Investors Show They’re Eager to Invest in Responsible Businesses
By Frederick Alexander
A few months ago we noted that even though 182 big companies from the Business Roundtable had signed onto a statement proclaiming that the purpose of the corporation had changed from profit machine to stakeholder value generator, none of those companies had actually changed their legal form. As a result, those companies continue to have obligations only to shareholders, despite the high-minded rhetoric.
As conventional corporations, each of these enterprises must organize its operations in a manner that revolves around optimizing its financial return to shareholders. That is, they can take care of customers, employees and communities, but only to the extent that such behavior relates to shareholder value. These companies do not have legal structures that countenance any sacrifice of shareholder wealth for stakeholder welfare. We see evidence of this failure of governance every day, from the hyper-leveraged supply chains that are unable to cope with a pandemic to the continual stripping of fair pay and dignity from the workforce, feeding injustice and unrest.
Benefit Corporations Are the Real Deal
We also described an alternative to shareholder primacy: conversion to a benefit corporation, a new type of entity that requires corporate executives to consider the interests of all stakeholders without prioritizing shareholders. In Delaware, the form is known as a “public benefit corporation” or “PBC.” Since we last reported on the subject, there have been some very promising developments that we hope will lead to more corporations adopting better governance that protects all of us, not just shareholders.
First, in a Harvard Business Review article, the Former Chief Justice of the Delaware Supreme Court, a highly credentialed finance professor (Harvard and Oxford), and a leading asset manager issued a call for business leaders and shareholders alike to support the PBC:
If the Business Roundtable supports conversion of their public companies to this model, their mere “trust us, we care” words will become those of accountable leaders who embrace an enforceable obligation to others. But corporate leaders cannot succeed unless institutional investors, such as BlackRock, Fidelity, State Street, and Vanguard, and organizations like the Council of Institutional Investors also walk their talk on corporate purpose and on the value of stakeholders. These and other large investors have demonstrated that their voting clout can move the market. If they support public companies in converting to benefit corporation status, our corporate governance system can change for the better — fast.
The Market Is Moving
While no Fortune 500 public companies have met the challenge, the shareholders of publicly traded Amalgamated Bank recently approved benefit governance at their annual meeting. Lemonade, an innovative insurance broker backed by SoftBank, Sequoia and other venture capital funds, completed the most successful IPO of 2020, rising 139% on its first day of trading (after pricing above the underwriters’ range). These two leaders will join the two corporations with benefit governance already trading on the NYSE or NASDAQ, Laureate Education and Natura (the owner of Avon Products and The Body Shop). In addition, the shareholders of Danone, the French multinational consumer packaged goods producer, recently approved its becoming the French equivalent of a benefit corporation, with 99% of the shareholders voting in favor.
The movement is growing internationally as well: On June 30, the first Canadian benefit corporation law became effective in British Columbia, adding to prior adoption in the United States, Italy, Colombia and Ecuador.
These developments make it increasingly difficult for the Business Roundtable signers to argue that the public markets aren’t ready for PBCs. The fact is that investors are hungry for opportunities to invest in responsible corporations. This study found hundreds of rounds of private investment in PBCs:
[W]e find that there are 295 PBCs which have received investment from VC funds amounting to over $2.5 billion in the aggregate. This investment is significant because it shows that the PBC form is not a failure and that it is capable of attracting for-profit investment, a marker of success. This investment is coming not just from pro-social VCs but from top-tier firms.
While these are all signs of growing interest from companies, investors and thought leaders, perhaps the most important news came at the end of June, when the Delaware General Assembly passed legislation that eliminated the artificial barriers of a supermajority vote and a shareholder right to cash out when conventional corporations convert to PBCs. The statute was also amended to otherwise make the form more user-friendly. (For more on these changes, read this excellent memo from the Freshfields law firm.)
No More Excuses
With these developments, there is simply no excuse for companies or investors to talk about the importance of stakeholders as equal partners while maintaining a legal form that treats shareholders as the only group that matters. If you are an asset owner or manager, now is the time to advocate for better governance at your portfolio companies.
Frederick Alexander is founder of The Shareholder Commons.
B The Change gathers and shares the voices from within the movement of people using business as a force for good and the community of Certified B Corporations. The opinions expressed do not necessarily reflect those of the nonprofit B Lab.
Real Change in Real Time: Benefit Corporations See New Interest was originally published in B The Change on Medium, where people are continuing the conversation by highlighting and responding to this story.