More often than not, modern day hipsters find themselves caught between an attraction to the sleek design of the latest iPhone model and the guilt associated with common corporate practices such as cheap-labour, tax inversion, and disregard for the environment or society at large. As a result, consumers have begun to demand that officers of corporations heed social welfare when making decisions. Unsatisfied with the status quo of ad hoc Corporate Social Responsibility (CSR) initiatives, social entrepreneurs, with the help of members of the legal community, have turned to a new corporate structure: the benefit corporation or "B-Corp".
While the normal corporation seeks to maximize profits (and shareholder value by proxy), the B-Corp is a hybrid organization that is only quasi for-profit. The B-Corp is a new form of entity that allows directors to pursue activities that consider all stakeholders, with the dual objective of seeking profits and doing social good without fear of breaching their fiduciary duty to shareholders.
Demand for corporations who blend profit-seeking with social welfare is more robust than one might imagine: a myriad of prominent companies such as Esty, Warby Parker, and Patagonia have chosen to operate under the axiom of "doing well while doing good". With the exception of Etsy (who in fact went public as a for-profit corporation), most of these companies have chosen to remain privately held, opting instead for covert convenience when it comes to pursuing their social mandates. But what about companies seeking public financing? Can the public markets act as a suitable platform for pursuits other than profits?
In October of this year, Laureate Education, the world's largest for-profit higher education provider, disclosed its intention to take $1.8 billion of its company to the public markets after being taken private by private equity firm Kohlberg Kravis Roberts (KKR) in 2007 in a $3.8 billion buyout. If successful, Laureate Education will be the world's first public benefit corporation, with a purpose that combines balancing profit with producing a "positive effect for society and students by offering diverse education programs both online and at campuses around the globe". While the idea of a corporation that appeals to the moral conscious first and rational self-interest second seems appealing, such a corporation raises serious legal questions and is ill-suited for public markets.
At the forefront of several troubling concerns lies the most pressing issue of them all: what exactly constitutes as "benefit"? With social purposes as ambiguous as Laureate's desire to create a "positive effect for society", one wonders just what actions can be undertaken in the name of positivity. While idealists surmise that by enacting a bi-annual audit where public corporations must demonstrate actions taken in good faith with their stated benefit mandates where stakeholders will be able to measure the corporation's commitment to society, they have failed to provide shareholders with the practical framework necessary for accountability. Under the scheme of "benefit" corporate directors are given free rein to make decisions to the detriment of the firm with no clear mechanism for consequences.
To be suspicious of corporations engaging in "greenwashing" that is, using clever public relations to disguise the true nature of a corporation's less-than-holy activities means being pragmatic, not cynical. By adhering to the firm's social commitments, management teams can bury or justify botched mergers, contracting businesses that are self-serving, and undertaking prohibitively costly initiatives. And while the "normal" corporation is equally vulnerable to mismanagement, shareholders are provided with legal tools for corporate oversight: namely suing directors for breach of fiduciary duty or initiating hostile takeovers to replace management.
The recent corporate feud between pharma-giants Mylan and Teva illustrates the dangers of abusing laws that give precedence to vaguely defined stakeholders. When Mylan, a Dutch company that reincorporated in Pennsylvania, faced an unsolicited $40 billion bid from Teva Pharmaceutical Industries, it pugnaciously rejected the offer, citing an arcane Dutch obligation to stakeholders other than shareholders, such as employees. The Dutch equivalent to a poison pill, "Stitchting", allows Dutch companies to issue preferred equity to a foundation. The foundation has the right to exercise the shares and obtain a temporary controlling stake in the company to fend off hostile bids deemed "not in the best interests of the company, its daily operations, or its pursuit of new alternatives". With no oversight of what strictly is or is not a benefit, and in the absence of any means to measure it, the benefit corporation will simply give rise to obscure takeover defenses that may in fact harm shareholder interests.
In addition to questionable Merger & Acquisition practices, future shareholders of Laureate Education also must worry about a serious conflict of interest that lies between KKR and the corporation. Since Laureate will be going public with dual-class stock, KKR will be allowed to indirectly retain an interest of more than 10%. Given KKR's aim is to maximize its own profit without concern for social benefit, which, in other words, involves selling its stake for the highest price, investors should be wary of Laureate's ability to adhere to its social mandate.
KKR is only one example of conflicting mandates between normal and benefit corporations.
Not only does the average investor have little concern for social benefit, but the average investor also relies heavily on investment vehicles such as mutual funds, which have an explicit fiduciary duty to maximize profits through investments. It is quite possible that mutual funds and other institutional investors simply avoid these companies all together - an outcome that would ultimately come at the expense of public benefit corporation shareholders.
As a generation still experiencing the effect of the 2008 Financial Crisis, our instinct is to view corporations as greedy, corrupt, and irresponsible entities whose activities need to be controlled. While this reputation is certainly deserved in some cases, the benefit corporation is not an answer. Management teams regularly make decisions that sacrifice short-term profits for long-term shareholder value. Current corporate law already enables corporations to "do good" articles of incorporation often include mandates regarding a variety of stakeholders. Moreover, corporations regularly engage in large-scale charitable donations, strengthen and develop communities, and contribute to important social causes. Benefit corporations create opportunities to prey on investor emotions by using their benefit status to disguise poor decision-making. Instead of creating another legal barrier that is difficult to navigate between corporations and society, we should empower investors to hold corporations responsible for their actions.