In an opinion piece in The Wall Street Journal titled “Companies Shouldn’t Be Accountable Only to Shareholders,” Sen. Elizabeth Warren announced this week that she will introduce legislation called the Accountable Capitalism Act to require all corporations with more than $1 billion in revenue to become federally chartered and adopt a new model of corporate governance based on the benefit corporation model already in use in 34 states.
While promoting “Accountable Capitalism” may not be surprising coming from a liberal icon like Sen. Warren, it may surprise some who haven’t been following the rise of the benefit corporation to know that Republicans, the world’s largest investors, and an increasing number of business leaders have been promoting a similar idea for years.
On the political front, across those 34 state legislatures—including Delaware, home to the majority of publicly traded companies and two-thirds of the Fortune 500—there have been 30 unanimous votes in support of benefit corporation legislation, and 88 percent of all legislators have voted in support. Benefit corporation laws have been signed by Republican Governors including former Indiana Governor and current Vice President Mike Pence; former South Carolina Governor and current U.S. Ambassador to the UN Nikki Haley; Gov. Scott Walker from Wisconsin; former Governors Sam Brownback from Kansas, Jan Brewer from Arizona, Chris Christie from New Jersey; and their peers in Florida, Idaho, Kentucky, Louisiana, Nebraska, Nevada, Tennessee, Texas, Utah and Virginia. Even libertarian conservative Sen. Rand Paul endorsed the benefit corporation model on a 2014 visit to Silicon Valley.
On the political front, across 34 state legislatures—including Delaware, home to the majority of publicly traded companies and two-thirds of the Fortune 500—there have been 30 unanimous votes in support of benefit corporation legislation, and 88 percent of all legislators have voted in support.
Benefit corporations are exactly the same as traditional corporations except for one important thing that is uniting strange bedfellows: Benefit corporations fix a source code error in the operating system of capitalism—a legal concept called “shareholder primacy.” Unlike traditional corporations, the boards of directors and officers of benefit corporations are required to consider the impact of their decisions not only on shareholders, but also on other stakeholders, like workers, customers, communities, suppliers and the environment. Research, business leaders and investors are increasingly on the same page that this kind of stakeholder governance is not only good for society—it is good business.
The directors of benefit corporations exercise their expanded fiduciary duty in service of achieving a higher purpose than simply maximizing shareholder value—their public benefit purpose is to create a material positive impact on society and the environment. To create greater accountability and transparency, benefit corporations are required to publicly report about their social and environmental performance so customers, workers, investors and policymakers can assess for themselves whether the company is living up to its promises. Not incidentally, this increased transparency builds trust, which in turn further builds value.
As a result, policymakers across the ideological spectrum aren’t the only ones who like the benefit corporation model of corporate governance. In addition to thought leaders like Nobel Laureate in Economics Robert Shiller, who says he believes benefit corporations, on the whole and over time, will be more profitable than traditional corporations, Larry Fink, CEO of BlackRock, the largest investor in the world with $6.3 trillion dollars under management, likes this idea too. In his 2018 open letter to CEOs, Fink called for “a new model of corporate governance.” Fink said that society’s expectations of the role of business in society have changed, and that all companies need to demonstrate the social value they create or they “will ultimately lose the license to operate.” Like Shiller, BlackRock and a growing number of their fellow institutional investors believe that better governance will drive value creation over the long term.
The risks—of growing inequality and climate change, for example—Warren believes, are too high to simply let the market decide the pace at which these large corporations decide for themselves when and how to serve the public interest.
The Best Means to the Agreed-Upon End
Before we tie this story too neatly in a bow, while Sen. Warren, Fink and Republican leaders agree on the end they seek, they disagree significantly on the means by which they would achieve that end.
In contrast to Sen. Warren’s regulatory approach, Republican and Democratic state legislators and Governors across 34 states, as well as investors like BlackRock and those that control $8.7 trillion in SRI (Sustainable, Responsible, Impact) investing, all prefer a market-driven approach that allows businesses and investors to opt-in voluntarily to this “new model of corporate governance.”
