CHAPTER FOUR

The Responsible Investing Movement

Chapter 1 set the stage by discussing the role of corporations and the investment chain in the global economy. Chapters 2 and 3 took a closer look at how conventional corporations are operated on the basis of shareholder primacy. This chapter will examine the effect of that operation on the investment channel. From a public policy perspective, this may be the most important part of the book, as it is intended to explain why shareholder primacy fails investors, even though it originated as a doctrine meant to protect their interests.

We will first examine the contemporary movement among investors to think more holistically and “responsibly” and will examine what the motives behind that movement might be. We then turn to the ways that investors can use benefit corporation governance as a tool to act responsibly and manage the systems upon which their portfolios depend.

Responsible Investors

As we will discuss in chapters 5 and 6, one simple idea undergirds benefit corporation governance: corporations should be managed for the benefit of all stakeholders affected by their operation, and not just for shareholders. But because shareholders get to decide where their capital is invested, one threshold question must be whether shareholders will ever choose to invest in benefit corporations. Shareholders might believe that they will always be better off investing in conventional corporations that follow shareholder primacy. If so, it may be unrealistic to suppose that a significant amount of capital will ever be invested in corporations that adopt a stakeholder model.

In fact, however, there is a current movement among many investors to seek investments that have more positive impact on all stakeholders. There are a host of phrases used to describe this phenomenon: socially responsible investing (SRI); environmental, social, and governance investing; responsible investing; impact investing; and others. This investing movement is closely tied to a call for expanded corporate disclosure that recognizes the importance of stakeholder impact and corporate sustainability. This is sometimes called integrated reporting or sustainability reporting. For ease of reference, I will use the term “responsible investing” as a term that encompasses all of these related ideas, using more specific terms only as necessary.

The responsible investing movement helps to put the benefit corporation concept into context. Many investors have come to believe that a greater focus on other stakeholders is important. These responsible investors may believe that such a focus is a better way to create shareholder value, or, in contrast, they may simply believe that other values should share priority with shareholder value. Teasing out some of the different threads motivating responsible investors may help to predict how benefit corporations are likely to fare.

Significant amounts of capital are invested in responsible investing of some form.¹ For example, some investors refuse to invest in companies that engage in certain industries, such as alcohol, tobacco, weapons, or fossil fuels. Others look for investments that will create specific positive effects, such as providing goods, services, or employment to underserved populations or creating technologies that address climate change or resource scarcity concerns.

Others seek to invest responsibly not just by choosing the right companies but also by providing stewardship to the companies they own. This latter type of responsible investing might mean voting for shareholder resolutions that encourage companies to measure their environmental footprint or voting to increase the diversity of a corporation’s board of directors. Globally, institutions are signing on to the Principles for Responsible Investment, a U.N.-sponsored project that has signed up asset owners and managers with $62 trillion in assets under management, under which signatories pledge to incorporate environmental, social, and governance principles into their investing.²

Concessionary Versus Non-Concessionary Responsible Investors

These trends all raise the same issue: Why would shareholders, who presumably seek to maximize their returns, focus on social or environmental issues, either from a substantive perspective or from a reporting perspective? There is no single answer to this question, as each investor has its own perspective. It is useful, however, to initially focus on one significant distinction: concessionary versus non-concessionary investors. The former are the easiest to explain: they are willing to accept a lower financial return that leads to positive impacts on other stakeholders. There are at least two motivations for accepting such a trade-off.

The first, which is purely self-interested, involves a recognition that some investments that promise a favorable return nevertheless involve companies that are conceding some return. For example, an investor might buy stock in a company that has a unique technology, even though the founder and controlling shareholder has made it clear that shareholder value will not be maximized if such maximization imposes certain environmental or societal costs. Even with such a built-in “cost” to shareholder value, the investment may present a favorable risk/reward balance. In contrast, some concessionary investments might reflect a willingness to accept below-market returns in order to create positive social and environmental impacts. This second form of concessionary investment is closer to what might be viewed as “altruistic.”

