Saturday, June 12, 2010

The Benefit Corporation: A step in the right direction, but . . .

Yesterday's CSR Blog at Forbe', featured a guest blog from my friend and social entrepreneur-extraordinaire, Jay Coen Gilbert.  Jay is a co-founder of B Lab, a nonprofit organization dedicated to using the power of business to solve social and environmental problems.

I've been proud to be affiliated with some of the great work B Lab has done surrounding the B Corporation, the Benefit Corporation Statutes that he mentions in his piece, and the Flexible Purpose Corporation statute that is wending its way through the California legislature this year and next.  

As an advisor to B Labs, I have always offered my candid, honest assessment of what I think works and doesn't.  And I have been incredibly grateful for the attitude Jay and his colleagues, Andrew Kassoy and Bart Houlihan, have taken towards my opinions, even when they did not square exactly with their views.  They've always been open and considerate to hear my views, desiring to learn from them and sometimes disagreeing, understanding that I am passionate about social entrepreneurship, fixated on healing the world's wounds and caring for ALL 6.8 billion of its people, but at the same time trained in the corporate realm, as an advisor to Global 1,000 companies and with a perspective gained from that training that is sometimes very different than theirs.

It is with humility that I offer these comments to Jay's blog piece.  He is doing great work.  I hope you will take some time to learn more about it.

Great to see you blogging on this topic and great to see Forbes hosting.
A couple of thoughts:

1. Of course, the tendency is always to blame the corporation for the "short-termism," as its results are most often manifested there, when there are failures or successes. This, in turn, drives the "stick" approach focusing on "creating significant exposure for [directors and officers] to a shareholder lawsuit against them personally for breaching their fiduciary duties."

But there is a demand side to this equation that you don't address and that the Benefit Corporation Laws won't address -- namely the constant chase by most Americans for the "dream" of higher and higher returns, with no regard for the global, societal or environmental costs. It seems the height of hypocrisy for the IRA owner who has benefitted enormously from the run-up in oil stocks over the past several years, to now wish to punish some corporate executives for the results of the investor demands to drive higher margins. It seems to me the responsibility needs to go much, much further.

Using your BP example, for one, we tend to ignore the real reason for this disaster -- America's addiction to oil and our love affair to our cars. Take into account the fact that the entire well that has spilled only about 1% of its contents into the Gulf would supply America's oil addiction with five days of oil, and you begin to see the magnitude of the demand problem. The real question is whether Americans are prepared to adjust their standard of living to come more in line with ideas of sustainability.

2. In our work together, we both agree on the basic premise that the law needs to change to encourage better forms of governance that permit living out aspirational goals of business life, rather than the dive to the bottom that you mention. The Benefit Corporation statutes in Vermont and Maryland are a good start. California Senate Bill 1463 and the creation of a Flexible Purpose Corporation is another approach. Both forms would permit company's to set forth in their charters, a stated purpose beyond making money. Both forms would require greater transparency through public reporting of measured impact on meeting that purpose. But the two forms differ in a couple of fundamental ways.
First, the "benefit corporation" form seeks to create accountability (beyond reporting) through a system of greater liability, whereas the "flexible purpose corporation" form seeks to unleash directors from the risk of liability, permitting them to experiment more broadly with the right mix of doing well and doing good, without concerns of personal or corporate suits. Some would say that the "stick" approach is something that has been tried for the past 60 years and has failed miserably. Just look at our system of regulations, where we spend billions of dollars seeking to regulate and enforce. For example, we spend hundreds of millions of dollars on regulating and enforcing oil drilling and we still ended up with an environmental catastrophe. Why?

Well, some would argue that the entire system of regulating and punishing doesn't work because the regulators become the captives of the regulated. The regulated influence (more than anyone or any group influences) the selection of the regulators, the drafting of the legislation, the drafting of the rules and even the budget allocation for enforcement. Thus, the "stick" approach seems to further the "dive to the bottom," setting up a lowest common acceptable denominator, rather than creating something aspirational. Take a look at the results of shareholder litigation and you will see the same thing -- short term compromises of reformed activity, coupled with big payouts to plaintiff lawyers, and no real change in the system. In this respect, it seems useful to understand whether there might be another fashion of pushing for the holistic corporate model you seek, by setting up something much more aspirational than "avoiding being sued." What if directors were not so risk averse and were not so regularly advised by that most risk adverse creature known to man -- that staple at board meetings -- the lawyer? What if directors felt they would be rewarded for encouraging innovation in a company, even if that innovation failed to produce monetary returns, because it lived up to the stated purpose of the company?

What if the goal were authentic transparency, without the risk of litigation, on what a company was doing to advance its blended value (or multiple bottom lines), so that greenwashing was no longer possible and best practices could emerge? Can any of that happen, realistically, if we add to the directors' concern, suit for yet another set of obligations?

Of course, regulations are necessary (and presumably will be for the foreseeable future). And expecting that corporations will suddenly become agents of good, overnight, is naive. But I learned a long time ago in raising my two daughters, that the best way to encourage them to become the best people they can be, I got far better results from spending more of my energy affirming who they were becoming, rather than criticizing what they were doing wrong.

Now I don't want someone to read into this that I'm defending BP. But whenever we have a crisis, we seem so keen on blaming someone. All the better if we can blame someone who is rich or who has made a lot of money. And we think that once we've made an example out of them, the job is done.

Unfortunately, that is never true. It may make us feel better, especially in the short-term. But it almost never solves the problem.

*Todd is a partner at the law firm of Jones Day, where he founded their Silicon Valley Office and runs their Renewable Energy and Sustainability Practice. The views expressed in this column are solely Todd’s personal views, not the views of Jones Day or its clients, and the information provided as to his affiliation with Jones Day is solely for purposes of identification and may not and should not be construed to imply endorsement or even support by Jones Day of the views expressed herein. 

© R. Todd Johnson, 2010. The thoughts, ideas and words expressed in this column are the property of R. Todd Johnson and may not be otherwise used or reprinted without express permission from Todd.

1 comment:

  1. Hi Todd,

    Thanks, as always for your thoughtful comments.

    Neither of us is proposing regulation to avoid future BP problems. You call the threat of litigation a 'stick' - fair enough. One might also call it accountability. Specifically, accountability to shareholders.

    The directors of Benefit Corporations are accountable to their shareholders not only to make them money, but to do so in a manner that creates a material positive impact on society and the environment, taking into consideration the impact of their decisions not only on short term shareholder value but also on the long term health of their employees, community, and the environment. This doesn't seem very much to ask.

    You mention that shareholder litigation has only led to 'short term compromises', 'payouts to plaintiff attorneys', and 'no systemic change.' We would all benefit from a deeper exploration and analysis of this issue.

    I am curious if you know of anything that has been written on this topic that might be of interest?

    As always, Best,