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The Supreme Court’s First Brush with Social Enterprise

A look at how Hobby Lobby affects emerging corporate forms.

Last month, the US Supreme Court published its highly anticipated opinion in Burwell v. Hobby Lobby Stores, Inc., a consolidation of cases challenging the Patient Protection and Affordable Care Act’s contraceptive mandate. In a 5-4 decision, the Supreme Court held that the contraceptive mandate, as applied to “closely held” corporations (majority owned by five or fewer individuals) like Hobby Lobby, violates the Religious Freedom and Restoration Act (RFRA), because it substantially burdens a corporation’s exercise of religion. The effect of this decision is that closely held corporations, which account for 90 percent of all US companies and 52 percent of all private employment in the United States, are now free to deny contraceptive health care coverage to their female employees based on religious objections. Because most social enterprises are closely held corporations, Hobby Lobby applies with equal force to corporate forms like benefit corporations.

In January, we cautioned that the Supreme Court might invoke the emerging body of social enterprise law as a justification for finding that for-profit corporations may mix profit and religious purpose to the detriment of women’s health. As we predicted, Hobby Lobby was the first Supreme Court decision to acknowledge social enterprise, specifically the benefit corporation form, which is available to social entrepreneurs in more than half the States. Recognition by the nation’s highest court is indisputably a watershed moment for social enterprise law. However, the context in which the court mentions these new corporate forms is troubling, and the court’s broader comments regarding corporate social responsibility raise important questions about whether there is truly a need for emerging corporate forms like the benefit corporation.

In the area of corporate religious rights, the law has traditionally distinguished between nonprofit corporations and for-profit corporations; the former possess free exercise rights, while the latter do not. However, in Hobby Lobby, the court rejected this distinction, emphasizing that under state corporate law, for-profit corporations may be formed for “any lawful purpose,” and that there was “no apparent reason” why such corporations could not pursue both financial and religious purposes. In support of this view, the majority opinion references the recent success of benefit corporation legislation. In Justice Alito’s words:

In fact, recognizing the inherent compatibility between establishing a for-profit corporation and pursuing nonprofit goals, States have increasingly adopted laws formally recognizing hybrid corporate forms. Over half of the States, for instance, now recognize the “benefit corporation,” a dual-purpose entity that seeks to achieve both a benefit for the public and a profit for its owners.

 

Benefit corporations are a new corporate form designed to accommodate for-profit entities that seek to produce both financial and social or environmental returns. To that end, each benefit corporation is required by law to pursue a “general public benefit,” with the option to identify one or more “specific public benefits” it intends to create, such as improving human health, or promoting the arts, sciences, or advancement of knowledge.

The Model Benefit Corporation Act is the basis for the overwhelming majority of the 27 benefit corporation statutes enacted thus far. The Model Act enumerates several specific public benefits; however, religious benefits are not among them. In fact, the word “religion” does not appear anywhere in the Model Act. Despite this, in a footnote, Justice Alito finds support for the majority view by citing to the definition of “specific public benefit” from the South Carolina Benefit Corporation Act. While Justice Alito is correct in observing that over half the states have enacted this legislation, he carefully selects an outlier as his example. Interestingly, South Carolina’s Benefit Corporation Act is one of very few that have departed from the Model Act’s definition to explicitly include “religious” purposes. In fact, when Justice Alito authored his opinion, only four states had enacted benefit corporation statutes that permitted the pursuit of a religious purpose. With dozens of statutes to choose from, the court appears to have deliberately selected the least representative definition of specific public benefit in an effort to suggest that benefit corporations are analogous to Hobby Lobby because they, too, are for-profit corporations that pursue religious goals.

