Opinion

Changing the World by Changing the Corporate Structure

With a new era of government deregulation upon us, the anxiety levels in many parts of the country are rising fast. Those who have looked to the government to solve our nation’s major problems — climate change, gun violence and income inequality, among others — view the prospect of regulatory retreat with despair.

But this pessimism overlooks the positive role the private sector can play in tackling our common challenges. We corporate lawyers know better because we understand the power of the corporate form.

We know the corporate form is the backbone of our society, influencing how our most powerful institutions function and providing the functional framework for the behavior of virtually all men and women who work around the world. We know that if you can change the corporate form, you can change the world.

Most corporations, of course, are structured to maximize shareholder value. Every manager wants to “beat the Street,” and their compensation usually, in large part, depends on winning that battle. Further, board members are often correctly counseled that actions which do not yield stronger short-term profits or which are out of step with others in their industry can yield greater liability.

But new corporate forms are emerging that have the potential to change how traditional business is conducted. They share two primary elements. First, they all require boards and management to consider social and environmental goals in addition to financial returns. Second, at least as of this writing, none of the new forms receive special tax treatment; investments and donations to the new corporate forms are not deductible, and revenue earned by the entities is taxed at normal rates.

One of the new forms, the Social Purpose Corporation, was drafted over a two-and-a-half-year period by a nonpartisan group of corporate lawyers (of which I was a member) and first introduced in California in 2009. In general, the SPC provides a safe harbor — in addition to the business judgment rule — that requires boards and management to emphasize shareholder-agreed social and environmental purposes in the corporation’s charter.

The SPC differs from a traditional corporation because of the fiduciary duty to the mission (and additional protection to the board and management in promoting the entity’s social and environmental goals), mission protection (two-thirds class vote to change the agreed purpose), increased accountability via reporting, and detailed provisions for conversion, merger, sale and consolidation.

Similarly, the Public Benefit Corporation, another new form, requires a broad public purpose in addition to the specified social and environmental goals.

Both the SPC and PBC have been designed for use by both small social enterprises and by larger public companies. The first PBC, Laureate Education, filed with the Securities and Exchange Commission to go public in October 2015 and began trading on the Nasdaq Global Select Market on Feb. 1, 2017, under the symbol “LAUR.” DanoneWave, currently the largest PBC in the United States, was created in April 2017 as a result of the closing of the $10.4 billion merger of Danone and WhiteWave Foods.

The SPC and the PBC can appeal to liberals and conservatives as an “extra-governmental” solution to the current crises our country faces. They can serve as vehicles for economic growth and job creation, as well as advance social and environmental goals approved by shareholders (as opposed to legislators) that also serve the corporation’s long-term financial health. When introduced in California, the SPC was the only bill that year that received 100 percent support from both Democrats and Republicans in the Senate.

To be sure, these new forms have yet to clear some significant hurdles. The weighting of fiduciary duties, for example, has not yet been tested in court. In other words, if a company is increasingly profitable in its operations and successful in emphasizing the agreed social or environmental goals, there is little risk of litigation. If, on the other hand, a company becomes unprofitable and is forced to make choices between adherence to the public purpose and financial stability, litigation risks will increase.

Unfortunately, it is also taking longer for corporations to appreciate how environmental, social and governance (ESG) factors will impact operations, which can be blamed on many reasons — including the difficulties associated with assessing the risk, the desire to maintain the status quo, compensation and tax structures.

But there are positive signs pointing to broader acceptance of the new corporate forms. The movement toward reporting on material social and environmental factors in a way that can be audited and included with financial reporting to shareholders represents a big step toward improving accountability for companies. Such reporting is also necessary for there to be a shift of the fiduciary duties of boards and management to include ESG goals, as contemplated by the new corporate forms.

In the end, we need the new forms so that the next BP oil spill is not just around the corner. We need the new forms so that shareholders can bring actions against large drug companies if they raise the prices of EpiPens, denying access to the general population.

We need the new forms so that “Black Lives Matter” can translate into educational opportunities for the underserved in our society. We need the new forms so that we can increase the number of women and minorities on boards and in management — and thereby improve productivity — of corporations (and law firms).

And most of all, we need the new forms so that the managers of our corporations are required to look further into the future and take actions to plan for climate change and cybersecurity breaches and artificial intelligence and changes in the labor force — even if such actions are at the expense of short-term shareholder profitability.


Susan Mac Cormac is a partner with Morrison & Foerster LLP and co-chair of the firm’s Energy and Clean Technology Groups and chair of the Social Enterprise and Impact Investing Groups.

Correction: A previous version of this opinion piece misstated the status of Laureate Education as a publicly traded company and the status of the merger between Danone and WhiteWave Foods.

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