The Covid-19 pandemic has forced corporate America to take a long, hard look at itself. Corporate responses to this crisis involve reassessing entire business structures—from employee rights and benefits to supply chain management to environmental, social, and governance matters. This assessment necessitates an evaluation of the purpose of the corporation, a debate that has been academic for years but is now all too real for business leaders in the current health and economic crisis.
Is it possible that the resolution to this debate is simple enough for the old Franciscan friar, William of Occam? When asking about the purpose of a corporation, perhaps the answer relies on making fewer assumptions. What if the debate about corporate purpose is resolved by adopting a different corporate form?
Delaware Public Benefit Corporation
Delaware corporate law doesn’t preclude the board of directors from considering the interests of stakeholders. In fact, fiduciary duties of directors require them to promote shareholder value, and to use business judgment to reconcile the various stakeholder interests to arrive at an action or decision that is in the best interest of the corporation.
However, Delaware does provide an alternative corporate form: the public benefit corporation (PBC). This form explicitly requires a corporation to have a material positive impact on society and the environment, and also requires directors to consider other stakeholder interests along with the financial interests of shareholders. A key feature of the Delaware PBC is that it provides a right of action for shareholders to sue the company if the company does not uphold its purpose and the interest of stakeholders.
Experts have noted that even this is a conservative model, as it does not give stakeholders enforcement rights. But it goes a long way toward furthering many ESG goals.
Delaware’s governor July 16 signed an amendment to the Delaware General Corporation Law (“DGCL”) that would make it easier for companies to convert to a PBC. This means that companies have fewer excuses for not putting their money where their mouth is, as they say, and truly integrating ESG or sustainability into their business operations.
Delaware is not unique in adopting a public benefit corporation law. In fact, according to B Lab, a nonprofit organization that provides certification for companies willing to meet high standards of sustainability and transparency called a “B Corp,” 36 states have enacted public benefit corporation legislation, and five more have pending legislation.
There is an undeniable trend of states adopting this alternative corporate form that embraces a stated corporate purpose with some benefit to the public.
A Scarcity of IPOs
So, if this corporate form is widely available, and there is general pressure on companies to incorporate ESG into their business operations, you would expect a lot of companies to go public as PBCs, right? Wrong.
Only two PBCs have issued IPOs. Ever.
The first was Laureate Education, Inc., in 2017. This Baltimore-based university has schools in Brazil, Chile, Honduras, Mexico, and Peru, and operations in Australia, Malaysia, New Zealand, and the U.K. The IPO basically flopped.
Lemonade Inc., a Delaware PBC and a Certified B Corp, issued its IPO July 2. This artificial intelligence-based insurance company states in its prospectus that its mission is to “[h]arness technology and social impact to be the world’s most loved insurance company.” After its first day of trading, Lemonade stock closed up 139%.
Vital Farms, Inc., which currently has a pending IPO, would be the third. It is also a PBC and a Certified B Corp. Based in Texas, Vital Farms provides agricultural food products, and begins its mission statement, “[o]ur mission is to bring ethically produced food to the table.”
There is an opportunity here for startups to take concrete steps toward making ESG an integrated part of the business. Corporate purpose doesn’t have to be an ongoing debate. Using the PBC, the purpose can be stated simply (William of Occam would be proud), and the directors of the corporation can be held accountable to that purpose.
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