A Tale of Two Types of Corporations

by Jeremy on July 8, 2010

This afternoon, I listened in on the B Corp quarterly update call.  Almost two years ago, Atayne became a certified B Corporation. Unlike traditional corporations, Certified B Corporations are legally required to consider the impact of their decisions on the long-term interests of their employees, suppliers, community, consumers, and the environment. The ultimate goal of the certifying organization, B Lab, is to create a new, legally recognized corporate form (like a C-Corp or S-Corp) with tax incentives, procurement preferences, and a social stock exchange for sustainable businesses.

There is a lot of exciting activity going on with B Corps.  There are currently 314 certified B Corps across 54 industries.  These companies employ over 6,000 people and sell products and services that make up a $1.5 billion marketplace.  And it is not just a bunch of mom and pop operations.  There are many well-known and established companies such as Seventh Generation, dansko, method, BetterWorld Books, and King Arthur Flour.

Additionally, over the last 6 months, B Lab made some great progress on their policy and legal initiatives.  On April 13, 2010 Maryland signed the nation’s first Benefit Corporation legislation.  This was followed shortly by Vermont.  As they proudly like to say, 2 down, 48 to go.

As I listened about all this positive activity around companies that are committed to more than just their shareholders, I started to think about an interview I recently read on Grist.

The interview was with Peter S. Kaufman a bankruptcy expert and addressed the idea of BP filing for bankruptcy.  When asked the question, “Let’s say you’re advising BP. What would you tell them to do?” Kaufman replied:

I’d advise them to explore the option of bankruptcy. I only know BP from public information. BP has a lot of cash and the ability to generate huge amounts of cash. But remember, just because BP can pay claims doesn’t mean they should, or that they will, given that their primary obligation is to their shareholders.

I find the last line particularly interesting. “Just because BP can pay clams doesn’t mean they should, or that they will, given that their primary obligation is to their shareholders.”

I translate the statement this way.  Since BP’s primary responsibility as a company is to maximize the wealth of their shareholders, they are not obligated to pay claims to the people who were and continue to be negatively affected by the results of their actions.  So, BP is not responsible for any harm they cause, unless it is to their shareholders?

I don’t think there is any question that BP will not end up paying billions in claims.  For me, the question is much larger.  Why should we even be questioning whether BP will pay claims?  How did our business community get to the point where someone would say that a company that causes destruction to others is not necessarily responsible for their actions, given that their primary obligation is to their shareholders?

All I can say is I am proud of the work of B Lab and even prouder to be part of the movement.

{ 1 comment… read it below or add one }

Rebecca July 13, 2010 at 9:24 pm

I’m also a B Corp fan. Andrew, Bart, and the B Lab crew are doing masterful work on behalf of all the B Corps.

As for the bankruptcy lawyer’s comments: while I am not a lawyer, I’m acquainted with a number of well-respected & bright corporate lawyers and governance experts.

First off, there is nothing in the law that mandates corporate boards/ management to put shareholders front and center (except in certain cases when a company goes on the auction block, and even then, the Revlon Rule need not always apply ). Allocation of profits is a political choice, as one shared recently.

Says Larry Thompson, general counsel of PepsiCo and former head of DoJ in a to-be-published paper on The Responsible Corporation, “The corporation and its special features—limited liability, perpetual existence, the power to sue and be sued in its name—are not attributes that private actors could, without the assistance of the state, recreate by themselves through the mechanisms of private contract.” Further, “the ‘business judgment rule’ protects managers who aim at sustainable, responsible business growth….The business judgment rule thus shields—and thereby promotes—managerial discretion to serve the corporation’s long-term prospects.”

For more, check out the teaching module on “What the Law Allows” at http://www.caseplace.org, one of Aspen Institute’s websites.

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