INTRODUCTION
A Corporate Lawyer’s Journey

Many readers of this book will be familiar with traditional corporations and the law that governs them and may wonder why more than thirty jurisdictions in the United States, including Delaware, the center of U.S. corporate law for the past century, would introduce a new corporate governance model. They may be reading this book to discover the “why” of benefit corporation law as much as the “how.” In light of that, I thought it might be helpful to tell a bit of my own history with the changes to the Delaware statute.

I have spent almost thirty years in private practice, advising clients on Delaware corporate law issues. As a partner in the transaction group of a leading Delaware law firm, I worked on preferred stock financings, initial public offerings, mergers, hostile takeovers, proxy contests, corporate governance, and fiduciary issues. My practice addressed anything in the life cycle of a corporation that involved the relationship between shareholders, directors, officers, and corporations. There was a great deal of complexity, but that complexity, for the most part, arose not from a profusion of laws and regulation but rather from the multiplicity of situations in which some fairly simple rules and principles were to be applied. In a nutshell, these principles are that (1) directors are elected by shareholders, and, once elected, have the full authority to manage the corporation; and (2) that authority is subject to the board’s fiduciary duties of care and loyalty: the directors must prudently and unselfishly manage the corporation to create a financial return for shareholders.

Of course, there are a few other rules (how the director elections work, what charters and bylaws can include, and so on), but that basic structure— shareholder-elected directors manage the corporation but must do so carefully and loyally for the financial benefit of the shareholders—underlies nearly every question that comes up in corporate law disputes. This paradigm is often called the “shareholder primacy” model, and it drove much of the advice I gave.

Thus, in my practice it was critical to help directors understand the primacy of shareholder value, particularly when the company was being sold. While corporations could certainly be good employers and provide valuable resources to the community, that was not their raison d'être; corporate law was about creating value for the shareholders, who owned the corporation and who elected its managers to oversee their investment.

For corporate lawyers, these were simple, non-ideological facts. The corporate form was a brilliant legal technology that allowed entities to raise large sums of money from disaggregated investors, who could diversify their investments across many such entities, allowing many corporations to take risks and create value. The underlying ethos was that investors were willing to risk their capital with these complete strangers because they knew that there was a system in place to protect them: elected directors who were obligated to be loyal to shareholders.

A few years ago, when I was chairing the bar committee (the “council”) that recommends changes to the Delaware General Corporation Law (DGCL), we were approached by B Lab, a nonprofit organization working to create a business infrastructure that encourages corporate conduct that benefits all members of society. B Lab certifies companies as being good corporate citizens (like a Fair Trade mark for companies). B Lab has requirements for certification: first, the company must meet a strict standard of social and environmental performance; second, the company must have a corporate governance model that mandates accountability for all stakeholder interests. For corporations, however, that second aspect violates the shareholder primacy model central to traditional corporate law, and B Lab was asking state legislatures to adopt a statute they had drafted called the Model Benefit Corporation Legislation (MBCL). The MBCL contains a number of provisions that require corporations to follow a broader fiduciary model. When a state adopts the MBCL or similar statutory provisions, corporations created under that state’s general corporation law can opt into the new provisions and become “benefit corporations.”

In Delaware, the council’s immediate reaction to B Lab was far from positive. The corporate bar was very comfortable with the way that corporate law worked, and recognized the tremendous value the corporate form had produced over time. Even corporate lawyers who believed that corporate behavior with respect to social and environmental issues was a concern, and who believed that the profit motive could encourage behavior that damaged the public interest, did not think those issues should be addressed by changing corporate law. Instead, there was consensus that those issues could be better addressed with laws and regulations that protect society and the environment and with contractual provisions negotiated with creditors, customers, and other stakeholders. There was also concern that trying to add those concepts into a corporate governance model would enhance board discretion too broadly and provide management with a tool with which to impinge upon the rights of shareholders.

However, the council was encouraged by the governor and the secretary of state to undertake a review of the concept, particularly in light of Delaware’s national leadership in corporate law, and the growing interest in the benefit corporation movement. With the assistance of B Lab, members of the council met with entrepreneurs and investors who championed the concept. As a result of this process, the council determined that an opt-in statute could offer the option of stakeholder-oriented governance for corporations, without impugning traditional shareholder rights. Members of the council found it particularly persuasive that there were business founders and investors who believed that benefit corporation law was a better fit for some businesses than conventional corporate law. In light of such demand, the council saw little reason to completely reject the benefit corporation model, as long as shareholders were adequately protected.

