Traditional corporate law requires that directors place profit above all else. In the United States, directors of for-profit companies are required to act solely for the ultimate purpose of maximizing the financial returns to shareholders. While corporations generally have the ability to engage in any legal activities, including those that are socially responsible, corporate decision-making must be justified in terms of creating shareholder value. This concept of shareholder primacy was reaffirmed in the Delaware Chancery Court in 2010, which stated that a non-financial mission that “seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders” is inconsistent with directors’ fiduciary duties. As the Chief Justice of Delaware has written: “American corporate law makes corporate managers accountable to only one constituency — the stockholders.”¹

Mission driven and other socially conscious businesses, impact investors and social entrepreneurs are constrained by this inflexible legal framework that does not accommodate for-profit entities whose mission and impact is central to their business model.

The business judgment rule does not provide an exception to the rule of shareholder primacy. In the ordinary course of business, decisions made by a corporation’s directors are generally protected by the business judgment rule, under which courts are reluctant to second-guess operating decisions made by directors. This deference however, only operates if directors are making decisions for the purpose of maximizing shareholder value. No deference is given if the directors’ purpose is to promote any other interest. Moreover, in a change of control situation, courts do not give business judgment deference, but instead require directors to show that they acted reasonably to obtain the highest price in order to maximize shareholder. Thus, regardless of its mission, a corporation may not consider social and environmental factors in a change of control. The Delaware Supreme Court stated, in its pivotal Revlon ruling, that “concern for non-stockholder interests is inappropriate” in the sale context.²

Constituency statutes do not commit corporations to sustainability. Some states have passed constituency statutes, which permit directors of traditional corporations to consider the same type of non-financial interests that directors of benefit corporations can consider. However, constituency statutes do not commit directors to considering these other interests, and thus do not create the accountability created by benefit corporation statutes. For a discussion of accountability under benefit corporation law, see here. Moreover, constituency statutes do not provide for any transparency with respect to the board’s consideration of the non-financial interests. For a discussion of transparency requirements under benefit corporation law, see here.

The nutshell. Benefit corporations expand the obligations of boards, requiring them to consider environmental and social factors, as well as the financial interests of shareholders. This gives directors and officers the legal protection to pursue a mission and consider the impact their business has on society and the environment. The enacting state's benefit corporation statutes are placed within existing state corporation codes so that they apply to benefit corporations in every respect except those explicit provisions unique in the benefit corporation form.

For a more complete discussion of these issues, see here and here.

¹ Strine, Making It Easier For Directors to Do the Right Thing, Harv Bus. Kaw Rev. 235, 241 (2014).

² Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. 506 A.2d 173.

The Public Benefit Corporation Guidebook