This suggestion confuses the pursuit of religious purposes with the sustainable, socially responsible goals benefit corporations were intended to produce. The absence of religion from the laundry list of specific public benefits in nearly all benefit corporation acts supports this claim. According to B Lab’s database, only 20 percent of all benefit corporations are registered in states that permit the selection of a religious corporate purpose, and few, if any, have taken advantage of this option. Thus, the Court’s suggestion that benefit corporations pursue religious purposes is, in theory, possible in only a small minority of jurisdictions, and mischaracterizes the current use of this new corporate form.

Furthermore, the Supreme Court’s reference to a specific religious purpose overlooks a crucial element of benefit corporation law—namely, that benefit corporations are bound by an overriding obligation to pursue a “general public benefit,” which acts as a check on the pursuit of any specific benefit. As William H. Clark, Jr., the principal drafter of the Model Benefit Corporation Act, has explained, this check ensures that benefit corporations are not, for example, “reducing waste while increasing carbon emissions, or reducing both while remaining indifferent to the creation of economic opportunity for low-income individuals or underserved communities.” In other words, the pursuit of a specific public benefit, even a religious one, cannot absolve a benefit corporation from the obligation to create a general public benefit. Thus, even in those few jurisdictions that permit benefit corporations to align themselves with a particular religious purpose, such a purpose may not, as Justice Alito suggests, be pursued at all costs, but rather is circumscribed by the broader purpose of creating a general public benefit.

Perhaps most importantly, the court weighed in on the longstanding corporate social responsibility debate and decisively rejected the notion popularized by Milton Friedman that the only social responsibility of business is to maximize shareholder wealth. Justice Alito candidly states that this understanding of corporate social responsibility “flies in the face of modern corporate law,” and emphasized that “modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.” As Professor Lyman Johnson recently observed, this means “business corporations ... can pursue a whole host of objectives other than making money. Those objectives include various humanitarian, social, and environmental objectives of the sort progressives have long championed.”

The court’s rejection of strict shareholder wealth maximization calls into question the rationale for creating specialized, blended-value forms like the benefit corporation. Indeed, the principal argument for social enterprise forms rests on the assumption that corporate law and its duty to maximize shareholder wealth could not accommodate for-profit, mission-driven entities. If, as Hobby Lobby suggests, shareholder wealth maximization is not an accurate statement of law, specialized forms like the benefit corporation may well be redundant. If the devout owners of a traditional, closely held corporation like Hobby Lobby are free to adopt an additional, religious corporate purpose, it stands to reason that social entrepreneurs should be equally free to use the traditional for-profit form to pursue any number of social or environmental benefits.

Of course, the very existence of the benefit corporation movement itself is evidence of the contrary. Justice Alito’s version of the corporate legal landscape overstates the ease with which “modern” corporate law has discarded the principle of shareholder wealth maximization. In fact, efforts to advance a “social” business purpose have been underway for nearly a century, from E. Merrick Dodd’s “social institution” theory of the 1930s, to Howard Bowen’s 1953 publication of Social Responsibilities of the Businessman, to the wave of constituency statutes in the 1980s that allowed directors to consider non-shareholder interests in more than 30 states. Over the past century, however, US courts have overwhelmingly chosen shareholder wealth maximization as the guiding principle in corporate dispute resolution, especially when a corporation is for sale. This reality was a critical driver of the movement to draft the Model Benefit Corporation Act and establish benefit corporations and other innovative forms like the L3C, the flexible purpose corporation, and the social purpose corporation. To suggest that a majority of state legislatures needlessly drafted, debated, and enacted social enterprise legislation when traditional corporations were already entitled to jointly pursue profit and purpose ignores a century of US corporate jurisprudence.

Justice Alito’s tidy conclusion that each US jurisdiction permits a corporation to pursue “any lawful purpose” fails to see the forest for the trees. Corporate charters have long provided that corporations are organized “for any lawful purpose,” and yet those very same corporations have found themselves subject to the requirement to maximize shareholder wealth. Social enterprise advocates across the United States may welcome Justice Alito’s assessment of state-level corporate law, but it grossly oversimplifies the incremental legal progress achieved by advocates of corporate social responsibility over the past century. Instead, in drafting benefit corporation statutes, state legislatures have directly responded to existing corporate jurisprudence by carving out specific social and environmental purposes considered worthy of a departure from shareholder wealth maximization. With rare exception, religion simply isn’t on the list.