In contrast, non-concessionary investors may believe that, over the long term, they will enjoy better returns as shareholders by investing in companies that are socially and environmentally conscious and that treat the community and their employees as well as shareholders. The motivations for non-concessionary investors to engage in responsible investing can be broken down into three categories, and, of course, these categories reflect the arguments that entrepreneurs and managers can make in favor of running their businesses with stakeholder values. The motivations, together with the motivations for concessionary investors, exist along a spectrum and tend to overlap, rather than existing discretely. Table 3 illustrates the spectrum of motivations.

TABLE 3: INVESTOR STYLES AND CORPORATE GOVERNANCE

Doing Well by Doing Good: No Concession

The first argument of non-concessionary responsible companies and investors is simply that a business can “do well by doing good.” For example, a company might use a more expensive but well-audited supply chain and argue that consumers are willing to pay a premium to buy goods that are ethically sourced. The prospectus of Laureate Education, a benefit corporation incorporated in Delaware, includes a good example of this argument as it applies to becoming a benefit corporation. In that document (discussed in more detail later), Laureate explains how its status as a corporation that has obligations to students and communities will cause it to be viewed more positively by regulators than would an entity driven by shareholder primacy.

There are several strains to this idea. The first is that stakeholders, including customers, workers, and communities, will want to have a relationship with a company that is responsible to society and the environment—millions of consumers express this sentiment both in surveys and through practice, as evidenced by the rise of certifications such as “fair trade,” and “organic.”³ In addition, there is an important element of risk mitigation involved. On this front, the BP oil spill in the Gulf of Mexico and the Bhopal tragedy and its monetary and reputational cost to Union Carbide are often cited as examples. The argument is straightforward: had these companies invested in safe practices that protected workers, adjacent communities, and other stakeholders, their shareholders would have been financially better off in the long run.⁴ There is also evidence that companies with social and environmental practices are likely to be better managed, so that such practices may be an indicator of good management that will create long-term value.⁵

This view emphasizes the creation of value over the long term. Thus, cost cutting on safety or environmental matters may boost the financial bottom line immediately, which may in turn boost share price in the short term (because companies are often valued on the basis of a multiple of profits or cash flow). But investing in sustainability measures, while reducing short-term profits, can pay off later, years into the future. It is worth noting that this argument suggests that markets are mispricing stocks, since owning a share entitles a shareholder to all future cash flows, not just short-term flows. In other words, this argument suggests that the markets are not “efficient.”⁶

In other words, considering the interests of all stakeholders is just good business. Numerous studies purport to support this claim. One important nonprofit group, the Sustainability Accounting Standards Board, has developed an entire set of reporting metrics, on an industry-by-industry basis, that requires disclosure on environmental and social issues that are material to financial performance in each industry.⁷ This reporting system is designed to provide environmental and social information to non-concessionary responsible investors. (In contrast, the International Integrated Reporting Council establishes standards that encourage companies to report on how their operations affect not only financial capital but also social, human, natural, and other capitals, without regard to their effect on financial return.)⁸

In this view, the value to shareholders of lowering their priority may simply be a paradoxical artifact of the real world in operation:

Although traditional corporations provide broad leeway to pursue nonshareholder interests as a competitive advantage when profit is explicitly sought after, traditional corporations preclude directors from “doing good for good’s sake”—which may in fact, somewhat paradoxically, prove to create an economic, profit-maximizing competitive advantage. One of the most interesting aspects of the economic implications of the statute is whether doing good without regard to shareholder interests will actually result in long-run profitability and more sustainable shareholder gains.⁹

The Paradox of the Value of Commitment: The Concession that Isn’t

There is a second, related argument that a requirement to act in the interests of stakeholders will benefit shareholders as well. This idea focuses specifically on the value to a corporation that is derived from the commitment made to those other stakeholders. This value means that companies that commit to making concessions need not be concessionary investments. If corporations make strong commitments to important constituencies, including workers and communities, and those commitments induce firm-specific commitments in return, the company may create value that would not be obtainable if the company were committed only to shareholders. In short, commitment to stakeholders can create value for shareholders.¹⁰ This idea is supported by social science research demonstrating that people tend to act generously when others are perceived to do so, but may retaliate if others act unfairly, even if such retaliation compromises their own interests.¹¹

