By Jay Coen Gilbert, Bart Houlahan, Andrew Kassoy, Co-founders, B Lab
The Truth About Ben & Jerry’s presents a dangerously inaccurate legal analysis of current corporate law and completely misses the point about the need for new corporate form legislation.
The sale of Ben & Jerry’s is a distraction.
Authors Anthony Page and Robert A. Katz, by generalizing their analysis of the unique situation of the sale of Ben & Jerry’s to conclude that there is no need for new corporate forms designed to serve the needs of social entrepreneurs, impact investors, and the public interest, have failed completely to account for:
- The facts of Delaware corporate law, arguably the only corporate law that matters when it comes to scaling high impact businesses,
- The practical reality of how corporate law is applied in the boardroom given the lack of clarity in existing corporate statutes across the country,
- The needs of the growing marketplace of impact investors who are demanding greater accountability and transparency,
- The needs of social entrepreneurs as shareholders to have additional legal rights to ensure, not simply hope, that directors consider social mission not just profit margin when making decisions, and
- The needs of some social entrepreneurs and impact investors to have the freedom and legal protection to build businesses that seek to optimize impact rather than profit.
The primary objective of the benefit corporation is to enable mission-driven businesses to be built to last and scale with their missions intact, not to entrench individual charismatic leaders. Once elected by the shareholders of the corporation, benefit corporation status, ensures, as existing corporate forms to do not, that a company and its directors and officers are clearly empowered to pursue the creation of value for the public even if doing so fails to maximize value for shareholders, and that impact investors are clearly empowered to hold a company accountable for maintaining the mission in which they invested.
On both accounts, existing corporate law – both the letter of the law and the practical reality of how it is interpreted, in operating and in liquidity scenarios – fails the test. Benefit corporations meet the test. Becoming a benefit corporation gives a company more choice and, as we’ll point out, it also gives social entrepreneurs and impact investors more power and consumers more protection from greenwashing.
It is true there are dissenting voices in the academy on whether or not current corporate law actually requires corporations to maximize shareholder value, but that misses the point for two reasons:
First, because the legal establishment believes otherwise. The authors fail to acknowledge this by failing to reference any Delaware case law since Dodge v Ford in 1919 (most famously, Unocal v Mesa, 1985 and Revlon v MacAndrews, 1986). Specifically, the most recent past and current Chancellors of the Delaware Court of Chancery think otherwise. Think of the Chancellors as something like the Chief Justices of the Supreme Court for business in the United States because the majority of public traded corporations, 63 percent of the Fortune 500, and most corporations that seek venture capital, are incorporated in Delaware.
In EBay v Craigslist, 2010, then Chancellor William B. Chandler III said, “Directors of a for-profit Delaware corporation cannot deploy a [policy] to defend a business strategy that openly eschews stockholder wealth maximization - at least not consistent with the directors' fiduciary duties under Delaware law.” And in Wake Forest Law Review, 2012, current Chancellor Leo E. Strine, Jr. says:
“These commentators seem dismayed when anyone starkly recognizes that as a matter of corporate law, the object of the corporation is to produce profits for the stockholders and that the social beliefs of the managers, no more than their own financial interests, cannot be their end in managing the corporation.”
Second, it misses the point because, not surprisingly given the above, practicing corporate attorneys think and act otherwise, and therefore corporate culture operates otherwise. If electing benefit corporation status does nothing other than create clarity between entrepreneur, directors, and investors, that the directors of a benefit corporation are required, not just permitted, to consider the impact of their decisions on stakeholders, then, as the authors themselves state in their conclusion, it is a useful innovation.
Even in a state with a permissive constituency statute like Vermont that allows directors to consider non-shareholder interests when making decisions, as the Vermont Assistant Attorney General wrote in an informal opinion sent to the Vermont Secretary of Commerce and Community Development in March 2000 in reference to a hypothetical scenario involving the sale of a Vermont corporation (remember, Ben & Jerry’s coincidentally announced their sale in April 2000), there is a hard to quantify limit to the latitude directors are given to turn down a purchase offer.