The Hobby Lobby decision has been both hailed as a victory for religious freedom, and denounced as a blow to women’s health and reproductive rights. We should also recognize that it is the Supreme Court’s first attempt to grapple with the difficult issues of corporate purpose raised by social enterprise and its corporate forms. That this emerging body of law remains susceptible to misinterpretation, even by Justices of the Supreme Court, should encourage lawyers, policymakers and social entrepreneurs to redouble their efforts to reach a consensus on the boundaries of social enterprise, and to craft more precise metrics and economic incentives for sustainable organizations that seek to use the power of business to achieve social and environmental goals.

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COMMENTS

  • Greg D's avatar

    BY Greg D

    ON July 21, 2014 01:15 PM

    Religion may not be on the list of B Corp purposes in most jurisdictions, but the fact that it exists in some means that it, well, exists. And, if it exists as constitutionally sound law anywhere, then it can and must be considered in review of law impacting such decisions as Hobby Lobby. To not do so would be not too far of a stretch from depriving minority groups of their rights just because they do not have majority sway (corporations are indeed a different legal entity than an individual, but, in the end, it is individuals who are impacted by corporate law). Thus, while the Hobby Lobby opinion may or may not be aligned with the majority of B Corp or other law, as pointed out in the above article, it nevertheless is aligned in part with minority legislation that is as valid legally as the legislation in the majority.

    Further, there are a myriad of reasons why an individual may or may not choose employment at certain corporations, some of which may be religious or non-religious considerations in the corporate culture at any certain entity. Specifically, a person may reject employment at one B Corp based on its mission, while embracing the mission of another. We do force every corporation to have the same corporate culture or values. Thus, if one does not like the religious culture at Hobby Lobby, they are free to pursue employment elsewhere - just as they might do for a variety of other reasons. To force such to be otherwise would be detrimental to freedom in general, not the opposite, and, in turn, could put in motion the loss of other freedoms as interpretation of law morphs over months and years when new legislation relies on the precedent established in the current matter.

    It is indeed free enterprise that should dictate what happens in the current matter. Religion should not be legislated any more than morality, generally speaking, for religion IS a moral matter. Let freedom and free enterprise control the outcome of the Hobby Lobby matter. And that certainly can’t swing either way as the principles of democracy prevail.

  • Haskell's avatar

    BY Haskell

    ON July 21, 2014 01:15 PM

    Thanks for this article. 

    I do, however, disagree with a literal interpretation of this statement: “only four states had enacted benefit corporation statutes that permitted the pursuit of a religious purpose.” Perhaps only a few benefit corporation statutes EXPRESSLY permitted religious purposes, but each benefit corporation statute I am aware of also has a catch-all provision that allows a specific public benefit purpose “conferring any other particular benefit on society and the environment.” Perhaps we could debate whether religious purposes fall within that incredibly broad category, but I think the better argument is that many, and maybe even most, religious purposes would.  The statues themselves purposefully avoid partisan issues like the one involved in the Hobby Lobby case.  I think judges would probably only look to the good faith of the managers, which was not disputed in Hobby Lobby, and would not second guess managers with any reasonable, good faith argument that they were seeking the best for society and the environment. As you know, the statutes provide a lot of flexibility and not much chance of liability.  After Hobby Lobby, however, it all might be a moot point if corporations are “persons” for RFRA purposes. 

    Also, you fail to mention that one of those states that expressly allow religious purposes for benefit corporations is Delaware.  As you know, Delaware is easily the most important state in corporate law - home to over 1 million entities and a majority of the country’s largest corporations.  In my opinion, Delaware’s stance alone is equivalent, in terms of corporate law impact, to the stance of 20 or 30 of the states that are less active in corporate law.  As Steve Bainbridge (UCLA) recently said (my paraphrase) - saying Delaware is only one state is sort of like saying there is only one 800-pound gorilla in the room.