One UK fund manager has published a paper suggesting that the trust created by a company both certifying its social and environmental impacts and embedding purpose into its organizational documents builds resilience and value:

One significant factor here is the degree of trust these businesses can build with their stakeholders—a trust that should, if anything, be bolstered by their willingness to have their societal mission validated by a third party and embedded in their governance articles. Certifying in this way makes it very clear to potential customers (and employees) that the company’s commitment to social and environmental goals is a fundamental part of its strategy—not just a specious marketing exercise.¹²

Indeed, the chairman of Laureate Education, the first company to go public as a benefit corporation, made the point in its initial public offering prospectus that being a benefit corporation was a way for it to explain its commitments:

I believe that balancing the needs of our constituents has been instrumental to our success and longevity, allowing us to grow even in challenging economic times. For a long time, we didn’t have an easy way to explain the idea of a for-profit company with such a deep commitment to benefitting society. So we took notice when in 2010 the first state in the U.S. passed legislation creating the concept of a Public Benefit Corporation, a new type of for-profit corporation with an expressed commitment to creating a material positive impact on society. We watched this concept carefully as it swept the nation, with 31 states and the District of Columbia now having passed legislation to allow for this new class of corporation, which commits itself to high standards of corporate purpose, accountability and transparency.¹³

The advantage of being able to build such reciprocal relationships has been described by Lynn Stout in her book The Shareholder Value Myth, and by Colin Mayer, a leading finance professor at Oxford’s Said Business School, in his book Firm Commitment. This theory is particularly important with respect to the consideration of benefit corporation governance, because without a shift from shareholder primacy, all stakeholder commitments are legally contingent on a continuing positive relationship to shareholder value, and this weakens the strength of the commitments.

This legally imposed contingency creates antagonism that prevents corporations from creating value through mutual commitment. Mayer uses the following example to illustrate this conundrum:

If there is an active labour market and it is easy for them to obtain alternative employment at any time, then it is the firm not the employees which is exposed. The employees have made no commitment, whereas it may be costly for the firm to train new workers every time that an existing one resigns. Now it is the potential employees who would like to be able to demonstrate commitment to gain employment but are incapable of doing so on their own. The firm offers a means of achieving this. It can do it financially by delaying payment of their wages, thereby making it costly for them to depart prematurely before the firm has recovered its investments in training them. Alternatively, it can encourage commitment by making employment in the firm a valued attribute in its own regard, reflecting strong employee affinity with the goals and values of the organization. Critical to both forms of control of firms over their employees is their corresponding trust in the firm—trust that the firm will not expropriate their deferred payments by, for example, engaging in reckless investments and trust that it really will uphold the values to which it aspires. That is why the balancing of commitment and control in the firm is so vital to it successful operation.¹⁴

Stout describes the problem as a conflict between current (ex ante) shareholders and their future (ex post) selves. The ex ante shareholders want the up-front value of committing, while the ex post shareholders want to get even more value by defecting:

There is an inevitable conflict between shareholders’ ex ante interest in “tying their own hands” to encourage their own and other stakeholders’ firm-specific contributions, and their ex post interest in opportunistically trying to unbind themselves to unlock capital and exploit others’ specific contributions. This conflict—a conflict between shareholders’ ex ante selves and their ex post selves, if you will—puts public corporations governed by the rules of stockholder primacy at a disadvantage when it comes to projects that require firm-specific investments. Rejecting shareholder value thinking, and instead inviting boards to consider the needs of employees, customers, and communities, allows boards to usefully mediate not only between the interests of shareholders and stakeholders, but between the interests of ex ante and ex post shareholders as well.¹⁵

