One of the problems of capitalism (at least I see it as a problem) is that its only fiduciary duty is to the shareholders. In other words, its business practices have to have the prime purpose of maximizing the returns to its investors, consistent with the existing laws. This makes sense, in a narrow way. After all, the shareholders are the ones who provide the money and in any large public company, they will constitute a varied group that has diverse interests. The only thing that they can be guaranteed to have in common is the desire for a good return on their investments.
But this leaves the issue of ethics in a twilight zone. Does the company have an obligation to maximize profits at all costs? What if it means squeezing workers with low wages and awful conditions? What if it means polluting the environment? What if it means shutting down a production facility in one town and moving it to another town or state or even country, devastating the economy of the community that was abandoned?
At present, the main requirement is that a company comply with existing laws. But there is no uniformity in the regulatory structures across the globe or even within countries and that can lead to a race to the bottom as companies seek communities that have the least regulations while countries compete to provide low-cost workers. This leads to the kinds of abuses as seen in the case with the company Foxconn in China, supplier of electronics products to companies like Apple.
This narrow focus on maximizing profits leaves very little room for corporations to act ethically if such ethical behavior increases the cost of doing business. Even if the company’s president and board would like the company’s actions to benefit the workers, community, and the environment, if those actions cannot be shown to benefit the company in tangible and intangible ways or are not required by law, they run the risk of violating their fiduciary responsibilities and could be sued by shareholders.
As Jamie Raskin writes:
When America began, the states chartered corporations for public purposes, like building bridges. They could earn profits, but their legitimacy flowed from their delegated mission.
Today, corporations are chartered without any public purposes at all. They are legally bound to pursue a single private purpose: profit maximization. Thus, far from advancing the common good, many for-profit corporations have come to defy the law, corrupt the officials charged with enforcing it and inflict harm on the public with impunity. The consequences are visible in the wreckage left by BP, Massey Energy, Enron, AIG, Lehman Brothers, Blackwater and Exxon Mobil, to name a few recent wrongdoers. Profits rule; anything goes.
This is why complaints that governments are crushing the private sector by over-regulating them, and that if left to themselves they would be better able to do the right thing, ring hollow. Governments must impose requirements on business entities to do the right thing.
Hence I was interested in the idea of the ‘benefit corporation’, a relatively new form of legal entity that allows companies to give social and environmental goals equal weight with making profits.
California has passed a law enabling the creation of such entities becoming the seventh state to do so, following Vermont and Maryland in 2010, and New York, New Jersey, Virginia and Hawaii in 2011. About 100 companies have so far become benefit corporations, most of them privately held. The outdoor clothing company Patagonia is one of dozen companies that have chosen to do so in California as a result of the new law there.
Raskin explains why this gives companies greater freedom.
The new laws permit companies to join the profit motive with the purpose of making a “positive impact on society and the environment.” In their articles of incorporation, Benefit Corporations declare their public missions—things like bringing a local river back to life, providing affordable housing, facilitating animal adoptions or promoting adult literacy.
But why would public-spirited corporations embrace these exacting duties when they can simply roam free and do a little bit of altruistic good on the side? For one thing, Benefit Corporations can’t be held liable by courts for failing to place profits over everything else. This is an important shift in law. The fear of shareholder litigation has driven many public-spirited businesses, most famously Ben & Jerry’s, to take the high bid rather than the high road in a corporate takeover fight.
I am not of the business world and thus don’t know what the downsides of benefit corporations are or whether this model can be scaled up to larger and more companies. Clearly it will result in lower profits and thus lower returns to shareholders. Its success would require the existence of large numbers of shareholders who want their money to do good for others as well as for them.