The Benefit Corporation The Unlikely Hero of a Sustainable Economy?

Imagine, if you will, a paradigm shift to a sustainable global economic system in which all corporations act as responsible global citizens. The unlikely hero at the center of this transformation? It’s the newest evolutionary form of a business firm—the benefit corporation.

The prevailing belief that corporations exist solely to maximize profit for shareholders is the single biggest impediment to creating a sustainable economic system. In the current paradigm, it is morally acceptable for corporations to externalize as many of the negative consequences of their behavior on society and the environment as is legally permissible. Corporations have no inherent social and environmental conscience.

Think British Petroleum, which made a series of cost-cutting decisions with respect to its Deepwater Horizon oil rig in the Gulf of Mexico. In 2010 such decisions caused the largest accidental oil spill in the history of the petroleum industry. Eleven people died in the accident and the Gulf of Mexico region suffered billions of dollars of environmental and property damage. British Petroleum settled federal criminal charges against it by pleading guilty to eleven counts of manslaughter, two misdemeanors, and a felony count of lying to Congress. Yet profit maximization remains the justification for corporate behavior and the default corporate conscience in the entire global economic system.

Intuitively, we all know there’s something terribly wrong with this picture. The lack of a conscience makes the corporation prone to periodic outbursts of behavior that could be characterized as sociopathic. Antitrust laws, labor laws, environmental laws, and the Sarbanes-Oxley Act of 2002 are all external attempts by society to regulate corporate conduct and create ethical standards of corporate behavior. With profit maximization normalized as their moral compass and default conscience, corporations are perversely incentivized to increase profits in violation of natural law principles.

Many U.S. corporations, for example, have felt compelled to maximize profit for shareholders and have moved manufacturing offshore to China and other countries where labor and operating costs are cheaper. This practice eliminates domestic manufacturing jobs, which reduces the employment tax base for federal and state governments and erodes manufacturing capacity. Often, these foreign workers toil in oppressive conditions that would be illegal in the United States. Such manufacturers often pollute the air and water in excess of U.S. standards, posing known health risks to people and repeating the same environmental mistakes we made in the United States.

What’s alarming is that corporations have begun to transcend the sovereignty of the nation-states that charter them by operating above the law. Multinationals create byzantine networks of foreign subsidiaries that leverage favorable tax codes and international tax treaties to maximize profit by minimizing corporate taxes. All of these strategies are perfectly legal ways of avoiding taxes that often end up harming society. Like most multinationals, Apple Inc. uses such laws to minimize the corporate tax it pays. Headquartered in California, Apple has accumulated $158.8 billion in cash while the State of California runs a budget deficit and has trouble funding the very public schools and universities that educate its workers.

How did our global economic system become so overrun by corporations that have no social or environmental conscience?

One reason is that we’re still using business methods that were designed for commerce in the seventeenth century. The corporation was primarily designed as an agent to conquer and exploit foreign markets for the crown. The oldest corporation in North America, the Hudson’s Bay Company,  which received its charter from King Charles II of England in 1670, did this particularly well. At one time the Hudson’s Bay Company controlled 15 percent of the landmass of North America.

The king, however, put the corporations on a short leash because he didn’t trust the people operating them. Since these early corporations were largely composed of mercenary forces, the last thing the king wanted was to create a rival political or economic power. The king chartered corporations for his own plans, and if they misbehaved he could simply revoke the charter or refuse to renew it. Because he was the ultimate authority, there was no need for the corporation to have a social or environmental conscience. Society and the environment needed no protection because natives in these far-off markets were considered inferior heathens and, under the prevailing Christian ethos, man was supposed to exercise dominion over nature and the environment.

We got rid of the king in the American Revolution but his corporation slipped unnoticed into the new nation. The truth is that “We the People” never answered the fundamental philosophical question: what should the rights and moral responsibilities of our corporations be? Instead, the chartering function flowed from the king to state legislatures. In the early years of the Republic, it took an act of legislation to charter a corporation.  It was usually chartered for a limited public purpose, such as building and running a canal, and for a limited term of years.

In 1811, the United States was outraged by the high cost of cotton products imported from Great Britain milled from American-grown cotton.  In response and to encourage investment in American mills, New York invented free incorporation and limited liability. Suddenly anyone could form a corporation without any personal liability as a shareholder for its debts and obligations. During the 1800s, these legal innovations spread around the world and spawned the age of industry by freeing capital for investment in new industries without liability exposure. Without any internal architecture to support a social or environmental conscience, such corporations often harmed society and the environment, resulting in new laws to correct such harms.

The first antitrust law, the Sherman Antitrust Act of 1890, for example, was adopted in response to the emergence of powerful railroad and manufacturing conglomerates that were perceived to have excessive economic power.  In the words of Senator John Sherman (R-OH), “if we will not endure a king as a political power we should not endure a king over the production, transportation, or sale of the necessities of life.”