As we noted in the discussion of the business judgment rule in chapter 3, some commentators believe that current law already allows directors to make such commitments, because the business judgment rule is so broad that it actually does allow director decisions that favor stakeholders over shareholders. Indeed, Professor Stout, in her discussion of the interests of ex ante and ex post shareholders, makes that very claim. As discussed in chapter 3, the claim that the business judgment rule allows such decisions is dubious, especially when a company is sold, and what good is a commitment to employees that evaporates upon the sale of the company? More importantly, however, even if directors could take the interests of stakeholders into account at the ex ante moment, there is certainly no argument that current law would compel them to do so. As discussed in detail in the chapters discussing the new benefit corporation statutes, such consideration is compulsory for benefit corporations. This compulsory nature of the statutes is the element that makes the commitments authentic and separates benefit corporation law from traditional corporate law in terms of potential to create value through mutual commitments, even if traditional law were interpreted to permit the consideration of stakeholder interests.

Universal Owners: Making Concessions to Preserve the Commons

Each of the two foregoing arguments might be characterized as corporate “enlightened self-interest.” That is, by treating stakeholders well, and by committing to treat them well, corporations, if they are patient, can reward their shareholders with more value over the long term. Thus, under the prior two theories, there is no overall “concession” involved in treating stakeholders well. However, these ideas go only so far; despite the presence of opportunities to create value with stakeholders, there will continue to be opportunities for individual corporations to create even more value for shareholders with less cooperative strategies, which often create “negative externalities,” or costs borne by stakeholders other than shareholders.¹⁶ In other words, there will always be opportunities to “do well by doing bad.”

Is there a non-concessionary argument that would lead investors to want the corporations that they own to forgo such strategies, or to pursue strategies that create positive externalities, even if they do not maximize the financial return provided by the company’s directly to its shareholders? There is, in fact, such an argument, and it is the third reason that investors should favor benefit corporation governance.¹⁷

This strategy is concessionary, but only on the level of individual corporations. It is a strategy that springs from the perspective of the investor that is diversified, with broad shareholdings across the entire market, and that has a long time horizon. Such investors are often called “universal owners”; pension funds, with broadly diversified portfolios and very long-term obligations, are classic examples of this type of investor.¹⁸ Indeed, this is the perspective of most beneficiaries of the institutional asset owners that dominate the market.¹⁹ These investors earn most of their return not by successfully picking stocks that “beat the market” but rather by being invested in a healthy market; generally, at least 80 percent of an investor’s return comes from the behavior of the market, often called “beta” in this context.²⁰ In fact, the significance of beta is not restricted to portfolios; most of the return at the individual company level is based on market performance.²¹ Accordingly, investors are actually hurt when a company in which they are invested tries to improve the return to its shareholders by externalizing costs in a manner that hurts the market. One writer captured this idea as follows:

Because the world’s asset owners have a stake in the prosperity of the economy as a whole, there is a strong argument that part of the role of an asset owner should be to push for policies and frameworks that reduce negative externalities. In practical terms, this would point to asset owners having a rationale to push investee companies to set minimum standards and certifications and to support sensible public policy (pollution control, emissions trading schemes, etc.) that would result in the most efficient allocation of environmental and social resources.²²

David Wood summed up the idea of universal ownership, crediting its creator and elaborators:

Among the more prominent theories used in support of responsible investment is that of Universal Ownership, proposed by Robert Monks and elaborated by James Hawley and Andrew Williams…. The theory suggests that investors at scale (and the investment market in the aggregate) are so large that they are invested not just in a set of companies, but also in the interrelated network of social systems that make up society. Their portfolio performance depends on the economic growth and social value that their investments, and therefore society, create in aggregate. Costs externalized by one set of investments onto society are likely to weigh down performance in other parts of the portfolio. By extension, “universal owners” will only benefit when investments have positive social value.²³

