Benefit Corporations and the Public Markets

The benefit option is now available in 30 states (including Delaware, where most public companies choose to incorporate). This choice entails one simple, but profound change in corporate governance: a benefit corporation must balance the interests of all its stakeholders in operating its business—it cannot maximize wealth for shareholders, while ignoring the costs imposed on others. Benefit corporations in the public markets can lead the transition away from the market paradigm of “shareholder primacy,” by allowing public shareholders to invest in entities that treat customers, employees and communities as the shareholders’ partners.

Investors, who must preserve the value of the systems into which they invest, should take note. While government action often dominates discussions of social and environmental policy, our private allocation of financial capital is a critical factor for almost all of these issues, from fighting disease and hunger, to wrestling with climate change and resource scarcity, to addressing inequality. Our future is as likely to be decided by the choices made in capital markets as by those made in capital cities.

Traditional corporations do not necessarily create poor outcomes. Corporate law allows business to aggregate capital from many investors and put it under centralized professional management. This enables a market economy that creates essential goods and services. Moreover, for many corporations, treating stakeholders well is the best recipe for shareholder return. So corporations often “do well by doing good.”

But not always: under traditional corporate law such positive outcomes are contingent on optimizing profit and “maximizing value.” If management has an option to create a better return that isn’t good for workers or the environment, the current market regime encourages them to take the lower road. This absence of a moral compass is producing a system that creates long term headwinds for the very investors who provide the capital.

This system creates a classic tragedy of the commons, with the negative outputs from each individual company dragging down the economy and creating systemic risk and instability. Consider the profit chasing that lead to the 2008 financial crisis, or the fact that carbon emissions and rising inequality have no cost on a balance sheet. This systemic damage threatens long term investors to an extent that individual maximizing cannot make up for.

Benefit corporations entering the public market will mean mainstream investors have are buying into the new paradigm—literally. Apply this change in thinking to the $70 trillion invested in publicly traded stocks around the world, and to the $10 trillion in private equity and venture capital. Good health at a fair price could become a primary corporate goal for healthcare companies, and not simply an outcome contingent on profit-seeking. Energy companies could have a duty to balance the effect of their decisions on the planet with the return they provide to shareholders, adding a new dimension to value creation. And before closing a factory to move jobs to a low wage jurisdiction, a benefit corporation would have to consider the effect on its workers and the surrounding community.

The question of benefit corporations and the public markets is an urgent one. The clock is ticking, and investors must act to preserve the long term value of their holdings and the society in which those investments are embedded. Benefit corporations allow both investors and corporations to move beyond one dimensional shareholder primacy and to build lasting value.

Further Reading:

"Delaware Public Benefit Corporations: Widening the Fiduciary Aperture to Broaden the Corporate Mission," Journal of Applied Corporate Finance

"Mission Alignment and Benefit Corporations," International Corporate Governance Network Yearbook

"Moving Beyond Shareholder Primacy: Can Mammoth Corporations like ExxonMobil Benefit Everyone?" Harvard Law School Forum on Corporate Governance and Financial Regulation