Patagonia Tests New Sustainable Legal Status
bloomberg.com
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This probably will still help, though, because many directors of normal corporations believe they have stronger profit-maximizing duties than courts have actually ruled that they do, and they're in any case worried about even unsuccessful shareholder lawsuits.
Treynor, one of the great finance minds of our time argues in one of his writings that management at a large firm can be more responsible for balancing the interests of all stakeholders rather than simply maximizing profits.
I believe that idea should be discussed more rather than simply accepting the idea that profit should always come first.
This is prevailing practice for publicly traded companies -- I feel like these Benefit and Flexible Purpose Corps are more about allowing companies to be publicly traded without having to play this game through setting social expectations than through real structural differences. (To be taken with a grain of salt as I'm not a lawyer or a financial professional, just someone that's been an individual investor.)
As someone who works at what was, until Patagonia, probably the largest B-Corp around, I'll comment on this.
Yes the idea is that with these legal designations and social/environmental charters written in to the company by-laws it will allow for, someday, a B-Corp to go public and not have to change the way it operates. The oft-cited example of "what went wrong and why we need this" is Ben & Jerry's.
When Ben & Jerry's was bought by Unilever in 2000 the new ownership shut down a handful of their social programs and stopped sourcing products from local farmers, among other changes. Other companies were concerned about that happening to them in the future, and thus B-Labs.
1. These concepts generally come with weaker governance for company managers, allowing them greater latitude to act inefficiently in general. By contrast with maximizing shareholder value, managers can undertake almost any program under some pretense or justification, ranging from excessive empire building, to justifying sweetheart deals with friends at greater cost citing "environmental" concerns. This doesn't matter for Patagonia because it's family-owned, but this would be a huge problem with making this a widespread practice in the Fortune 500.
2. Widespread use represents a de facto tax on businesses through less efficient operations, but without the control of the political process to direct it. Even if you aren't in favor of governmental interference, it is generally better for organizations that are going to have charitable aims to be directly accountable, whether via the democratic process or the donation process.
3. Returns to shareholders, in light of the returns that go to other stakeholders, are reduced, thus potentially reducing the amount of financing available from capital providers.
So it doesn't really matter if Patagonia does this, but doing it on an economy-wide scale would potentially be a big mistake.
Compare that to the American experience, in which fraud and abuse has been widespread: Enron, Worldcom, the S&L Bailouts, CountryWide, Wachovia, etc.
As programmers, we know that bad code can be written in any language, and clearly fraud can be committed under any legal system. Still, we also know that each language tends to encourage certain habits, while discouraging certain other habits. Obviously one can find examples of fraud in Germany and efficient operations in the USA. However, it is striking how few scandals ripple through the German business community, and how very competitive German manufacturing firms are.
Given the comparison of Germany to the USA, I'd be cautious about dismissing systems of stakeholder democracy.
German companies have much more concentrated share ownership, which gives them an advantage for corporate governance that perhaps makes scandals less likely. Also, they are a product of the German culture which is very different from American culture.
Aren't these "benefit corporations" also ultimately accountable to shareholders who invested money in them? Although social benefits are more difficult to measure than profits and dividends, that doesn't change the fact that whoever pays the bills will have an incentive to ensure that the corporation does what they think it should do. In fact, shareholders might be in a better position to hold managers accountable than donors to a non-profit are.
But to whom? You can't assume shareholders agree on what this means, so you're introducing a layer of politics into the board elections. I'm not sure that's a good thing.
You could say the same about buisnes management- shareholders will disagree on strategy. But the current solution to that is the "business judgement rule" that says boards have wide-ranging protections so long as they're acting in good faith. You'd have to assume the same sort of thing would be adopted for charitable decisions - the "charity judgement rule", if you will.
And now you have a board with wide freedoms on business decisions and on non-business decisions. In other words, you have a board who can do pretty much anything they want outside of outright fraud. That is not exactly inspiring corporate governance for would-be investors or would-be do-gooders.
That was a comparative statement. You're right, it may be difficult for shareholders to sue the management even if they make inefficient or even self-serving decisions. But lawsuits are not the only means by which people can hold other people accountable. Shareholders have the right to fire the management, in addition to the right to withhold further investment. Donors to charities only have the latter right.
So I'm only disagreeing with your claim #2 that charities are more accountable than these new types of corporations. Too many charities are run in an unaccountable way because the directors are accountable to nobody but themselves.
> But to whom? ... [snip] ... you're introducing a layer of politics into the board elections.
Politics happens everywhere, including for-profit corporations and non-profit charities. There's no escaping it.
Case-in-point: REI. Though they're a co-operative, they don't behave at all like one. They don't have a straightforward product pricing policy (co-operatives shouldn't have "sales"). They don't hold free and fair elections to their board of directors (candidates for election must be approved by those currently in charge). They altogether fail to serve as an example of how a co-operative should behave (this is obvious when you compare them, and their prices, to their Canadian counterpart MEC).
Wow, I never new that. Granted I know very little of the legal implications of incorporating, but still. I wasn't expecting it to be so plain. Corporations have a legal obligation to not care about anything but money. Explains a lot.
