Friday, April 16, 2010

The Business Judgment Rule and Public Benefit

Maryland is now the first state with "benefit corporation" legislation, which requires companies formed under the act to consider stakeholder interests as part of the corporate mission. In addition, the law allows the benefit corporation to set a course to pursue specific public benefit purposes.  Examples include seeking carbon neutrality, giving 50% of profits to charity, and using only local suppliers. 

The law was supported and initially drafted by B Lab, which is "a nonprofit organization dedicated to using the power of business to solve social and environmental problems," and William H. Clark, Jr., a partner at Drinker Biddle and Reath LLP, in Philadelphia.  Not ironically, Mr. Clark was also the primary drafter of the North Dakota Publicly Traded Corporations Act, a shareholder friendly governance option. Mr. Clark was hired in 2005 by a group of shareholder activists, including Carl Icahn, to draft the North Dakota act. 

I am not sure what think about this benefit corporation legislation.  I can understand how expressly stating such public benefits goals might have value and provide both guidance and cover for a board of directors.  However, I am skeptical it was necessary. 

Not to overstate its binding effects today, but we learned from Dodge v. Ford that if you have a traditional corporation, formed under a traditional certificate of incorporation and bylaws, you are restricted in your ability to “share the wealth” with the general public for purposes of “philanthropic and altruistic” goals. But that doesn't mean current law doesn't permit such actions in any situation, does it? 

If a corporation were to form today, stating as its purpose in the certificate specific goals of creating a sustainable profitable business that would consider all stakeholders as part of the process, is that not permissible?  What if we take it a step further and state that the corporation is formed on the belief that the best way to create a long-term and profitable business is to create loyalty to the company through generous giving to charity, reasonable prices, high wages, and thoughtful environmental stewardship?  In addition, the certificate could add that the board of directors, in carrying out their duties, must consider the corporate purpose as part of their business judgments.

Frankly, although it would provide unambiguous notice to investors, I am not sure such language even needs to be in the certificate or bylaws.  It seems to me that a board could simply determine that, after careful and thoughtful information gathering and analysis, it was their business judgment that considering public benefit is in the long-term goals of the corporation and its shareholders because the company will fill a specific niche in the market, rendering it a more profitable, more stable entity, in the long-term for the shareholders.

There is no requirement I can recall that says a company must maximize profits on a day-to-day basis.  (Excluding Revlon duties, of course, for auction situations.)   And, if the company is not trying to make any money, this benefit corporation law is not needed, either.  We already have the non-profit corporations/501(c)(3) option. 

I’m not really against the law, and I think it has some nice ideas behind it.  I am just not sure it fills much of a corporate governance void.

Business Associations, Corporate Governance, Corporations, Joshua P. Fershee | Permalink


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