  • Greg D's avatar

    BY Greg D

    ON July 21, 2014 01:26 PM

    MODIFICATION ON THE ABOVE POST FROM GREG D:
    “And that certainly can’t swing either way as the principles of democracy prevail” should read “And that certainly can swing either way as the principles of democracy prevail.”

  • Robert T. Esposito's avatar

    BY Robert T. Esposito

    ON July 23, 2014 08:05 AM

    Haskell,

    Thank you for your comment.  You are correct in noting that each benefit corporation statute includes a “catch-all” provision that permits the pursuit of a specific benefit that confers “any other particular benefit on society and the environment.”  We certainly could debate whether many, most, or even any religious purposes fall within that broad category, but I think you will agree that this issue is deserving of much more time, space, and prominence than the comments section of this article affords. 

    I would note, however, that there is no evidence in the legislative history of these statutes that supports the contention that religious purposes fall within the catch-all category.  If state lawmakers intended to permit benefit corporations to pursue religious purposes, it strikes me as odd that they did not discuss this possibility when debating these bills, and also omitted any mention of religious purposes in the laws themselves. While some states have departed from the Model Act’s language to include religious purposes, nearly as many have made non-religious additions to the list of specific benefits. The Pennsylvania statute includes facilitating “the transfer and adoption of new technologies;” the Louisiana statute includes “historic preservation” and “urban beautification;” and the Hawaii statute includes the use of patent rights held by a benefit corporation to “create and retain jobs in the state,” “uphold fair labor standards,” and “enhance environmental protection.” These examples seem to me to be more representative of the “specific” and “particular” benefits benefit corporations were intended to produce. 

    Furthermore, whether or not corporations are “persons” for RFRA purposes does not change fact that any specific religious purpose is limited by the obligation to pursue a “general public benefit.” This term is vaguely defined, and the production of a general public benefit depends on which third-party standard a benefit corporation chooses to measure itself against. I am not aware of any standard that rewards the pursuit of religious purposes in its calculus. Moreover, attempting to quantify social and environmental benefits has proven to be a difficult endeavor – by what metric would one assess the achievement of a religious purpose? Percentage of successful conversions? Number of prayers offered? Measurement of social and environmental impacts presents complex problems that many standard-setters and impact investors are currently struggling to solve. Measuring religious impact, on the other hand, seems to me to present an intractable problem, particularly when one considers the longstanding disagreements between members of the same religion, not to mention the internecine conflicts between different belief systems. In other words, one man’s religious benefit is another man’s blasphemy. In my opinion, the dearth of legislative history on this topic, the absence of applicable third-party standards, and the obvious problems with measurement in this space all weigh heavily against concluding that religious purposes fit neatly within the catch-all category. 

    Regarding Delaware, you are again correct that it is one of the minority jurisdictions that permits the pursuit of a religious purpose. However, while Delaware may be the only 800-pound gorilla in a room filled with publicly-traded corporations, surely the same cannot be said for closely-held benefit corporations. According to the latest tally, Delaware accounts for only 16% of all registered benefit corporations, and, as you know, none of these are publicly traded. Nevada and California both outpace Delaware in the number of registered benefit corporations.

    A oft-cited reason for incorporating in Delaware is the well-developed body of corporate law in that state, and the judicial expertise and predictability afforded by its Chancery Courts. However, with new corporate purposes, structures, and duties imposed on directors, benefit corporations signal a departure from Delaware’s well-trodden path of corporate law precedent. While Delaware courts may be well-positioned to address the unique issues raised by benefit corporations, they cannot claim any more knowledge or experience in these matters than the courts in any other state.  Accordingly, I do not think Delaware’s preeminence amongst benefit corporations is a fait accompli, and do not believe we have arrived at a point where one can say that Delaware is equivalent to “20 or 30” other states.

