If Boeing had placed stakeholder values at the core of its business, would it be in the position it is today? We will never know if Boeing could have avoided the 737 Max catastrophes had it been a benefit corporation. Regardless, the system of shareholder primacy is ripe for change. It is time to stop hoping corporate leaders act like human beings and instead, require that they do.

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Throwback to November 18, 2020 when Boeing received clearance from the Federal Aviation Administration that its 737 Max could resume flight in American skies. While redesigns and pilot trainings are important steps, this plane should not return to the air until shareholder primacy, the systemic flaw in the way corporate leaders make decisions, is addressed. 

Benefit corporations are legal entities that, if widely adopted, could change the corporate decision-making paradigm. Benefit corporation law mandates that corporate leaders adopt a stakeholder approach to decision-making: where corporations consider the impact of their decisions on consumers, employees, the environment, the community, and greater society, in addition to the shareholders. Under benefit corporation law, the system of decision-making would no longer pit a corporate leader’s humanity against her duty to her shareholders. Instead, those duties, ideally, would align with those of shareholders and society. However, becoming a benefit corporation is not without its challenges and the decision whether to become one should be carefully considered.

 

But – What does it even mean? A “benefit corporation” is a legal entity like a C-corporation or a limited liability company (LLC) that establishes a legal framework for mission-driven companies. To date, thirty-eight states, including Delaware, have adopted benefit corporation legislation and companies such as Patagonia, Kickstarter, and King Arthur Flour are structured as benefit corporations pursuant to the legislation.

Benefit corporation law requires corporate leaders to consider the impact of their decisions on all stakeholders. This means that when a corporate leader is presented with a decision, they are not duty-bound to favor the decision that maximizes shareholder returns. Had Boeing been a benefit corporation, it means that Mr. Muilenburg would have been required to pay attention to emails about his exhausted employees or persistent safety concerns; his employees and the consumers, under benefit corporation law, would all be stakeholders to whom he owed a legal duty.

Moreover, benefit corporation law requires greater corporate accountability. A benefit corporation must be organized for the purpose of creating a “general public benefit” (and/or specific public benefits that are tailored to the business and operations of the corporation) and allows shareholders to bring suit when that purpose is not being met. 

 

Why should a Corporation Become a Benefit Corporation?

Benefit corporation law is voluntary, meaning no corporation is required to act by the mandates of the law unless they so choose.

Many investors may not be interested in the idea that their interests are placed on par with other considerations and either refuse to invest or jump ship. In addition, benefit corporations are a new type of corporate entity that are yet to be tested in court, leaving this entity open to legal uncertainty. Furthermore, benefit corporation law allows for expanded corporate liability in allowing shareholders to sue for failure of the company to pursue its general public benefit. This is in addition to corporate suits already available to shareholders. Finally, being a benefit corporation comes with potentially heightened reputational risk. Missteps currently considered commonplace would likely invite greater public ire when coming from a company that promised to be a more responsible corporate steward.

 That said, emerging evidence shows that a stakeholder approach to decision making generates significantly better financial returns, albeit in the long-term. Companies that place stakeholder values at the core of their business consistently and significantly outperform the S&P 500 and experience less volatility during crisis times such as the COVID-19 pandemic. Additionally, these companies enjoy greater employee engagement because they attract people who are committed to the mission and are dedicated to realizing it. Corporations that have the ability to ride out the growing pains could see their bottom line strengthened as a result.

 The question of whether to become a benefit corporation is dependent on several factors.

 

#1 Stage of Development

Corporate leaders should first consider their stage of development. A not-yet-incorporated entity can easily choose to be a benefit corporation, often times by checking a box on the relevant state’s incorporation form.

A corporation that is already formed will face additional hurdles in becoming a benefit corporation. Most states require a super-majority vote of the corporation’s shareholders to convert an existing corporation into a benefit corporation. This requirement is meant to protect shareholders, who, in voting to become a benefit corporation would be sacrificing their primary status. Larger, publicly-traded corporations would additionally need to take into consideration the stance of institutional investors and, more broadly, public opinion and the impact of such action on their stock price. And all corporations, regardless of their development stage, would incur legal fees in drafting or amending their respective governance documents to conform to the laws’ requirements.

 

#2 Available Resources

Similar to the stage of development, corporate leaders should take a look at their available resources. Once incorporated, governing a benefit corporation requires dedication. This may include creating a separate committee of the board of directors to manage the corporation’s expanded duties, creating a specific management role or new department, reviewing and/or drafting additional internal policies, and otherwise constructing a new framework for making decisions. Corporations in earlier stages of development may not have the resources to allocate to the maintenance of this kind of entity, nor may further-developed corporations have the desire to reorganize their system of decision-making so drastically.

 

#3 Risk Appetite

Finally, corporate leaders should consider becoming a benefit corporation as a risk proposition.

In conclusion this is largely a choice that every stakeholder needs to make – What legacy do we want to leave behind? If not now, when? The time to move from sustainability bystanders to owners is no more a question but a business pre-requisite.

 

 

 

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This fortnightly knowledge byte series is an effort to rekindle courage to take action, share experience, insights, and innovation available across the globe to give us the courage and accelerate change. For we can be the generation that passes on a future of hope, abundance, and tranquillity to our children if only we are brave enough to see it if only, we are courageous enough to be it!  

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