That latitude would be greater for a benefit corporation. Benefit corporations would not only enjoy greater legal protection to choose to remain independent, or to choose to sell to a non-high bidder that would better meet the needs of workers, communities, and the environment, but also to choose to make decisions that create incremental value for society even if at the expense of maximizing value for shareholders.
But benefit corporation status does more than that.
Benefit corporation status also requires that the corporation seek to create a material positive impact on society and the environment as assessed and publicly reported against a credible and comprehensive third party standard. Current corporate law does not address these issues of corporate purpose or transparency, but increasingly, entrepreneurs and investors care about these issues, as does, and perhaps because so does, a skeptical public that wants to support a better way to do business.
In their conclusion, the authors state that ‘proponents of benefit corporations . . . should be pressed to identify real and unavoidable instances of the Ben & Jerry’s scenario.’ Based on our analysis above, here are two:
- If Ben & Jerry’s were incorporated in any of the roughly 20 states in which no constituency statute exists, including Delaware; and
- If Ben & Jerry’s justified any corporate decision on the benefits that might accrue to society and not to shareholders.
The latter would seem particularly relevant for social entrepreneurs or impact investors, if not also for consumers, policy makers, and those of us that make up society.
Additionally, as about 20 practicing corporate attorneys, including a former President of the American Bar Association, stated in a White Paper entitled The Need and Rationale for the Benefit Corporation (Clark et al, 2011), and as the Vermont Assistant Attorney General seems to concur in her informal opinion, ‘Based on the limited case law available, courts [even in states with constituency statutes] seem reluctant to wade into these issues and often fall back on shareholder primacy [i.e. maximizing shareholder value as the de facto sole legitimate corporate purpose].’ Here is the relevant section from the White Paper:
While it is clear that directors of mission-driven companies incorporated in constituency statute jurisdictions may take into consideration the interests of various constituencies when exercising their business judgment, the lack of case law interpreting constituency statutes, coupled with the context in which many of these statutes were enacted, makes it difficult for directors to know exactly how, when and to what extent they can consider those interests. . . . Based on the limited case law available, courts seem reluctant to wade into these issues and often fall back on shareholder primacy.
Without clear authority explicitly permitting directors to pursue both profit and a company’s mission, even directors of mission-driven companies in constituency statute jurisdictions may be hesitant to “consider” their social missions for fear of breaching their fiduciary duty...
Further, permissive constituency statutes only create the option (and not the requirement) for directors to consider interests of constituencies other than shareholders. Thus, directors have the permission not to consider interests other than shareholder maximization of value. Mission-driven executives and investors are often in minority shareholder positions and would prefer that directors and officers be required to consider these expanded interests when making decisions, with a shareholder right of action providing the “teeth” to enforce such consideration. This is particularly true in situations where a company is considering strategic alternatives and directors’ discretion in making business decisions is more limited by traditional principles requiring shareholder value maximization.
The authors draw three lessons for social entrepreneurs which we address in order.
Lesson #1: A hybrid legal form is neither necessary nor sufficient to maintain a social enterprise.
Whether or not a benefit corporation is necessary (it is in the circumstances discussed above) or sufficient (it is not), as the authors themselves state in their conclusion, electing benefit corporation status might prove useful, not to mention easier and less expensive than hiring ‘shrewder’ lawyers to ‘(re)discover tested solutions to perennial challenges’, particularly in aligning expectations between executives, directors, and investors, and ‘cultivating consumer loyalty.’
Lesson #2: Financial success is critical to maintaining control.
We agree: no margin, no mission. The authors are correct in stating that the biggest threat to an entrepreneur losing control of her or his mission-driven business is running the business poorly. This is too often overlooked or underestimated and can’t be said loudly enough. But it is equally critical to remember that benefit corporation legislation seeks to enhance mission control, not entrepreneur control.