  • Stephen DeKuyper's avatar

    BY Stephen DeKuyper

    ON July 28, 2014 08:00 AM

    I think there might be some apples and oranges comparisons going on here. Both Hobby Lobby and Conestoga Wood have specific references to Christianity or Christ in their mission statements. The religious beliefs of the owners are purposeful in that they are foundational to the way they run their companies. The company is not created to promote religion like a church, but these beliefs underlie the business (although serving God is a meta-purpose). Whereas I understand that the ‘alternative’ purpose of a benefit company is included in the actual business they undertake. I don’t think ‘purpose’ means the same in these two cases.

    Regardless, I question the premise that the determination of an owner(s) to ground the moral foundations of their company in religious beliefs is some how less valid than another company’s desire to “do good” to the environment. Why is Apple’s desire not to harm the environment any more valid than Hobby Lobby’s belief that all life is valuable and to respect it? In fact, under the profit-maximization view and considering that environmental issues are not specifically cited in the mission statement, it is irresponsible for Tim Cook to consider anything other than profits when running Apple and it is wrong for him to criticize investors who believe that saving the environment should not come at the expense of profits. If Apple wants to save the environment, it should become a benefit company.

    We also need to consider what issues Hobby Lobby and Conestoga were contesting. They were not specifically arguing against a woman’s right to contraception nor were they trying to stop them. What they argued against was their responsibility to fund contraception methods which were specifically abortifacients (4 out of 10 I believe). The owner’s belief in the value of a human life is not some throw-away desire, but a foundational, spiritual and ethical belief and they should not be forced to participate in this practice.

    I don’t think everyone needs to agree on the individual purpose(s) of each company. We do need to recognize they are simply legal fictions that facilitate the interaction of individuals and those individuals should be free to purpose their own goals.

  • Miguel Padro's avatar

    BY Miguel Padro

    ON August 6, 2014 11:30 AM

    Thanks for raising some important questions with this piece.  (Apologies for being late to the party with this comment.)

    While I agree with the aims of the B-corp movement, I disagree that the mere existence of B Corp legislation is proof that it is necessary (and that by implication, C-corps are prohibited by law to pursue social and environmental goals.)  By way of analogy, the enormous popularity of bottled water does not prove that the water from our faucets isn’t drinkable. 

    Many of the flagship B-Corps existed before the B Corp movement.  A distinct B-Corp structure was not a prerequisite to building a socially responsible company.  Further, companies can become “Certified B-Corps” without ever incorporating legally as a B-Corp.  There are, for example, LLCs that have gone through the independent B-Corp Certification process to demonstrate their performance according to B-Corp principles.  Considering the B-Corp certification is available to any company that meets the standards, it is fair to ask whether B Corp state legislation is actually necessary. 

    More concerning, however, is the idea that B-Corp legislation is necessary because C corps are legally prohibited from organizing to pursue social and environmental goals.  The norm of shareholder wealth maximization should not be confused with the actual rules according to the law.  As Christopher Bruner has written, corporate law remains “fundamentally ambivalent” about prescribing a purpose for all companies.  Justice Alito was correct to echo this sentiment in his Hobby Lobby opinion.  The law does not require maximizing shareholder value, nor does it prohibit C-corps from pursuing social and environmental goals.  The real barriers to more responsible corporate behavior are the norms we accept around corporations and their relationship to society and investors.  We need to find ways to change these norms so that fiduciary duty is not used as an excuse for externalizing negative costs on to society.  Unfortunately, the arguments frequently used to advance B-Corp legislation reinforce the exact norms around C-corps that we most need to change. 

    The B-Corp Certification is an enormously valuable innovation but I remain concerned that by creating distinct chartering option for responsible business,  B-Corp legislation efforts at the state level are implying that irresponsible business is a perfectly acceptable default choice for most companies. 

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