatives to similar products made by big, greedy corporations. But when the big, greedy corporations offered to buy them out, the hippie capitalists couldn’t come up with a better alternative.

The 1980s were an era when most corporate managers and lawyers gleefully took cover behind Milton Friedman and other “free market” economists. The actor Michael Douglas captured this slimy worldview in 1987, in the movie Wall Street, with his Oscar-winning portrayal of the corporate raider Gordon Gekko. “Greed, for lack of a better word, is good,” said Gekko. “Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”

Gekko’s speech came on the heels of Revlon v. MacAndrews, a Delaware Supreme Court decision that triggered a feeding frenzy among corporate predators. The Court held that once buyers begin bidding up the price of a publicly traded stock, corporate directors must disregard the interests of stakeholders and focus only on maximizing shareholder profits. The Revlon decision never made it to the US Supreme Court, and lawyers are still arguing about it. But when it passed in 1986, it was seen as the law of the land.

Lots of community minded business people were horrified by Gekko and Revlon. They devised constituency statutes to give corporate directors a way to fight back. Pennsylvania was the first state to pass one, in 1983. Others followed quickly and today, 32 states have them on the books.

But this wasn’t really a legal dispute. It was a clash of worldviews, and the well-meaning hippies never had a chance against Gekko. The directors of Ben & Jerry’s were forced to sell to Unilever in 2000, even thought the Vermont legislature passed a constituency statute in 1998. One big reason for the sale (described in my book) was the threat of multiple lawsuits from profit-hungry shareholders.

“With the exception of Connecticut, constituency statutes are not mandatory,” says Clark. “They simply allow directors to consider other interests.” In other words, constituency statutes codify a large body of corporate law that says directors have the right to serve stakeholders as well as shareholders. But this legal right doesn’t mean much, once the money starts talking.

Constituency statutes were the best we could do until the late 2000s, when Clark and several business people developed a better idea. Benefit corporations are legally required to pursue a double bottom line. They are now building enormous amounts of good will and loyalty by treating their employees, suppliers, customers, and neighbors well. They are also publicizing their good works as a way of distinguishing themselves from their competition. Many benefit corporations are highly profitable for this reason.

If a profit-only corporation buys a benefit corporation, it could change the charter or absorb the assets. But a move like that would also endanger the very thing that makes the acquisition attractive.

Changing a benefit corporation’s policies runs a serious risk of losing a lucrative market segment. This is because so many consumers will pay more for products that reflect their commitments to fair trade, a living wage, and other causes.  These activist consumers are the ultimate guardians of the socially responsible business movement. Benefit corporations are their best choice, because benefit corporations are finding ways to grow sustainably without abandoning their stakeholders.

Why Milton Friedman Would Have Been OK With Benefit Corporations

FriedmanWikipediaIn the mid-20th century, corporate CEOs and board members often described themselves as the custodians of a public trust. Like statesmen, their job was to balance competing interests in ways that were wise and fair. Milton Friedman (1912-2006) the son of immigrant shopkeepers, saw that they were lying, and he hated their elitism. He attacked it like a bare-knuckle fighter.

Friedman led a group of economists at the University of Chicago who argued that corporations should be managed only for the benefit of shareholders, and that stakeholders—employees, suppliers, customers, and neighbors—should be rewarded only if it also puts more money into shareholders’ pockets. Friedman and his pals said that a corporation is not a government or a charity, and its social responsibility is simply to increase shareholder profits.

The “shareholders first” argument was radical when it was introduced in the 1960s, and Friedman did not pull any punches. In 1970, he wrote in The New York Times that executives who believe they should serve the broader community are playing around with their investors’ money. They are guilty of “hypocritical window-dressing,” he said, and have a “schizophrenic character.”

Friedman won the Nobel Prize in 1976, advised President Reagan on economic policy in the 1980s, and wrote several blockbusters, including Free To Choose (1980). Thirty-five years later, greedy people still use his writing to justify their immoral acts. But if you’ll go back and read that 1970 article, it’s also clear that he would not have objected to the idea of a corporation whose charter directs it to pursue both profits and social benefits. Friedman wrote:

“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for example, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.

“In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them.”

Friedman understood that corporations are just social and legal organizations, and that they can have any goals they are chartered to pursue. He insisted that shareholder profits should be a corporation’s only goal merely because an alternative had not yet been devised. He was the uber-capitalist, so he probably would not have invested in a benefit corporation—but he wouldn’t have objected to it, either. It was honest. People should be free to choose.

 

The Deep Legal Roots of Sustainable Business

Benefit corporations are a new kind of business, but they are also the latest development in an 80-year-old debate. One side says that corporations should be managed to benefit their shareholders and no one else. The other says that corporations work best when the interests of shareholders are balanced with those of workers, customers, and communities.

Today’s corporate directors tend to agree with the “shareholders first” argument. But that wasn’t always the case. Fifty years ago, if you had said that the only goal of your corporation was to reward shareholders, people would have called you greedy, a bad citizen.

AdolfBerleThe debate emerged in 1931, when business lawyers were seriously worried about capitalism. Adolf Berle, an original member of Franklin Roosevelt’s “brain trust,” wrote in the Harvard Law Review that corporate powers “are necessarily and at all times exercisable for the ratable benefit of all the shareholders.” To rule otherwise, he said, would defeat the “object and nature” of a corporation. Government’s role was to regulate. Businesses should follow those rules and go no further.

A year later in the same journal, E. Merrick Dodd answered Berle. His article “For Whom Are Corporate Managers Trustees?” describes a more expansive view. Public opinion ultimately makes law, wrote Dodd, and the public is increasingly seeing the corporation as “an economic institution which has a social service as well as a profit-making function.” He cited urgent calls to provide workers with economic security, no small matter in 1932.

Berle (above) and Dodd

MerrickDoddDodd cited a 1929 speech by Owen D. Young, who said, “It makes a great difference in my attitude toward my job as an executive officer of the General Electric Company whether I am a trustee of the institution or an attorney for the investor. If I am a trustee, who are the beneficiaries of the trust? To whom do I owe my obligations?

“My conception of it is this: That there are three groups of people who have an interest in that institution. One is the group of fifty-odd thousand people who have put their capital in the company, namely, its stockholders. Another is a group of well toward one hundred thousand people who are putting their labor and their lives into the business of the company. The third group is of customers and the general public. Customers have a right to demand that a concern so large shall not only do its business honestly and properly, but, further, that it shall meet its public obligations and perform its public duties – in a word, vast as it is, that it should be a good citizen…

I think what is right in business is influenced very largely by the growing sense of trusteeship which I have described. One no longer feels the obligation to take from labor for the benefit of capital, nor to take from the public for the benefit of both, but rather to administer wisely and fairly in the interest of all.”

Dodd and Berle were both elite corporate lawyers, law professors, and loyal Roosevelt men. Berle saw a corporation as an aggregation of stockholders. Dodd saw it as a social institution with many stakeholders. He argued that each group had different rights and responsibilities, and the job of managers was to balance those competing interests. Dodd said that it was proper for corporate managers to confer benefits to society. He also predicted that public opinion would soon demand this.

Two decades after Dodd published his article, Berle conceded. Legal decisions between the 1930s and 1954 had supported Dodd’s view, he wrote, and “the argument has been settled, at least for the time being.”

The idea that corporate directors have the legal right to protect the interests of stakeholders was not challenged for another fifteen years, when Milton Friedman and other economists from University of Chicago came forward with a more radical version of Berle’s 1931 argument. The doctrine of “shareholder primacy” quickly went mainstream in 1981, the year Ronald Reagan kicked off the Decade of Greed.