Benefit corporations have become more common since I started this post, on the heels of this WSJ article describing them. I have long found these legislative exercises to be a substantial waste of time and effort. Public fiscal discipline is non-existent, and yet legislators have time to fool around with this sort of mickey-mouse smoke & mirrors?
It’s awfully easy to create the restrictions you want in a company, to frame the board’s decisions in standard ways. There are at least this many:
- Elect wise-minded board members
- Create voting structures to facilitate or ensure the first.
- Only have shareholders that agree with the first two items.
- Write the purposes and restrictions into the articles and then into the bylaws; with super-majority provisions to change them.
- Create a company vision and mission that align with a strategy and strategic plan so that the company almost can’t succeed without accomplishing the mission.
- Don’t sell.
- Don’t try to have your cake and eat it too.
For example, there are anti-takeover statutes in many jurisdictions that allow, or even require, a board to consider other factors beyond the selling price when evaluating an offer to sell the company. No one needs a special kind of corporation for that.
Plus, there are only certain circumstances where Delaware law, for example, requires an otherwise unrestrained board to seek the highest price: and even then, let’s not forget the most obvious point — shareholders almost never *have* to sell to the big bad buyer. And when they do, they get fair value for their shares and can reinvest in something new.
Boards manage companies, but shareholders own them. Shareholders vote their shares how they see fit. If you don’t sell to other people, you don’t have to worry how they vote. Large tech companies have started to go down the road of two classes of stock, ostensibly so that founders could maintain voting control while reducing their economic exposure to the effects of their decisions.
Charlie Elson is quoted in the article. I didn’t take a class from him at Cornell Law, but I’ve heard him lecture and read several/many of his articles. He’s a smart guy, too. If he thinks it’s bad, that might be the corporate governance version of Occam’s Razor.
So what’s a director to do? To me, it’s simple. You use the same solution that solves CEO/Chair “problems:” exercise your independent fiduciary duties to the company. If the board thinks that not polluting is going to be a better long-term decision for the company, that’s going to be a hard decision to beat. Delaware’s business judgment rule gives directors broad latitude to run the company.
A lawyer I’ve worked for and with and know well has taken a more favorable view of these “alternative” styles of corporations. I understand part of his argument to be that with these protections hard-coded into state statutes and the articles of incorporation that they permit, you make it much harder for shareholders to even bring lawsuits. That’s valuable because defending lawsuits, especially when shareholders work to draft personal liability claims, is both stressful and expensive for the company.
But ultimately, my last bullet point above is the most important one: don’t try to have your cake and eat it too. What’s that mean? Taking investor money without setting clear expectations is a bad idea no matter what your plan is: social enterprise or blitzscaling. If you sell to someone, but you still want to run everything, then you’ve got more work to do to make it foolproof. Convince more folks. Make a better plan. Find common ground. Use debt instead of equity. Stay small and only grow at your self-financed growth rate. Trying to take someone’s money with no strings attached is either naive or offensive. You seldom want investors who don’t like the way you’re already doing things, unless you don’t like the way you’re doing things.