Take a "sweat shop", for example. There is one view that they are exploitative and that low wages overseas should not be tolerated. There is another view that those wages generate income in areas of the world where it is greatly needed. How is a board of directors to decide which view to take? Which shareholders should they listen to?
So boards have been defined as the people who watch the business for the good of the business. And they're given great leeway in doing so. (You can't sue them for making bad business decions, for example - only fraudulent or grossly negligent ones).
Bundling charity with business is an interesting idea, but I'm not sure it's better than separating them, or if there isn't an inherent contradiction in the two when you apply it to large public companies.
After all, profits can always be used to better humanity without the conflicts I've described after they've been given to the shareholders.
I'm a little skeptical that it will change much, but we'll see. It will be interesting to watch.
Likewise, on both counts.
Though I think it's important to remember, even if this enterprise fails the state of California is a big enough experimental setting to provide all sorts of interesting (and possibly even useful) new data.
It is, in fact true, that the board of a company incorporated as a for-profit has a fiduciary duty to shareholders which does, yes, translate into trying to make money for them. And there have been (rare) cases that this has come up an issue. It factored into a lawsuit Ebay brought against Craigslist at one point. If Apple's Board of Directors suddenly decides that they're going to donate all of Apple's profits to the Save the Whales Foundation, they would doubtless be sued. (I'm assuming for purposes of argument the BoD would even have the legal authority to do so.)
That said, boards are not required to maximize short-term profit. They can make modest philanthropic contributions. They can do things for their local communities. They can pay their employees well and give them lots of time off. And so forth.
The argument, in the context of fiduciary responsibilities, would be that all these things can contribute to the long-term value of the firm.
If, however, you honestly don't care much about making money and want to give most of your profits back to the local community of whatever, you really shouldn't be incorporating as a for profit.
http://techcrunch.com/2011/08/24/couchsurfing-raises-7-6-m-w...
Will be interesting to see how they monetize
There are still a lot of questions and issues around this type of corporation as has been pointed out. There certainly is a void that will ultimately get filled through case law at some point in the future. Having said that, I think it's a step in the right direction for companies that want to add some level of protection around their "Triple Bottom Line" philosophy. Ben and Jerry said that has this sort of corporation existed they would not have sold Ben and Jerry's. But, it does not mean that it's a fit for all companies. The start-up that I am working on now is not a benefit corporation and we probably will not become one. Not because we do not want to take into account the aspects of a triple bottom line, but rather because at this point it's not something at the core of what we are doing.
Overall, I think it's at least a good option for those that would like to focus on a triple bottom line. How exactly the law is interpreted will be interesting to see how it plays out.
However, this is balanced by the legal protection offered to the company when it does do something that does not strictly increase its profits.
It comes down to your values though -- if you believe that the most important thing is to make money while leaving yourself open to the smallest cross-section of legal liability, that's exactly what a standard corporation is for. If you believe that your purpose is to build a better world, and you need an organization with cashflow to do it, you had fewer options in the past. Now you have two more, at least in California.
If you wanted to make profits and to build a better world, what prevented you from setting a regular company and a charity and have the former donate to the latter? A lot of people donate millions of dollars this way.
It looks like it's one of those feel-good laws that everybody pats themselves on the backs about how they promoted public benefit and nobody even thinks about how it would work or what would be the consequences...
The better and more important question would be whether they were put in a benchmark like the Russell 1000 since it would force mutual funds to consider whether they should own it.
All public companies are C corporations. I'm trying to see if there is a requirement in the SEA or NYSE listing standards that mandate, this, but given the NYSE's requirement of fiduciary responsibility to shareholders, B corps produce a legal conflict of interest.
Will the B Corp legal framework create additional liability for our Board of Directors and officers?
It is the opinion of our attorneys that adopting the B Corp legal framework to expand the definition of the ‘best interests’ of the corporation should reduce the liability for Directors and Officers by creating legal protection (called ‘safe harbor’) for them to take into consideration the interests of multiple stakeholders when making decisions, particularly when considering financing and liquidity scenarios. Adopting the B Corp legal framework will, however, give shareholders additional rights to hold Directors and Officers accountable for taking into consideration these same interests when making decisions ‐‐ and that of course is the whole point.
From the FAQ for investors and directors: http://www.bcorporation.net/resources/bcorp/documents/FAQs%2....
In your particular scenario involving SOPA/PIPA, the company's executives can straightforwardly claim that they acted in good faith to promote the interests of the broader business sector that they are a part of, and thus they would not be liable for their actions.
If, however, this provision is not toothless and useless, then I don't see how it can not create additional potential liability. Of course, it can play both ways - i.e. the management can both claim public good as defense for controversial actions and be attacked on public good grounds for them. It's just an additional complication, compounded by absence of any clarity on the question of what the said good is.
It is telling that your document does not give a clear answer to the question of additional liability, basically saying "we're reducing liability, no, wait, we're increasing it and it's a good thing!".
The problem is that generating shareholder value is objective and empirically validate-able. Having these other systems increased the complexity of the system - bad - while giving it a dual qualitative raison d'être.
Present structure of a for-profit corporation paired with a non-profit foundation is less ambiguous.