Etsy sold its soul for a lower corporate tax rate.

Etsy forfeited its opportunity to be the global leader in corporate governance and business as a force for good when it availed itself of clever Irish tax strategies to reduce its overall corporate tax rate.  By transferring its intellectual property to an Irish subsidiary, Etsy will reduce its tax rate on future profits derived from such property from 35% in the US to 12.5% in Ireland.

In opting for business as usual instead of pursuing its mission of re-imagining commerce, Etsy joined hundreds of other multinational corporations, including Google, Apple, Microsoft, Medtronic and Abbott Laboratories, that have either transferred intellectual property to Ireland or re-domiciled there in so called inversion transactions to reduce their US taxes.

Etsy’s tax strategy is only newsworthy because it reveals that its much touted commitment to social responsibility is ephemeral.  Etsy is the second publicly traded US corporation that is a Certified B Corporation, a business that has passed the B Lab Certified B Corporation social and environmental impact assessment.  To maintain their certification, B Lab requires Delaware Certified B Corporations such as Etsy to convert into Delaware public benefit corporations by August 1, 2017, the fourth anniversary of Delaware’s adoption of the law.

A Delaware public benefit corporation is a for-profit corporation that must operate in a “responsible and sustainable manner” and chose one or more public benefits, which are set forth in its charter.  In addition, directors must balance the pecuniary interests of stockholders, the chosen public benefit and the best interests of those effected by corporate action.  In short, the Delaware public benefit corporation empowers socially responsible corporations to demonstrate their commitment to doing the right thing by backing such commitment with the power of law.  For example, directors in Delaware public benefit corporations are afforded liability protections for choosing to operate their businesses in a socially responsible way.

Etsy could have been the iconic socially responsible corporation by becoming the first publicly traded US Delaware public benefit corporation but it squandered this historic opportunity when it chose not to convert prior to its IPO.   It’s a shame because Etsy had the votes: its significant stockholders had signed a voting agreement, which expired upon the IPO, to convert the company into a Delaware public benefit corporation.  Etsy could have become the first publicly traded US corporation to dare to make a legal commitment to doing good, not only by stockholders but also by society and the environment.

Etsy simply blew it.

Now, instead of being the global thought leader in sustainable and responsible business, Etsy finds its socially responsible credentials and bona fides under attack.  Its Irish tax jig caught the attention of Americans for Tax Fairness, who have demanded that B Lab revoke Etsy’s Certified B Corporation certification.  Whatever B Lab decides, Etsy will lose this certification anyway in 2017 unless it elects to convert into a Delaware public benefit corporation.

Yes, Etsy’s tax strategy exposes the company’s hypocrisy, but the reality under prevailing US corporate law is that directors of every corporation risk breaching their fiduciary duty to stockholders to maximize stockholder welfare if they do not avail themselves of international tax arbitrage strategies such as the one employed by Etsy.  As the Chief Justice of the Delaware Supreme Court wrote in a recent law review article, “tax arbitrage is a permissible way to reduce the corporate tax bill and further stockholder welfare. For those who decry this reality the solution must come from other bodies of positive law that constrain corporate behavior, such as the tax code itself…”

Unless a corporation has become a Delaware public benefit corporation or its equivalent in the 32 other US states and jurisdictions that have adopted this corporate form or has custom-designed governance architecture, its board of directors must pursue the corporation’s only legitimate purpose – to maximize stockholder welfare – even if doing so harms society. International tax arbitrage clearly harms society by eroding our US federal and state tax base. In other words, the prevailing corporate law often has the unintended consequence of forcing corporations such as Etsy to engage in sociopathic behavior in order to maximize stockholder welfare.

By choosing to maintain its status as an ordinary Delaware corporation, Etsy’s board of directors had little choice but to do the wrong thing by society and sacrifice the company’s socially responsible principles by engaging in a common international tax arbitrage strategy that benefits stockholders but ultimately harms the US and its taxpayers.  Pursuing tax strategies that optimize profit over community is precisely the kind of  “race to the bottom” that Etsy’s CEO Chad Dickerson does not believe is “a sustainable, successful model.”  Delaware’s public benefit corporation statute would have authorized Etsy’s directors to pursue a less profitable tax strategy that is in integrity with its principles.

To be fair to Etsy, every US corporation that aims to pursue a heroic purpose, such as Etsy’s of re-imagining commerce, and operate in a socially responsible manner faces a similar ethical dilemma unless it converts into a benefit corporation or designs custom governance provisions in its charter documents.  Prevailing corporate law makes it problematic for directors of US corporations to be socially responsible unless they operate in benefit corporations, which afford express liability safeguards and incentives for directors to operate their corporations in a responsible and sustainable manner or pursue a purpose other than maximizing stockholder welfare.  This is precisely why B Lab has begun to require Certified B Corporations incorporated in states that have adopted benefit corporation legislation to become benefit corporations.

Etsy’s situation also highlights the biggest challenge facing all impact and socially responsible investors: it is impossible to identify a pretender from an authentically socially responsible company unless it has made a legal commitment to do the right thing by stockholders, society and the environment.  As long as Certified B Corporations, businesses aligned with the principles of corporate social responsibility or businesses seeking to pursue heroic purposes or multiple stakeholder models, such as those pursuing the tenets of Conscious Capitalism, are incorporated in conventional corporations, prevailing corporate law works to negate their socially responsible intentions and exposes their directors to potential liability.

With the Chief Justice of the Delaware Supreme Court endorsing the benefit corporation as a legitimate vehicle for such businesses in another recent law review article, expect more of them to convert into benefit corporations to have the law on their side.

I’m holding on to my shares in the faint hope that Etsy will wake up, put the power of law behind its principles and become the first publicly traded Delaware public benefit corporation.  Only then will impact investors begin to have a clear choice between investing in corporations that are legally committed to doing the right thing by stockholders, society and the environment and those that are committed by law despite the best socially responsible intentions to business as usual.

Until the choice has become clearer, the  prevailing corporate law will continue to prevent socially responsible companies such as Etsy from truly walking their talk.  Without using the benefit corporation form or designing governance architecture that elevates heroic purpose and principles to the status of law, prevailing law requires the maximization of stockholder welfare to trump social responsibility.