The objective of a mission-driven business ought to be to create value for society, not to create long term control for the entrepreneur. That’s why benefit corporation legislation creates accountability to shareholders (to create value for shareholders and to create value for society) that simply doesn’t exist in the constituency statute states that the authors laud. In this important respect, benefit corporation legislation recognizes that it’s not about the people, it’s about the system. Which brings us to lesson number three.
Lesson #3: It’s the people!
While this is true enough, it is also true that people are enabled or constrained by the system in which they operate. As a point of law, no matter how thoughtful or noble or harebrained the people, depending upon your point of view, there is zero flexibility for the people (in this instance a company’s directors and officers) to decide to pursue a corporate purpose other than maximizing value to shareholders.
As the authors themselves state, ‘executives at [benefit corporations] likely feel less pressure to maximize profits at society’s expense.’ Their ensuing question regarding causation (i.e. whether [benefit corporations] make directors ‘more virtuous’ or vice versa) is like asking which came first the chicken or the egg. The practical thing to know is that chickens lay eggs. And that benefit corporations, assuming they ultimately behave like Certified B Corporations, will create higher quality jobs and improve the quality of life in their communities more so than ordinary businesses.
Whether causal or correlated, let’s have more of them, please.
What about the authors’ remaining point that, in the end, directors don’t make the final decision, shareholders do?
True, but shareholders don’t get to vote until a sale offer is presented to them. The negotiations over the terms of the sale have already taken place, so shareholders only choice is to say no. Ignoring how infrequently less-informed shareholders vote against the recommendations of a board, simply exercising the right to say no is not a very compelling method for scaling high impact social enterprises that are built to last.
Moreover, the authors miss several important elements of benefit corporation legislation that give ‘the people’ more power. Shareholders of benefit corporations have additional rights of action (i.e. the legal standing to bring a lawsuit) –- rights that do not exist under existing corporate law, even in states with permissive constituency statutes like Vermont -- to hold directors accountable to consider the impact of their decisions on all stakeholders and to pursue the creation of a material positive impact on society and the environment as assessed against a credible and comprehensive third party standard.
That positive impact can now be judged more easily not only by shareholders, directors, or if need be a judge, but also by the general public (aka ‘the people’) for whom the benefit corporation is required to publish publically their annual benefit report which includes that assessment of their overall social and environmental performance against a third party standard. It is largely this transparency provision in benefit corporation legislation that would give ‘the people’ (whether they be investors, consumers, policy makers, or employees) useful information to form an educated opinion about, for example, whether or not they feel Chevron’s ad in this same Fall issue of SSIR about their support for education in America tells a complete story about their overall corporate social and environmental impact.
Because benefit corporations meet clear and higher standards of corporate purpose, accountability and transparency, it offers entrepreneurs clear differentiation and it offers investors and consumers additional protection. Rather than a potential ‘unhelpful distraction’, benefit corporations are making it easier for social entrepreneurs, impact investors, and we the people to create the change we wish to see in the world.
Perhaps most importantly, the authors’ exclusive focus on a legal analysis of the Ben & Jerry’s sale misses something crucial – that ultimately performance matters more than policy. Lost in the inordinate focus on whether Ben & Jerry’s could’ve or should’ve resisted the sale to Unilever is an examination of what matters most to many observers – namely, what has happened to Ben & Jerry’s post sale?
The best way to judge the sale of a mission-driven business is to assess to what extent that mission has been maintained post sale as evidenced by its ongoing performance. And in a world in which the public (perhaps appropriately) doesn’t trust what a company says about itself, maybe especially so for a business that claims to be one of the good guys, verified performance matters even more.
We’ll examine this lingering question soon in Part 2. Stay tuned.
About B Lab:
B Lab is a nonprofit organization whose mission is to harness the power of business to solve social and environmental problems, and whose activities include working with businesses and investors to advance benefit corporation legislation and certifying businesses that have met rigorous and independent standards of performance as Certified B Corporations. For inquiries, contact Jay Coen Gilbert at firstname.lastname@example.org or 610-296-8283.
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