Friday, May 23, 2014

McDonnell on Fiduciary Duty in Benefit Corporations

Brett McDonnell (Minnesota) recently posted a new article entitled Committing to Doing Good and Doing Well: Fiduciary Duty in Benefit Corporations.  I have not read the article yet, but it is printed and in my stack for the summer.  The abstract is below. 

Can someone running a business do good while doing well? Can they benefit society and the environment while still making money? Supporters of social enterprises believe the answer is yes, as these companies aim at both making money for shareholders while also pursuing other social benefits. Since 2010, states have begun to enact statutes creating the “benefit corporation” as a new legal form designed to fit social enterprises. Benefit corporations proclaim to the world that they will pursue both social good and profits, and those who run them have a fiduciary duty to consider a broad range of social interests as they make their decisions rather than a duty to focus solely on increasing shareholder value. Does this novel fiduciary duty effectively commit these businesses to doing good? How will courts actually apply this duty in practice? Will this new duty accomplish its goals without unduly high costs?

 

This article is among the first to analyze in detail the fiduciary duty provisions in several versions of these new benefit corporation statutes. It compares duties in benefit corporations to duties in traditional corporations in the leading categories of fiduciary duty cases. It argues that there is likely to be a modest “flattening” in the risk of liability for directors and officers of benefit corporations. That is, as compared to the level of risk in ordinary corporations, the risk of being held personally liable will be bigger for decisions where that risk is weakest in ordinary corporations, while the risk of liability will be smaller for decisions where that risk is highest in ordinary corporations.

 

The article then asks whether the statutes strike the proper balance in holding directors and officers accountable. The statutes could be too strong if they scare off investors and managers. They could be too weak if they allow managers to proclaim their virtue while ignoring their duties with no fear of legal sanctions. Neither possibility can be dismissed, but this paper argues that the statutes have got it just right. They create enough risk of liability that managers must pay attention to their legal duties, allowing courts to help shape norms of appropriate behavior, while not imposing such high risk that this promising new business form becomes unattractive.

http://lawprofessors.typepad.com/business_law/2014/05/mcdonnell-on-fiduciary-duty-in-benefit-corporations.html

Business Associations, Corporate Governance, Haskell Murray, Social Enterprise | Permalink

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