Naturally, feudal institutions beget feudal behavior. Corporate leaders of today often act like feudal kings, treating the corporations as agents of their personal empires. AIG, for example, paid its executives $165 million in bonuses six months after receiving a $182 billion bailout from the U.S. government. While this action wasn’t technically illegal, it was unconscionable in the court of public opinion.

In short, there is a design flaw in the corporation that makes its present form unsuitable for life in a massively interdependent world with finite resources. Corporations lack a social and environmental conscience by design. Endowed with the power of immortality, corporations aren’t required to act with consideration for the societies that charter them and the planet that ultimately sustains them. Our courts have endowed corporations with many of the rights of citizens without requiring a corresponding moral responsibility appropriate to their size and greater power to adversely affect society and the environment.

We, the people, are waking up and remembering that the ultimate authority to charter corporations and determine the scope of their responsibility lies with us. Occupy Wall Street and its “we are the 99 percent” refrain helped remind us that we, the people, have the ultimate sovereignty over corporations. We now understand that we cannot create a sustainable economic system without the participation of our largest collective life forms, the corporations. The guiding principle of profit maximization must be expanded to include the provision of a material positive impact on society and the environment. External regulations are no substitute for an internal moral compass that not only protects shareholders but also people and the planet.

Happily, the corporation is on its own hero’s journey and is evolving to acquire a conscience. Indeed, a global movement is afoot to correct the corporation’s fundamental design flaw in order to endow it with the legal architecture that activates an internal social and environmental conscience. Twenty states, including California, New York, and Delaware, have adopted legislation creating a new form of corporation, the “benefit corporation,” that by definition is required to act with a social and environmental conscience in addition to the usual pecuniary one. Generally, benefit corporations seek to optimize profit for shareholders and provide a material positive impact on society and the environment from their operations taken as a whole. Such corporations have a public purpose in addition to simply making money.

Benefit corporations generally expand the fiduciary duties of directors to consider the effects of corporate behavior on all of a corporation’s stakeholders, such as employees, vendors and suppliers, the communities in which it does business, the environment, and its shareholders. Benefit corporations generally also require transparency and accountability to shareholders for meeting the public purpose. California’s law, for example, requires that corporations measure their provision of a material positive impact on society and the environment against a third-party standard such as B Lab’s Certified B Corporation assessment. Generally such measurement must be shared annually with shareholders and the public to ensure accountability.

Since the first benefit corporation law was passed in 2010, approximately 500 corporations in the United States, including the California-based outdoor clothing company Patagonia, have become benefit corporations. And the movement among companies to have their social and environmental impact assessed against third-party standards is growing. Today 15,000 businesses have taken B Lab’s Certified B Corporation assessment and 990 businesses in thirty-two countries have become Certified B Corporations. British Columbia passed a law enabling the formation of community contribution companies in July 2013, and Chile is considering adopting benefit corporation legislation.

The benefit corporation is the most important development in the field of business law since the advent of free incorporation and limited liability in 1811. These new corporate laws represent a massive shift in our collective consciousness about business, from a narrow focus on profits to triple bottom-line orientation—people, profit, and planet. Impact investing, corporate social responsibility, and movements like Conscious Capitalism are all part of this global shift in consciousness, which begins to recognize that we are all part of one planet and one human family. The benefit corporation will help businesses shift from an egocentric focus on profits to include consideration of the “we” and the “one.”

What kind of a world would we live in if every corporation optimized the effect of its behavior on society and the environment while still making a profit? B Lab, a non-profit headquartered in Wayne, Pennsylvania, promulgated the following Declaration of Interdependence a few years ago, providing a vision of what it could be:

We envision a new sector of the economy, which harnesses the power of private enterprise to create public benefit. This sector is comprised of a new type of corporation, the B Corporation, which is purpose-driven and creates benefit for all stakeholders, not just shareholders.

As members of this emerging economy and as entrepreneurs and investors in B Corporations, We hold these truths to be self-evident:

That we must be the change we seek in the world.

That business ought to be conducted as if people and place mattered.

That through their products, practices, and profits, businesses should aspire to do no harm and benefit all.

To do so requires that we act with the understanding that we are each dependent upon another and thus responsible for each other and future generations.

What can you do as an individual? Increasingly, you’ll have a choice as to which economy you would like to be a part of—the old economy dominated by corporations, whose sole purpose is to maximize profit for shareholders, or the emerging economy in which corporations exist to optimize good and profit. You can hold corporations accountable by voting with your pocketbook to do business with benefit corporations and Certified B Corporations who are serious about sustainability. Encourage your favorite companies to become benefit corporations and measure their provision of a material positive impact on society and the environment against third-party standards such as B Lab’s. With your actions, you can help create a sustainable economic system.