One way for companies to monetize sustainability: they can change their legal structure to become a benefit corporation, a corporate form that requires for-profit firms to consider society and the environment alongside profit when they make decisions. Proponents say becoming a benefit corporation can boost company value and employee retention. They also say adopting the legal structure of a benefit corporation gives companies more freedom to pursue mission-oriented initiatives than other corporate structures do. They argue that C Corporations are limited in doing things like donating food packages to children in Africa, because such firms have a legal duty to maximize shareholder value in the short term.
Lynn Stout, professor at Cornell Law School, says that view is bunk. Under the business judgment rule, “directors have pretty much free reign,” Stout says. “As long as the company’s directors are not taking the company’s resources for themselves, it is up to their business judgment to decide what is is the long-run interest of the shareholders.”
As an example of that freedom, she cites in a 2011 lawsuit, Air Products and Chemicals vs. Airgas. Air Products offered $5.9 billion in a hostile takeover bid, and Airgas’s directors demurred. The Delaware Chancery Court ruled that Airgas did not have a responsibility to maximize shareholder value in the short run, even in a takeover situation. “And the long run isn’t going to happen until long after the court has gone home,” Stout says.
Stout says the myth that companies are required to maximize short-term shareholder value could actually encourage firms to avoid sustainability initiatives. “C Corporations make up a much larger percentage of companies [than benefit corporations], and it would be a great shame if this encouraged C corps to be run in a more shareholder focused fashion than they need to be,” she says.
Andrew Kassoy, founder of B Lab, acknowledges that directors and management have some discretion to act in the long-term best interest of shareholders, even if that means making a dent in revenues in the short-term. But becoming a benefit corporation has another benefit: it may make the firm more attractive to investors “who care about investing in a business that’s creating a positive social impact,” he says. If you’re an investor and you want the board of directors to consider sustainability, “you’re at their whim,” Kassoy says. “They [may introduce sustainability initiatives], but they also may not. So the other advantage of the B Corp from an investor’s perspective is that there’s accountability there. You’re not just hoping for it.”
On that point, Stout and Kassoy agree. “The difference between a [benefit corporation] and a C Corp is that even though a C Corp has discretion to consider other interests, they have no obligation,” Stout says. For benefit corporations, however, “there are a lot more obligations without much benefit,” she adds. That’s why this structure “has only really been embraced by relatively few corporations that have dedicated consumers that they’re pretty confident this will appeal to,” she says.