Stanford Social Innovation Review : Informing and inspiring leaders of social change

SUBSCRIBE | HELP

Socially Responsible Business

Every 500 Years or So

Is Delaware a tipping point in the evolution of capitalism?

The formation of the first joint stock company was, some say, the seminal event of the last 500 years.

Through its innovative legal structure, it allowed entrepreneurs to aggregate investment capital and mitigate risk. This in turn catalyzed the financing of the Age of Exploration and marked the birth of capitalism, unleashing unprecedented opportunity as European powers rose and fell (and unleashing devastation as they battled through the centuries over resources across the Americas, Africa, and Asia).

Today marks another seminal event in the history of capitalism.

Today, Delaware—the touchstone of American corporate law, and thus the American corporation and capital markets—introduced benefit corporation legislation. This legislation creates a new type of corporation that will have similarly powerful effects, unleashing an Age of Social Innovation and marking a tipping point in the evolution of capitalism.

The Delaware Bar, Chancery Court, and elected officials spent the last several years examining various legal innovations, including benefit corporation legislation that has been signed into law in 12 states (and that is moving forward in more than a dozen others) and alternative models, such as the Flexible Purpose Corporation in California and the Social Purpose Corporation in Washington. The experts in Delaware decided that benefit corporation legislation best meets the needs of the growing market of entrepreneurs and investors interested in using business as a force for good. Importantly, with Delaware on board, leading social entrepreneurs and impact investors now have a clear path to scale via the public capital markets.

By requiring that Delaware benefit corporations “operate in a responsible and sustainable manner” and that their directors “balance the [financial] interests of stockholders … [with] the best interests of those materially affected by the corporation’s conduct” (including their workers, their community, and the environment), Delaware affirms that any new corporate form must be distinct and meaningful. This is accomplished by demonstrating that business exists in the context of society and ought to be accountable for its impact on society, whether or not that impact is captured by a financial statement.

Something as opaque to most of us as redefining the fiduciary duty of directors to include this “balance” requirement is really nothing more than putting into corporate law the higher law that we should do unto others as we would have them do unto us.

It is nothing more and nothing less. It is simple. It is profound.

In a system of corporate law that places an extraordinary—and well-founded—faith in directors’ judgment, benefit corporation legislation simply expands the scope of those things about which we expect directors to exercise their judgment.

And, importantly, this has legal teeth. Shareholders of benefit corporations are given a right of action to enforce these higher standards of corporate purpose and accountability.

Further, by backing the benefit corporation model, Delaware supports the development of more efficient and effective capital markets by requiring that these new corporations report on their overall social and environmental performance, not just on a single—and potentially narrow—public benefit purpose, as with other alternative models that will inevitably lead to greenwashing.

While Delaware’s benefit corporation legislation does not go as far on the crucial issue of transparency as the legislation passed in the other benefit corporation states (which require annual public reporting against a third-party standard vs. Delaware’s biennial self-reporting to stockholders), it represents a significant step in the right direction. Significantly, in response to this issue, the Colorado Bar has just drafted legislation using Delaware’s basic language but adding a requirement for annual public reporting against a third-party standard. We hope that Delaware will eventually do the same.

While the passage of benefit corporation legislation in Delaware will provide needed legal infrastructure for a new economy that is more inclusive, resilient, and sustainable, it is of course up to entrepreneurs and investors to put the law to good, better, and best use.

Only the next few (hopefully not hundred) years will tell.

Tracker Pixel for Entry
 

COMMENTS

  • Jeremy Burns's avatar

    BY Jeremy Burns

    ON April 20, 2013 12:26 AM

    Jay,

    Can you explain how the Delaware Benefit Corporation differs from the California’s Flexible Purpose Corporation? Is there any advantage from the former than the latter?

  • Erik Trojian's avatar

    BY Erik Trojian

    ON April 22, 2013 12:06 PM

    The DE Legislation and CA’s FPC law are very different in the world of corporate forms.  The DE version is closer to CA’s benefit corporation law that was enacted at the same time as CA’s FPC law.  The CA benefit corporation law has seen a 4x greater use then the FPC version.  I think this is due to the general public benefit requirements of the benefit corporation law, which is defined as a material positive impact on society and the environment.  This consideration of society AND the environment and not a picking and choosing of what you will consider, which is the FPC law, is at the heart of the DE Legislation.

    Companies that elect DE’s proposed law will be considering society and the environment in their day to day operations.  This is the purpose of the benefit corporation.  The DE law, like all other benefit corporation state laws, unlike the FPC, also gives shareholders a private right of action to enforce the new mandate of the consideration of society and the environment.  This is the company’s accountability aspect.  Lastly is the transparency portion of the law.  In the 13 states that have enacted benefit corporation laws the benefit corporation must produce an annual benefit report and issue it to the public and their shareholders.  This report must use a third party standard as an evaluation tool for the production of the report.  The company does not need to be certified or audited by a third party like B Lab, but must use it as a rubric.  However, in DE the benefit corporation must produce a report for the shareholders, but must elect to have it assessed against a third party standard and also that is available to the public.

    In summary the key differences between CA’s FPC law and DE’s proposed benefit corporation law is that in DE the company must consider society and the environment at all times and in the CA FPC law they can pick a short term one off consideration, such as building a baseball field for the community and then never have to do anything else for society or the environment.  Additionally, the DE legislation provides shareholders a private right of action to enforce their rights, in the CA FPC law the shareholders have very little rights and no enforcement mechanism.

  • BY Jeff Mowatt

    ON April 22, 2013 10:06 PM

    A tipping point in the evolution of capitalism?

    Perhaps, along with others who’ve already committed to this change.  You may be interested to read these extracts from strategy papers, where it’s argued that capitalism can be deployed for a primary social goal.

    http://www.p-ced.com/1/node/80

  • Melonie Tharpe's avatar

    BY Melonie Tharpe

    ON May 1, 2013 08:56 AM

    As these new flexible corporate identities are voluntary and likely much easier for new corporations to adopt, is there any public awareness campaigns, public pressure or other devices being used to ensure that more corporations sign up? In an ideal world all corporations should care for their constituents, workers and the environment. Now that we have appropriate laws and regulations to allow for these concerns to override the traditional financial ones, what and how is the consumer community influencing corporations to participate? I would love to see some examples of positive pressures or some large-scale campaigns to increase participation. Any examples or thoughts?

  • Barbara Menezes's avatar

    BY Barbara Menezes

    ON July 25, 2013 01:48 PM

    The formation of the first joint stock company was the seminal event of the last 500 years because people WANTED to earn more money and stock companies were a new way to do that. That’s why it is seminal, it scaled up all over the world really fast beacuse people were just doing it, and buying more bond and ratifying the new system.

    The benefit corporation legislation is a obligation that, at first, companies won’t like and won’t want to implement. They will do it just because it’s an OBLIGATION and will look for ways to not do it. It won’t scale up internationally because it, at first, brings no return to investors eyes. This legislation is far from being a seminal event.

    This article is bad because it misses a very important point: innovations need to be wanted by all stakeholders (specially the ones with money) to be implemented and absorbed in more and more contexts. And a legal obligation in one country is not the way to make enterprises socially responsible around the world.

Leave a Comment

 
 
 
 
 

Please enter the word you see in the image below: