Can Conscious Capitalism Be More Effective?

(originally published on Linked In on September 6, 2016)

Conscious Capitalism espouses a multiple stakeholder, multiple purpose approach to business within the constraints of a single stakeholder, single purpose legal system. It works, but the fit is not optimal. The benefit corporation appears custom-made to liberate the Conscious Capitalism movement from these constraints because it legitimizes a multiple stakeholder, multiple purpose approach to business.

Conscious Capitalism’s four key tenets – the corporation as an ecosystem of stakeholders, the CEO as a steward of the ecosystem, a heroic corporate purpose in addition to making a profit, and a values based culture – align well with the four key tenets of the benefit corporation. Most state benefit corporation statutes are based on the Model Benefit Corporation Legislation, which has four principal tenets: the additional purpose of creating general public benefit, accountability, transparency and extension of fiduciary duties to include all of the corporation’s stakeholders, including stockholders, society and the environment.

First, the benefit corporation inherently recognizes the corporation as an ecosystem of interdependent stakeholders and the tenet of steward leadership by extending the fiduciary duties of directors to include all of the corporation’s stakeholders, including society and the environment.

Second, the benefit corporation recognizes heroic purposes by requiring corporations to have a purpose of creating general public benefit, which means providing a material positive effect on society and the environment. The requirement to create general public benefit reflects Conscious Capitalism’s philosophy of creating value for all stakeholders and casts having a multiple stakeholder model as a heroic purpose unto itself. The model legislation also authorizes including additional specific purposes in a corporation’s charter to create or more specific public benefits, which could be drafted to reflect a Conscious Capitalism based corporation’s unique heroic purpose.

Third, the benefit corporation recognizes the importance of social and environmental values in addition to profit maximization by measuring the provision of general public benefit against a third party standard and reporting the impact to stockholders and the public, thus providing accountability and transparency.

Why the Conventional Corporation is Problematic for Conscious Capitalism based Corporations

The prevailing law requires Conscious Capitalism based corporations that pursue a multiple stakeholder model and a heroic purpose to constantly justify such pursuits. Directors risk breaching their fiduciary duties to stockholders if they cannot show that considering the interests of other stakeholders or pursuing a heroic purpose is directly related to maximizing stockholder welfare. The risk is greater for Conscious Capitalism based corporations incorporated in states without a so-called constituency statute, which authorizes directors to consider the interests of other stakeholders.

In states without a constituency statute, the pursuit of stockholder welfare appears to be the corporation’s only legitimate purpose. Similarly, in financial circles there is widespread belief that the only responsibility of corporations is to increase their profits, as posited by Milton Friedman in his famous New York Times essay. Professor Lynn Stout challenges the policy arguments underlying this belief in The Shareholder Value Myth and also argues that shareholder primacy is not the law, even in Delaware. The current Chief Justice of the Delaware Supreme Court, Leo Strine, quashed any serious debate on the legal issue, however, by affirming in The Dangers of Denial that the sole legitimate purpose of the corporation under the prevailing corporate law of Delaware is to “maximize stockholder welfare”.

Delaware is the prevailing corporate law in the United States because a majority of the Fortune 500 corporations and approximately 1/6th of all US corporations are incorporated there. The prevailing corporate law of Delaware in which the corporation has only one legitimate purpose – maximizing financial performance – coupled with the widespread belief that the corporation exists solely to maximize profit for stockholders becomes the de facto law in most corporate boardrooms, including those incorporated in other states and those with constituency statutes. The commentary about board process in Medtronic’s proxy statement issued in connection with its acquisition of Covidian and ultimate re-domicile in Ireland provides a prime example of this phenomenon. This real or imagined legal doctrine, along with prevailing attitudes in the capital markets, makes it problematic for conventional corporations to pursue other corporate purposes or to consider the interests of stakeholders other than stockholders unless doing so is a direct means to maximizing stockholder welfare.

The Conscious Capitalism movement addresses this concern by making the economic case that pursuing a multiple stakeholder model and a heroic purpose enhances stockholder welfare. Firms of Endearment by Rajendra Sisodia, Jag Sheth and David Wolfe, shows how corporations that adopt multiple stakeholder models provide a greater rate of return to investors than their conventional peers.  While this may be true in many cases, corporations can still seek profit by externalizing costs onto society and the environment.