Here’s the challenge Sen. Warren likely sees with this market-based approach: Investors are too often more talk than action. Sen. Warren isn’t alone in her skepticism. The leading international corporate law firm Cleary Gottlieb is also skeptical that the actions of investors match their rhetoric. Board votes, not open letters, influence corporate behavior.
In the few years since benefit corporations laws have been on the books, more than 7,000 businesses have adopted this new legal structure. Many of these benefit corporations are venture-backed, a few are publicly traded, and collectively they have raised nearly $2 billion.
So how has this played out so far in the marketplace?
In the few years since benefit corporations laws have been on the books, more than 7,000 businesses have adopted this new legal structure. Many of these benefit corporations are venture-backed, a few are publicly traded, and collectively they have raised nearly $2 billion. That sounds promising.
However, some high-profile, venture-backed Certified B Corporations (e.g. Etsy and Warby Parker) have been decertified when their boards, and presumably their investors, were unwilling to adopt the benefit corporation governance structure to meet the legal requirement to maintain their certification. The same hurdle of getting investor approval for adopting the benefit corporation governance structure has been the greatest obstacle for many existing large publicly traded companies to pursue B Corp certification.
So far, beyond Laureate Education, who raised $90 million in an initial public offering as a benefit corporation, and the Brazilian multinational Natura, who obtained investor approval for a benefit corporation-like amendment to its articles of incorporation, there is only one existing publicly traded company that has been willing to press this issue with its investors. As reported in the current Economist story “Choosing Plan B,” Danone, the French food giant, is the only Fortune 500 company to date that has been willing to state publicly its intention to meet the performance and legal requirements to become a Certified B Corp, first declaring this to investors at their 2017 annual shareholder meeting.
Republican and Democratic state legislators and Governors across 34 states, as well as investors like BlackRock and those that control $8.7 trillion in SRI (Sustainable, Responsible, Impact) investing, all prefer a market-driven approach that allows businesses and investors to opt-in voluntarily to this “new model of corporate governance.”
For Sen. Warren, this is just too slow. The risks—of growing inequality and climate change, for example—she believes, are too high to simply let the market decide the pace at which these large corporations—and the public capital markets which drive and constrain much of their behavior—decide for themselves when and how to serve the public interest. Sen. Warren, like the corporate attorneys at Cleary Gottlieb, is skeptical that the capital markets and the corporate boards they often control will ever actually vote for the “new model of corporate governance” they talk about.
So, not surprisingly, Sen. Warren wants the federal government to step in where markets have so far failed to protect and promote the public interest.
Uniting on the Means
There may be a way forward that would reconcile these two competing visions for how to achieve the shared objective of “Accountable Capitalism.” One way is for large institutional investors like Larry Fink to use their bully pulpit to say clearly that benefit corporation governance is one “new model of corporate governance” they would support. This would signal to boards of directors that if companies want their investment dollars and to maintain their license to operate from other stakeholders (like the government), adopting a corporate governance structure like the benefit corporation would be welcome.
This capital market signal, and some meaningful first-mover adoptions from corporate leaders like Danone, would make a compelling case against the need for federal regulation of large corporations. These first-mover, large corporations could simply use the existing benefit corporation statutes, which use shareholder accountability provisions and public transparency rather than federal oversight to provide guardrails on corporate behavior.
Another path forward to bring the government-driven versus market-driven approaches closer together might be for Sen. Warren to amend her proposed legislation to require large corporations to utilize existing benefit corporation state statutes rather than to create new federal oversight bureaucracy.
Either path forward might align Sen. Warren, leading Republicans, the capital markets and corporate leaders to unite not only around a common vision for the role of business in society, but also around the means to make that vision a reality.
Jay Coen-Gilbert is co-founder of B Lab, a global movement of people using business as a force for good. This article first appeared in Forbes.Photo: Meg via Flickr (CC BY-NC-ND 2.0)