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.