How Conscious Capitalism Can Continue to Evolve

Justice Strine’s recent law review articles Making it Easier for Directors to Do the Right Thing and The Dangers of Denial, present Conscious Capitalism with two clear choices of how the movement can evolve.

The first choice is to use legal forms such as the benefit corporation as the preferred structure for Conscious Capitalism based corporations because it recognizes and legitimizes a multiple stakeholder and multiple purpose approach to business even when those interests are not clearly aligned. Justice Strine not only establishes the legitimacy of the benefit corporation but also explains why socially and environmentally responsible businesses such as those in the Conscious Capitalism movement need the form to transcend the constraints of the profit maximization paradigm.

The second choice is to continue espousing a multiple stakeholder and multiple purpose philosophy in a legal framework that recognizes only a single purpose and single stakeholder philosophy. Conscious Capitalism could reduce the tension inherent in this approach by encouraging corporations to incorporate in states that have constituency statutes. Nevertheless, this approach is incomplete because it does not provide corporations with a tool for addressing shareholders exercising legal or governance rights in order to advance a shareholder primacy agenda.

The Natural Synergy between Conscious Capitalism and the Benefit Corporation

Leading corporations in the Conscious Capitalism movement celebrate their multiple stakeholder approach to business, their steward leadership of their ecosystems, and provide accountability and transparency to their stockholders and the public by touting their achievements to inspire others to join the movement. In other words, Conscious Capitalism based corporations are already behaving as if they were benefit corporations.

Some Conscious Capitalism based corporations are already benefit corporations. Patagonia, whose former CEO was a frequent attendee and speaker at early Conscious Capitalism conferences in Austin, recognized the values alignment with the benefit corporation and became a benefit corporation immediately upon the effective date of California’s statute in 2012. Ben & Jerry’s, whose CEO, Jostein Solheim, is one of the featured speaker’s at this year’s conference, is a benefit corporation and subsidiary of Unilever. Plum Organics, a subsidiary of Campbell Soup Company, whose CEO, Denise Morrison, is also a featured speaker at this year’s conference, is also a benefit corporation.

Adopting the benefit corporation as its corporate vehicle of choice could eliminate the tension that Conscious Capitalism based corporations have with prevailing law because it turns the corporation from a single stakeholder and single purpose entity into a multiple stakeholder and dual-purpose entity with the twin purposes of optimizing stockholder welfare and creating general public benefit. It expressly authorizes corporations to pursue profit and provide a material positive effect on society and the environment. It allows ethical corporations such as those in the Conscious Capitalism movement to put the full power of corporate law behind their social and environmental values and higher purposes. The benefit corporation creates enterprise-wide integrity and alignment by enabling a legal architecture that supports such values and purposes and is not at odds with the prevailing ethos of maximizing stockholder value.

By making an enterprise wide commitment to a multiple stakeholder and dual-purpose entity, a Conscious Capitalism based benefit corporation could eliminate the constant need to legitimize this approach as a means of maximizing stockholder welfare. In addition, such a corporation could deflect criticism that Conscious Capitalism is nothing more than good marketing because underneath the rhetoric there is no legal commitment to pursue any purpose other than maximizing stockholder welfare or consider the interests of any stakeholders other than stockholders. In short, grounding its tenets in a legal form that is in alignment with its values would signal the seriousness of Conscious Capitalism’s commitment to use business as a force for good.

Conclusion

Conscious Capitalism, social entrepreneurship, impact investing and corporate social responsibility all reflect a global shift in our collective consciousness about business, from a narrow focus on profits to a triple bottom line orientation – planet, people and profit. All of these movements recognize that humanity needs to take better care of its shared common home with its finite resources and that business has great potential as a force for good. Unless, however, the legal architecture of the corporation shifts from having a monomaniacal focus on profits for stockholders to a triple-bottom line, multiple stakeholder, approach, this shift in consciousness is unlikely to take hold because the corporation ultimately defaults to maximizing profit for stockholders as dictated by prevailing law and business custom.

With the basics tenets of the benefit corporation – general public purpose, accountability and transparency, and extension of fiduciary duties to multiple stakeholders – in alignment with its philosophy, Conscious Capitalism could be more effective by grounding its four key tenets in a legal form better suited to its philosophy than a conventional corporation.

 

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