For example, universal owners were hurt by the “value-maximizing” activities of those financial companies that created the market crash in 2008. Moreover, these investors have nonfinancial interests as well: they would prefer to live in a world that is peaceful, prosperous, and stable, and such a world is much more likely to exist if corporations are not externalizing costs and risks in order to increase the financial return of a single company.²⁴ This latter concept of investors’ multiple interests recognizes that what we often label “capitalism” is actually “monocapitalism,” focused solely on financial capital. Universal ownership makes room for “multicapitalism,” so that success is measured not only against financial capital but also against human, natural, and other capitals as well.²⁵

Continued healthy markets will depend on responsible investors recognizing their own universal ownership and working to improve the beta of their portfolios (not to mention the health of their society and planet), rather than only viewing responsible investment as a means by which to increase individual company performance: “In our view, while alpha can sometimes be found in ESG [environmental, social, and governance] arenas, and this may serve a legitimation function that ESG/RI [responsible investment] factors matter and are material, it also has the potential to undermine what is critical: the change of the whole market (beta) to minimize and mitigate negative externalities. Such externalities, if left alone, undermine the ability to create sustainable long-term development.”²⁶

Steve Lydenberg further suggests that modern portfolio theory, the framework for professional investors that emerged in the 1970s, operates on the assumption that systemic risk is exogenous to portfolio management, so that investors focus (and reward portfolio managers) only on their performance as measured against the market, and that investors and managers ignore their effect on the market. This may lead investors to focus on maximizing the value of individual companies or portfolios as compared to the market, while ignoring, and perhaps even damaging, the systems within which those companies and portfolios are embedded: “But while the assumption that portfolio decision-making could be treated as independent and disconnected from the markets that these decisions take place within—and, by implication, from the world at large—may have been appropriate during early stages of MPT [modern portfolio theory], it now appears increasingly reasonable to raise questions about the system-wide impacts of these decisions.”²⁷

One clear implication of the idea that investors need to monitor systems is that government is failing to do so with law and regulation. There are many reasons this may be the case, including the use by corporations of strategies to limit the effect of laws and regulations, such as bare compliance, regulatory arbitrage, and lobbying efforts to limit the effect of such efforts.²⁸ For example, the pharmaceutical industry uses the capital of its shareholders to employ lobbyists in order to maintain high profits, which may well do long-term damage to our social system by contributing to inequality, as well as imposing short-term suffering on those in need of medicine.²⁹ Indeed, one commentator has noted that the ability of corporations to lobby the government undermines the claim that the presence of government controls can justify shareholder primacy: “The claim that shareholders should be prioritized because the availability of external laws mitigates non-shareholder conflicts with shareholders only makes sense if the firm itself cannot eliminate or modify those laws.”³⁰

In addition to corporate strategies to avoid regulation, there is the simple problem that law and regulation often come too late to address the external costs of corporate behavior. For example, innovation in the financial industry can create systemic risks that are unregulated due to their novelty. If corporations had a duty to consider externalities when innovating, this regulatory lag would be addressed.³¹ Table 4 contrasts the corporate governance implications of universal ownership principles with the implications under Modern Portfolio Theory.

Shareholder Primacy and Responsible Investing

Many in the responsible investing movement, as well as many entrepreneurs, are concerned that shareholder primacy is an obstacle to the goal of responsible corporate conduct.³² Of course, shareholder primacy runs directly counter to pure concessionary responsible investing, where investors are simply willing to take a decreased financial return in exchange for owning shares in a corporation that provides a greater social return. But even for investors who believe that the corporations that they invest in can act responsibly toward all stakeholders without conceding financial return (for one or more of the three reasons outlined above), shareholder primacy may create an obstacle. This concern becomes more acute as the motive for responsible conduct moves from the idea of doing well by doing good to making firm commitments to stakeholders and, finally, to principles of universal ownership. Table 3 (on page 46) illustrates this relationship.

TABLE 4: SHAREHOLDER PRIMACY V. STAKEHOLDER GOVERNANCE

Clearly, shareholder primacy at the level of a single corporation is incompatible with principles of universal ownership, which requires individual companies to avoid taking profitable actions that impose costs on other companies and on the system generally. Similarly, it is difficult for a corporation to take advantage of the value of making authentic commitments to stakeholders if the law (i.e., shareholder primacy) appears to require reneging on those commitments if opportune. Even with respect to responsible strategies that are simply good long-term investments for shareholders, the reputational stigma of shareholder primacy may interfere with the complete integration of such strategies.

