October 11, 2012
Better bureaucrats, please ... and Benefit Corporations
Like many other states, Massachusetts has recently passed an amendment to its corporate law that permits the incorporation of "Benefit Corporations" (Chapter 238, Section 52). I have opinions about whether this is anything more than just a marketing effort, but let me put those to the side for the time being. Here, I'd like to focus on the fact that the Secretary of State of the Commonwealth of Massachusetts apparently has a tenuous grasp on what the corporate law of Massachusetts presently is. In the Commonwealth's official notice and FAQ for Benefit Corporations, the Corporations Division describes the need for Benefit Corporations, thusly:
What are benefit corporations?
Benefit corporations are corporations organized under Chapter 156A (the professional corporation statute) or Chapter 156D (the business corporations statute) that have elected to be a benefit corporation in their Articles.
Benefit corporations are similar to traditional for-profit corporations but they differ in one important respect. While directors and officers of traditional for-profit corporations must focus primarily on maximizing financial returns to investors, the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making.
For example, the directors of a traditional for-profit corporation faced with financial difficulty may opt to build up cash reserves by laying off employees in order to fulfill their fiduciary duty to prioritize returns to investors. A benefit corporation's directors faced with similar economic circumstances could prioritize retaining the corporation's workforce through hard times, opting to dip into cash reserves to do so, in order to pursue the corporation's public benefit goals.
Or ... the board of a for-profit corporation could simply decide to not lay-off employees and not face any repercussions from shareholders for a decision (not to lay-off workers when times are tough) that already is well within their rights.
I've written on this before in the context of state anti-takeover laws. Constituency statutes were adopted here in the Commonwealth during LBO boom to help give directors the power to resist unwanted offers. Currently, the directors of a Massachusetts corporation can put "shareholder maximization" behind the interests of employees, suppliers, creditors, whatever. Here's 156D, Sec. 8.30:
Section 8.30. GENERAL STANDARDS FOR DIRECTORS
(a) A director shall discharge his duties as a director, including his duties as a member of a committee:
(1) in good faith;
(2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and
(3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.
So ... a director of a MA for-profit corporation is presently under no legal obligation to put the maximization of short-term shareholder value/returns over interests towards constiuencies of the corporation, like employees. It's true that constituency statutes were originally adopted as anti-takeover statutes and they still play that role. But, for a publicly minded corporate board, the constituency statutes in place already provide plenty of legal cover to pursue public benefit in the corporate form.
I'll have more to say on Benefit Corporations later. For now, I am wondering whether Benefit Corporations might be a back door into supercharged state anti-takeover protections for firms that opt in? I don't think it's necessary, but lawyers have been known for pursuing belt-and-suspender defenses.
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I have been thinking about benefit corporations for much of my (very) limited time in the academy, and I agree that there is a lot of misinformation floating around. You are right that the benefit corporation proponents are just flat wrong here.
Professors Lyman Johnson (W&L/St. Thomas), Joan Heminway (Tennessee), Marcia Narine (UMKC), Dana Brakman Reiser (Brooklyn), Cass Brewer (Georgia State), and I had really nice conversations about benefit corps. at Regent's social enterprise symposium last weekend, and I am speaking at UC Hastings' symposium (focused on benefit corps.) on 10/19.
Also, I am working on an article regarding benefit corporations and M&A (for the UC Hastings symposium).
A big difference between the benefit corporation statutes and constituency statutes is that the benefit corporation statutes require (instead of permit) consideration of various stakeholders. In my opinion, constituency statutes have not been very effective at getting directors to seriously consider interests other than shareholders. It remains to be seen if the benefit corporation statutes will have more success.
Posted by: Haskell Murray | Oct 12, 2012 9:51:21 AM
In your criticism of the Secretary of State's FAQs, you are ignoring the fact that the FAQs say directors must focus “primarily” on increasing shareholder value. Constituency statutes permit the board to consider other interests, but that permission comes against the backdrop of shareholder primacy. You would be correct if you were making your comments with respect to Pennsylvania. The Pennsylvania constituency provision, 15 Pa.C.S. sec. 1715, lists shareholders along with all of the other constituencies that directors may consider. Massachusetts, and most other states, do not. In PA, shareholders have been demoted to the status of any other constituency and thus don’t command the primary loyalty of the board. In MA and states with the typical constituency statute, the underlying – and primary - duty to shareholders remains firmly in place.
You also put the rabbit in the hat when you say “a director of a MA for-profit corporation is presently under no legal obligation to put the maximization of short-term shareholder value/returns over interests towards constiuencies of the corporation, like employees.” I agree with that statement. But I note your subtle insertion of “short-term.” Replace “short-term” with “long-term” and the statement would be indisputedly wrong. Simply omit the term and the statement is also wrong.
Perhaps most importantly, you miss the point that some entrepreneurs want the identification backed by credibility and accountability. Which explains why in the states with benefit corporation legislation there are typically 10 or more companies lined up on the first day the statute takes effect eager to elect the new form.
Posted by: William H. Clark, Jr. | Nov 8, 2012 6:22:40 AM