Shareholder Interests Appear to Remain Front and Center in Public Benefit Corporations
POMERANTZ MONITOR | SEPTEMBER OCTOBER 2021
In the wake of the economic downturns following the collapse of the dot-com boom at the turn of the century and the Great Recession of 2008—which were both attributed, in part, to corporate misconduct—legal advocates began exploring alternatives to traditional corporations (“C Corps”) that would prioritize social responsibility and the greater good over short-term profits and share price maximization. These efforts accelerated in 2010, when Maryland became the first state to enact legislation authorizing “public benefit corporations” (“PBCs”). Since then, more than 35 states and the District of Columbia have enacted laws authorizing PBCs, which are for-profit corporations whose boards of directors are required to consider both public benefit and financial performance when making decisions.
While thousands of private PBCs quickly formed in response to these laws, it was not until 2017 that a PBC launched an IPO in the United States. After a short pause, at least nine more PBCs launched IPOs in 2020 and 2021, and, in January 2021, a public C Corp converted to a PBC for the first time. It most likely will not be the last time a C Corp converts to a PBC, as in the past year shareholders of at least 16 public C Corps (including Alphabet, Amazon, Facebook, and Wells Fargo) have submitted proposals to convert those companies to PBCs.
PBCs, and the laws enabling their existence, hope to incentivize socially responsible—or, more precisely, socially cognizant—decision-making by requiring their officers and directors to consider the interests of both the corporation’s shareholders and stakeholders, e.g., employees, customers, members of the community at large, and the environment, over short-term profits.
While these “dual priorities” of PBCs may appear to conflict with, or at the very least diminish, shareholders’ interests, upon closer examination, shareholders’ position at the focal point of corporate activity likely remains undisturbed.
What is a PBC?
Three factors distinguish a PBC from a C Corp. First, the PBC’s corporate purpose stated in its formation documents must include a “social mission.” Second, as described above, PBC directors must consider the impact of the company’s actions on shareholders as well as stakeholders. Third, PBCs must report on their pursuit of their social mission.
Although these elements are generally consistent across PBC statutes, their particulars can vary widely from state to state. For example, while some states require a primary corporate purpose of creating some public benefit, in Delaware, PBCs need only identify public benefits that are among their purposes. In addition, while PBC statutes generally require directors to consider non-shareholder stakeholders when making decisions, these statutes neither identify stakeholders nor assign levels of importance to different types of stakeholders. Finally, some states require PBCs to publicly report on their pursuit of their public benefits while other states only require these reports to be distributed to shareholders.
At its core, incorporating as a PBC ostensibly protects the company’s directors by giving them the flexibility to consider stakeholders without breaching their fiduciary duties to shareholders. For example, a PBC’s board, as opposed to a C Corp’s board, can reject a substantially larger offer from a potential acquirer if the board determines that accepting the offer would undermine the public benefit defined in the PBC’s formation documents. On its face, this act would appear to conflict with shareholders’ interests, since it would seem to be in the shareholders’ interest for any acquisition to occur at the highest possible price. As we will see, however, such an act most likely would be exactly what the PBC’s shareholders wanted the board to do.
Do the Dual Priorities of PBCs Conflict with Shareholders’ Best Interests?
Whether a board has a legal duty to maximize its shareholder value (i.e., a company’s share price) has been and continues to be vigorously debated. Setting aside whether this duty exists, PBCs do not appear to conflict with shareholders’ interests, even if certain actions may not maximize a PBC’s share price.
For example, although a PBC’s directors can consider other stakeholders when making corporate decisions, ultimate corporate authority is still vested squarely with shareholders. If shareholders are unsatisfied with a director’s performance, they have the right to remove that director. Indeed, since the 1990s, rules and regulations have been enacted or revised to make it easier for shareholders to act if they are unsatisfied with a board’s decisions. Rule 14-8 of the Securities and Exchange Act of 1934, which was adopted in 1992, made it easier for shareholders to include their own proposals in proxy statements, and New York Stock Exchange Rule 452, which was enacted in 2010, prohibits brokers from voting in director elections when they have not received instructions from their customers. Since brokers traditionally voted such shares in accordance with current management’s proposals, removing these votes makes it much easier to reject management proposals.
In addition, many PBC statutes expressly provide for “enforcement proceedings” that can be brought when a company fails to pursue its stated public benefit or if the company violates a provision of benefit corporation law. These statutes, however, solely vest the right to bring such enforcement proceedings with shareholders, not the stakeholders.
Further, laws governing PBCs maintain all the rights vested in shareholders of traditional C Corps, including voting on major transactions, inspecting books and records, and filing derivative suits. In short, nothing in the formation of government of a PBC displaces shareholders from their perch atop the corporate hierarchy.
Beyond this undisturbed vesting of authority within shareholders, however, other factors strongly suggest that a PBC will act in its shareholders’ interests. PBCs, which are formed expressly for the purpose of pursuing, and hopefully achieving, some social good, wear their proverbial hearts on their sleeves by enshrining these purposes in their foundational documents and, in the case of publicly traded PBCs, using “Risk Factors” in quarterly and annual reports to expressly warn investors that corporate decision-making may not be based solely on creating profits. Accordingly, an investor in a PBC decides to invest in substantial part because of the PBC’s commitment to a particular social good at the expense of profits, and thus a PBC’s board furthers shareholders’ interests by prioritizing social good over short-term profits or share price.
In addition, a company that incorporates as a PBC should be able to (i) recruit employees who identify with its social mission and who will thus be more productive and loyal, (ii) motivate existing employees who share those values, and (iii) attract business from customers who share those values. Increasing employee productivity and customer loyalty is obviously in shareholders’ best interests because it will make the company’s performance more consistent over the long term.
While these and other arguments show how the PBC form is designed to incentivize corporate conduct consistent with shareholders’ interests, arguments that PBCs conflict with such interests tend to arise from assuming the worst in people—in this case, corporate officers and directors. For example, one common argument expressed by Frank H. Easterbrook and Daniel R. Fischel in The Economic Structure of Corporate Law asserts that officers and directors of a PBC cannot act in shareholders’ best interests because “a manager told to serve two masters (a little for the equity holders, a little for the community) has been freed of both and is answerable to neither.” Another argument asserts that directors and officers will instantly prioritize their own personal interests over shareholders’ and stakeholders’ interests at the first sight of any weakening of their fiduciary duties to shareholders. This is because, the argument goes, there is no effective means to hold the officers and directors legally accountable given that shareholders’ class actions and derivative lawsuits can be batted away by attributing any decision, no matter how irrational, to the pursuit of a vaguely defined social benefit, and stakeholders have no ability to sue under any circumstances.
Conclusion
While it appears that shareholders continue to reign supreme even in PBCs, this new corporate structure has not been around long enough to generate a performance track record or to be tested by proxy battles, derivative lawsuits, and securities fraud class actions. Dueling arguments that they advance or undermine shareholders’ interests are thus only based on theoretical deductions, not hard evidence. Once data on financial performance has accrued and a representative sample of challenges to decision-making have succeeded or failed, it will be time to take stock of whether PBCs are an advance in corporate evolution or a harbinger of doom.