Shareholder primacy is a particularly difficult obstacle to overcome for publicly held entities, which are subject to significant pressure to deliver increased share value over the short term.³³ These organizations control roughly $70 trillion of equity capital, so that to the extent concepts of shareholder primacy dominate public markets, addressing this obstacle is of critical importance.³⁴ Operating as a universal owner requires investors to insist that companies in their portfolios forgo shareholder value maximization if such maximization creates significant negative externalities. However, without a governance model that mandates stakeholder governance in place of shareholder primacy, universal ownership principles will run counter to the rules governing the individual companies that make up an owner’s portfolio. For example, a short-term, concentrated investor can claim that it is a breach of fiduciary duty for a conventional corporation to reduce carbon output if the indirect costs to the company of the emissions do not outweigh the direct benefits of maintaining cost savings by continuing to emit carbon at a globally unsustainable rate. Accordingly, introducing benefit corporations into the public markets could have a tremendous impact by allowing long-term, diversified owners to ensure that the systems in which they invest are robust and stable.

A number of commentators disagree with this conclusion. Their arguments take a number of forms, and it is worth addressing each of them here, because it is easier to understand the structure of benefit corporation legislation discussed in subsequent chapters if the contours of the arguments around its necessity are well understood.

Argument 1: There is no such thing as shareholder primacy in the law.³⁵ This argument is surprisingly resilient in light of the fact that the Delaware Supreme Court has declared that shareholder primacy is the law, that the chief justice of that court has adopted this view in his academic writings, and that thirty-three states felt it necessary to adopt constituency statutes that reject primacy, whereas Delaware and other important jurisdictions have not.³⁶ Perhaps the best form of this argument is that the law is unclear, even in jurisdictions like Delaware that are purportedly primacy jurisdictions. But directors are not generally interested in taking legal chances.³⁷ A longtime corporate law practitioner makes this clear in a commentary:

Directors who reject this notion [shareholder primacy], who take actions that are for the primary benefit of so-called “stakeholders” in the corporation—be they employees, customers, the communities served by the corporation or others—have their ideas rejected in the boardroom, may be the subject of scorn and derision in the business press and with their peers, can be voted out of their positions by shareholders and even found to have breached their fiduciary duty to the company and its shareholders.³⁸

Argument 2: There are many nonprimacy jurisdictions. There are many jurisdictions where primacy is clearly not the law, including the thirty-three states that have adopted constituency statutes, and the many non-U.S. jurisdictions where consideration of non-shareholder interests, as a primary concern, is permitted (as we will discuss further in chapter 9). Couldn’t companies just move to jurisdictions where the law clearly permitted consideration of stakeholder interests?

This argument cannot carry the day, however; reincorporating in another jurisdiction involves many risks and costs. For example, other available jurisdictions may be viewed by investors as less favorable.³⁹ In addition, there may be questions as to whether contracts would transfer to the new entity.⁴⁰ Even if these obstacles could be overcome, the transfer to a constituency jurisdiction will not mandate consideration of non-shareholder interests because in all U.S. jurisdictions without shareholder primacy, stakeholder consideration is permissive rather than mandatory, and there are no remedies or accountability measures protecting stakeholder interests.