In 2013, Delaware adopted a statute that reflects that balance and that allows corporations to opt into a structure where the duties of directors extend beyond the consideration of shareholder interests to include the interests of all stakeholders. As I will discuss in chapter 6, however, Delaware’s statute has some significant differences from the MBCL, and also uses slightly different terminology, so that a corporation using the Delaware version is called a public benefit corporation (PBC). I will try to use the term “PBC” when referring specifically to Delaware entities and “benefit corporations” when referring to the general concept. As of this writing, a total of thirty-five U.S. jurisdictions and Italy provide some form of benefit corporation legislation.

I wanted to write this book because I suspect that many corporate lawyers, investors, and policy makers are still where the council was when first approached by B Lab—suspicious that this is not a very good idea, and maybe thinking, If it ain’t broke…. I want to share some of my thought process in moving from being first a strong skeptic, then one of the drafters of the PBC statute, and, finally, head of legal policy at B Lab.

First, I reexamined corporate theory as we studied B Lab’s proposal. One idea that struck me came from Lynn Stout, a law professor at Cornell, who wrote an important book called The Shareholder Value Myth.¹ In that work, she notes that if a human being were to operate under the rule of always maximizing value for herself, no matter the cost to others, we would consider such a person a psychopath. As discussed in chapter 4, most corporations do not actually operate in a completely antisocial manner, but the question is whether the principle of profit value maximization makes any sense in a world where corporate activity dominates the economy. Do we really want directors to be guided by fiduciary duties that can justify child labor in their supply chain, or shifting costs to future generations, as long as they determine that such actions are legal and will increase shareholder value? One writer painted a particularly grim picture: “Somehow, at the beginning of the twenty-first century, the corporation had evolved to the point of being a sociopathic institution, at odds with the deep-rooted prosocial tendencies in human psychology and behavior.”² Admittedly, the terms “psychopath” and “sociopathic” seem strong and certainly do not accurately describe the behavior of most corporations. The point, however, is that such behavior is the logical extension of mainstream corporate governance rules.

Another work I found significant was the book Firm Commitment, written by Colin Mayer, a finance professor at Oxford.³ Mayer convincingly shows that the existence of the value maximization principle destroys trust, which paradoxically destroys value for the “value-maximizing” entity. He argues that third parties, including employees, customers, and communities, know that any commitment the corporation makes may be contingent on either legal compulsion (such as a contract right) or the commitment to continuing to create value for shareholders. Thus, rather than trusting the corporation as a partner, these third parties must always be on guard against the corporation’s tendency to maximize shareholder value at their expense. This lack of trust creates antagonism and overly legalistic relationships that deter the creation of durable longterm value with trusted partners.

A third element that was important in my conversion was the position of the “universal owner.” Large institutional owners, like pension funds and mutual funds, end up owning most of the market in order to be sufficiently diversified. Small asset owners, like an individual 401(k), would be wise to have the same diversification. The returns of such universal owners suffer from the commons-grazing effects of a corporate law regime that supports corporate managers who load negative externalities onto the system in order to “create value” for their individual shareholders. Hermes Investment Management, a well-known UK pension adviser, articulates this idea in its ownership principles: “Most investors are widely diversified; therefore it makes little sense for them to support activity by one company which is damaging to overall economic activity…. It makes little sense for pension funds to support commercial activity which creates an equal or greater cost to society by robbing Peter to pay Paul.”

Yet traditional corporate law requires Paul Corp. to rob Peter Inc., even though they have the same shareholders. The fact is that institutional investors have emerged as an important force in corporate governance over the past two decades, and they are increasingly using their voice to act as stewards on behalf of their beneficiaries. This stewardship obligation will require institutions to manage not just companies but also the systems in which their portfolios are embedded, in order to prevent the Peter/Paul problem.

All of this led me to believe that there is good reason to provide an option where corporations can be managed for the good of all stakeholders rather than simply to provide a financial return to shareholders. Hopefully, by making room for such corporations, benefit corporation governance can create better opportunities for entrepreneurs and investors interested in corporations that operate in a responsible and sustainable manner, and place market pressure on other businesses to do the same.

I remain convinced that the for-profit corporation is the best vehicle for raising and allocating capital (other than for certain public goods that remain the responsibility of government and nongovernmental organizations). However, given the challenges that our planet and society face, I also believe we must find a way for that vehicle to recognize the interdependence of our complex globe, and the corresponding responsibility that corporations have. The benefit corporation provides a path.