This is not to say that constituency statutes do not make it easier for corporations to behave more responsibly with respect to stakeholders in jurisdictions where constituency statutes have replaced shareholder primacy. However, without an actual obligation to stakeholders, it will be much more difficult for companies to resist the types of rent-seeking behavior that shareholder primacy thinking at the investor level engenders; because current financial markets favor a primacy mentality, directors and other managers are very likely to continue to strongly favor shareholder interests, as will the many intermediaries in the investing chain, despite the applicability of constituency statutes.⁴¹

Argument 3: The business judgment rule permits directors to favor stakeholders over shareholders. The business judgment rule provides that courts do not generally interfere with business decisions; as a result, directors have extremely broad discretion in managing a corporation. So it is true that corporations can act responsibly and claim that such actions will benefit the shareholders in the long run.⁴² But taking comfort in the business judgment rule and making this claim does not address the core concern: the ability to take an action to protect stakeholders, even if that action reduces the company’s financial return to shareholders. It should not need to be said that we must not manage our capital markets on the basis of dissembling, nor could directors really be comfortable making decisions on the basis of an agreed-upon fiction.⁴³ Moreover, the business judgment rule does not apply in change in control transactions, which involve some of the most critical decisions in the lifetime of a corporation.⁴⁴ But more critically, as noted in response to argument 2, while the aggressive use of the business judgment rule might allow corporations to act responsibly in many situations, it would not require it. Without the accountability created by such a requirement, shareholder primacy thinking is likely to dominate the boardroom, particularly at public companies, in light of the short-term, share price focus of the current markets. For all these reasons, the business judgment rule simply does not provide the benefits of stakeholder governance.

Argument 4: Stakeholder governance cannot work, because there are too many interests for corporations to reconcile; this will allow managers to simply act in their own interest, because there will be no clear standards.⁴⁵ The fact is that managers must constantly think about all of their stakeholders in order to efficiently manage a business; benefit corporation governance merely allows them to give those interests a priority not available in shareholder primacy settings. Moreover, directors of benefit corporations are not able to ignore shareholder interests because shareholders retain all their corporate governance rights—including the right to elect the board that controls the management of the corporation.⁴⁶

The concept of too many interests to balance ignores the fact that, for the most part, that is how life works: we must always balance a number of competing interests.⁴⁷ This is true for all businesses, not just those that are governed by stakeholder values. Eric Beinhocker explains that to be successful, a business must attract capital, manage employees, create relationships that are profitable for suppliers, provide goods and services that satisfy customers, meet legal obligations, pay taxes, and generally ensure that society continues its license to operate.⁴⁸ In other words, all businesses must manage many interests; under shareholder primacy, the only difference between shareholder interests and other stakeholder interests is that the former is an objective whereas the latter are constraints. In a benefit corporation, that objective is transformed into the additional constraint of providing shareholders with a competitive return; despite this change, however, there are not any “new” interests to manage in a benefit corporation.

Finally, it also is worth noting that, even for corporations operating under shareholder primacy, there is no one-size-fits-all answer as to what maximization is; indeed, given the very different perspectives of equity holders, that is far from the case.⁴⁹

Argument 5: Creating corporations that are specifically designated as stakeholder friendly will give greater license to conventional corporations to act irresponsibly and create negative impacts on society and the environment. Traditional corporations already have such license, and many take advantage of it, underpaying workers, polluting the environment, and ignoring the negative effects of their operations.⁵⁰ As long as such activities are not illegal, the only path to improving corporate behavior is market pressure. The creation of benefit corporations lies on a critical path to increase that pressure by highlighting the legal distinction between companies that are legally required to protect their stakeholders and those for whom decent treatment of such stakeholders is always contingent on legal compulsion or shareholder value.⁵¹ Denying corporations the opportunity to legally prioritize societal interests will only serve to slow any such market pressure.

But it is not just directors and investors who can drive this change. Once the flag is planted, other markets can serve to drive capital to corporations that are governed for the benefit of all stakeholders:

When the dinosaurs of old-world financial primacy find that they can no longer attract the talent they require, they may discover their epoch is over. The market will indeed carry out capital allocation, but it will not be the financial market. It will be the talent market. Talented individuals will seek out organizations whose own values are transparent and who favor balance and sustainability over “profit-maximization at all costs.”⁵³

* * *

Part 1 has described shareholder primacy and the reasons why corporations and investors might want to shift to more stakeholder-oriented governance. Part 2 examines how benefit corporation laws provide a tool for doing so.